While pondering what might set off the next firestorm of debt default, currency crisis, derivative bombs, stock market crashes, bond market smash, housing collapse, or other nightmare scenarios, I decided to search the "musty old Rasputin archives" to see what precipitated any similar meltdowns in recent history.
Well, lo and behold, what did I find?
The scorn of a woman, of course. Nothing like a crossed ex-lover to make a house of cards crumble, I say!
In this case all it took was one, simple letter from a "Jilted Janet" to set off a cascade of events, leading to the downfall of several "kingpins", the demise a well-known company, and a decimation of an entire industry (at least for a while).
And who were these ill-fated players in this modern-day tragedy?
Do the names Michael Milken, Ivan Boesky, Dennis Levine, Drexel Burnham Lambert and "Junk Bonds" ring a bell?
Well, if they do please read on to see what set this daisy-chain-of-destruction into motion. (And if they don't read on anyway to see what similar scams were underway a scant twenty years or so ago.)
See if you can spot any parallels to today.
The year was 1986. Michael Milken was the undisputed "Junk Bond King". His firm, Drexel Burnham Lambert, was the leader in providing junk bonds to finance many takeover deals for raiders such as Carl Icahn, T.Boone Pickens and Ron Perelman. Drexel held a 45% market share of the junk bond business and Michael Milken had personally made over $1.1 BILLION dollars in the 1980's providing his services. (Yes, that was billion, with a "b", which twenty years ago was quite a sum.)
The yearly "Predator's Balls", held in Beverly Hills and sponsored by Milken and Drexel, were famous for bringing together all the Alpha-dog takeover specialists and their investors and included wild parties and rock bands providing entertainment.
In addition to Drexel's profits on the junk bond deals, many stock arbitrageurs had also made multi-millions by betting on the next takeover target.
Ah, but for that woman scorned...
For it seems that in early 1986 Merrill Lynch's New York office received a terse letter, written in a lady's handwriting style, that spilled the beans on an insider trading scheme two employees in Caracas, Venezuela were currently undertaking.
Merrill dutifully launched an investigation.
Sure enough, not only two but THREE employees in that Latin American branch of the esteemed investment house had been suspiciously profiting from investments in stocks of companies which were subesquently taken over. The "overly-lucky" brokers were questioned and of course immediately broke down and confessed that they were just piggy-backing on orders that came through from a Carribean branch of a Swiss bank. The alert brokers noticed how well the account had done, and decided they would just mimic its trades.
Merrill's auditors were NOT amused.
The humor-challenged internal investigative group turned the information over to the SEC. (Back in the day when the SEC actually investigated such shenanigans!) The SEC pressured the heretofore secretive Swiss to cough up the identity of the Carribean account.
The Swiss, sucummbing to the arm-twisting, complied (Can YOU say "Patriot Act forerunner"?) and narc'd on the owner.
His name?
Dennis Levine
Yes, Dennis Levine, an employee in the Mergers and Acquisition department of Drexel Brunham. It turns out that Mr. Levine had been making untraceable collect calls to the Swiss bank, which would then place stock buy and sell orders for those companies which Mr. Levine had inside information were takeover targets.
Great work if you can get it.
Needless to say, Mr. Levine turned over faster than an armidillo on a Texas highway. He offered up a number of his buddies, who were also partaking in the scheme.
One of those names?
Ivan Boesky
Ivan Boesky, the inspiration for "Gordon Gekko" of Oliver Stone's "Wall Street" fame. Multimillionaire arbitrageur.
That Ivan Boesky.
As with all wanna-be big shot criminals, once the feds turned the screws, Boesky cracked.
And whom did HE implicate?
Marty Siegel, Levine's boss at Drexel
And the "Big Enchilada" himself:
Michael Milken
From there, the scam rapidly unwound leading to arrests and convictions for Levine, Boesky, Siegel, and Milken. Boesky paid a $100 million dollar fine and got jail time. Milken was ultimately fined $500 million and was given a ten-year prison sentence.
By the time all this courtroom drama played out, in 1990, Drexel was bankrupt.
And the junk bond market was crushed.
(Side note: many junk bonds in that time period offered a 13%-15% or higher yield. The TOTAL outstanding junk bond market at that time was $200 billion. A mere pittance of today's approximately $1 trillion of the $5 trillion in outstanding corporate debt.)
So, there you have it bears.
The fury of a woman scorned led to the collapse of a multiple hundred-billion empire.
Now, this begs the question: What might trigger the NEXT meltdown? A collapse which could be orders of magnitude larger than the junk bond collapse of the late 'eighties?
Anyone wanna bet on the cause?
Ras
