He's Ba-a-a-ck

Joel reads the Financial Times so we don't have to. And adds a new chapter to the chronicle of the man who has spent the last 15 years helping us to forget that he ever went to prison:

When Michael Milken entered the federal prison camp at Pleasanton, California, in 1991, it was tempting to conclude that an era in finance had come to an end.

From his X-shaped desk at Drexel Burnham Lambert in Los Angeles, Mr Milken and his weapon of choice – the high-yield bond – had revolutionised Wall Street in the 1980s, developing a market for the debt of young companies lacking an investment grade rating and raising billions for corporate raiders who could not persuade traditional investment banks to support them. But by the time he pleaded guilty to six counts of violating securities and reporting laws, his bank had collapsed, the high-yield market had fallen off a cliff and he had come to be portrayed in the popular press as a Wall Street Icarus brought to earth.

From a Wall Street perspective Mr Milken remains on sidelines, still banned from the securities industry as part of his settlement with US regulators and pursuing a second career as a philanthropist. But today former colleagues of Mr Milken – most notably at GSO Capital Partners, a debt boutique bought last year by Blackstone, the private equity group – are playing an increasingly prominent role in finance, applying lessons learnt at Drexel in the 1980s to navigate the shoals in the credit markets and generate high returns from risky debt.

The new visibility of the Drexel crowd stems from dramatic changes that have taken place in a business Mr Milken helped build – financing leveraged buy-outs. Now that the market for loans to back buy-out deals has collapsed, the leading private equity firms have changed their strategies. Today, unable to borrow money from the banks to take large companies private, they are looking to buy bombed-out debt at discount prices with the hope that a recovery will generate their customary big profits.

“The debt market is an interesting place to be now,” says Jim Coulter, co-founder of TPG, one of the major private equity firms. “We borrowed when we knew that debt was too cheap. Now that debt is more expensive [to issue], it is a good time to invest in debt.”

The turmoil of recent months has put a premium on credit-analysis skills – and calculating the ability of companies to pay back their debts under a variety of economic scenarios is the kind of work Drexel staffers grew up on. ...

--Financial Times, 10 Ag 2008

Comment:I'm a big Michael Milken fan. Yessir, always mighty proud to say it. I haven't any doubt that he violated the securities laws, though how far his violations wwere "real" and how far of the parking ticket variety--I've never had a good enough feel for securities markets to know.

But his main crime was shaking up the country club and making money available to people with five-o'clock shadow. His main profit-making insight--amazing how many people miss it--is that anything is a bargain at the right price. So, if you buy debt at 25 cents on the dollar and sell at 27, you've made a profit.

I take great joy in presenting this argument to my finance students. Or I used to: lately I find they have no idea who he is any more. For all they care, he might as well be as dead as Adlai Stevenson. or (any day now!) Ronald Reagan.

Source: I don't know any one book that is fair and balanced on Michaael M. Daniel Fischel, Payback is way over the top partisan advocacy, but he does have a lot of very good talking points.

Sober Afterthought: Is this FT story real, or just a clever bit of PR?