The Predators’ Ball by Connie Bruck Page A

this time, Milken was already known for the ferocity with which he responded to challenges on what he viewed as his domain. And he and his crew responded to Merrill with the kinds of tactics that would ultimately make them hated by all their rivals on the Street.
    Drexel and Merrill were co-managing a junk issue for Volt Information Services in 1981. Drexel arranged the road show that introduced the company’s managers to prospective bond buyers. On the plane to Chicago the Merrill bankers found themselves in coach, while Drexel went first class with the Volt executives; and when they all arrived in Chicago, Drexel and Volt were in one hotel, Merrill in another. But the coup de grace came when the Merrill bankers arrived at the site of the road show and discovered—too late to notify their customers—that the location had been changed.
    According to one Merrill Lynch banker, this was no anomaly but almost routine in the early eighties. “It got so that when we were co-managing a deal with Drexel and going to a road show, we always checked with their customers, to be sure that Drexel hadn’t changed the location, at the last minute.” Drexel stopped this practice by 1984–85, he added.
    Drexel’s dominance was not founded on dirty tricks, only accompanied and perhaps protected by them. Fred Joseph emphasized that it was his and Milken’s creativity that allowed them to keep doing so much junk business in the recession. By 1980, soaring interest rates were already causing bondholders to suffer. So, in order to keep luring bond buyers into the market, Milken and Joseph came up with newfangled pieces of paper over the next several years. High-coupon, high-premium convertible bonds (if the related common stock declined, the high yield would offer significant downside protection). Bonds with warrants. Commodity-related bonds: four were exchangeable into silver, one into gold, two had returns relatedto the price of oil, and one had a coupon which would increase based on the volume of trading on the New York Stock Exchange.
    â€œI used to sit with a company and say, ‘What do you want?’ ” Joseph recalled. “I’ve got to give the investor the potential to earn the return that he thinks is fair for this package. But I can give him the return any way I want. I can give it to him by giving the money back sooner, or by giving him a higher interest rate, or by giving him more stock, or the stock cheaper.
    â€œÂ â€˜Tell me the one thing that’s the least important to you, and if you give me control of one variable, there’s nothing we can’t do.’
    â€œAll the other firms didn’t have the confidence of having a Mike Milken who could sell this paper,” Joseph added. “So they had to look at spread sheets, figure out what had been done, and do one just like it. But we could just sit there with our minds wide open, smoke pot”—he laughs—“daydream, and say, ‘What do you want?’ ”
    Even with its inventiveness, Drexel was having trouble finding companies willing to pay what it took to raise money in 1981–82. And in its push to keep doing junk deals, Drexel did a couple that were notably outrageous. One was a $30 million offer in 1982 for Flight Transportation, a company which billed itself as offering jets for private charter to the Caribbean. There were, however, no jets, only a scam, and the FBI closed in shortly after the offering, while most of the money was still in escrow. Many of the bondholders sued, and they eventually achieved nearly full recovery in a settlement with Drexel.
    â€œIt was deliberate fraud on the part of Flight Transportation, but if we had been more careful we should have been able to spot it,” conceded Stanley Trottman, the investment banker whose deal it was. After the Flight Transportation debacle, Drexel instituted some controls on the freewheeling junk-bond enterprise. A