Wednesday, October 27, 2010

The Economist on Milken

If you remember who Anita Hill is, you probably also remember Michael Milken.  If so, you may enjoy a (mostly) excellent wrapup on Milken's junk bond revolution in this week's Economist.  It's billed as a where-are-they-now piece about the later careers of his apprentice superstars: guess what, they're still coining money.

I'd fault it on three, maybe two an a half, issues at least though:
  • One, "fallen angels" v. "new issues."  Milken's kickoff insight was that junk bonds were cheaper than they needed to be, even taking account of risk.  He based his argument on so-called "fallen angels"--once gold-plated bonds that had, well, fallen.  But then he kept flogging the same formula when pushing new-issue junk, which was an entirely different matter.
  • Two, the betrayal element in management buyouts.  BigCo his limping along with a mediocre stock price and ho-hum returns.  The managers pay off the stockholders, take it private and ta da, Cinderella turns into a princess.  This has always seemed to me to count as a monstrous breach of fiduciary duty--if the value was implicit, weren't the managers supposed to find it for their own principals, the shareholders, rather than helping themselves.  I'd speculate that this may be part of the general decline in fiduciary duty in modern commerce--the same impulse that makes it okay for the bank to take your most intimate financial secrets and and trade them off to your competitor, or to sell you crap that they know you don't understand.
  • Three, though this is more disputable--I think they underplay the dark overlap between the flogging of junk bonds and the gang of knaves who perpetrated the savings and loan crisis.  This is purely an issue of fact, and the devil is in the details.  But I suspect there was more incest here than the Economist's gaping admiration might suggest.

Still, I'm on board for the main theme: the junk bond revolution was mainly A Good Thing which blasted sleepy enterprises out of their torpor, opened up opportunities for talented upstarts who otherwise would never have seen the inside of a boardroom, and jimmied open the tight inner circle of self-perpetuating elites.

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