Michael Milken and the Invention of Junk Bonds

On this day, July 4 in the year 1946, the man considered as the inventor of the modern junk bond was born in California, United States. His name is Michael Milken, the finance wizard who filed for bankruptcy but still became one of the richest persons in the world. According to forbes.com, his net worth is valued at $3.8 billion as of July 5, 2020.

Michael Milken
Michael Milken (Credit: wsj.com)

Michael was born to a Jewish accountant father. He finished a degree in finance from the University of California in Berkeley with the highest honors. He proceeded to earn his MBA from the University of Pennsylvania Wharton School of Business. After graduation, he went to work at an investment firm known as Burnham Harriman Ripley which would later become Drexel Burnham Lambert. He started as director of low-grade bond research and later was given the privileged to trade bonds. Soon, he was able to persuade his boss to allow him to form a high-yield bond trading department. He went on to change the course of finance history.

Michael is considered to have “revolutionized” how companies are financed. His technique was to underwrite high yield bonds issued by companies with lower credit ratings. The rationale behind is that risk has already been adjusted. In a few years, Drexel was dominating the high yield bond market and Michael was earning hundreds of million dollars that he got the moniker “Junk Bond King”.

Among the prominent clients of Drexel were Carl Icahn, T. Boone Pickens, Rupert Murdoch and William McGowan. The company also underwrote the financing of high profile takeover of such firms as R. J. R. Nabisco and other firms in the 1980s.

In 1990, Michael was convicted of violating the securities and tax law. He was sentenced to 10 years imprisonment and fined a total of $1.1 billion. His prison term was soon reduced to 22 months. Although he was banned for life from involvement in the securities industry, Michael remained a respected figure in Wall Street. After his released from prison, he started giving away his wealth. He founded the Prostate Cancer Foundation and the Milken Institute, a non-profit economic think tank.

Michael has three children with his wife Lori Anne.

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