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The Biggest Ponzi Scheme Of Them All?





By Benjamin J. Stein -- Simon & Schuster -- 219pp -- $23

If you believe Michael R. Milken was the most contemptible financial bad guy of the 1980s, I have just the book for you: A License to Steal will confirm your worst suspicions.

Although federal prosecutors pursued Drexel Burnham Lambert Inc.'s junk-bond czar for almost a decade, they failed to uncover the far-ranging pattern of egregious wrongdoing many observers had suspected. What they did find was related to stock trading, not junk bonds. But many Milken-watchers still think the bulk of Milken's malfeasance involved the junk market, which he all but invented and presided over for years. Surprisingly, none of the authors of the recent spate of Milken books explored Milken's junk doings in detail.

In A License to Steal, freelance financial writer Benjamin J. Stein vigorously tries to rectify that oversight. Stein believes that Milken, whom he compares to mobster Meyer Lansky, was at the heart of a broad conspiracy that bilked investors, savings and loan depositors, insurance policyholders, and taxpayers out of tens of billions of dollars. The conspiracy's linchpin was junk bonds. Because of his absolute control of the junk market, says Stein, Milken could "artificially fix" junk prices "to give himself any level of commission or profit he wanted." That enabled Milken and a network of loyal cronies at financial institutions such as insurance companies and S&Ls to operate a gigantic Ponzi scheme. They would sell junk issues, then use the proceeds to invest in other junk issues.

To further fuel the Ponzi, says Stein, Milken and his cohorts persuaded a wide group of investment managers who ran mutual funds, pension funds, and other portfolios to buy billions of dollars of junk. The sales pitch: While junk bonds might be riskier than higher-rated bonds, the rich return more than offset the extra risk. Stein claims Milken deceived junk buyers by hiding evidence that the default rate of junk issues was much higher than he claimed. "Everything," says Stein, "every lie and puff and phony statistic was to preserve for as long as possible the basic untruths of the junk-bond scam."

To propagate the lies to ever-larger legions of buyers, Stein claims, Milken enlisted an extensive and impressive network of academics, rating agencies, regulators, accountants, politicians, and journalists who condoned--or declined to expose--the scam.

The purported Ponzi began disintegrating in 1989, after Milken was forced out of Drexel. That led to Drexel's demise in 1990 and the collapse of several junk-laden insurance companies, S&Ls, and other financial institutions. The conspiracy to conceal the true risks of junk, especially Drexel junk, persists even today, claims Stein, with firms such as Salomon Brothers, Merrill Lynch, and Morgan Stanley filling the void left by Drexel. "The power players of junk are still powerful," he warns ominously.

True believers in Milken's villainy may buy Stein's thesis. More knowledgeable and skeptical readers probably won't, especially since Stein's book is long on assertions and short on documentation. A sometime Hollywood screenwriter and bit actor whose writings on Milken have been given wide exposure in Barron's, Stein has inflated a core of truth into an elaborate paranoid fantasy that often defies logic.

Stein's take may accurately depict the junk market in the early 1980s. By mid-decade, however, whatever conspiracy may have existed was waning. The market had expanded far beyond the Drexel network and attracted many other securities firms, which undermined Milken's power to rig prices. And it's improbable that Milken could have hoodwinked hundreds of professional investment managers into ignoring clear evidence of junk's excessive riskiness and inflated prices.

As it turned out, junk was in fact overpriced. But because of the world-wide credit expansion of the 1980s, so were most other financial assets, most dramatically commercial real estate. A euphoric assumption prevailed that assets would continue to appreciate indefinitely. It was that euphoria, not some Milken-engineered plot, that deluded junk-buyers--and probably even Milken's cronies.

Stein's allegation that Milken ran a big Ponzi also seems farfetched. Junk took a beating during 1990-91. But un-Ponzi-like, the market has rebounded handily. Stein's assertions about default, largely based on a 1988 study by Harvard University researchers, don't square with other analyses. Stein is right that annual default rates climbed above 5% during 1990-91, a time of sharp credit contraction. But default rates on original-issue junk were considerably below that through 1989, according to several studies. And while the Harvard study foresaw ever-rising default rates, actual rates are now declining. Furthermore, Drexel has had one of the lowest default rates of any of the junk underwriters.

Milken was clearly a prime architect of the debt explosion of the 1980s, whose dissolution cost investors and others billions. He may also have operated the junk market as a vast criminal enterprise. But that has yet to be proved.CHRIS WELLES

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