Junk bond king Milken astounded by Wall Street crisis
Duncan Mavin, Financial Post
Published: Wednesday, September 24, 2008
HONG KONG -- The sodden tail of typhoon Hagupit that lashed Hong Kong could not keep hundreds of professional investors and analysts from crowding the conference centre at the Grand Hyatt to hear the words of renowned U.S. financier and philanthropist Mike Milken yesterday.
But if they were looking for comfort from the storm currently engulfing global markets, there were only harsh truths from Mr. Milken who has seen it all in a career that began five decades ago.
"Thirty-to-one leverage is not a business, it has never been a business and it will never be a business," said Mr. Milken in a clear reference to the now infamous debt to asset ratio at defunct Wall Street giant Lehman Brothers. His own businesses have never been leveraged by a ratio of more than four to one, Mr. Milken said.
The legendary banker -- widely credited with almost single-handedly developing the market for junk bonds during his time with Drexel Burnham Lambert in the 1970s and 1980s -- lectured a packed meeting room at the CLSA Investors conference for more than an hour and a half.
In particular, the financier who once paid a US$200-million fine and served almost two years in jail for securities and reporting violations revealed little patience for those now suffering after having treated credit ratings as a valid proxy for their own research on asset quality.
To a room including many professional money managers, Mr. Milken said, "the lesson of the last 200 years, not the last two years, is you are paid to do credit, not buy ratings."
Most analysis of the financial crisis on Wall Street has pinned some of the blame on complex financial instruments and credit rating agencies that dished out triple-A ratings that later proved to be unworthy. Financial instruments "properly deployed" are a valuable tool and help increase overall wealth, said Mr. Milken, but their deployment in the last few years "has been astounding," he added.
Latterly, after beating prostate cancer into remission, Mr. Milken has also gained renown for his work to promote medical causes -- a 2004 Fortune Magazine article called him "The Man Who Changed Medicine," while Esquire dubbed him one of the "75 Most Influential People of the 21st Century." At yesterday's event in Hong Kong he said investment in education and healthcare is needed to boost global productivity.
Mr. Milken also drew a distinction between U.S. banks which are not currently in a position to finance more consumer spending, and well-capitalized Chinese banks that have more funds available. In response to a question about his opinion on Warren Buffett's investment in Goldman Sachs, he said the giant investment bank's "greatest asset" is its employees and he approved of any move to hold those people together. |
