In 1987, Michael Milken committed an unpardonable sin; he was reported to have made over half a billion dollars in income as the lead high-yield bond trader for Drexel Burnham Lambert (DBL). This is a fantastic amount today, of course, but in 1987 it was beyond comprehension. How could any one man do that? Clearly no one is worth that much, in an intrinsic sense*, or so it was thought, but surely there was chicanery involved. So when aspiring political prosecutor Rudy Giuliani went after Mr. Milken for securities violations, there was little sympathy in the popular culture. To make that much money, he had to be guilty of something. And indeed he was. But the question is, did the punishment fit the crime?

Mr. Milken’s financial genius was to recognize and seize an opportunity that was heretofore unnoticed. When Milken looked at the returns of so-called junk bonds compared to highly rated bonds, he found that a portfolio of junk bonds would significantly outperform safer bonds. Junk bonds were riskier, but they were riskier because they represented younger growing companies–some might make it big, but others would fail. But a portfolio of these companies would hedge the risk of the few failures and allow the very high yield of the winners to more than compensate for those that didn’t return 100 cents on the dollar. This meant there was an arbitrage opportunity for the enterprising entrepreneurial financier who could take advantage of this. Milken was able to take this knowledge, which effectively meant the junk bonds were selling too cheap relative to higher rated bonds, and make getting into junk bonds even easier. DBL began to push the junk bonds to their investors, and to make the thinly traded junk bonds more liquid, DBL began to “make a market” for any of the junk bonds they were selling. This meant an investor in bonds that DBL pushed could always find a ready buyer–if no buyer was ready when an investor was ready to sell, DBL stood ready to buy the bond back itself. By making a market in junk bonds, DBL found many investors ready to come in, and this allowed many more companies to issue high yield debt. And DBL began to own this lucrative market.

This is one of the reasons why the 1980s economic performance was superior to the 1970s–higher growing companies were replacing sclerotic companies. The 1970s saw an era where firms aggregated into conglomerates, with many disparate and unrelated businesses combined. With no good underlying rationale than just the pursuit of bigness, many of these companies were inefficient. Their sheer size made them difficult to reform, as the leadership of the companies were able to resist shareholder pressure. But the advent of Milken’s junk bond revolution made the corporate buy out possible. Corporate raiders could use tax deductible debt to finance a leveraged buyout of these companies, and then break them into smaller, more efficient firms at a large profit. The attendant downsizing made the corporate raider and their instrument of choice–the leveraged buyout enabled by Milken’s junk bonds–a stench in the eyes of the public.

Yet preserving the inefficient status-quo is equally troubling as it would preserve lower growth, higher prices and less opportunity. Yet if you were in one of those companies that were downsized, you would be particularly bitter at the corporate raider who made millions by “leaning” you and your co-workers (as well as the existing corporate management) out of a job. In this era, an aspiring prosecutor named Rudy Giuliani could make a name for himself. Mr. Milken did violate securities regulations, principally he doled out favored participation in some investment vehicles to friends, family and others he wanted to encourage a relationship with. The issue is that the government used racketeering laws (designed for the Mob, which no one argued remotely described Mr. Milken) to go after Milken on issues that normally–for anyone else that was not a publicly known gazillionaire–would be given a fine, with maybe at worst a suspension of trading privileges for a few months. Instead, the government went after Milken to send him to jail for a long period of time, and, shockingly, with the intent to ban Mr. Milken forever from working in the securities business. Given the outrageous nature of the government’s intent, Mr. Milken could have fought the issue for years, but the government prosecutors had a trump card. If Mr. Milken didn’t concede, they would target his younger brother for jail as well. Mr. Milken conceded and spent many months in jail before he was released. And he was banned from the securities business for life.

One has to wonder why someone who was an architect of one of the major financial innovations in the 20th century, who found a way to steer capital toward innovative higher growing young companies, would be targeted for elimination. We’ll never know, but my suspicion is that Mr. Milken simply was too powerful for Wall Street. A Californian before the internet era, Mr. Milken had already moved much of his junk bond operation to Southern California. If he continued, how much more financial business would leave Wall Street to be conducted in LA? We’ll never know.

Mr. Milken did violate our securities laws. But justice requires that justice is blind, and his violations would have led to a far smaller result had anyone else done this. Mr. Giuliani’s political ambitions may or may not have had a role in charging Mr. Milken. But we have strong reason to believe that Mr. Milken would not have been charged if he were not so successful. The Biblical call for impartiality in the law is best expressed by Lev 19:15:

‘You shall do no injustice in judgment; you shall not be partial to the poor nor defer to the great, but you are to judge your neighbor fairly.

Justice would never have charged Mr. Milken, at least not anything like the way he was, and we as a society are poorer in that his gifts in financial activities were denied an outlet. This was a great pardon by Mr. Trump and I salute him for this.

* At one level, one’s intrinsic worth is incalculable–every individual is worth so much that the Son of God went to the cross to die for each of us that would trust in Him.