Lawyers Have NEVER Understood Tech Innovation
James B. Stewart is many successful things – an Ivy League lawyer, Wall Street Journal scribe, author of the multiple prize-winning Den of Thieves, darling of sanctimonious pettifogs everywhere, and now eminent professor at Columbia Business School.
But perhaps he should think twice before proudly revisiting his one moment of egregious gullibility – the time he believed Ivan Boesky’s self-serving charges against Michael Milken.
Instead, Stewart has doubled down on Milken’s guilty sentence in a New York Times critique of President Trump’s pardon of Milken. In fact, he implied that it was Boesky who deserved the pardon.
Boesky was an arbitrageur who had been caught accepting bags full of cash bribes in his office and was obviously serving as a prosecution witness to gain a diminished sentence for his offenses.
He ended up leaving prison after a two year sentence and $100 million fine, which he celebrated by sailing off into the sunset in a boat full of bimbos.
By contrast when Milken was released, he went into inner city LA to teach math classes to troubled teenagers.
No Justice from “Junk Bond” Judgment
Stewart was not the only luridly imaginative lawyer to misunderstand Milken in Dow Jones publications.
Ben Stein, then of Barron’s, also wrote an acclaimed book against Milken – A License to Steal: The Untold story of Michael Milken and the Conspiracy to Bilk the Nation.
Like Stewart, Stein denounced the so-called “decade of greed” of the 1980s, epitomized by what he called Drexel-Burnham’s “Junk Bond Ponzi.”
And like Stewart, Stein showed no comprehension at all of what Milken was actually accomplishing through his creation of a parallel financial system of high yield bonds, or what it meant that those bonds could support entrepreneurial ventures beyond the ken of the established banks.
Milken had to play on both sides of the market. He was both choosing the companies to support and placing the bonds with buyers, and so his new economic model did not fit conventional banking assumptions.
As a result, his siege of transformative innovations aroused intense suspicion and resentment. This rendered the press and judiciary bodies as credulous tools of his competitors.
The Dangers of Outsider Trading
I called it the “outsider trading scandal.”
It’s the phenomenon where outsider ignoramuses could bring down major business innovations& – just as Congress and the judiciary today are bringing down the great US technology companies such as Google, Amazon and Facebook.
Calling the most ingenious and catalytic investments in the history of Wall Street a “Ponzi scheme” was at best a colossal misjudgment.
Suffice it to say that Milken’s so-called Ponzi “junk”? Well, it matured over the subsequent decade to achieve a total market cap of close to a trillion dollars.
Contrary to the claims of Stewart and Stein, even the junk bond holdings of S&Ls such as Columbia Savings and Loan – which tanked during the crisis – would have saved the S&L from bankruptcy.
If only Congress had not forced them to sell them prematurely.
None of the critics then had any idea of what Milken was actually doing — building out cable TV as a unique US communications system, financing the first national installment of single mode optical fiber through MCI, and establishing national wireless coverage through McCaw cellular, now ATT wireless.
Even when Milken left jail, banned from security markets, he acknowledged that he could not reenter the securities markets.
But could he perhaps pursue his interest in education, with his brother Lowell? Within a few years, Milken had rebuilt his fortune in the education arena with innovative firms such as K-12.
How to Recognize an Entrepreneurial Spirit
Unlike all these frothing journalists, Trump actually understood Milken’s accomplishments.
Trump adopted the key argument from one of my own Wall Street Journal articles, later included in David Brooks’ compendium of the best conservative writing of the era.
As John Eggerton wrote in Multichannel News: “Trump Pardons Milken Hailing Him as Helping Create Cable and Wireless.” He goes on to say:
“Milken… was described by the President in glowing terms, and credited with pioneering [high yield] bonds, efforts Trump said ‘helped create entire industries, such as wireless communications and cable television.’
‘Milken channeled a total of some $26 billion into MCI, McCaw, Viacom, TCI, Time Warner, Turner, Cablevision Systems, NewsCorp, and other cable telecom wireless, publishing and entertainment companies,’ wrote Discovery Institute fellow George Gilder back in 1995. ‘At the time virtually none of these firms commanded substantial collateral acceptable to a bank and thus they could have raised these billions nowhere else.’
‘With an eventual $2.5 billion from Drexel, MCI built the first national single mode fiber optic network and spurred AT&T and Sprint into action to give the U.S. a global lead in the technology,’ wrote Gilder. ‘With another $1.2 billion, McCaw launched the first national wireless telephone system. And with $8 billion, TCI, Viacom, Time Warner, Cablevision Systems, and Turner, followed by many other Drexel high-yield issuers, made U.S. cable television a unique national asset…’
Trump…suggested: ‘The charges filed against Mr. Milken were truly novel. In fact, one of the lead prosecutors [Rudy Giuliani] later admitted that Mr. Milken had been charged with numerous technical offenses and regulatory violations that had never before been charged as crimes.’”
And following my own observations from that time…
Trump also suggested Milken’s guilty plea was something of a self-sacrificing move ‘in exchange for prosecutors dropping criminal charges against his younger brother.’”
(Lowell is the brilliant Stanford grad who later led Milken’s educational ventures).
The lesson of the Milken saga is that in order to understand what is happening in the investment world, it is necessary to grasp the significance of technological innovation.
Lawyers and financial writers can totally miss what is going on, as Congress today, filled with lawyers, totally misses the significance of what is happening in Silicon Valley, Israel and China.
The DC bureaucracies and Congress together pose a dire threat to America’s most successful technology ventures such as Google and Amazon.
We hope to redress that gigantic mistake here, and open up new Milkenesque opportunities for our readers.
Editor, Gilder’s Daily Prophecy