Den of Thieves

by James B. Stewart

  The high-yield bond conference had begun small, in the late 1970s, two years before Milken moved his operation to the West Coast. The market had been in a slump at the time, and Milken had been in one of his rare demoralized states. He complained to Joseph that he couldn’t get any buyers to listen to his message about the profit possibilities in low-rated paper. “Get me some clients,” Milken begged.

  Joseph had the idea of a conference bringing together some of his corporate finance clients, the kind of companies that would typically issue unrated debt, and some of Milken’s network of buyers. The meeting was hardly a rousing success. Joseph could only muster three companies, and Milken managed to attract only seven or eight buyers. But on a cold rainy day in March, they had the meeting in a Drexel conference room. Milken spoke with fervor about the potential of junk bonds, as though he had an audience of hundreds.

  The next year was only slightly more successful: 50 people showed up. In 1979, Milken moved the conference to the Beverly Hilton Hotel in Beverly Hills. The dinner on Friday night, meant to be the social high point of the two-day session, was a fiasco. Ten minutes before guests were to be seated, Drexel executives were handed lists of the corporate and institutional clients who were to be seated at their tables. They were supposed to greet them and steer them to their assigned seats. Most had never met before, so they couldn’t recognize them. People had to sit at random. The food—greasy quiche and pu pu platters with chicken and beef on sticks—had everyone searching for extra napkins. There was no entertainment except a dry speech by the chairman of Sun Chemical.

  Afterward, Engel came up to Milken. “These CEOs are used to doing things in style,” he said. “The hors d’oeuvres were disgusting and dinner was chaos.” Milken was only too happy to give Engel responsibility for planning the next conference.

  At Engel’s direction, the 1980 conference was done with greater style at the more upscale Beverly Wilshire Hotel. It began Tuesday night and ended Saturday morning, as would all the future conferences. Engel invited existing clients, potential clients that Milken thought should issue debt, bond buyers, and institutions deemed potential bond buyers. Executives of companies that already had issued low-grade debt were featured as speakers, praising the rejuvenative powers of junk.

  At the Friday-night dinner, the food and seating arrangements were vastly improved. But the speakers, a panel of academics and a pollster, were dull. Many of the 175 guests dozed off.

  By 1984, however, the high-yield conference had come of age. Over 800 people, a capacity crowd, attended the gathering, held at the Beverly Wilshire. Milken was the official host, the star of every session he attended. He spoke about junk bonds and broader, grander themes: job formation, education, and the scarcity of human capital. They were themes he would repeat in countless speeches for years afterward, and his minions hung on every word, as though Milken the bond salesman had metamorphosed into a worldly philosopher for the eighties.

  Engel now had a staff of eight people, but Milken himself approved the 1984 conference in every detail, even the seating arrangements. Nothing was left to chance. Barry Diller, the head of 20th Century–Fox who’d defected from Paramount Pictures, couldn’t be seated near Martin Davis, the chairman of Gulf + Western, Paramount’s parent. Roger Stone, head of Stone Container, a junk-bond issuer, was seated near representatives of Fidelity, the mutual fund that was a huge buyer of Stone’s bonds. Client service was taken to new lengths: when an institutional junk-bond buyer asked for a mirrored ceiling and walls in his hotel room, Drexel had them installed.

  The Friday-night dinner for 1,500 had to be moved to the Century Plaza Hotel. This time no one fell asleep. Instead of the dreary economist or pollster, a giant screen was unfurled, the lights were dimmed, and a video “commercial” appeared, starring Steve Wynn and Frank Sinatra. Then Milken and Wynn came onstage and into the spotlight. “You guys don’t know how to do commercials,” Milken kidded Wynn.

  “Oh yeah?” Wynn replied. “Let’s have an expert decide.”

  With that, Sinatra himself came striding onstage, brandishing a fistful of cash. “Here you are kid,” Sinatra said, handing the money to Wynn. “Buy yourself a few bonds.” The audience roared its delight as Sinatra launched into a 45-minute medley of songs.

  The Sinatra appearance cost Drexel $150,000. But it was a pittance compared to the billings eventually generated by clients, and by people who became clients, as a result of the conference.

  A year later, at the 1985 gathering, Joseph looked out over the packed ballroom and marveled at the turnout. The conference had been moved back to the Beverly Hilton to accommodate the huge crowd. Over 100 issuers of Drexel-backed junk bonds were scheduled to make presentations. Joseph moved from the head table to the podium for one of what he and Milken referred to as their “brief commercial interludes,” an opportunity to pitch Drexel to the assembled throng.

  This was the moment to tout the firm’s new shift into the takeover arena. “We’ve been working on ways to finance the unfriendly takeover,” Joseph said as the audience listened raptly. He explained the concept of the “highly confident” letter that had been discussed at the November strategy session. “We think we’ve solved the problem; we believe we can do it,” he said. Joseph elaborated on his own philosophy: Companies should belong to those willing to take risks—in other words, to Drexel’s clients rather than to public shareholders. That’s what capitalism was all about. Anyone with Drexel’s backing could buy a company. “For the first time in history, we’ve leveled the playing field. The small can go after the big,” Joseph concluded.

  He wondered if the full import of what he’d said had sunk in. But afterward, in the men’s room, he overheard two conference participants. “Did you hear what Fred said?” one asked. “Yeah. Wow!” said the other. “It’s awesome.”

  With the new emphasis on hostile takeovers, the conference that year was dubbed the “Predators’ Ball.” The sobriquet proved as hard to suppress as the term junk bonds, and it stuck to all subsequent high-yield conferences.

  Later that afternoon, Joseph and Milken held an M&A session, and Milken estimated that the attendees combined could muster $1 trillion in buying power. Practically every raider, would-be raider, and raider specialist was there. Carl Icahn gave a presentation. Sir James Goldsmith, the legendary Anglo-French financier, asked questions, as did Carl Lindner. Publishing magnate Rupert Murdoch added his thoughts, with more comments from Boone Pickens, the Texas oil raider, and Joe Flom. There was also a healthy dash of glitz. For its presentation, Mattel, a Drexel client, paraded buxom models dressed in full-size counterparts of Oscar de la Renta’s new line of Barbie doll evening gowns.

  But the real action unfolded in a far more private setting, in Bungalow 8, situated in the lush tropical gardens of the Beverly Hills Hotel. Bungalow 8 is the largest of the hotel’s bungalows, with three bedrooms, a living room, dining room, and private terraces.

  Bungalow 8 had become the nerve center of the conference, the site of the most feverish dealmaking and the pursuit of other fantasies. It was Engel’s abode each year. He had begun hosting the Thursday-evening cocktail party in 1983. Only selected clients were invited, giving the parties instant cachet within the Drexel client orbit. Beautiful young women, mostly aspiring actresses and models, mingled with the wealthy businessmen. Wives were banned, though they could attend the lavish dinner that followed at Chasen’s restaurant. Few did.

  Drexel corporate finance officials begged Engel to invite their clients. Clients themselves would plead with Engel. “I know I’ve paid $50 million to Drexel in fees this year and I think I should be invited to the party,” was a typical refrain. By 1985, competition was fierce.

  That Thursday evening, the select converged, greeted by the affable Engel. Joseph’s attention was momentarily diverted by some of the dazzling young women mingling in the crowd. He’d been assured that none of them were prostitutes. After all, who needed to pay attractive women to attend a cocktail party with
a collection of the world’s richest men? One of Drexel’s biggest clients, Carl Lindner, had already had Joseph check out a young woman who’d caught the eye of Lindner’s son; Joseph had been assured she was a respectable doctor’s daughter, a personal friend of one of Drexel’s directors. Joseph had said he wouldn’t tolerate the loose mores of the old Burnham & Co., especially now that Drexel was moving onto center stage.

  But those thoughts quickly vanished, for far more important matters were brewing that night in Bungalow 8. Boesky was in a corner talking quietly with Icahn; Sir James was in a group with Pickens and Flom. Murdoch and Lindner were chatting with Kay and Engel, the affable host. Within only a few weeks, Pickens would launch his bid for Unocal, Peltz would bid for National Can, Sir James would attack Crown Zellerbach, and Farley would go after Northwest Industries—all with Drexel financing.

  A sense of electricity had begun moving through the conference crowd, even outside Bungalow 8, as imaginations were released by the prospect of Drexel-generated billions. The excitement climaxed at the Friday-night dinner. The crowd rocked to the strains of “Ghostbusters”: “Who ya gonna call when you want money fast? Call Drexel,” went the lyrics. Then the screen vanished and Diana Ross, dazzling in a sequined gown, stepped into the spotlight as the evening’s surprise star. She sang a medley of Motown hits and managed to change outfits twice.

  Most participants were suitably impressed. Yet a few doubts remained. “What you don’t know is if you have a watershed in American business,” one participant that year told the San Francisco Chronicle, “or a South Sea Bubble.”

  5.

  Wilkis answered the phone in his office at Lazard Frères. It was the first call of the morning and, not surprisingly, it was Levine. “Don’t work today,” he began.

  “Dennis,” Wilkis replied wearily, “you know I can’t.” Wilkis was amazed that Levine had so much free time; nothing had really changed since his days of playing hookey at Citibank.

  “Then let’s have lunch,” Levine continued. “We’ll go to the River Cafe.”

  Wilkis agreed. “Let’s have lunch” meant, of course, that Levine wanted to talk about “the game.” Nowadays, they never discussed it on their office phones. They used pay phones if they had to, or better yet, met in person.

  At the time, in mid-1984, no place in New York was “hotter” than the River Cafe, an elegant, exorbitantly expensive restaurant located on a barge tethered to the Brooklyn waterfront. Restaurants had suddenly become the new theater for rich New Yorkers, most on expense accounts. They were the places to see and be seen, to display the latest fashions, to impress each other with the ability to get the right table.

  Levine loved the trendy spots, loved using his “walking-around money” to secure the best tables. That afternoon he got a table with a stunning view of the Manhattan skyline across the East River and waited for his friend. “I’m testing your loyalty,” Levine began when Wilkis arrived. “Are you paying?”

  Wilkis nodded, feeling he had no alternative.

  “Good.”

  Wilkis could easily afford it. He’d recently visited the Cayman Islands for the first time since shifting his account, and his bankers had been all smiles. In little more than a year, his account showed gains of well over 50%.

  Levine ordered a bottle of expensive Bordeaux and looked imploringly at Wilkis. “Bob, there’s something I want to know,” Levine began. “Are you seeing me because you’re really my friend? Or do you only come because I give you information?”

  “Cut the crap, Dennis,” Wilkis replied, uncomfortable at the sudden sentimentality. “Let’s talk about the game.”

  But Levine seemed to want to talk about anything else. He loved to complain about his wife, and invited Wilkis to do the same, but Levine’s crude, even vicious remarks made Wilkis uncomfortable. “I hate to go home,” Levine would say. “I can buy any babe you want.”

  Levine took a similar approach to just about anything Wilkis brought up. For the first time, Wilkis was beginning to enjoy life in Manhattan, going to concerts, operas, and bookstores, meeting people with similar interests. None of this interested Levine. “Fuck it if you can’t buy it,” was his standard line.

  Levine loved to regale Wilkis with tales of injustices he endured at Lehman Brothers. Peter Solomon “loved him,” he said, but nearly everyone else discriminated against him. Lehman was “old money,” he explained. Wilkis was puzzled. “I don’t get it. Aren’t they Jewish?”

  “They’re German,” Levine answered. “They’re just as bad as WASPs.”

  After a while, Levine turned to the real purpose of the lunch. “We have to talk,” he said, seriously.

  “What about?” Wilkis asked.

  “Relax, Bob,” Levine replied, drawing out the conversation even more, prolonging the suspense. “Have a brandy.” Only when the vintage brandy arrived did he come to the point.

  “Wally’s incredible,” he said. “So is Goldie.”

  Wilkis squirmed. He knew he hadn’t been contributing much. He had gleaned advance word of United Technologies’ bid for Bendix, near the end of the takeover battle that had brought Martin Siegel to fame. That had netted Levine over $100,000 in profit on a 20,000-share trade less than a week before the bid. But the big scores had come from others: Levine had made over $800,000 on a Lehman deal, a Litton Industries bid for Itek Corporation, trading on information from his own firm. Sokolow had leaked the details of that transaction, and Levine had incautiously bought a whopping 50,000 shares just five days before the bid was announced. Levine had also made nearly $150,000 on the acquisition of Simmonds Precision Products Inc., a Goldman client, by Hercules Inc.

  “I’ve been keeping score,” Levine continued. “Here’s Goldman, here’s Wally. Wilkis, you’re in the red.”

  Wilkis felt a stab of anxiety. Had he become dispensable? For all his discomfort with the relationship, Levine was still his closest friend. The game bound them together at a level of intimacy he had experienced with no one else. He truly believed that Levine cared for him. Levine seemed in frequent need of reassurance that Wilkis was his friend.

  But there was an even stronger element. Wilkis had to admit that he loved the thrill of gambling on takeover bids. He liked the tension when things looked tentative and the exquisite pleasure when the bid came through and the stocks soared. These triumphs gave him an overarching sense of superiority. The money itself seemed increasingly irrelevant; unlike Levine, Wilkis didn’t want to walk around with cash bulging from his pockets. He’d withdrawn almost none of his mounting trading profits.

  Levine exhorted Wilkis to try harder to learn what was going on at Lazard, but made it clear he wasn’t going to cut him off—at least, not now. “I have to have someone to help me keep my deals straight,” Levine said, explaining that that could be Wilkis’s role. “Your memory frightens me sometimes,” he continued. Wilkis had almost photographic retention. “I only hope the tables don’t turn and I come up against you. You know more about me than I do.”

  Wilkis took comfort from the fact that, for better or worse, his life was now almost inextricably linked to Levine’s. Levine confessed that the game was almost the only thing that mattered to him. It was “the holiest of institutions,” he said.

  Wilkis returned to Lazard with new determination to serve Levine better.

  Despite all of Levine’s complaints, his stature at Lehman Brothers had been increasing as the takeover boom gained momentum and the firm was gradually beset by internal turmoil, chronicled in the best-selling Greed and Glory on Wall Street. As the earthier traders, led by Lewis Glucksman, had gained the upper hand in their battle with the more patrician investment bankers, led by Peter G. Peterson, other investment bankers fled the firm. Levine’s seniority increased accordingly. Gleacher, who’d hired him, left in late 1983 for Morgan Stanley, after Glucksman bypassed him to install Richard Bingham as head of M&A. Levine had maneuvered himself into the office right next to Bingham’s. He argued that his intelligence-gath
ering was so vital that he had to be close to the department head to “report the breaking news.”

  In the summer of 1983, Levine managed to grab the ball during a Lehman-backed bid by Clabir Corporation for HMW Industries Inc., a defense contractor and weapons manufacturer known for its deadly cluster bombs. Clabir was a client of Lehman investment banker Steve Waters, who tapped Levine to be his number-two man on the deal. Levine in turn asked Sokolow to handle some of the analysis. The comparatively low-profile, roughly $100 million deal soon had an illustrious Wall Street cast: Siegel represented the target, HMW; Reich was assigned to the deal by Wachtell, so he was actually working with Levine; and the two biggest factors in the outcome of the bid were arbitrageurs Boesky and Robert Freeman at Goldman, Sachs, who amassed huge positions in HMW.

  Levine, his extra-long phone cord trailing him as he paced about the office, soon staked out a role talking to the arbs and working the street for information about Boesky’s and Freeman’s intentions. Waters let Levine do his thing, amazed at the way information spread in this new era of dealmaking. Sometimes he’d mention something to Siegel, his counterpart on the other side, and within an hour his phone would ring with calls from Boesky and Freeman, who would already know what he’d just told Siegel. Other investors, of course, were privy to none of this, but no one gave much thought to whether securities laws were being skirted; it all fell into a broad “gray area.”

  Boesky and Freeman played vital roles in the HMW drama, illustrating the new central position of arbitrageurs. HMW initially resisted Clabir’s bid, but Waters thought he could get a friendly deal at the right price. Boesky and Freeman, however, had amassed such a large block of HMW stock between them that the company’s attitude was almost irrelevant. Indeed, it was Siegel, capitalizing on his relationship with the arbs, who persuaded Boesky and Freeman to work together, using their large combined shares to hold out for a high price. He persuaded them to file a 13-D disclosure which would acknowledge that they were acting as a group.