Michael Milken – Innovations in Finance, Medicine, and Education (EP.371)

This episode explores the multifaceted career of Michael Milken, highlighting his transformative impacts on finance, medicine, and education.

1. Michael Milken’s role in developing the high-yield bond market significantly democratized access to capital for companies previously unable to reach public markets.
2. Milken’s personal experiences with cancer led him to become a major advocate for faster and more effective medical research and treatments.
3. Education is a recurring theme, with Milken advocating for greater investment in quality and access to education as foundational for societal progress.
4. Milken’s approach combines deep financial knowledge with a commitment to social causes, illustrating the potential for finance to drive positive change.
5. His work has had a broad impact, influencing fields from finance to healthcare, and shaping practices in philanthropy and public policy.

1: Early Influences

Milken discusses his childhood fascination with facts and data, and how family discussions on current issues shaped his analytical skills.

• Michael Milken: "Knowledge captured my attention a great deal."

2: Innovations in Finance

The formation of the high-yield bond market and its impacts on global finance are detailed.

• Michael Milken: "Enabled capital to become available for the 99% of companies that could not previously access the public markets."

3: Medical Research and Philanthropy

Milken explains his transition to philanthropy, driven by personal health challenges and a commitment to accelerating medical research.

• Michael Milken: "My philanthropic efforts over 50 years [are] supporting medical research, education, and public health."

4: Education Initiatives

Focus on Milken’s efforts to enhance educational opportunities and outcomes worldwide.

• Michael Milken: "We need to revitalize this commitment in education."

1. Consider the Broader Impact of Investments: Investments can and should consider the broader social impacts, as exemplified by Milken’s career.
2. Support Medical Research: Engage with and support initiatives aimed at accelerating medical research for faster cures.
3. Advocate for Education: Support or initiate programs aimed at improving access and quality of education in underserved communities.
4. Philanthropy as Change-Making: Use philanthropic efforts to address fundamental societal issues like health and education.
5. Stay Informed on Financial Innovations: Keep abreast of new financial instruments and models that can democratize access to capital.

Michael Milken is a legendary financier and philanthropist. Mike is best known for his role in creating the high yield bond market in the 1970s and 1980s at Drexel Burnham Lambert, his guilty plea, and his remarkable philanthropic efforts over fifty years supporting medical research, education, and public health. Under Mike’s leadership, upstart Drexel became the most successful securities firm on Wall Street, enabled capital to become available for the 99% of companies that could not previously access the public market, and turned into the greatest breeding ground for talent in the industry. Approximately seventy investment firms are headed by leaders who worked for Mike, including founders and leaders of Apollo, Ares, Blackstone, Canyon, Cerberus, Crescent, GoldenTree, Goldman Sachs, Jefferies, Leonard Green, and Moelis.

Our conversation begins with Mike’s childhood and his early interest in democratizing access to capital. We discuss his career goals, the importance of capital structure, and his perspectives on markets today. We then turn to Mike’s long history of philanthropic work to improve education and advance cancer research, as described in his book Faster Cures: Accelerating the Future of Health.

I should note that we do not discuss Mike’s difficult years post-Drexel or his pardon in 2020. However, next week Mike’s longtime personal attorney, Richard Sandler, will join me to discuss just that.

People

Michael Milken

Companies

Drexel Burnham Lambert

Books

"Faster Cures: Accelerating the Future of Health" by Michael Milken

Guest Name(s):

Michael Milken

Content Warnings:

None

Ted Seides

Capital allocators is brought to you by. Ten east, an investment platform for sophisticated investors to access private markets. Ten east brings benefits of having your own family office without the cost and headaches of doing so. It's founded and led by Michael Lafell, former deputy executive managing member of Davidson Kempner. Michael and his invest team offer members the opportunity to co invest by offering at their discretion.

Michael Milken

Michael and his team source diligence and commit material personal capital to each investment. The opportunities shared on the Teneast platform offer exposure to private credit, real estate, niche venture and private equity and other idiosyncratic investments that typically aren't available through traditional channels. The principals have over a decade track record of investing in these types of exposures across more than 350 transactions. Post investment, the tennis team conducts ongoing monitoring and reporting, just as you'd expect from an institutional investment organization. I've known Michael for about a decade and after becoming impressed by the quality of ten east offerings, its research process and high quality investment team, I became an advisor to the organization and investor in multiple offerings.

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Ted Seides

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Hello, I'm Ted Saides and this is capital allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content@capitalallocators.com. All opinions expressed by TeD and podcast guests are solely their own opinions and do not reflect the opinion of capital.

Michael Milken

Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast. My guest on today's show is Michael Milken, legendary financier and philanthropist, Mike is best known for his role in creating the high yield bond market in the 1970s and Drexel Burnham Lambert, his plea in a controversial prosecution, and his remarkable philanthropic efforts over 50 years supporting medical research, education, and public health. Under Mike's leadership, Upstart Drexel became the most successful securities firm on Wall street, enabled capital to become available for the 99% of companies that could not previously access the public markets, and turned into the greatest breeding ground for talent in the industry.

Ted Seides

Approximately 70 investment firms are headed by leaders who worked for Mike, including founders and leaders at Apollo, Ares, Blackstone Canyon, Cerberus Crescent, Golden Tree, Goldman Sachs, Jeffries, Leonard, Green, and Molis. Our conversation begins with Mike's childhood and his early interest in democratizing access to capital. We discuss his career goals, the importance. Of capital structure, and his perspectives on markets today. We then turn to Mike's long history of philanthropic work to improve education and advanced medical research, as described in his book faster cures accelerating the future of health.

I should note that we do not discuss Mike's legal controversy post Drexel or his pardon in 2020. However, next week, Mike's longtime personal attorney, Richard Sandler will join me to discuss just that. I hope you enjoy the show. And if you do this week, if. You'Re single and walking down the street while listening to capital allocators and look up and see a beautiful woman or man coming your way, what better way to get the conversation going than saying, excuse me, but do you happen to know about capital allocators?

Michael Milken

They might respond, that sounds amazing, and start a really interesting conversation. Who knows, it could be the beginning of a beautiful relationship. Thanks so much for spreading the word. Please enjoy my conversation with Michael Milken. Michael, thanks so much for joining me.

Unknown

It's great to be with you. I'd love you to take me all the way back to your childhood and. Would love to hear what really captured. Your attention when you were a kid. I think knowledge captured my attention a great deal.

Facts my favorite book was the almanac. It gave you all this data and it came once a year and I used to put it under my pillow at night. So after I was supposed to be at sleep. I'd often would bring it out with a flashlight and read it. And then when you got two almanacs, you could look at the changes from year to year.

And I didn't know that that was the first derivative when I was young, six or seven or eight. And then later, if you got more almanacs, you could look at it over time. And that was the second derivative that you learned about. When I was a little older, but I was fascinated about why people had strong opinions. And at my dinner table in my family, we constantly discussed issues, and you had to, at a very young age, be able to back them up with facts.

And so my parents had these bridge parties once a month at their house and other people's house, and I so look forward to them, because in bridge, one player sits out every hand, and it gives me a chance to quiz that adult, ask the adult what they believe in, et cetera. And for a while, I got to stay up starting about eight, and got to ask questions of the adults that came over, there were 24 adults or 28 adults. And it was a great opportunity not to share my knowledge, but to see. What they believed and what they knew. Where do you think you got that curiosity about those types of facts to interact with adults at that young age?

I'm not sure, but I was always the student, why? In elementary school, I was always the one that had his hand up asking, why? Why? Is that true? A lot of times you find in education that your teachers aren't necessarily current on facts, and so you can surprise them.

And at a very young age, I had concluded that adults had strong opinions, but very few of them ever did research. And if he asked them, where did you hear that? They would tell you. Someone else told them, and then someone else, but you couldn't find anyone that actually did research, and that's one of the reasons why rumors start or misinformation occurs. So I use these evenings.

Yes, I discovered very early that not every adult could tell me every state or every capital or the highest mountain. But what I discovered is they had a lot of opinions based on facts that were not accurate. And so my conclusion was, if we could do research and understand facts, we'd have a real opportunity to change things. By presenting those facts. Where did that take you in your studies as an undergraduate and graduate student?

As a high school student, I had many activities like all the others, many other kids, athletics, et cetera, but was very advanced in math at a very young age. I had written a letter to the president. When I was eleven years old, after Sputnik went up to run the space program, my qualifications never missing a math or science problem at that time, and I really never got a return call. But I would say I went to Berkeley with the idea that maybe someday I'd run the space program I had. The most Nobel Prize winners in science started out with math or physics courses, et cetera.

But shortly after I arrived at Berkeley, there was the free speech movement in November of 1964, so long ago. But my career changed and my interest in undergrad changed with the Watts riots that occurred on August 11, 1965, in Los Angeles, and my opportunity to meet a young african american man who had watched the building he worked in burned down. He was married, had a child, had no savings, and now had no job. And he told me that he would never have access to capital or money to go into business because of the color of his skin. His father never did, and he saw that business as someone else's business, not his business.

Michael Milken

So I decided to go change my. Major at Berkeley to finance. It didn't make any sense to me that we weren't loaning money to people based on their ability. And so switched to business at Berkeley and began to study credit, really, in September of 65. What was it about credit that led you to dive in and do this independent research?

Unknown

Well, the fact that this individual felt he couldn't borrow money because of the colors skin was obviously very irrational to me. Gary Becker, who became a very close friend and eventually won a Nobel Prize based on human capital in 1992, many years later, had written this piece in the 1960s on why irrational behavior could. Be rational as to how people view the world. And so I started studying credit, and as a sophomore, discovered that what everyone said about credit was wrong. And there was a book by Bradford Hitman on long term corporate bond and investor experience.

And the riskiest credits were perceived as the best. And the best credits were perceived as the worst. Whether you were the head of the federal reserve or whether you were secretary of the treasury or a major money manager, what you were saying was based on incorrect evidence. And this book, which covered every single bond issued from 19 19 44 through the depression, clearly showed that the risk premium was greater than the risk, and even during the depression. So you can imagine what it's like during good economic times or nondepressed economic times.

It was self discovery. And that passion has carried me today. Almost 60 years later. So as a student figuring out this original research, you could cry from the rooftops, but I imagine people still looked at you as a student. And I'm curious what you did with that to get to where you got to at Drexel.

Well, I first started talking to my professors and showing them that what they were saying might be incorrect if it was based on data, not what people thought. And I made the decision to go to Wharton for graduate school, primarily because I had the luxury. At Wharton, you could waive courses based on experience. And so I was able to take three majors at Wharton. One was finance, one was operations research, and one was information systems.

Shortly after arriving at Wharton, I started working for Drexel as a consultant. One of my professors suggested that I might be able to help the firm at that time. In the late 1960s, investment banking's brokerage firms were under severe financial trouble because of the physical delivery of a certificate. So you actually had to move it. If you had pave in Portland, Oregon, you had to get it from New York to Portland, Oregon.

And quite often you might have something called DK. They didn't know it go all the way back to New York, et cetera. And so eventually, the interest expense was exceeding the revenue for firms. And so my agreement with Drexel is I would help solve the delivery problem for them and others with my operations research and information systems background, and I would be able to go over my research with them. At that time, the firm was the leading research firm, headed by Paul Miller and Clay Anderson and Jay Sherrod.

And so I felt that the fundamental basis of investing was research. And in the 60s, you had fixed commissions, so if you wanted to buy a million dollars worth of stock, you paid 1%. And the highest paid individuals were salespeople. And so my view was the foundation of the firm was research. And we needed to invert the pyramid where research is the foundation of financial investing and advising, then trading, and then if you can trade it and buy it, you can work on selling it.

And so Drexel served as a great opportunity, since they were a research based firm, primarily equities at that time. And shortly thereafter, I became the head of fixed income research and then the. Head of all fixed income at Drexel. So you famously brought this interaction with this one individual who didn't have access to credit into really the genesis of the high yield markets. I'd love to hear how you were.

Ted Seides

Able to do that from scratch. At Berkeley, I'd done my credit work, and at Wharton, I had done my capital structure work. So I had set out with, really, five missions when I went full time. And I remember writing this letter that other people that were, quote, valedictorians of their business school class, that many others had chosen different routes, consulting, government, et cetera. But I decided to go to Wall street because this is where you allocated capital.

Unknown

And so I had set out five goals. One, the democrazization of capital. So ten, banks couldn't decide whether you could have a business or grow it, but thousands of potential investors. So you had to provide education, knowledge, data to get thousands of investors involved in it. Two, you had to have the right capital structure, and depending on the industry, the firm, the people.

I created this six elements of capital structure. One, understanding the management. Two, the industry. Three, the economy. Four, capital markets.

Those are what you study in business school. And you learn the best time to finance is when you don't need money. And the worst time to finance is when you need money. And lastly, the two that you really don't learn in school. One is regulation, because you can put regulations into effect that put any company out of business and any industry out of business.

You saw what China has done with their education industry by essentially putting it out of business in the last two to three years, which was a major industry in China. And lastly, society. Does society think what you're doing is a value for society or not a value for society? In the late 1930s, there was work published telling there was a link between smoking and your health, and smoking could give you cancer. But by 86, Marlboro was still the most valuable brand in America.

And in 89, at one point, Philip Morris, now Otria, was the most valuable company in the world. But shortly thereafter, the data came out and it was widespread. And you had whistleblowers relating to smoking and health. And therefore it was not perceived by the marketplace or investors anymore as a company that was providing value to the markets. And so the second area was, how are you going to finance?

Your third was essentially to create a trading market so that you can buy and sell securities. So your willingness in your career to buy something at Yale might have been based on the liquidity of that investment. Often when you make an investment, you. Think, what's your exit? So you had to be a market maker.

And we eventually made markets in 7000 different securities. Next, the alignment of management, employees and shareholders. I would say to you in the 1960s and 70s, quite often, the utility curve of the CEO did not overlap with this utility curve of shareholders or even their own employees. And as a result, you had this movement that began in the 1970s in private equity continues today that has linked them. So that was another.

And my last goal was diversification. So if you created a portfolio of dozens or hundreds of securities in a marketplace, you were not necessarily dependent on any one credit. And that became things like CLos today, and we've securitized credit cards and auto loans, et cetera. So those five goals I had set out in 1970, and all five of them have been achieved by myself and thousands of others today in the marketplace. And I would say you really needed dramatic events to occur.

A lot of people, when I made presentations, would say, that's great, but that wasn't going to convince them. And so at the end of 74, if you bought a portfolio of non investment grade debt, by the end of 76, you made 100% on your money unleveraged. So everyone that you told what they should be doing in January, February or March of 74, that didn't do it. You now had the credibility, okay, I. Didn'T double my money.

I didn't make investments. I was on a panel in 1974 at the institutional investor conference with a professor that's very famous today and has ratios that are famous today. And he predicted 700 of the 2000 largest companies in America were going to go bankrupt, including states like New York. And cities like New York City. And I said, based on history, which I had studied for 200 years, including the depression, that was not going to happen.

We were on a panel together in 77, and he pointed out that he had predicted the four major bankruptcies that had occurred between 74 and 76. The two of us probably were the only ones in the room in 74 and 77. And he hadn't stated that he predicted 700 to get four right. So this period of time changed the views. And the other dramatic thing that changed was something called the Nifty 50.

And this is idea that you could buy 50 stocks. They were so great that you never had to sell them. You could hold them forever. And the average PE ratio was 66 times of these great companies. And many of them were great, like Disney and Walmart, but many of them were Polaroid and Kodak and others.

The basis of bank trust investing was buying this Nifty 50. So you would never be fired if you lost money in IBM, okay? If you made another investment, you could have been irresponsible. Adjusted for inflation, you lost 90% of your money in the next decade. And this led to the growth of money management, fidelity, and all the other money managers where people said, well, gosh, if I'm losing money with trust banks and it's not safe, I need to find other alternatives.

Michael Milken

And this caused an explosion in equity. Mutual funds, debt mutual funds, high yield convertible securities, et cetera. And so, yes, you could be right on your research, but it takes these events to occur for people not necessarily to believe and invest with you, but to understand what you told them before it happened would happen. You don't get any credibility if you told them you said that before, but. They never heard it.

Unknown

So I'd say that laid the basis. And then in the late 70s, we began the initial issuance of non investment grade debt for both public companies and private companies. As you look forward to today, so much of the private equity market, and increasingly private credit, is fueled by those same initiatives you started decades ago. I'd love to get your perspective where you see those types of innovations and where you see just an extrapolation of what you started long ago. I'd say, first, many people try to separate this, but to me, there's no difference between private credit, public credit, term loans, et cetera, 99.5 or something.

Of all the companies in the world are non investment grade debt companies, very few are investment grade. And therefore, you can imagine my excitement when everyone is focused on 500 companies and I have 10 million to figure out what to do. And for the rating agencies, the past is always aa and the future always has risk. You tend to rate older companies higher. We study that in credit.

So what I see is really the evolution of the results over a very long period of time here, going back particularly to the work that I had done in the 60s. So we're 60 years later now. The rates of return have been significant and have exceeded higher rated debt and often equity rates of return. So whether it's private credit, whether it's public credit, whether it's term loans, today you have thousands and thousands of institutions that can make their own credit decisions as to who to invest in. And I would say that hasn't changed.

The original work we did on securitization of companies debt, it then went to mortgages, where I would take thousand mortgages or 100,000 mortgages and securitize them. But that's gone farther than I had planned. Whether it's accounts receivable financing, whether it's letters of credit today, the idea that you can spread risk by having numerous investments that look similar as car loans have or credit card loans have. This is extended to the securitization of, for example, royalty streams, franchise fees, etc. Companies and organizations have been able to borrow substantially lower.

If you look at one of the greatest purchases in sports, the Los Angeles Dodgers, for example, they were able to securitize the media stream from an investment grade company. In that case, it was Time Warner Cable today, charter for the next 30 years that paid, whether you played baseball or didn't. And so they were able to discount the cash flow from the media stream from an investment grade credit, and the present value of that exceeded what they paid for the baseball team. So you got the baseball team for close to nothing. But it is this securitization and the trade off in the credit markets where you have strong credits or weak credits, where you're borrowing from another credit.

In the 74 period, 50 years ago, when they put on credit controls and you couldn't loan money to a company you didn't currently loan it to because of the oil shock and because of inflation, you often found suppliers that were good credits, loaning money to the buyer to finance their purchase. You found end users, customers loaning money to the manufacturers to manufacture the product. The securitization of credit has allowed millions and hundreds of millions of homeowners throughout the world to buy a home, tens of millions of owners of cars to buy a car, versus an individual loan. And so computers have helped and the technology has helped to do this, but it's allowed people to borrow longer and. Borrow at lower rates.

Ted Seides

So alongside of the innovation in financial technology you started long ago, your time at Drexel had a group of people working with you that have become, by a large amount, the leaders in this space today. And if I just run off the founders of Apollo, Aries, Blackstone Canyon, Crescent, Molas, Richie handler, CEO Jeffries David Solomon at Goldman Sachs, I'd love to hear your perspective on talent. How did you think about assessing talent? Well, I had a number of things I did. But I would stress to you we had a mission.

Unknown

You felt like you were creating jobs, you were building industries. I remember not one person believed in cellular mobile. Not one. It's hard for someone in 2024 to believe that. But if we're talking early 1980s, John Klugey, who we finance, believed in it, Craig McCall believed in it.

And many people like Craig, I did not have a relationship. But after he knocked on every door and someone told him they would not loan money against mobile, I mentioned to him, why are you going to a veterinarian if you need brain surgery here? And so I would say to you the mission of financing businesses, of the future, of creating opportunities, of identifying people with talent and giving them capital. What's dramatically misunderstood is the importance of your managers, your leaders and businesses. People looking at the numbers often don't understand.

By far the most valuable asset, and that is the human capital. In 1965, after the Watts riots, I wrote down this formula, essentially that prosperity is financial technology. Thousands of different types of financial instruments serve as a multiplier effect on the world's largest asset, human capital. The world's second largest asset, social capital. And then what you find on the balance sheet, real assets.

And the human capital in the United States, if it had to be measured, I would say would be around 1500 trillion. So we're talking 60 to 70 times the GDP of the country. And Steve Jobs often wrote early in his career, it's not the capital you have, and it's not the amount of money you're spending on research, it's the people you have and how you lead them. And IBM was outspanning him 50 to one at one point. And so the key, I think, is people.

And it's the same on a football team and a basketball team. It's easy to see on a basketball court. I grew up in LA, went to graduate school in Philadelphia, of course, learned to hate the Celtics at a very young age. Philadelphia had maybe more talent and lakers had more talent, but Boston always won and they worked as a team. So in looking for people, you want to find people that want to play as a team.

You also want to find people that know when they have a losing hand and drop out. So one of the things I like to do was play cards late at night with people before we hired them, when they were tired, and then you would egg them on. I heard you're the greatest trader. Why are you dropping out of this hands now? If they'll let social interaction influence their decisions, then, gosh, we can't afford to have them as a trader.

I used to like to drive with people. I often would schedule to go someplace with a person we were interviewing and we drive together and I would wait till it was so late you could never get there in time if you went in a straight line. And I wanted to see do they just get on the road and stay on the road? Are they trying to find alternative routes to get from point a to point b faster? And so generally, I did not hire anyone that drove in a straight line.

Michael Milken

And did not change routes or did. Not drop out of hands when they had no chance of winning. And then I wanted to meet their family. I don't even know if you're allowed to do that today in hiring people, but a lot of times people can present themselves as someone when you're interviewing them. But if you can go out with their family, go to dinner, meet their kids, et cetera.

Unknown

You can see maybe what type of person there are. And the other thing I wanted to do was make sure a person really wanted this as a career, that they really wanted to serve their clients to finance industries, businesses, and were willing to make sacrifices of time and things if need be, to do that. Not everyone really wants it. They might want it, but they really aren't going to be there at four or five in the morning. So I often, when I interviewed people, would tell them to meet me at four in the morning or 430 in.

Michael Milken

The morning just to see whether they really wanted it. And I think each of those individuals. And thousands of others, I think there's. 72 private equity firms now headed by people that work with me. We gave them a phd in finance.

Unknown

Okay, so they got their phd in how to build capital structure. What is credit? Not to be influenced by extraneous things that aren't real, not live by regression analysis. When you go to school and graduate school, a lot of times you learn regression analysis. What is regression analysis?

It tells you the future is going to be like the past. But technology today has so dramatically changed the future that those that are using regression analysis really are not the best performing managers today. And I find today that many, many people are still thinking the future is going to be like the past. The dramatic changes in demographics, I don't. Think investors have really focused on.

So over the last few years, you've had significant weakness in chinese real estate markets. Now, when should you have started to figure this out? First, the government was fueling the growth of their gdp by funding real estate. But second, they've gone from having 23 to 25 million children born a year to less than ten. So they've had a 60% reduction in the number of children born.

And if this continued in the future, they would lose four to 600 million people. So you could look at Japan, where two people die for everyone that's born and you can buy in rural areas today, entire towns for 250,000 because the people are gone and the young people want to live in the cities. So if you're building all this real estate and your population is going down every year, eventually you're going to need less real estate. So when do you see that trend? But that started a decade ago.

Michael Milken

It didn't start two years ago. Once you cessed out some of these important characteristics of the people, their motivation, having the right skills, the right vision that was aligned with yours, how did you get them to join you, if. You'Re on a mission, if you stand. For something, a lot of people will join you. You're trying very hard not to hire a person that's going to be a mercenary, that's in it for the money.

Unknown

Now we probably finance 3000 different companies. I only had one CEO ever tell me he was in it for the money. Now, many of them might have thought that, but if they told me, they would have thought, well, maybe I wouldn't have financed it. And I think when you look at the people that have built industries, built companies, it was passion and their rewards were their success. I remember with Craig McCall, I told Craig when he came to see me, he was really the person that changed the course of mobile in this country.

But his family had built radio stations, cable paging other industries. And I told him that he's going to have to sell everything his family had done, that this was going to become so capital intensive west we could leverage. But he would need to have equity that if he truly believed that mobile was the future, then he essentially, unless he wanted to be diluted to little to no ownership, was going to have to make the decision to bet on mobile and give up what the family. Had done, which he did. What are some of your other favorite stories of backing entrepreneurs back then?

Well, some of the best things you. Do are things you don't do. People think there's a commonality of interest. So with an investment banking firm, you have a merger and acquisitions department. They get paid when you do a transaction.

So often the people that are the best is getting people to do things so they can get them to do things. And I would often ask them, have you ever seen a deal you don't like? Okay, you like every deal. Now they get paid up front. Our clients, our investors get paid on the back end.

Long term, did the investment work out? Did it pay interest? Many of the stories that I have enjoyed the most are rebuilding stories. In the case of Toys R Us, they came out of interstate department stores in the 1970s where you were building. They had a great company hidden inside, a company that was losing a lot of money.

And it was hard to see interstate department stores, Juul, which was Toys R Us, which at that time in the 70s was very small compared to the overall company. One of the great opportunities that never occurred occurred with Lockheed in the early 1970s. And you had Textron and Linton offer to buy Lockheed. The debt of Lockheed was trading at $0.15 on the dollar. And if you and I had ever sat down and said, we're going to have a meeting in the mid 1960s with our board of directors, and you were the chairman, and you told them, today we have five years to go bankrupt.

I want you to come back and give me your best ideas on how we can go bankrupt. And Lockheed executed maybe ten things. One, they went into commercial aircraft they weren't in and lost billions of dollars. Two, just in case they had demand for the commercial aircraft, they didn't go with United Aircraft or GE for engines. They went with Rolls Royce, and Rolls Royce went bankrupt.

People weren't willing to buy airplanes that didn't have engines. They built their plant over the major earthquake zone in the United States in case you could catch an earthquake. They borrowed short, they paid dividends. They didn't want any long term debt. They had a backup contract, a Navy contract, an area they had no expertise, and they lost seven or 800 million as a backup plan.

And then they bribed some of the royal families in Europe so that you wouldn't even want to save them if you had to. And at the end, they took every strike with every labor union. So even their own employees didn't want. But they were one of the largest government contractors. The government was very dependent on them.

They were making a lot of money in that business, but it was blurred by all those other things. And Textron made an offer to buy them and its stock got obliterated because the market thought they were under their mind. And the company eventually survived and built. And the debt that traded at $0.15 on dower never missed an interest or a principal payment. And today, I believe, is the largest government contractor.

So many of the stories are rebuilding, stories that you see when you look back, and whether it was cable, whether it was entertainment, whether it was media, whether it was home builders. Home builders were constantly boom and bust. They borrowed short. When things were great, they made money, and when things were bad, they went bankrupt. And one of those companies, MDC and Larry Maizell, just was sold the other day to a japanese company for the.

Michael Milken

Highest price it ever traded. I believe if you feel you have a mission and a purpose, then you can get a lot of people to. Join you on that mission. When you start talking about that Lockheed example, how do you think about the optimal capital structure for businesses? Some businesses are highly volatile.

Unknown

You had almost a decade that if you weren't in technology and you weren't in real estate and you weren't in retail, almost no company went bankrupt in ten years. If you're a supermarket, you might have a totally different capital structure than if you're a tech company. And so for some companies, even a dollar in debt is too much because of the volatility and risk in the business. For others, that has very low volatility on their business, you can have higher capital structure. And part of the efforts and the work that I did that say went for my thesis in graduate school was understanding that you could manage the capital structure of a company the same way you can manage the operating side of the businesses.

And in the 1970s, because there was so much stress in the early 80s, interest rates overnight going to 21%, et cetera. Often the chief financial officer became the CEO. Today, when we think of the challenges, I think you're going to find many of the people that were the head human resource manager eventually goes to become ceos. And can you attract the best in brightness? Can you retain those people?

Do they believe in your mission? Do they want to work for you? Are they proud working for your company? Many companies have the wrong capital structure. Today, almost 50% of the 20,000 largest companies in America are owned by private equity.

Many of these capital structures were built in 20, 17, 18, 19, 20, 21 when interest rates were very low. So many of them today have the wrong capital structure at the wrong time. So you leverage seven to one. And if I loaned you money at 15%, say, in 1983, and you were leveraged three to one, you were paying 45% of your cash flow out in interest. Well, if you borrowed seven times and you borrowed at six, you were paying 42.

But if you have to refinance at ten, there goes all your free cash flow. And so we're going to see in the next few years opportunities to exchange debt for equity and recapitalize good companies and good industries. And the owner will either put in more equity or approach the creditors about. Exchanging some of their debt for equity. I want to take a break in the action to tell you about Netsuite by Oracle, helping businesses accelerate growth and run better with a suite of ERP financial, CRM and ecommerce products.

Ted Seides

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Allocators that's Netsuite.com allocators to get your own KPI checklist. Netsuite.com allocators. And now back to the show. You've seen these cycles in the past, and I'm curious, with so much capital that's come into the hands of private equity managers and credit, how do you think this shakes out over the next five or ten years? I think for the last decade, in many ways, 50% of every company being sold by private equity was sold to another private equity firm.

Unknown

Today, if you have longer term debt, you can't really sell the company unless you're selling it to an investment grade type credit. So I think you're going to see a private equity company buy part of another company to provide some liquidity. So I think you're not necessarily selling the company. You're going to bring new capital in so you can get distributions. I think that will play out the.

Sophistication today of your private equity. Many of your private equity firms are larger credit firms today, and private equity is the smaller part of their business. They're very sophisticated, and in my opinion, they will be buying up the debt of many companies to exchange it for equity as a way of buying. And I see that occurring over time in the future. One of the things I learned over the years, the six lessons of credit that occurred, one, it's credit, not leverage.

And so leading into the financial problems of eight and nine, you saw companies dramatically leverage themselves up to get the same equity rates of return, but they weren't the same credit. And you saw people leverage 1020, 50 to one in some of these financial institutions. Now, that isn't the case today. Second, I really have never met a person over a long period of time who's generated a high rate of return. By guessing where interest rates are going.

So, yes, you're right once, yes, you're right twice, but not in the long run. So making investments, whether interest rates go up or down, is a key decision. Three rating agency ratings are a trailing measure, not a forward looking measure. And you might rate a company whose future doesn't look bright or is going to be disintermediated high based on the past. Or you might rate a company low.

I mean, Tesla was not investment grade debt even. It was approaching a trillion dollars in market cap. So it just took a long time to get there. Four most loans to real estate are not investment grade. And if you want to identify the major financial problems of the last 20 to 30 years, you can be traced down to this belief in overinvestment in real estate and the belief that you can leverage it up.

There's maybe three companies in America that are rated AAA, s and P rated in a period of time, 15,000 structures, almost all of them real estate. And in some cases, you lost 100% of your money in AAA. Sovereign debt has not been a good credit over time. And the final conclusion is debt markets underpin equity markets. If I'm able to get significant double digit returns in debt, and I have actual assumptions of seven or eight, I don't really need to go to equities.

Michael Milken

And I think we learn that time and time again. As you've taken and distilled all these lessons over time, I'm really curious how you've thought about backing participants in the market with your own capital, with your family, office capital, and what are those key criteria you've used to determine how these folks will invest your capital. I start with the individual, and do I have confidence? How does the individual see the world? Do they have blinders on?

Unknown

Are they willing to see the world? Can they change? In any business, there are changes. What you expect might not occur, the unexpected occurred, Covid occurs. Can you adjust?

The very first decision we make is on people. After that, we can make a decision on industry structure, where in the capital structure you come in. So I have many things on my plate, not the least of which is medical research. Most people don't realize why I'm there, that the number one driver of economic growth in the last 200 years is public health and medical research. And so more than 50% of all economic growth can be attached to public health and medical research.

I don't sit in a trading desk. I can't look at on a day to day basis. So we are dependent on individuals that we see if there's a change, they recognize the change from that standpoint. And so we really invest in people. So democratization of finance has been a key underpinning of so much of your life.

Ted Seides

There was a point in time, a long time ago, where health became a real issue for you, and you spent a tremendous amount of time. And the subject of this book, faster Cures on medical research. And I'd love to hear some about that journey. I think it was John Lennon had in a song, you have a plan, life plan, and then world things happen. So I had lost ten relatives to cancer.

Unknown

Our children had serious health challenges. In the mid 70s, when all my economic theories proved to be correct, we were faced with all these health. So I've been involved now for 50 years in medical research and trying to apply the same thing we applied in finance and the economy for medical research. Sharing information, sharing data, getting people to work together, having it be fact based and bringing capital. And so I'd been funding cancer research for 20 years when I was diagnosed with cancer.

And yes, they told me I had. 18 months to live 30 and a half years ago. Yes, you had to find a way to deal with that issue. And I focused very heavily on science. I had never done any work in prostate cancer.

The form of cancer I had. I'd done a lot of work in breast cancer, melanoma, pediatric neurology, but not in this area. And so it took me 30 days to figure out a strategy and then implementing a new organization we called cap cure cap C-O-R-E ca all cancers, p. Prostate cancer, and cure all life threatening diseases. The first step we analyzed was to tell people, we're not going to be a threat, we're going to increase funding for all diseases.

We didn't want people to think we're going to divert funds. And we spent a number of years trying to figure out how to double the National Institute of Health's budget, the largest funder of medical research, and eventually put on a march a half million. People in the country. And today, the US government has invested an incremental 500 billion in medical research. And part of the side of that was why we found a vaccine in less than a year in the rna work.

And people don't realize, but it was only seven weeks, 63 days between the sequencing of the dna of the virus and the first human being that Moderna gave the vaccine to. And so it's an area I've dedicated my life for 20 years to as a philanthropist, and now I've dedicated the last 30 years as an activist and philanthropist. And I think these are issues that. Are important in life. There are issues in the stock market that goes up and down or bonds, et cetera, but things that are life and death.

And I would say to you, one of the biggest mistakes that most people do that are diagnosed with a potential life threatening disease is they don't do enough at the beginning. So at the beginning, they do the least possible and hope it works out. When they have reoccurrence at the end, they're willing to do anything to stay alive. And if you did a little more. At the beginning, you wouldn't maybe have a reoccurrence later.

And I'd say the other thing we learned is prevention and wellness. We've invested hundreds of millions in studying your microbiome today. And we know that we can change your genes today with CrisPR, but we don't know what happens. So it might be decades before that technique is widely used, but we can change how your genes are expressed by changing your lifestyle, what you eat, what you drink, and what you do. And therefore, even if you have a high probability of getting a life threatening disease, you might not by changing how your genes are expressed.

So prevention is one of the great ideas today that we all could employ. And I, let's say, became extreme in this area of what I did. For two years, I did not eat anything except raw vegetables and raw fruit because I didn't know if cooking or anything changed the molecular makeup. And it might not work, but it. Wasn'T going to hurt me.

Ted Seides

When someone comes to you with some type of cancer and it's early and they have the opportunity to do something early, are there two or three things that you've learned from your research that are the most important actions for someone to take? First, let's find out what your disease really is. So if someone tells you you have breast cancer, there's many kinds of breast cancer. If someone tells you you have prostate cancer, there's many kinds. What do you actually have?

Unknown

Not a generic name. So you can sequence your own genome today, maybe for $100, not 3 billion, which it cost and took 13 years spending an hour. Two, you can sequence your microbiome, and three, you can sequence your disease. So let's find out exactly what disease you have, what form? What is the mutation?

And my guess is in ten years, a person will say, I have an XYZ mutation. They're not going to say, I have this disease that's been identified in a part of my body. Once you know that things that look like they're not aggressive can be aggressive. Things that look like they're aggressive might be nonaggressive. And for some people, doing nothing is an alternative than understanding where the leading research is.

You might have an institutions that are, say, the number one institution in the country in cancer overall, but in a particular form of cancer, they're 40th. And then you want to make sure, like anything, that if you talk to a surgeon, they're likely to suggest surgery. If you talk to a radiologist, they're going to suggest that. And so let's get a few opinions from individuals. And so those are some of the steps.

And nutrition, personal discipline is hard. Not everyone can do that. But for many people with what appears to be serious disease, if you're willing. To change your lifestyle, you can do. What'S called active surveillance.

And so you can wait and see if you're willing to see, by changing your microbiome, it changes. And so understanding your metabolism and things has a major effect on your outcome. And today they've now approved giving the microbiome of one person who responded well to treatment, to another person that didn't respond well and see if they can respond well. So we've learned today that this exists, it's available, and the promise of science today is so unbelievable in so many ways. There's so much exciting things happening.

Ted Seides

The third prong, alongside of finance and healthcare across your life has been education. And again, would just love to hear some of your thoughts on the work you've done in and around education. Well, we've been active for 50 years, but when you think about it, most people, when they think about what made the United States the United States, they think of freedom, democracy, bill of rights, declaration of independence, immigration, et cetera. But between 1870 and 1960, the United States added one year of formal schooling every decade. And by 1960, the US was the most educated country in the world by.

Michael Milken

Two years, more than any other country. Since then, other countries have caught us and passed it. And so in the recent study shows in k twelve education that us now. Ranks 31st in the world. To me, you want to be able to do something, you want to execute, you want people to come up with new ideas, new industries, entrepreneurs.

Unknown

It all starts with education. And we discovered outside of the parents or the guardians, the most important thing was the teacher and the classroom. So we started these awards programs. My brother's overseen them a little these years to try to lift the self image of the education profession. Today, we probably have given 3000 of all these awards.

Michael Milken

Over the last 38 years, we've launched. Online schools, a company that became a whole new industry, virtual charter schools in the 1990s. It's a public company called strive today. But millions of kids, if you're in a school area where it isn't safe to go to school, you can get your classes online. The state and these virtual charter schools will treat you like you're a public school student.

Unknown

You get your computer free, broadband, free teachers, free mentors, free all courses. And we built out every lesson for every day for college. We created an industry that's widespread now and that's going to college online. And so at the peak, our company, we represented 30 different universities, University of Florida, Vanderbilt, and others. And so you were actually going to us.

We ended up selling that company to persons. And likewise, we launched a very catchy organization called Mike's Math Club, where we gave special skills to kids beginning in elementary school so that they would love math and we would empower them so they could multiply two digit or three digit numbers in their head faster than a calculator. They would know 106 times 104 is 11,024 before you could pick that up in a calculator. And getting them to love math. And one of the highest paid professions in America are people that are mathematicians.

And the financial world today has changed dramatically. I had to look hard in the 1960s to find another person who was a math major in finance. Today, you don't have to look anywhere. They're inside every company. And so when you think about the United States and the future of this country, it is so important today that we educate our children to the level of world standards, and we let our children down by making them think they excel when our standards.

A 90% tile here in the US, and math might be a 40% tile in another country. As many people know, we've had massive grade inflation while we've seen test scores drop. And so the world looks at America as the ideal of the America as America is a meritocracy that you can succeed, have access to capital, regardless of who your parents are, where you were born, your religion, your race, and you'd have a chance to succeed. And if you failed, a chance to try again. The foundation of our country is education.

And we're really the first country to decide. We're going to offer education to all of our citizens. And when you look at our country today, 50% of every software engineer or scientist in Silicon Valley in the last 30 or 40 years was not born in the United States. 60% of many of our medical research not born in the United States. 77% of everyone in PhD programs in AI not born in the United States.

We have been the beneficiary of immigration. So we need to revitalize this commitment in education. As you look out across each of these, across finance, healthcare, and education, what opportunities are you most excited about? I'm excited about the leveling of the playing field. If I don't know who I'm making a loan to, it's pretty hard to discriminate.

So if I'm buying a securitized mortgage, okay, and there's a thousand people that are borrowers, I don't know whether they're born in the United States, Mexico, Dominican Republic, Nigeria, wherever they might have been born. I don't know where their parents are. I don't know where they went to school. And so securitization is a democrazization of access to capital in that sense. So I'm excited about that and how that works.

Number two, technology. The ability today to drive costs down. So there weren't too many people lined up in the 1990s to say, okay, sequence my genome here, I'll give you a billion dollars, and I'll come back in ten years and we'll figure out what the issues are at $100, at $20, at $50, it's now available to all of us. Amazon and companies like Amazon now allow us to deliver goods to places that were food wastelands in the country and places you didn't have access to product and services. Today they can be delivered to your door wherever you might be, the Internet, a great leveler of civilization.

You might be in a school, there's no physics teacher in your high school, but you can take the class online and get credit in your school. Today. I feel technology affords this. I couldn't be more excited about focus ultrasound. Now I'm a star trek kid from the idea that you can have non evasive surgery.

So we went to minimally evasive surgery. Where you're in the hospital, less damage. To your body, et cetera, and you can't even find the scar when they took your appendix out. But now we have non evasive surgery, shooting your body with sound waves and knocking out the bad cells. So it's like going to a dentist.

We're going to be able to clean out the bad cells in your body. So you go, it's an outpatient. You go, they zap the things you don't want in your body, and you go home and periodically you go in for a checkup to make sure you can do that again. But it's now been approved for 50 or 60 diseases. I have a good friend who had terrible tremors all these years.

He went in. When he walked out, he had no tremors. So there is enormous potential. It's been approved for Parkinson's and other diseases. When you think back that life expectancy on planet Earth was 31 years of age in 1900, and today it's mid 70s.

It took 4 million years of evolution to extend life expectancy by eleven years. In the last 120, we up by 40, 20% of all people in the United States died before their fifth birthday in the world in the start of the 20th century, half. So if you wanted to have six children, you needed to have twelve. If you wanted to have three, you have six. And so the enormous population explosion and things happening in subsaharan Africa today, there's a byproduct of the breakthrough of many of these medical treatments.

A woman today has a 2% chance of passing aids on to her child, down from 95% 20 years ago. So I think if you're a good investor, the very first speech I gave on Wall street in the late 60s was the best investor was a social scientist. And if you ask me again today, I would tell you the best investor is a social scientist. Understanding where the world is going. As you look back on all these things you've done, what are you most proud of?

Well, I'm proud of my wife, who I met in 7th grade 65 years ago. In our relationship, I'm proud that our kids are responsible members of society, and we've been blessed with ten grandchildren. So what is your greatest legacy? Your greatest legacy, in my opinion, is your children. Will they be productive members of society?

Will your grandchildren? I think seeing the death rate from many of the diseases we dealt with dropped by 50, 60, 70%. I was in Houston a few years ago and met with 47 patients that were stage four melanoma, average life expectancy under six months, who are all in total remission. And so we worked for ten years on these checkpoint inhibitors and prostate cancer. They were not successful for a number of reasons.

We're working on different strategies today, but a 50% drop almost overnight in deaths from melanoma, deaths from prostate cancer, and others that are with us today. Sickle cell anemia and other things. Using CRISPR is going to be approved. You're going to eliminate this disease? Eliminate it.

And I would say seeing a vaccine go into a human being, not in a decade, but in nine weeks, that worked bodes well for the future as it relates to so many things, social media and technology, it brings blessings and it also brings many challenges. But being able to live a healthy, long life will allow us to have the ability, and I feel it's our generation's responsibility, to eliminate many of these diseases as a cause of death. And I do believe the thousands and thousands of people that I had a chance to work with, who all have their phds in finance today, are out there financing good ideas and businesses. The future. Mike, I want to ask you a couple of fun closing questions before we wrap up.

Ted Seides

What is your favorite hobby or activity outside of work and family? Visiting early childcare centers or elementary schools. Young kids have no filtering mechanism, so when you talk to them, they tell you exactly what they think. What happened in their house last night? And I always feel the future of a country can be seen by visiting the schools.

Unknown

So when I first started going to China and the Middle East, I always would go and visit their elementary schools, sometimes middle and high schools, just to see what the kids thought, what they're learning, what they believe in. And so it is invigorating. What's one fact that most people don't know about you? I think most people don't know that I was voted the friendliest and my wife was voted the most likely to succeed in our high school graduating class. Yes, I was the head cheerleader, and Sally Fields, he was my head song leader, but my wife was the one voted the most likely to succeed.

So we met in 7th grade, and I've stayed close to her ever since. What's your biggest pet peeve? I think one of my biggest pet peeves is lack of prevention. So most of the money in health and medical is spent on care or cure, and if we dealt with it early, you could prevent these things from happening. And so we spend very little on prevention.

We're trying to build in to insurance companies and companies today that they will pay for exercise or other types of things. Many companies today make their healthier food offerings cheaper in the corporate cafeteria than they do others. So I think we have so much knowledge today of what sugar does to your body and other things do to your body. We can see what's happened in China, where almost 40 years ago no one had diabetes, and now they have the most people with diabetes in the world due to 20,000 fast food restaurants, increased carbs, increased sugar, and aggressive protein diets. So I think it's a pet peeve.

When you see people who got a disease that probably wouldn't have. There's a high correlation between heart attack, diabetes, strokes, and being overweight. We did a study back as far as 20 years ago showing that just the change in weight in America cost. The country one and a half trillion a year. People don't remember in their very first Super Bowls, there wasn't one lineman that weighed 300 pounds.

And if you look at that today, you can find a high school where every lineman weighs 300 pounds, and you just can imagine what's going to happen. To them in their lifetime. Which two people have had the biggest impact on your professional life? I'd say Gary Becker would be one. He wrote these things in the read.

He was really the father of the concept of human capital, that the assets not on the balance sheet were the major assets, that maybe 75% to 90% of the assets of a country, a state, a city, are the productivity of the people. We became close friends. He did get prostate cancer, unfortunately, died of cancer about a decade ago. But whereas his work was primarily in the academic area, I applied these concepts both at our milk and institute, our foundations, and in business. And the second one was the young man, I don't remember his name, that I met that day, August twelveth, 1965.

And the Watts riot started August 1165. Lori and I got married August 11, 1968. So I would never forget what occurred that day. And I'd say those two people have had a dramatic effect on the path I have chosen over the last 60 years. What's the best advice you ever received?

There's many, I would say, studying the data, going into debate at a young age. If you compete in debate, and I'd encourage everyone to encourage their kids, you have to debate both sides, you have to know both arguments, you have to see the world. And I think one of the things that's really propelled me over the years is seeing the world through other people's eyes so that I can understand their views of the world, why they feel that well, but that was great advice, going into speech and competing in the national forensically at a very young age. Any others that come to mind? Well, there's many.

Michael Milken

You are what you eat. I began to meditate in 93, and I probably ate more hot dogs. That's what people don't know about me than anyone, except those that have won the Nathan's hot dog contest. When I was at Berkeley, they opened what I call the shrine top dog. And anyone who's ever gone to Berkeley knows top dog.

Unknown

And I did not go to sleep once at Berkeley without having two to twelve top dogs before I went. So giving up hot dogs was a very difficult thing for me. And I've had many friends who have unfortunately died from cancer that couldn't give up their favorite foods. So I think the advice that you are what you eat has allowed me to be here today. And I'm the happiest guy to be.

Michael Milken

With you today, 30 years later. Michael, one more what life lesson have you learned that you wish you knew a lot earlier in life? I'd say simply distributing more information widely. I gave thousands and thousands of speeches, but I didn't really give interviews. I didn't really go on television.

Unknown

I had a mission. And so when people don't really know who you are, anyone else can make up any caricature in the world. If you're going to go try to change the world, you need to be a public person. And I was a private person. One of the great politicians of the 20th and early 21st century, Willie Brown, told me, unless you've defined who you are early, it's too late.

If some event occurs, and I think had we been more public, had I gone on television more or done more interviews and I declined them all, it would have been different. And I think the course of history would have been different. And so I wrote a note to Bill Gates when they were going after Microsoft as a monopoly in the told them he should get out there, talk interview, get on shows so they don't think he's some mastermind nerd that's going to control the world. I think changing the financial system, giving people access to capital obviously is not great. For those that had access to capital, they now have to compete.

And so I think it was a big mistake I had made and I'd give that advice. If you are on a mission, you should publicly have people understand where you're going, how you're going to get there. Doing that internally, even if you have 10,000 employees, is not enough. You have to publicly have people if you're going to dramatically change something, come along with you during that period of time. Well, Mike, I'm very grateful you came to that lesson so you would take the time to spend with me today and share so much of your story.

Ted Seides

So really appreciate the time. Thank you. All the best. Thanks for listening to the show. To learn more, hop on our website@capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast, transcripts, my investment portfolio, and a lot more.

Have a good one and see you next time.