The Predators’ Ball (7 page)

And Drexel's lack of ambivalence showed in its commitment of capital to this new business. In 1976 Drexel Burnham had merged with William D. Witter, a research boutique in which the Belgian Compagnie Bruxelles Lambert, just months earlier, had purchased a controlling interest for about $20 million in cash. Drexel thus became Drexel Burnham Lambert, with a capital base of $67 million, and Bruxelles Lambert—controlled by Baron Léon Lambert—owned a 28.3 percent stake in the newly merged firm. Now, with the junk-bond business under way in the late seventies, Burnham says he went back to his Belgian investors for two separate infusions, of $10 million each, mainly for the Milken-Joseph venture. The Bruxelles Lambert stake in the firm went to 35 percent.

By 1978, Joseph had assembled his core corporate finance group, the half-dozen investment bankers who over the next eight years—to their astonishment—would each amass many millions of dollars. Among them was Stephen Weinroth, who arrived at the firm that year after stints as an investment banker at L. F. Rothschild and Loeb Rhodes and then as the chief operating officer of a private company.

Weinroth was drawn to Drexel because he saw a “happy constellation” in place. The medium-sized companies Drexel was targeting were indeed an underserved market, the high-yield bond was its perfect product, and Milken was already dominant in trading those bonds. Moreover, Weinroth—avuncular, rotund, hardly an investment banker in the white-shoe mold—felt temperamentally suited to these clients and the role he would play. “With medium-sized companies, you can really get to know the managements, and you can really help them. I figured I could make a difference. I wasn't dealing with an Exxon.”

After Weinroth had been at Drexel for about six months, he would tell Fred Joseph that when he was at Loeb Rhodes two things had always scared him: when he was pitching a piece of business he was afraid he would lose it to Goldman, Sachs, and then if he got it he was afraid the firm would not be able to perform. At Drexel, these fears vanished. “I said, ‘Freddy, it's too easy. This isn't even fair, it's so easy.' ”

W
ITH THE FIRM
flexing its muscles so pleasurably in this burgeoning market, Milken in early 1978 announced to his immediate boss, Kantor, that he wanted to move his entire high-yield group to Los Angeles. He and his wife were both L.A. natives. The winters in the East were too hard on her and their young children, who were sick a great deal, and he and his wife were intent on going home. It was important to him to make the move soon, as his father was ill with cancer and he wanted to be near him. Furthermore, it made business sense: he would be able to work a longer day, since California was three hours behind New York.

There apparently were other factors. As one Drexel executive would put it, “The nervous Nellies at the firm, especially Tubby Burnham, were driving him crazy, always worrying about the size of his positions, and he wanted to put some distance between himself and them.”

Others said Milken wanted to escape the bureaucracy that was a requisite part of life in the firm, even for him, who had managed to shun much of it. Out in L.A. he would be far freer, while Joseph, more important to him than ever, would be his proxy back in New York. In sum, Milken would have his own fully integrated, insular, autonomous and delightfully faraway shop—the natural extension of what he had begun five years earlier, after the Burnham merger.

Milken's decision hit the firm like a thunderbolt. It would cost the firm millions to open up a full-scale trading operation in Los Angeles. The very engine of the firm would be situated three thousand
miles away. Milken, who was fiercely independent and aggressive, would be harder than ever to keep in check.

But the point is that it was Milken's decision, not his request. Kantor said later, “What could we do? Mike was making one hundred percent of the firm's profits.”

It was not as though Burnham and Company had been a shell when Milken arrived. The firm had been profitable every year of its forty-odd-year history. It had had the strength to take over Drexel Firestone at a time when many submajors were folding or being absorbed. But Milken's profits were so astronomical that when the profits and losses of all the departments in the firm were calculated, the others canceled one another out and Milken's profit figure was that of the firm, overall.

Almost as stunning as the fact that a thirty-one-year-old trader could dictate to a Wall Street firm that it move its major base of operations to the hinterlands of Los Angeles (where no other firm had even a meaningful outpost) was the fact that Milken convinced his entire East Coast staff of about twenty traders and sales and research people to move with him. The only people he lost were clerical.

The incentive, of course, was not mysterious. Through the investment partnerships that Milken ran, by 1978 his top people had already become millionaires. They were the envy of Drexel. An invitation to join them was a ticket to wealth. Gary Winnick, who had sold furniture before coming to Drexel in 1972 and by 1978 was selling high-grade bonds to institutions, recalled how Milken recruited him for the move West.

For the past two years, Winnick had worked across the trading floor from Milken. They had a passing acquaintance. Winnick said that he came in early and left late, as of course did Milken, and Milken noticed this. Later, Milken would tell him that he admired his work habits. In the spring of 1978, shortly after Winnick heard that Milken was moving his group to L.A., Milken—who had spoken to Winnick infrequently—asked him as they walked out on a Friday afternoon what he was doing that weekend. Winnick replied that he and his wife were going to look for a house to buy in Westchester County. “Don't buy anything,” Milken said.

He's got something in mind for me, Winnick thought to himself. He felt as though his heart were going to jump out of his chest. Winnick was then making about $50,000 a year. Milken's people
were widely rumored to be making half a million, a million, more—and they were no more gifted than anybody else in the business. He raced home to tell his wife what the wizard had said, to puzzle over those three words, to dream about what he knew could be—if the words meant what he hoped—one of life's greatest opportunities. Several weeks later, Milken finally asked him to join.

Winnick was not alone in his assessment of Milken's people as being notable only for their newfound wealth. “None of Mike's guys was anything when he took them on—he created them,” declared one former Drexel executive. “What he wanted was bodies—but
loyal
bodies. Disciples.”

His faithful cavalcade moved west. In later years, Milken—who, though he would avoid the press, was not loath to cultivate the legend that grew up about him—would tell friends that he and his wife made the trip west by car, so as to afford him time away from the phone. She drove, and he sat in the backseat, mired in prospectuses.

Another story he told about this trip is more revealing. Not long before Milken and his wife began their journey, he (in Drexel's account) had shorted some bonds with warrants (to buy stock at a given exercise price) attached. When you short a security, you sell it to another party at a given price, for future delivery. What you are betting is that by the time of delivery, when you have to buy the security, its price will have dropped, so you will buy it for less than your selling price. As the Milkens started out, however, the company's stock took off on one of the greatest runs of all time—and escalating with it, of course, were Milken's shorted bonds and warrants.

“Mike said, the warrants were going up and up, there was nothing he could do—he just kept stopping and making calls from phone booths all the way to California. It was a very long trip,” recounts one former Drexel employee. “It would have been a very hard hit if it had been the firm's capital that took the loss. But by the time Mike got to California, he had managed to lay off the position on his clients. He told that story laughing—especially the part about how he'd been able to lay it off.”

M
ILKEN AND HIS ENTOURAGE
opened shop in a skyscraper at 1901 Avenue of the Stars, in Century City, on July 3, 1978—the day before Milken's thirty-second birthday. For months there was no
name on the door behind which they were trading. Some of Milken's associates say he did this in order to show Burnham that the business was his and he didn't need the Drexel name. Others insist that he felt a sign was unnecessary—his was not a walk-in business for the public—and that the anonymity suited him. “All Mike has ever wanted,” maintained one longtime associate, “is to be left alone to do business.”

Milken was serious about the longer workday. He set the clocks to New York time, so that everyone would remember that they were living by New York market hours. He expected his people to arrive by 7:30
A.M
. New York time—4:30
A.M
. California time.

He bought a house in Encino in the San Fernando Valley, near where he and his wife had grown up. Encino is a pleasant, well-to-do California suburb, but it has none of the palatial sweep of Beverly Hills or Bel Air. Milken, however, has no taste for such splendors. In Encino he was surrounded by family. When he arrived, his parents (his father has since died) lived nearby in a modest California ranch house, as did his brother, Lowell (in a larger one). His cousin Stanley Zax had just become chairman and president of the Zenith National Insurance Company, and the large Zenith building (with a Drexel retail branch on the first floor) was a half block from Milken's parents' home.

The nucleus of Encino is Gelson's, the superfancy supermarket where Milken would often go on a Saturday morning, accompanied by a flock of his children and their friends from the neighborhood. These were not stolen, unproductive moments. Milken enjoyed doing this because he was interested in the business of Gelson's and liked to see how things were priced and displayed. He likes children, generally feeling more comfortable with them than with adults, but their presence too had purpose: they would pick out their favorite products, and then Milken knew what was hot. “For Michael, there are no chores. Everything is a learning experience,” said Harry Horowitz, his friend since boyhood.

As homey a tableau as this makes, the house the Milkens chose was not without a certain cachet. It had been the guest house on the Clark Gable and Carole Lombard estate. When Gable died, in the midseventies, the land had been divided into numerous, relatively small lots, so, while some of the homes that were built there are large and ornate, most of them are close together. The overall impression of the area, now known as the Clark Gable Estates (with
street names like Tara and Ashley from
Gone With the Wind)
is of an extremely upscale, nouveau-riche development.

The Milkens' home, however, is different. Secluded, at the top of an uphill driveway, it is only partially visible from the street: a deep-blue multilevel shingle house with enormous stone chimneys. While it does not seem very large from the front, it opens up into large, airy spaces. “Mike paid $750,000 for it in 1978, and I remember we were all agog,” says one member of Drexel's corporate-finance department.

Within several months of Milken's move, his brother, Lowell, two years his junior, left the prestigious, hard-driving Los Angeles law firm of Irell and Manella where he was an associate to join Milken at Drexel. Lowell Milken, who graduated summa cum laude from UC Berkeley and then graduated from UCLA Law School, where he was the editor of the law review, had been a highly regarded fourth-year associate at Irell, clearly destined to make partner. But with his brother, at Drexel, he could utilize all he had learned at Irell and Manella and do much more.

Michael Milken had been investing for his brother as well as for himself for years, and by this time the Milken assets were probably between $25 million and $50 million. Lowell Milken came in to manage those assets; as those of Milken's high-yield group grew, he would manage those as well. At Irell he had done tax work for small entrepreneurs; now he set about constructing tax shelters for his, his brother's and the group's incomes. Movies, including those produced by Dino De Laurentiis, became a favorite shelter. According to two former Drexel partners, they believed that these shelters were so effective that Michael Milken paid relatively little in taxes.

During the next several years, Lowell Milken would form a company at Drexel named Cambrent Financial Group, which would function as a service arm for the Milkens and the high-yield group and employ a handful of lawyers. Lowell Milken would draw on his Irell and Manella connections for talent, hiring two of the firm's outstanding lawyers, Edward Victor and Craig Cogut. Richard Sandler, who had been Lowell's close friend when they were growing up and had attended UC Berkeley and UCLA Law School with him, also joined and functioned as Michael Milken's personal attorney. Cambrent would be located at Drexel—adjacent to Milken's trading floor, in fact. But it would have no relationship to Drexel. And its very existence would underline the utter separatism of the Milken operation.

Lowell Milken was the technician with the green eyeshade, the administrator of the empire. But he would also be his brother's closest adviser and probably his sole confidant. His office was shouting distance from Michael Milken's desk in the center of the trading floor. Friends of both say that Michael trusted his brother to do the equity analysis that he did not have time to do himself. While Michael was a creative fount of ideas, in perpetual intellectual motion, Lowell distilled, rejected, organized, and attended to the legalities. He was a fail-safe mechanism for Michael. Michael made no important decision without consulting his brother.

Other functions of Lowell's are less touted. Shorter than Michael, also sporting a toupee, Lowell was so abrasive that he would soon make Michael—notorious for driving his people by insult—look almost beneficent. The two did an effective good-guy/bad-guy routine. Michael would say, in response to a request from a group member, that it was fine with him, just check with Lowell; and then Lowell, his rage triggered at its mention, would summarily reject it. Lowell came to be regarded within the firm as Michael's hatchet man and would be feared and disliked by some in Milken's group. He shared his brother's obsession with control, and it seemed to lapse over into his personal life as well; Lowell's wife was said by employees at Drexel to wear a beeper. But however much animus existed between group members and Lowell, no one could come between the two brothers.