Liar’s Poker (Michael Lewis) #4

Having attracted tens of billions of dollars to his new speculative market, Michael Milken, by 1985, was faced with more money than places to put it. It must have been awkward for him. He simply could not find enough worthy small-growth companies and old fallen angels to absorb the cash. He needed to create junk bonds to satisfy the demand for them. His original premise—that junk bonds are cheap because lenders are too chicken to buy them—was shot to hell. Demand now exceeded natural supply. Huge pools of funds across America were dedicated to the unbridled pursuit of risk. Milken and his Drexel colleagues fell upon the solution: They’d use junk bonds to finance raids on undervalued corporations, by simply pledging the assets of the corporations as collateral to the junk bond buyers. A take-over of a large corporation could generate billions of dollars’ worth of junk bonds, for not only would new junk be issued, but the increased leverage transformed the outstanding bonds of a former blue-chip corporation to junk.

The process by which a take-over occurs is frighteningly simple—in view of its effects on community, workers, shareholders, and management. A paper manufacturer in Oregon appears cheap to a twenty-six-year-old playing with his computer late one night in New York or London. He writes his calculations on a telex, which he sends to any party remotely interested in paper, in Oregon, or in buying cheap companies. Like the organizer of a debutante party, the twenty-six-year-old keeps a file on his desk of who is keen on whom. But he isn’t particularly discriminating in issuing invitations. Anyone can buy because anyone can borrow using junk bonds. The papermaker in Oregon is now a target.

The next day the papermaker reads about himself in the “Heard on the Street” column of the Wall Street Journal. His stock price is convulsing like a hanged man because arbitrageurs like Ivan Boesky have begun to buy his company’s shares in hopes of making a quick buck by selling out to the raider. The papermaker panics and hires an investment banker to defend him, perhaps even the same twenty-sex-year-old responsible for his misery. Five other twenty-six-year-old at five hitherto unoccupied investment banks read the rumors and begin to scourge the landscape for a buyer of the paper company. Once a buyer is found, the company is officially “in play”. At the same time the army of young overachievers check their computers to see if other paper companies in America might not also be cheap. Before long the entire paper industry is up for grabs.

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