View from New York: Morality tales on Wall Street
Saturday 06 March 1993
The junk-bond market and Michael Milken: The former Drexel Burnham financier, sentenced to 10 years in prison for securities fraud, was freed after only 24 months, only to be diagnosed with prostate cancer. Only a month ago, Kimba Wood, the judge who pronounced his original sentence and later reduced it, came very close to being nominated as the new US Attorney General, losing out because she had hired an illegal immigrant and, it later emerged, because she had trained to be a Playboy bunny while studying at the London School of Economics.
The leveraged buyout and Kohlberg Kravis Roberts: The kings of the debt-financed takeover, KKR, announced a restructuring of RJR Nabisco, the food-and-tobacco giant it took private in 1989 in what is still the largest corporate finance deal of all time. Frustrated with RJR's stagnating market performance - as the company's management was four years ago when it launched the buyout - KKR plans to split the company's shares into separate listings reflecting the food and cigarettes businesses - just as RJR's much-vilified chief executive, Ross Johnson, suggested back in 1989.
The casino society and Donald Trump: The high-living property developer, who spent the 1980s naming dozens of casinos, office towers and an airline after himself, struck a deal with his creditors that will free him from personal liability for his debts by the end of next year. And 10 years after he first proposed 'Trump City,' a vast Manhattan development that was to have included the world's tallest skyscraper, Mr Trump this week won preliminary approval to build the renamed, and considerably more modest, 'Riverside South'.
These pieces of news are not without their ironies. But the moral of the stories is not that there is no justice on Wall Street. It is that none of the morality tales that were supposed to purge the market of the evils of the Eighties have ended up as anticipated.
Of all the 1980s anti-heroes, it is the fate of Mr Trump - whose bestseller, The Art of the Deal, was much derided when insolvency suddenly loomed in 1990 - that has most galled his peers. While the banks stripped him of most of his trophy possessions - his airline, yacht and the Plaza hotel - in reorganising his dollars 3bn debt, he has been able to maintain his ostentatious lifestyle, his Atlantic City casinos, and his 100,000 sq ft Mar-a-Lago mansion in Florida (soon to be 'the most exclusive club in the world,' according to Mr Trump).
And by a cruel twist of fate - his creditors are obliged to acknowledge the importance of his untarnished name among small-time gamblers - he has been spared the humiliation of formal bankruptcy. The 'pre-packaged restructuring' of his casino debt might amount to the same thing, but Mr Trump 'can still hold his head high when he goes to New York City looking for tax abatements' for his new project, complains one banker.
KKR's investors have been more fortunate than Mr Trump's, but that is small comfort for speculators who thought they were in on the 'deal of the century' when they bought into the RJR buyout in 1989. Figures out this week show that they would have done as well and in some cases better buying shares in its blue-chip rival, Philip Morris, or investing in a stock-index fund.
After deducting KKR's management charges, their annualised return has been between 11 and 12 per cent. The Standard & Poor's index of America's 500 biggest companies has grown by an average of 12.7 per cent a year over the same period.
And after some very expensive and damaging financial engineering, RJR now finds itself confronted with the same investor- value problems it faced under its previous management: the co-existence of two very different product lines means lower market multiples for the whole firm. Mr Johnson, the former RJR chief executive, initiated the buyout process for that reason, only to be pilloried on Wall Street for trying to buy the company on the cheap. The market's verdict now? KKR, which outbid Mr Johnson's group, 'paid an enormous premium over the stock price when they bought RJR,' says Roy Burry, a Kidder Peabody analyst.
But the most ambiguous outcome for the 1980s villains is the fate of Mr Milken, as even his prosecutors now concede. The man once regarded as 'the Hannibal Lecter of American business' (as one defender put it) leaves his halfway house in Los Angeles without having incriminated any of his supposed co-conspirators, and with a fortune estimated at more than a billion dollars.
Mr Milken's expensive lawyers and PR team have played no small part in his rehabilitation. But the appearance of a travesty of justice owes a lot more to the high expectations that were created for it.
With the US deep in recession by 1990, not only Mr Milken and Drexel Burnham went on trial: so too did the entire junk- bond market, and implicitly the whole merger and debt frenzy of the 1980s. He was blamed not only for the debasement of Wall Street ethics, but for the failed restructuring of American industry, the huge debt overhang, unemployment and America's lack of international competitiveness.
Wall Street has since had a chance to reevaluate Mr Milken's legacy, though he is still held to be at least partly guilty on all counts. But when he was finally sentenced, it was not even for insider trading or market manipulation, but for six technical crimes. And he did apparently live up to his vague promises to 'co-operate' with the continuing investigation while in prison - an agreement botched by his prosecutors, according to an essay by James Stewart, the author of the best-selling Den of Thieves, in this week's New Yorker.
So it is hard to fault Judge Wood for her decision to cut his sentence in half. But much of the recent Milken revisionism also seems misplaced: he simply got away with his stone-walling, and there is little doubt he knows much more than he revealed.
In the end, Mr Stewart argues, Mr Milken was both adequately punished - his ordeal lasted seven years from the time Ivan Boesky first implicated him in 1986 - and Wall Street properly deterred from similar crimes. The market 'is, for the time being, a more careful, law-abiding place,' he says.
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