Eagle on the Street

  I’ll have to think it over, Shad told Schneiderman. And I would have to be sure in advance that any decision checks out with the ethics people.

  On the weekend of January 7, 1989, Fred Joseph boarded an airplane in New York bound for The Hague. He met with Shad at the embassy residence and their talk was simple and direct, a negotiation between old and trusted friends. Nearly two decades before, Joseph had backed Shad in an unsuccessful bid for the top job at E. F. Hutton. Now, they scratched on a single piece of paper the outline of a proposed deal that would make Shad Drexel’s chairman and reunite them as a team. It would have been possible with no one else besides Joseph. Shad had trained him years before and had complete confidence in his candor. The prospect of their being together again—with side-by-side offices in the heart of Wall Street’s financial district—was appealing to Shad in many ways.

  But there were issues to consider. Shad said he couldn’t join the firm before Drexel reached a legal settlement with the SEC. He also said that, if he accepted, he didn’t want to be a figurehead recruited solely for his good name or as a stock-market cop. He wanted to be an active chairman of the board. “The best defense,” of Drexel’s soiled reputation, he believed, “was a good offense within the rules.” Shad told Joseph that he had to know more about the circumstances surrounding Drexel’s guilty plea and about the financial health of the firm. And he said again that he would have to consult with the ethics people at the SEC. What would SEC officials think of the longest-serving chairman in SEC history—and the one who presided over the initiation of the Drexel probe in the first place—taking over as chairman of an outlaw investment bank? What would his friends say about his apparent abrogation of the oft-repeated pledge to spend the final one-third of his life serving?

  Shad began a telephone campaign to ask friends and associates on Wall Street what they thought. Shad told them that he didn’t feel Drexel should be put out of business and he kept reminding people that the economy had produced eighteen million new jobs since 1982, most of them in the kind of small and medium size companies that Drexel and Milken had financed with junk bonds. He didn’t mind the newspaper leaks mentioning that he was considering the job—he wanted desperately to hear reactions. Some of his friends urged him to stay away from Drexel, arguing that the risk of another scandal at the firm was too great and that the firm had unsavory clients. Others told Shad that he ought to concentrate on developing the ethics program at Harvard and other eleemosynary pursuits. Still others said that whatever wrongdoing Drexel had engaged in, the firm had done much good through its pioneering work to finance takeovers and growing companies with junk bonds. It was important for stockholders, and therefore for the nation, that the firm survive, these friends and acquaintances said. These were the friends to whom Shad listened.

  Ever the investment banker, Shad wanted to perform due diligence before giving Joseph his final okay. He hired Perrin Long, the prominent Wall Street analyst, to advise him on the firm’s financial situation. He met with scores of employees in Drexel’s headquarters and in the firm’s Beverly Hills office, to learn more about its business and to ascertain whether he would be able to ensure high ethical standards. He talked for hours with Fred Joseph about how he would play the dual role of chairman of the firm and chairman of a special oversight committee that would keep a close eye on Drexel’s compliance with securities laws.

  All in all, Shad was impressed. It seemed to him that with more than $1 billion in capital, the Drexel brokerage was in strong financial shape. There seemed to be a hefty backlog of business in the pipeline. Despite the years of legal turmoil, the guilty plea and the split within the firm over Joseph’s decision to cut off Milken, it appeared to Shad that key employees and clients appeared to be sticking with the firm. Still, Shad knew his reputation for integrity and effectiveness could be put at risk. The more conservative Wall Street where he had worked was gone. Drexel seemed willing to take enormous financial risks in return for holding on to 100 percent of a deal and its fees. Joining Drexel would be something of a gamble, but he had prided himself throughout his career on taking intelligent risks and felt that his willingness to do so had been one of the major factors responsible for his success.

  Shad wanted the support of government prosecutors. He didn’t want to take the job and then be attacked by the Justice Department or the SEC as someone who once had prosecuted a renegade firm and now was going to help it prosper. He received a boost when U.S. Attorney Rudolph W. Giuliani called and urged him to take the job. Shad asked him to make his endorsement public and Giuliani did, declaring in a television interview that it would be a good thing if Shad joined Drexel. The government wasn’t trying to put Drexel out of business, Giuliani said, and Shad could play a constructive role in making sure the firm avoided misdeeds in the future.

  One last issue worried Shad, a question neither Joseph nor anyone at Drexel or in the government could address. Would Michael Milken—now at legal odds with Drexel after the firm had agreed to cooperate with the government in his prosecution—take revenge against the firm either by using his clout with key clients to wreck its business or by encouraging his loyalists within the firm to turn on Joseph? On the one hand, Shad thought, if Milken continued to fight and were acquitted, that opened up all kinds of possibilities for Drexel’s business in the future. On the other hand, if the defiant Milken perceived that he was going to be nailed by prosecutors as a result of Drexel’s decision to cooperate in the probe, would he try to take down the firm and Joseph with him?

  “I know it takes guts for me to come from New York and ask you to turn the other cheek, but I believe it is in your best interest,” Shad said, as he gazed into Michael Milken’s eyes.

  Struggling to make up his mind about the Drexel chairmanship, Shad had made the pilgrimage to California in March 1989, to seek Milken’s counsel. They met at Milken’s home in Encino. The financier was playing basketball with one of his sons when Shad pulled up. Shad’s motivation was self-interest; he had come to size Milken up for himself, to attempt to determine whether Milken was likely to make life difficult for Drexel in the months ahead. In a sense, Shad was also seeking Milken’s blessing before accepting the chairman’s job. Considering the magnitude of financial crimes the SEC had charged Milken with, it was remarkable that a former SEC chairman would consider such a meeting. But Shad was far less convinced of Milken’s venality than Gary Lynch and others at the SEC, and he was more convinced of the merits of Milken’s junk bonds.

  “You have been instrumental in building Drexel,” Shad told Milken, stroking his ego. Milken often stated that he saw himself as a builder and that too many people in Washington were interested in tearing down rather than building up.

  I have been asked to help Drexel along in the future, Shad said. I want to talk with you about the future, not the past.

  They met for five hours, adjourning at one point to a nearby restaurant. Shad came away impressed and reassured. Milken seemed to him a man of conviction who, like Shad, made rational rather than emotional decisions. Before their meeting, Shad had thought Milken’s pronouncements on such public-spirited matters as helping Latin America’s faltering economy were nothing more than public relations rhetoric from a man in deep trouble. But after hearing Milken discuss his ideas about restructuring outstanding Latin American debt and financing businesses in the region, Shad thought Milken truly cared about the region and had highly developed theories that made business sense and could someday be put into practice. After dinner with Milken and his wife, Lori, Shad left feeling confident that Milken was not a man who would take steps that would hurt the Drexel firm.

  Soon after Shad’s private meeting with Milken on March 29, 1989, and following the breakdown of settlement talks between lawyers for the financier and government officials, the Manhattan U.S. Attorney filed a ninety-eight-count criminal racketeering indictment charging Milken, his brother, Lowell, and others with manipulating stock and bond prices, bullying clients, insider tradi
ng, rigging takeovers, and numerous other securities law violations. Added to the SEC charges that had been filed against Milken the previous September, the former Drexel junk bond king now faced the most devastating array of charges ever filed against a major Wall Street figure. He stood accused of the most sweeping set of financial crimes leveled by the U.S. government since the 1920s. Upon the filing of charges, much of the attention was focused on Milken’s salary, including the $550 million he drew in 1987, which was listed by prosecutors in the opening pages of the indictment. Milken, once again, proclaimed his innocence and predicted he would be vindicated at trial.

  Two weeks later, on April 13, SEC enforcement chief Gary Lynch announced that the commission had reached a settlement of the agency’s civil charges against Drexel that included an array of unprecedented monitoring techniques designed to prevent fraud at the firm in the future. Lynch said that despite the breadth of Drexel’s violations and its belligerent attitude, the decision had been made not to strip it of its license to do business. The SEC’s financial sanctions against Drexel were included in the settlement that had been reached between Drexel and the Justice Department, in which the firm agreed to pay $650 million, about half to be set aside for claims of those injured by its fraudulent activities. The SEC filed no charges against Fred Joseph or anyone else at Drexel for failing to properly supervise Milken and the junk bond operation, a decision that Lynch said had something to do with technical aspects of the case and that the commission would review.

  On the same day in Manhattan, Drexel announced that former SEC chairman John Shad would become its chairman. Shad said he wanted to help save the firm and enable it to continue financing American industry. He had been away from the Street for a decade and now he had a sense of purpose as he returned. Lynch called Shad “a great choice” that would give SEC officials “comfort.”

  Shad received phone calls from Lynch and SEC Chairman David Ruder congratulating him on the decision. Michael Milken also phoned.

  Shad felt the need to reconcile publicly how his decision to return to Wall Street fit with his grandmother’s credo to spend the final one third of his life serving. Unwilling to face up to what was clearly an abrogation of that pledge, Shad found a way to package it for himself and for public consumption. His solution was replete with irony; Shad indicated that he would donate his entire multimillion-dollar salary as chairman of Wall Street’s most notorious investment bank to the Harvard Business School ethics program he had funded.

  In a statement released by Drexel upon Shad’s acceptance of the chairmanship of that profit-making enterprise, the firm said, “The bulk of Mr. Shad’s present and future resources are dedicated to charitable activities.”

  Nobody challenged the words.

  “I look on it,” Shad declared that day, “as a form of service.”

  Epilogue

  Michael Milken was sentenced to ten years in prison on November 21, 1990. He had pleaded guilty to six felony counts of securities fraud, market manipulation, and tax fraud the previous spring, ending nearly four years of shrill defiance of the SEC and federal prosecutors. Standing in the august courtroom of New York federal Judge Kimba Wood, the forty-four-year-old Milken seemed a broken man. He wept at public court proceedings. In addition to confessing that he was a felon, Milken said he had violated his own values and standards of morality. Still, Milken’s offer of contrition struck some as halfhearted, since his lawyers continued to insist that his crimes were technical and small relative to the sum of Milken’s business and philanthropic accomplishments.

  Judge Wood said to the two hundred raptly attentive spectators in her chambers that in sentencing Milken, she did not want to hand down “a verdict on a decade of greed.” Instead, she wanted only to punish an individual who had admitted to serious crimes. Despite Wood’s disclaimer, Milken’s sentencing had become the essential public postmortem on the 1980s, a decade neatly memorialized in newspaper columns as a period of excess and avarice. The sentence she meted out was by far the stiffest punishment given to any defendant in the Wall Street scandals uncovered by John Shad’s SEC. Some former clients of Milken and lawyers involved in the investigations that led to his guilty plea denounced Judge Wood’s sentence as grossly excessive. Others called it a welcome and just deterrent against Wall Street fraud. The debate grew voluble and the sentencing became a kind of democratic catharsis, with every bystander in the street asked to opine on how many years Milken should spend in the slammer. Their answers were a measure of public judgment on what had gone wrong in America during the Reagan years.

  On the evening that Milken was sentenced to a decade behind bars, Luis Baston, a thirty-six-year-old nursing student from Brooklyn, stood on a windy Wall Street corner, wearing the uniform of the Salvation Army, ringing a bell beside his charity’s collection can. “I think they should lynch him,” Baston answered when asked about Milken’s ten-year term. “These people always get away with the white-collar crimes. Ten years should be the minimum, but when he serves, they should put him in with the regular prison population.”

  But what about the hundreds of millions of dollars that he had contributed to charities from his junk bond profits? “I’m helping charities also,” Baston answered. “But I’m not putting my hand in the pot.”

  Inside SEC headquarters, where senior enforcement division officials had taken a straw vote on the sentence just days before Judge Wood ruled, they were pleased with Milken’s full sentence: a ten-year prison term, plus three years of community service, plus the $600 million he had agreed to pay the government. The ten-year sentence for Milken on the day before Thanksgiving was only slightly more than most of them had expected.

  Shad viewed Milken’s sentence as a shrewd trade by Judge Wood. When Milken cut his plea bargain, he refused to answer questions from investigators before his sentencing. Judge Wood said in determining his sentence that she would not give him any credit for possible future cooperation. To the contrary, the judge said there were signs Milken had encouraged others to destroy incriminating documents during the probe in subtle ways that allowed him to maintain some deniability. Wood also said Milken deserved harsh punishment because many of his crimes showed a pattern of just stepping over to the “wrong side of the law” in an apparent effort to get some of the benefits without running a substantial risk of being caught. In contrast, Ivan Boesky and Marty Siegel committed more blatant crimes—exchanging cash in briefcases for inside information—but received lesser sentences than Milken because of their swift and thorough cooperation with prosecutors. At his sentencing, Milken received neither the benefits of his years of fighting nor of his guilty plea, a dismal outcome for a man who had made his fortune achieving optimal returns. The one thing Milken did achieve in his plea bargain was criminal immunity for his brother, Lowell. He also avoided the stigma that goes with ratting on colleagues and clients. Judge Wood said that if government prosecutors later asked her to reduce Milken’s ten-year term—after his reluctant but legally mandated post-sentencing cooperation—she would consider shortening it.* Shad felt Judge Wood had found a clever way to maintain leverage over the fallen financier.

  Intellectuals saw in Milken’s predicament confirmation of their own ideologies. The editorial writers at the Wall Street Journal, strident but eloquent adherents of the Chicago School economic theories who had cheered Milken and Drexel lustily during the 1980s, described the harsh sentence as a harbinger of economic bad times. “Michael Milken has often been depicted as the symbol of the 1980s, the Master of the Universe presiding (with Ronald Reagan) over the decade of greed,” they wrote. “We fear he is becoming the symbol of the 1990s, the decade of vengeful destruction.… The sentence is best understood as penance for the heretic. Michael Milken was a threat—to entrenched corporate managers, to Wall Street competitors, to regulators who prefer their markets neat and pretty. It was his bad fortune to serve as the symbol of this era that many people apparently want to lock away forever in some deep dark cave.… It matt
ers only in a perverse sense that the decade of the 1980s was a period of unparalleled economic growth, surely far better than the malaise of the 1970s. And better, we fear, than the 1990s are likely to be if current humors prevail.”

  Perhaps the overwrought tone of the Journal’s editorial writers reflected a recognition that at the turn of the decade, Michael Milken’s America (and Ronald Reagan’s, too) no longer existed. Unemployment was rising and recession taking hold. Hard times had come again to Wall Street. Many of the big securities firms that profited from the 1980s boom were hurting badly, as takeovers and trading volume dried up. Thousands of young Wall Street traders, investment bankers, salesmen, lawyers, and clerks were out of work. (This made it easier for the SEC to hire and retain top legal talent.) As the economy slowed, scores of junk bond—financed companies that once were clients of Milken’s declared bankruptcy or teetered on the edge under the weight of junk bond debt. Investors suffered staggering losses in junk bonds, and Merrill Lynch issued a study refuting Milken’s thesis—and primary sales pitch—that a diversified portfolio of junk bonds produced superior financial returns. As takeovers soured and real estate values fell, the stability of the nation’s banking system was threatened. Bankruptcies in the savings and loan industry (S&Ls), including the collapse of several large thrifts that had staked their profitability on Milken’s junk bond market, had precipitated political scandals and a taxpayer cleanup expected to cost more than $500 billion. Savings and loan regulators sued Drexel, seeking the recovery of billions of dollars, claiming that the entire junk bond market had been a fraud and a sham. Stock prices were weak, and there was a sense on the Street that it would be years before individual investors, burned by the 1987 stock market crash, would return to the market. Consumer confidence, as measured by surveys and spending patterns, was at its lowest point in a decade. The biggest growth industry in the legal and financial world was bankruptcy law.