The Predators’ Ball (8 page)

Michael Milken's power did not go to his head in a way that impaired him as a salesman. Not long after he arrived in L.A. he called James Caywood, who had just arrived in Houston to run a high-yield-bond fund named American General Capital Management.

“Mike said, ‘I hear you're the new high-yield manager,' ” Caywood recalled. “ ‘I'm Mike Milken. Why don't you get on a plane, come out here, we'll spend some time and talk about the high-yield market?'

“I said, ‘Mike, I've been in this business ten years as a salesman. I know it's customary for the salesman to come to see the customer.'

“He said, ‘You know, you're right.' And he walked in the door one day later,” Caywood added.

Milken arrived carrying under his arms two enormous files, like carousel cases, each weighing about thirty pounds. “He said, ‘Every bond you want to talk about is either in here' (pointing to the files) ‘or in here' (pointing to his head). There were about 150–175 issues—however
many, he could tell you the name of the chairman's cat. He cut the wheat from the chaff—‘This is what's good about these guys, this is what's bad.' ”

Caywood thought that Milken had to be the world's best bond salesman. He had an almost unbelievable memory for prices that bonds had traded at years earlier. Caywood also thought Milken was a workaholic, and told him so. “Mike got sort of insulted. He said, ‘I don't think I should be criticized for working hard. Some people like to play basketball. Some like to play golf. I like to work hard.' ”

That night, after Milken and Caywood had dinner, Milken boarded a plane for Los Angeles at eleven o'clock Houston time. Caywood estimated that Milken would have arrived at his home in the San Fernando Valley about four hours later. “When I got to work the next morning—it was five
A.M
. California time—Mike had already called. The man is a
machine.”

By late 1978, demand was outpacing supply in the junk market. There were eleven high-yield mutual funds. At American General, Caywood had $150 million to invest and was receiving $1–2 million more a day. Like other high-yield funds, American General promised clients large monthly dividends—“so even if the bonds didn't make sense to buy,” Caywood said, “you had to buy them.”

Offerings, moreover, tended to be small. “You were lucky to get ten percent of a twenty-five-million-dollar offering,” Caywood declared. “So that was two and a half million. Hell, I was getting in two and a half million a day.”

Whatever the investment demands of Caywood and other portfolio managers of these funds, which generally had $50–150 million, they were dwarfed by David Solomon's at FIFI. By the end of 1978, Solomon had $400–500 million. Solomon, therefore, could not afford to be choosy, and he opted of necessity for a bottom-fishing approach, buying up the dicey bonds, the junkiest of the junk.

Less than two years after Drexel had issued its first junk-bond offering for Texas International Company, then, a market with well over $2 billion in new issues had been created. Companies were lining up to issue the bonds. Buyers were clamoring for them. And Milken, with his core group holed up in Century City, was the undisputed patriarch of this new universe.

Years later, junk buyers who met him then would recall the fervor of Milken's pitch. “He didn't just say, he
preached,”
one
buyer recalled. “He was like a messiah, preaching the gospel. He had this total singlemindedness of purpose.”

“If my purpose was to try to help people, maybe I was singleminded,” Milken responded, in an interview in 1987. “The marketplace was willing to invest in long-term, fixed-income securities of non-investment-grade companies. I felt it was our responsibility, in terms of making a contribution to both parties, the companies and the investors.

“To me,” Milken continued, “it was a form of discrimination—to discriminate against the management and employees of a company which offered value-added products and services, all because he didn't get a certain rating. It seemed grossly unfair. So I would not have been true to myself if I didn't use the tools I had, to try and raise capital for these people.

“If you say to me, ‘What characterizes Drexel?' ” Milken concluded, “it's a commitment to helping people—being there when they need you.”

What Milken had formed went far beyond his inspired salesmanship. One buyer who accepted his invitation to come out to see him in Century City in January 1979 was Howard Marks, who had managed money at Citibank for pension clients and was about to start managing a high-yield mutual fund there. Later Marks moved to L.A. to join Trust Company of the West, where by the mideighties he would be investing a portfolio of about $2 billion in junk bonds.

After his visit, Marks thought that Milken's operation would make a great case study for Harvard Business School. He was struck by the completeness, the circularity, what he calls the “yin/yang” of Milken's creation. As Marks recalled, “He had the issuers. He had the buyers. He had the most trading capital of any firm. He had the knowhow. He had the best incentive system for his people. He had the history of data—he knew the companies, he knew their trading prices, probably their daily trading prices going back at least to 1971. He had boxed the compass.”

It was, indeed, all in place. A springboard moment. And now Milken was about to add a new dimension to his fabulous farrago. For the past ten years he had been building his following, earning their fealty. With his extraordinary acumen and Tubby Burnham's capital, he had been able to line the coffers of already wealthy men like Lindner, Riklis, Steinberg and Tisch. Others, less successful when Milken found them, owed him more. He had transformed
David Solomon of First Investors into a star portfolio manager. And, through his trading partnerships, he had transformed his key people from nonachievers into millionaires, binding them to him with their newfound, albeit largely untouchable wealth.

As Milken's universe expanded from trading to incorporate the original issuance of junk, however, the bounty that was his to distribute increased exponentially. Now he had a product which would not simply allow some wealthy investors to make a killing (buying for the upside) but could transform a dissolute financial institution into a powerhouse. And he had pools of capital that could be tapped to transform small-time entrepreneurs into major, and ever grateful, corporate players. There were many who would profit from Milken's new, expanded abracadabra powers—and who would jump to do his bidding. As the first of them, Stephen Wynn, would say to
Forbes
magazine years later, about Drexel, “They made me.”

S
HORTLY AFTER
Milken arrived in Century City, Steve Wynn came to see him. Five years earlier, Wynn had taken control of a foundering, third-rate casino in downtown Las Vegas, the Golden Nugget. He had added a hotel to the gambling operation. Golden Nugget's pretax profits had been $1.1 million the year before Wynn assumed control; by the end of 1978 they were $7.7 million. But the Golden Nugget was still a sleazy joint, and Wynn had bigger ambitions.

He had spent Memorial Day weekend in Atlantic City, where he visited the newly opened Resorts International. The crowds, in lines dozens deep for the slot machines and the gaming tables, had stunned him; he had never witnessed such raw, pent-up demand. Wynn had decided that Atlantic City was the future and he was going to get a piece of it. All he had to do was raise $100 million to build a Golden Nugget there.

“One hundred million, for a company which had a ten-million net worth and three million in income! It was ridiculous!” Wynn exclaimed in an interview in 1986.

Wynn's close friend was Stanley Zax, the chairman of the Zenith National Insurance Company. “Zax knew I was dealing with a small broker,” Wynn recalls. “He said, ‘Get your ass on a plane and meet me at 1901 Avenue of the Stars, the thirteenth floor, and I will introduce you to the only guy who can do this—my cousin.'

“I got there and Stan introduced me to this young kid, thirty-two, wearing jeans, a plaid sports shirt and black loafers. Stan told him he'd known me for ten years and that I was good at my business.

“I told Mike about Atlantic City. He asked me brief, terse questions. He asked for annual reports of Golden Nugget. Asked where I'd gone to school (I'd gone to Wharton).

“He said, ‘I'm in the bond department, I don't bring in clients, that's the job of corporate finance. On the other hand, I usually can persuade them to look at things my way.' (I didn't realize how humorous that was).

“ ‘I'll tell you what I'm going to do. You think you need a hundred million. I think you need a hundred twenty-five million. I don't like people to be underfinanced. I'm going to do your deal. The firm has turned down Harrad's, Bally's and Caesar's—they don't want the gaming industry, don't want the association. I don't think they should have turned down Harrad's.

“ ‘Get in that plane and go to see Fred Joseph in New York. Be there at eight
A.M
. Monday. Joseph will go and try to convince Tubby Burnham and Bobby Linton [who had become president of the firm, succeeding Mark Kaplan]. Wear a regular suit. Do you have shoes with laces?' ” Wynn shook his head. “ ‘Well, dress conservatively.' ”

Linton was nervous, but Burnham finally overruled him and decided in favor of it. There were good reasons to take the gamble. Wynn had a track record. He had his own money in, something which carried a lot of weight at Drexel; nearly his entire net worth, about $2 million, was in Golden Nugget. Moreover, the gaming industry was essentially without investment-banking services because no other firm wanted the taint and gaming was not considered a growth industry at the time; if Drexel could overcome its queasiness, it could probably have the whole industry. And besides—Milken wanted it.

Over the next two years, Drexel raised not $125 million but $160 million for Wynn's idea. The capital came largely from mortgage debt, with some subordinated debt and small equity offerings—so Wynn's ownership stake, roughly 20 percent, was barely diluted. And six years later Wynn's $2 million stake would be worth about $75 million and he would sell the Atlantic City casino for $440 million. It would turn out to be, as one corporate-finance
professional who worked on the deal says, a “grand-slam home run.”

“I was the first [investment-banking] client that Mike brought in,” said Wynn proudly. “He
saw
it. He saw that Drexel could get control of the whole gaming industry. And they did.”

But in the beginning Milken had raised $160 million for something that was little more than a gleam in Steve Wynn's eye. One buyer, James Caywood, recalled that as hungry as he was for junk at that time, investing in the Golden Nugget bonds had required a leap of faith. “It was a dream. The balance sheet was nonexistent. Those of us that bought were doing nothing but betting on, number one, Drexel, and, number two, Steve Wynn,” said Caywood.

Wynn concurred. “We symbolized, in terms of timing and our essential posture, the archtruth of Drexel's philosophy. There we were, wanting more money than anyone could argue we had a right to. It was venture capital, masquerading as debt finance,” he concluded, capturing the essence of Milken's operation.

Even with the enormous demand in the junk market in 1979, it took almost two years to raise that $160 million. Wynn crisscrossed the country, visiting scores of mutual funds and other institutions. In one fourteen-day period he did road shows in twenty-five cities. “Mike told me at the start that I'd have to sell them hard,” Wynn recalled. “He said, ‘Tell your story. If your deal works, and it will, inside of five years you'll be able to do five hundred million over the phone.' ”

And that, Wynn added, was exactly what had happened. Over the next six years, Drexel raised about $1 billion for him. He had never had to do another road show. He had never had to wait for the authorization of Burnham, or of anyone else at the firm. “If I want two hundred fifty million dollars, I just call Mike. Done. In one issue, Mike took forty million himself. Personally.”

Though the intense Milken and the flamboyant Wynn (now known through his television commercials, in which he features himself with Frank Sinatra, Dolly Parton and other stars) would seem to make an odd duo, the friendship had purpose. Wynn would be useful to Milken as an entertainment arm, providing stars as entertainers at the Predators' Ball. He would be a business-getter, bringing to Milken clients such as Circus Circus and Lorimar. And, through Golden Nugget and also his personal portfolio, Wynn would become a major investor in other Drexel deals, including the hostile
megadeals. Briefly he would become a principal in the hostile game, making a bid in 1985 for Hilton Hotels for $1.8 billion, which he then dropped.

Interviewed in mid-1986, Wynn indicated that he planned to return to the hostile arena and was only waiting for the right moment with the right target. “Mike and I have never fired both barrels. When we do, it won't be for any little four-hundred-million-dollar acquisition. It will be a tidal wave. It will be a two-, three-, four-billion-dollar deal.”

“This,” Wynn declared, pausing for effect, “is how real wealth moves. It gallops.”

N
OT LONG AFTER
Milken and his cadre had moved to the West Coast, their colleagues back in corporate finance in New York began to feel that the epicenter of deals, money and power was decidedly westward. Indeed, with Milken out in L.A., Drexel Burnham in New York had the quality that Gertrude Stein delineated in Oakland: “There is no there, there.”

In September 1979, Joseph and a select group from his corporate-finance department held a session with Cavas Gobhai, a consultant whom he had used for years and whom Joseph's colleagues teasingly referred to as his “guru,” to address their unease. It was a three-day meeting, held at the Barbizon Plaza on Central Park South because Bruxelles Lambert owned an interest in the hotel.