The Predators’ Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders

Connie Bruck

Non-fiction

1988, Penguin


“In the third week of March 1985, the faithful, fifteen hundred strong, came to Beverly Hills to pay homage to Michael Milken, the legendary junk-bond guru of Drexel Burnham Lambert whom many of his followers called simply “the King”. For the next four days, they would savor the world he had created for them.”

So begins this story about American financier, philanthropist and king of junk bonds, Michael Robert MilkenThe Predators’ Ball is the result of in-depth investigative journalism by Connie Bruck, a well-known political journalist and business reporter, who began her career at The American Lawyer, then moved to The New Yorker. Her articles have been published in The Washington Post, The New York Times and The Atlantic. Bruck has won the Gerald Loeb Award twice, received the John Hancock Award, and has written several books, including the one we’re discussing here: The Predators’ Ball.

 Background

For her two and a half years of work on The Predators’ Ball, Connie Bruck conducted about 250 to 300 interviews. As she mentioned at the end of the book, she was lucky to have started interviewing employees of Drexel, the company where Milken worked, in February 1986, 9 months before the company went downhill. Had she waited until after the great disgrace and scandal, it would never have been possible to get such frank and extensive information from the participants. Intriguing, wouldn’t you agree?

Milken, by the way, tried in every possible way to prevent the release of the book: he fired staff and offered to buy all future copies in one fell swoop, if only work on it was stopped. Obviously, there was something revealing in there. So, let’s figure out what it was.

 The plot

The book, as I said, tells Michael Milken’s life story — and he was, and is (he is still alive), a fascinating character. 

When the story begins, the reader is transported to the 1960s, where the theme of the American dream, typical for American literature of the twentieth century, is introduced. Michael Milken embodies that dream — that freedom and hard work are the keys to prosperity and success — and directs all his energy into the financial sphere.

How it all begins

During his holidays from the University of California at Berkeley, Michael Milken worked at the investment bank, Drexel Harriman Ripley. After graduating with an MBA from the Wharton School of the University of Pennsylvania, he took a permanent job at Drexel. During this time, Milken identified shortcomings in the work of the rating commission. He noted that, when issuing bonds, the AAA rating (a rating given to companies with good credit history and high performance) was awarded only to large companies. Small firms and fast-growing enterprises with little history were assigned a maximum rating of BB (or the lower C and D ratings). To get these bonds to market, the owners were promising higher payouts, as companies with low ratings could postpone the terms of payments or pay less than the entire amount of the nominated debt. 

The advantage of such securities over the rating bonds of class A was their par value. At a market price of 30 cents on the dollar, they could be used for financial events at par.

Milken bought out cheap bonds and then resold them at the highest possible price to trusted clients, or else waited for their payment dates. Even if six out of ten  of the purchased packages of securities remained unpaid, the profit from the remaining four would cover the costs and make a profit. In this way, Michael raised most of the capital.

Call me the King

In 1973, Drexel merged with Burnham and Company to form Drexel Burnham. Using his authority, Milken convinced his new boss, Wharton Tubby Burnham, to open a department for trading high-yield or junk bonds in the newly-formed company.

Milken once said, “The opportunity to be true to yourself in high-yield bonds is great. It is not like buying a stock. With a stock, its value is generally dependent upon investors ’collective perceptions of the future. No matter how much research you have done regarding a particular stock, you don’t have a contract as to what the future price will be. But with a high-yield bond there is a date certain in the future when it matures, and if you hold it to maturity and your analysis is correct, you will be correct in your calculation of your yield — and you do have a contract as  to future price. One is certain if you’re right. The other is not.” (The Predators’ Ball).

The fame of the so-called “Junk Bond King”, who made it possible to create financing for any company with the help of “junk”, added credibility and reliability to the financial instrument. 

But that wasn’t all Milken used to do. He started to work with takeovers. Any company that approached Drexel Burnham could raise capital to take over a larger company. The subsequent payment of the debt arose from the received turnover of the enterprise, or as a result of its sale. The maturity of the bonds made it possible over time to restructure the debt at a much lower interest rate.

As the business was booming in 1979, Milken started to organise annual Predators’ Balls, which were extremely luxurious gatherings of high-net-worth investors who made their money through shorting, buyouts and other aggressive tactics.

“By five-thirty each morning, an armada of about one hundred limousines glided into position around Beverly Hills. Dozens of them ferried guests from the lush green-and-pink medley of the Beverly Hills Hotel — then owned by arbitrageur Ivan Boesky, his wife and his in-laws, and completely booked by Drexel for these four nights — through the city’s wide, stately, palm-tree-lined streets. Their destination was the Beverly Hilton, where the annual Drexel High Yield Bond Conference — by now known as the Predators’ Ball — was being held, just a few blocks from Drexel’s West Coast office.” (The Predators’ Ball).

Michael (aka perpetual motion machine) Milken

Milken had achieved a lot thanks to his hard work. “Breakfast was served at 6 A.M., a concession to popular tastes by Milken, who was at his desk each day by 4:30 A.M.” (The Predators’ Ball). Connie Bruck claims that Milken achieved his phenomenal performance by avoiding stimulants, because they would disrupt the rationality of his thinking. Thanks to this he was always, except in rare cases, able to make rational decisions in the shortest possible time.

It was after midnight. The ball was over.

But the lack of stimulants in Milken’s life didn’t prevent the explosion. After “Black Monday” on October 19, 1987, when the Dow Jones fell by a record 22%, the fall of Drexel’s share price caused the value of junk bonds to fall. Large defaults on them finally finished off the economy.

In 1988, the same year as The Predators’ Ball was published, the Securities and Exchange Commission charged Milken and Drexel Burnham Lambert with insider trading and stock fraud. A year later, Milken was indicted by a federal grand jury and eventually spent nearly two years in prison after pleading guilty to securities fraud.

Is it worth reading?

At 400 pages, The Predators’ Ball may sound like a daunting and confusing read to the novice investors, but sticking with it will give you a picture of the financial world of the 1980s. The junk millionaires of the US stock market of the ’80s have become a kind of legend of trading: featuring in books, films and media publications.  Even now, interest in them has not faded. The rise and fall of Michael Milken is like a history book of finance—not only does it describe the events, it teaches you to look for opportunities, believe in yourself and work for a result, but don’t forget about morality of course. And I cannot but mention that some of the manipulations described in the book truly are mind-blowing. 


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