SINGAPORE (Oct 22): Michael Milken, the junk bond king of the 1980s, is still remembered as much for his role in developing the market for highyield bonds as the securities violations that led to his paying massive fines, serving jail time and being permanently banned from the securities business.
Junk bonds were traditionally investment-grade bonds gone wrong. As investors fled in the face of an increased likelihood of default or credit rating downgrade, the market value of these bonds tanked, resulting in their yields shooting up. Milken realised that a portfolio of junk bonds could produce better returns than a portfolio of investment-grade bonds, even after taking account of the increased risk of default. He made a fortune for himself at the Wall Street firm Drexel Burnham Lambert advising investors and upstart companies to take advantage of these debt instruments.
Milken argued that it was young companies, many funded by high-yield bonds, that drove growth in the US through the 1970s and 1980s. He also pointed out that the US itself was not an investment-grade prospect when it became independent more than two centuries ago. “Junk bonds? Perhaps there’s a better name for the bonds that fuel 95% of American business,” he is once quoted to have said. “Perhaps something like corporate growth bonds. Or state development bonds. Or job creation bonds.”