Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Michael Milken

What it is:

Coined the "Junk Bond King" during the 1980s, Michael Milken was instrumental in engineering a lucrative junk-bond market before being indicted on numerous counts of securities fraud. After serving a brief prison sentence from 1989 to 1991, he became a philanthropist supporting advances in medical treatments.

How it works (Example):

Born in Encino, California in 1946, Michael Milken attended the University of California at Berkeley, graduating with a B.S. in 1968. He went on to receive an M.B.A from the University of Pennsylvania's Wharton School of Business. At Wharton, he took a particular interest in high-yield/high-risk securities.

Milken was hired by the investment firm Drexel Firestone, which was eventually re-named Drexel Burnham Lambert following numerous mergers. Milken was appointed the executive responsible for the firm's new department for junk bond trading. By the 1980s, junk bonds had become a lucrative source of corporate financing, and Drexel was essentially the only high-yield bond underwriter and trader during the 80s.

In 1989, Milken was indicted on over 90 counts of racketeering and fraud. Milken pleaded guilty to six counts of tax and securities violation in 1990 and was sentenced to 10 years in prison with a mandate not to return to the finance industry. The judge reduced Milken's sentence to two years because of good behavior and his cooperation.

Two years after his release in 1993, Milken developed prostate cancer and, subsequently, became an advocate for cancer research, founding the Prostate Cancer Foundation. He pursued this in addition to numerous other philanthropic activities, which include support of other areas of medical research as well as education.

Why it Matters:

Michael Milken demonstrated in the 1980s that there was a profitable market in non-investment-grade bonds. His shortcomings came out during a time of excessive market greed, yet his work resulted in a new type of bond market that changed the finance industry. He demonstrated that companies could successfully capitalize by issuing junk bonds despite their higher risk.

By creating a market for junk bonds, less-solvent companies were able to finance their operations. Milken helped kick-start many industries during the 1980s and is largely responsible for financing growth in Nevada's gaming industry during that time.