– March 10, 2020

“You know, we eat guys like you for lunch every day of the week.” Those were the words of AT&T Chairman John deButts nearly fifty years ago. He directed them to MCI Chairman Bill McGowan, whose fledgling company had designs on competing with AT&T in the long-distance space. DeButts was properly contemptuous.

AT&T controlled 100 percent of the long-distance market at the time, one out of every 500 Americans worked for the communications giant, and arguably most problematic of all for MCI, banks and investment banks generally didn’t want to have anything to do with the businesses that presumed to compete with ‘Ma Bell. Not only was toppling the monopoly seen as a fool’s errand that didn’t rate financing, it was viewed as unwise to anger a corporation that generated more banking fees on an annual basis than just about any other.

MCI’s chances of success were quite a bit less than slim to none, only for Michael Milken to enter the picture. We write about Milken after President Trump so correctly pardoned him last week for “crimes” that had never before been prosecuted. We’d like to think he did so not just to reverse past injustices, but most importantly in honor of Milken’s remarkable capitalistic achievements. Simply stated, it would be hard to find a greater wealth creator and driver of progress than Milken, and his intrepid financing of MCI speaks to this truth.

Indeed, there’s an old saying that “banks only lend to you when you don’t need the money.” Milken understood this truth all too well, having discovered in the 1970s that other than for the bluest of blue-chip businesses, growth financing was exceedingly difficult to come by for the 99% of businesses that weren’t blue chip, or investment grade. Financial institutions operated on the assumption that the present predicted the future. Not so Milken. His research revealed the opposite.

Milken discovered that a corporation’s balance sheet generally measured yesterday, not tomorrow. And so he set about “democratizing” access to capital. Having attended UC Berkeley in the 1960s, Milken had embraced the desire of some within the student body to improve society. He would work tirelessly to change the world for the better too, but as he once put it, “Unlike other crusaders from Berkeley, I have chosen Wall Street as my battleground for improving society because it is here that government institutions and industries are financed.”

There are no companies, no jobs, and there is no progress without investment, and Milken would vastly improve the world around him through skillful development of the companies not recognized by traditional banks and investment banks, but that would be greatly enhanced through bespoke finance.

Milken ultimately raised billions for MCI given his belief that the present was a lousy predictor of the future. Keep in mind what an amazing achievement this was. At the time Milken and Drexel Burnham were hired as MCI’s investment bankers, the still fledgling company was 1/100th of AT&T’s size, and the service it provided was spotty on account of MCI still having to pay AT&T to do a lousy job routing its customers’ calls.

Milken essentially won MCI financial freedom, whereby it could purchase 150,000 miles of fiber optic cable that enabled MCI’s build-out of its own fiber optic network. This proved profoundly good for customers formerly victimized by monopoly pricing. Thanks to growth made possible by funds raised by Milken, MCI was by 1990 taking 100,000 customers a week from AT&T, not to mention that the cost of a long-distance call plummeted 70 percent between 1984 and 1996. AT&T’s former snack became its potent rival. 

Notable about the financing of MCI is that the benefits of it didn’t stop with MCI. Its “junk bond” financed growth led to the rise of the mobile communications industry. Thanks to the MCI’s aforementioned fiber optic cable binge, there existed the infrastructure for the rise of cellular calling.

.The problem yet again was a lack of finance. Though cable television pioneer Craig McCaw sensed that people “preferred to roam,” investors didn’t share his vision. With good reason. There was seemingly no market for a form of communication that required customers to spend thousands of dollars on a single phone. Enter Milken once again.

He seemingly gravitated toward opposite thinkers, and McCaw personified the latter. As McCaw once calmly put it, “the greatest ideas you ever have are the ones that other people don’t understand.” Milken eventually raised $2 billion for McCaw Cellular in the span of three years, and thus came out of it a national cellular network that forever changed how Americans lived and worked. Ironically, Milken financed McCaw’s acquisition of MCI’s cellular assets, only for AT&T to eventually purchase McCaw Cellular in 1993 for $12.6 billion. McCaw acknowledged that Milken “did for us as much as any human being could.”

Crucial is that the remarkable commercial leaps didn’t end with Milken’s financing of MCI and McCaw Cellular. His visionary realization that some of the best businesses in the world didn’t rate investment-grade financing led to enormous growth in the high-yield bond market that he invented. A market largely created by Milken didn’t just revolutionize telecommunications. Sure enough, Milken’s amazing eye for the businesses of tomorrow led to major leaps in the gambling and healthcare spaces, along with the rise of other boldfaced commercial names that include, but are not limited to CNN, Turner Broadcasting and Occidental Petroleum.

The shame in all this is that sometimes outsiders attract the scorn of those on the inside. And Milken  was an outsider. Not only did he work for a 3rd tier investment bank in Drexel Burnham, his approach to finance rejected the stodgy view popular on Wall Street that financiers should largely focus on the giants. Not Milken. He would once again finance the insurgents aiming to disrupt the existing order in all manner of industries. And his genius didn’t stop there. Milken also financed the outsiders of the Carl Icahn, T. Boone Pickens and Reginald Lewis variety who, with funds raised by Milken, would undo all manner of incomprehensible conglomerates put together by traditional Wall Street firms. In short, the more successful Milken became, the bigger the target on his back became.

Most think Milken was ultimately imprisoned due to “insider trading” violations. Such a view isn’t true, plus it’s worth asking why what has never been reasonably defined (insider trading) would rate imprisonment in the first place. The more informed markets are, the better. Those who bring information into pricing should be cheered, as opposed to handcuffed. But that’s a digression.

In Milken’s case, and per University of Chicago emeritus professor Daniel Fischel, “There is no evidence that [Milken] did [commit any crimes], and certainly no evidence that he engaged in any conduct that had ever before been considered criminal.” Translated, Milken was wrongfully convicted and imprisoned for technicalities that had never before rated criminal trial. Cheers to President Trump for pardoning Milken. The only shame is that it took 30 years for this injustice to be reversed.

Since his wrongful conviction Milken has become a global statesman, has given away enormous sums for cancer research, and has largely “rehabilitated” himself in the eyes of public. But in conclusion, we ask readers to consider the unseen.

In consideration of all that he accomplished while a giant in investment banking, what advances and what industries never saw the light of day over the last thirty years owing to Milken being needlessly removed from finance well before his time? His banking of a communications revolution surely makes working remotely more than doable amid a Coronavirus scare, but what about dynamic drugmakers who would have been well posititioned to battle the virus from day one, thus rendering it a non-story from day one? That the previous question is impossible to answer should have us all wondering what might have been, while also hopefully existing as a cautionary bit of history that will ideally cause Americans to think more deliberately before “convicting” those who do things differently in the future. Thank goodness President Trump righted a grave wrong with the pardon of Michael Milken. 

This article, written with Stephen Moore, originally appeared on RealClearMarkets

John Tamny

John-Tamny

John Tamny, research fellow of AIER, is editor of RealClearMarkets. His book on current ideological trends is: They Are Both Wrong (AIER, 2019)

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