The Predators’ Ball | Connie Bruck

Summary of: The Predators’ Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders
By: Connie Bruck

Introduction

Welcome to the thrilling world of Michael Milken, the man behind the rise of junk bonds and the iconic Drexel Burnham. In ‘The Predators’ Ball’ by Connie Bruck, you’ll explore his journey from humble beginnings to the meteoric rise of Drexel Burnham. You’ll learn how Milken’s maverick personality and investment strategies turned the world of finance on its head, creating a market for high-yield bonds and attracting a new wave of corporate raiders. Through this summary, you will gain insights into the pivotal role junk bonds played in the 1980s, both in building empires and in their eventual downfall. Get ready to embark on an unforgettable voyage into the tumultuous world of high finance.

The Maverick Michael Milken

Michael Milken, a middle-class Jewish Californian from the Valley, never fit the mold. He was a cheerleader in high school and “sold out” by majoring in business administration during the politically heady 1960s at the University of California at Berkeley. Unlike his pipe-smoking and blazer-wearing classmates at Wharton, Milken didn’t smoke, drink, do drugs, or even drink coffee or carbonated beverages. As a bond trader on Wall Street, he commuted by bus from Cherry Hill, New Jersey, and wore an aviator’s cap over his toupee on cold mornings. This gave him two hours each way to study corporate prospectuses and SEC filings. Milken’s mantra was “If we can’t make money off our friends, who can we make money off of?” Milken became a maverick, inspiring others to pursue creativity, risk-taking, and unconventional thinking.

The Rise and Fall of Drexel Burnham

Drexel Burnham was a product of numerous mergers that sought to establish a sturdy reputation in investment banking. Founded in 1871 in Philadelphia, Drexel had a distinguished pedigree, partnering with legendary banker J.P. Morgan. However, the U.S. Congress passed the anti-trust Glass-Steagall Act, requiring banks to choose either investment or commercial banking, but not both, which led Morgan’s firm to become Morgan Guaranty Trust Company, while Drexel focused on investment banking. The firm spent the next 30 years creating a reputation for solid money management but lacked A-plus, marquee clients. Consequently, Drexel Harriman Ripley merged with a New York investment bank, but struggled as a business and faced a crisis by 1970. A cash injection from Firestone Tire and Rubber and a merger with profitable yet small brokerage, Burnham, saved the firm from collapse. Drexel Burnham was now a top-tier investment-banking firm that catered to Fortune 500 clients. Experts would long debate whether the value that Milken’s onslaught had added to American business outweighed the damage it had done to Drexel Burnham, which ultimately collapsed due to legal issues and loss of reputation.

Milken’s Investment Strategy

Michael Milken, the notorious financier, made a fortune investing in junk bonds, giving him significant influence over corporate America in the 1980s. While Drexel’s high-grade bond department was losing money, Milken’s department was profiting from deeply discounted bonds that were generally below “investment grade.” These bonds were rated BA1 or BB+ or even unrated, and often traded at 10% to 30% of face value. Although many people derided them as “crap,” academic research supported Milken’s investment strategy. Economist W. Braddock Hickman found that a large, diverse portfolio of junk bonds could outperform a similar portfolio of high-grade bonds over the long term.

The Early Success of Michael Milken

Michael Milken’s exceptional ability to sell high yield bonds made him a valuable asset to Drexel Firestone. Burnham’s founder gave Milken more money to invest, as he himself was unhappy at Burnham. Thus, Burnham gave him $2 million, which he doubled in a year, and then $4 million to invest. Milken’s compensation and power only grew from there. His success allowed him to develop a network of loyal investors, including institutional investors, and his compensation kept pace with his growing influence. In 1978, not happy with second-guessing at Drexel, he moved his high-yield bond operation to Los Angeles. Milken was then responsible for all of Drexel’s profits, and his phenomenal memory and technical grasp kept colleagues and clients alike continuously flabbergasted.

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