Don't Pardon the Junk Bond King

Many politicos mark the 1980s as the beginning of the financial era that is now crashing around us. It's is fitting then, that one of the original financial felons from that time period, Michael Milken, is asking for a pardon from President Bush. In the 1980s Milken's finance schemes set off a string of hostile takeovers and he and his cohorts became known as "Corporate Raiders", with Milken, the "Junk Bond King". His security fraud convictions may be almost forgotten, and it is doubtful that he will receive a pardon on the last day of Bush's presidency, but Milken's financial revolutions deserve to be remembered because they typify the type of capitalism gone awry that is at the root of our 21st century financial crisis.

I'm not talking about the hard working innovative entrepreneurs that have created so many valuable companies here. I'm talking about the side of our society that has condoned so much lawless corruption in financial services that the foundation of our economy is crumbling.

Thirty years ago Michael Milken was a key innovator in new ways to finance B grade companies with money that wasn't there -- but could be if unrecognized assets were tapped. What he got people to bet on was the possibility that by cutting "costs" (usually jobs) these undervalued companies would become hugely profitable. For a while he was right, until his house of cards came down a few years later and bankrupted his company, Drexel Burnham Lambert, the 5th largest investment bank in the nation. Milken ended up getting himself and Drexel sued by the SEC and U.S. Attorney Rudy Giuliani for insider trading, stock manipulation, defrauding its clients, and stock parking.

Before all this Milken was a golden boy financial whiz kid from Wharton. He was a numbers guy, to the extreme. He wasn't very social and didn't even spend his extravagant wealth very extravagantly, (in 1987 he made $550 million). Still, he managed to almost single-mindedly change the structure of our capital markets. The biggest impact came from Milken's new method of creating liquidity in bond markets. He shifted the responsibility of running a company from the managers, who owned little of its stock, to the new shareholders. It worked well if the new shareholders fired employees and sold off assets to create quick short-term profits, and it created huge fees for the new breed of money managers under Milken.

All this was promoted as a healthy shake up for corporate America. Milken saw himself and his ilk as beacons for a new more democratic form of financing, opening up access to corporate America. He still argues that his work helped to cut out the fat and made our economy leaner and stronger. But what really happened?

According to Social Science Quarterly, Americans now have the highest income inequality of any nation in the "developed world", and its been growing worse for thirty years.

Statistics also show that from 1800 until the 1980s, the United States paid the highest wages in the world (Peter Lindert, National Bureau of Economic Research). But since the 1980s, shareholders have earned record profits, while the portion of the productivity enjoyed by the average American has declined. In the last thirty years millions of good paying jobs have gone overseas in every industry from banking to electronics and films. What started with a giddy push for unregulated market fundamentalism ended up leading to a growth in income inequality not seen since "The Gilded Age". Instead of creating a more democratic meritocracy, this unregulated business expansion has gutted our middle class, led to unsustainable destruction of our environment, and endangered our ability to dissent.

The thinking of the Reagan era was that unrestrained self-interested greed would fuel growth and be good for everyone. "Greed is good" became the commonplace mantra, but underneath there was another unspoken mantra -- in this free market nobody is watching, so "crime pays".