Payback: The Conspiracy to Destroy Michael Milken and his Financial Revolution, by Daniel Fischel

by | Apr 22, 1998 | Business

Fischel's thesis is that Milken was a financial genius who fell victim to envy and became the scapegoat for economic disasters caused by the government.

Whenever legitimate business activities get saddled with pejorative terms, one should look for the deeper injustice being put over. “Junk bonds,” “insider trading,” “corporate raiders,” “hostile takeovers,” and “bust-up artists” revile characteristic activities of the 1980s–the so-called “decade of greed”–and the man at their center: Michael Milken. The story is that Milken and his gang on Wall Street went mad with insatiable greed, orchestrating a crime wave that tore up corporate America for a quick buck. Consequently, many think Milken deserved his years of government persecution, fines of over $1 billion, two years’ imprisonment, and lifetime ban from the securities industry.

In an admirable act of justice to Milken, Daniel Fischel blasts this verdict in his book Payback. Fischel’s thesis is that Milken was a financial genius who fell victim to envy and became the scapegoat for economic disasters caused by the government.

Aware of widespread ignorance about economics, Fischel–an economist and professor of law and business–begins by presenting the historic context of corporate America’s stagnation during the 70s. At the time, many firms had become inefficient and unprofitable as they grew large and expanded into “unrelated lines of business.” Fischel attributes this trend to a combination of government laws and mismanagement. For example, laws restricting stock ownership favored a dispersion of many small shareholders, making it difficult to hold management (which tended to own little corporate stock) accountable.

The economic shifts of the early 80s combined with deregulation and relaxed antitrust enforcement to create “new entrepreneurial opportunities” for taking over badly-managed corporations, reorganizing them, and redirecting or selling resources for more productive use. Enter Michael Milken, who ingeniously created the principal means to finance this “restructuring.”

Fischel provides a brief yet inspiring sketch of Milken’s career. At university, Milken discovered that major bond-rating agencies underrated “talent and future prospects” in their risk assessment of certain emerging firms and exaggerated the risk of their bonds, which thus had to offer higher yields to attract investors. Consequently, Milken foresaw incredible opportunities in “high-yield” bonds if one could identify the underrated firms.

Hired in 1970 by Drexel (a third-tier investment bank), Milken worked brilliantly throughout his 18-year career there to expand dramatically the market for high-yield bonds, which became entrepreneurs’ life-blood in their revitalization of corporate America. Fischel relates how Milken acquired a reputation as the most knowledgeable and dependable financier in the business, who, after a few hours on the telephone, could raise billions from investors to finance the takeover of a badly-managed corporation.

Fischel shows how, contrary to myth, Milken’s restructuring revolution significantly benefited America by improving corporate efficiency. The total value investors placed on American corporations rose dramatically; the Dow Jones industrial average tripled during the 1980s after remaining flat throughout the 70s. This growth made many wealthy, including Milken, who made Drexel the most profitable investment banking firm on Wall Street. Fischel’s uplifting story offers a rare opportunity to experience admiration. Yet at the time the opposite reaction prevailed.

Fischel tells how Milken’s financial revolution upset the status quo of the business “establishment,” and how certain “threatened” and displaced businessmen, motivated by envy and fear, launched the assault on Milken. For example, displaced financiers such as Nicholas Brady, who had to sell his firm, and Felix Rohatyn, whose prominence was evaporating, wrote newspaper articles, filled with “anti-greed” rhetoric, in which they forecast economic doom and condemned the restructurers. Fischel succinctly explains how the attackers first enlisted the broader media, then the government, using a time-honored technique in American economic history, “equate the competitive threat to you with injury to society, exaggerate the magnitude of the danger beyond recognition, and then claim regulation is the only solution.”

Although Fischel provides an informative dissection of securities regulations, a more essentialized presentation of their non-objective nature and an explicit identification of their egalitarian underpinnings is given by Richard Salsman (“Wall Street Under Siege,” TIA 3/28/88). Still, Fischel clearly demonstrates the way vague laws designed to prevent takeovers led to vaguer laws criminalizing “insider trading,” “stock parking,” “manipulation,” etc. He shows how legitimate and beneficial business activities became purposely undefined crimes to give government “maximum power and discretion to prosecute whomever they choose for essentially whatever reasons they might choose.” Congressmen such as John Dingell vigorously defended vagueness, arguing that “to define the criminal behavior would inevitably be underinclusive and provide a “road map for fraud.” In case after case, Fischel shows how the government exploited the fluid, expansive, retroactive nature of securities laws against the restructurers.

The destructiveness of non-objective law crystallizes in Fischel’s most horrific chapter, “Rudy Giuliani’s Reign of Terror.” Fischel tells how the opportunist US attorney persecuted and terrorized innocent businessmen and ruined their careers and fortunes. On one occasion, desperate to force certain businessmen to plead guilty and help incriminate Milken, Giuliani sent 50 armed guards to arrest them for an alleged tax fraud, only to discover later that taxes had been overpaid. He deployed the Racketeering Influenced and Corrupt Organizations (RICO) Act to destroy their company–a law specifically designed by Congress for Mafia types, giving the government “sweeping new powers” to “seize entire businesses connected even indirectly with a defendant at the time of indictment, before any proof of guilt.”

By the time Milken was indicted, everyone involved felt the government was unstoppable. But none understood how it could get away with such police-state tactics in America. Convinced of his innocence, Milken initially decided to fight the case but eventually caved in to the government’s strong-arm tactics; as advised by his lawyers, he pled guilty to six of the “more serious” charges in the 98-count indictment. Given the government’s zeal, biased press coverage and Milken’s guilty plea, many concluded that Milken must have committed serious crimes.

Fischel’s research on the government’s case against Milken was completed after Milken’s 1990 sentencing trial, when all the documents were available for study. He dissects the six felonies to show that, aside from lacking evidence, all were mere bookkeeping infractions which violated no legitimate rights and harmed nobody. As for the other 92 counts, a Fatico hearing–one held by a sentencing judge to assess a defendant’s character–revealed that prosecutors had no case. Milken was an innocent victim.

Fischel’s book stands in stark contrast to Den of Thieves (1991) in which author James Stewart ignored the Fatico hearings, dropped any historic/economic context, dismissed the 80s economic boom as psychologically driven, sanctioned all laws and police-state tactics, and mixed hearsay with facts–and still failed to demonstrate Milken’s alleged guilt. According to Fischel, Stewart was “the government’s favorite mouthpiece … by writing front-page stories for the Wall Street Journal” filled with anti-greed rhetoric and passing on government leaks designed to scare victims into pleading guilty.

It is painful to read Fischel describing how Milken’s defense strategy at his sentencing trial consisted of stressing his generous philanthropy, begging for community service instead of prison, and expressing “deep remorse” for his “crimes.” Judge Kimba Wood sentenced him to ten years’ imprisonment (reduced later to two) stating: “Crimes that are hard to detect warrant greater punishment in order to be effective in deterring others from committing them.” Failing to grasp the moral issues involved, Milken had granted the sanction of the victim.

Since justice consists of granting to each what he deserves, justice demands restitution for Michael Milken, who suffered undue punishment and continues to be persecuted today for his recent assistance to corporate America. The best act of justice an author can perform is a book that paves the way for restitution. By vindicating Milken, Fischel’s book makes an important step towards that goal. However, restitution requires government action–which requires public pressure–which requires a proper moral verdict on Milken by the culture–which requires a major philosophical re-orientation; and, not surprisingly, this is where Fischel’s book falls short.

Fischel cites envy as the attackers’ motive, but fails to identify what made envy such a potent destroyer–the pervasive morality of altruism. Only an assault on altruism as evil and a defense of egoism as good can reverse the destruction. But Fischel never proclaims Milken’s moral right to pursue his own selfish interests. His defense of Milken (and capitalism) consists of appealing solely to public benefit, which is a concession to altruism. Fischel never mentions altruism’s greatest enemy and capitalism’s greatest champion–Ayn Rand.

Restitution would require the effective participation of Milken, who needs the knowledge of what makes evil seem powerful and of how to combat it. As Ayn Rand wrote in Galt’s speech: “I saw that the enemy was an inverted morality–and that my sanction was its only power. I saw that evil was impotent–that evil was the irrational, the blind, the anti-real–and that the only weapon of its triumph was the willingness of the good to serve it.” Though he had read Atlas Shrugged, Milken tragically failed to understand the role he played in sanctioning his own persecution.

Fischel makes the same error. The book neither explicitly calls for restitution nor provides any advice on how Milken could defend himself against his destroyers. Implicitly conceding that evil is potent, Fischel too feels Milken had little chance against a seemingly unstoppable government (even though his account illustrates a golden opportunity for the kind of defense Ayn Rand offered in Rearden’s trial). Grasping the sanction of the victim, in its philosophical context, is necessary for the good to triumph. While Fischel’s Payback is an admirable down payment on justice for Milken, real “payback” requires Ayn Rand’s philosophy of Objectivism.

Originally appeared in The Intellectual Activist.

Glenn Woiceshyn is a freelance writer, residing in Canada.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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