Den of Thieves, by James Stewart, 1991
The 1980s were a pivotal decade in the development of American capitalism. It was during the last two years of Carter, and the two Reagan presidencies, that the American labor movement was soundly defeated in a series of strikes. During the 80s, jobs disappeared to Mexico and overseas, factories closed, and the U.S. successfully beat-up a number of small countries. Finance-dominated capital began to spread over the whole world economy. Two recessions occurred, one as deep as a mine-shaft. The markets fell off a cliff twice. The S&L industry collapsed, and had to be rescued by tax-payers. The decade ended with the destruction of the degenerated Soviet workers’ state – finishing this decade of the global class war with a massive victory for capital. It was an ugly fucking time. I remember it well.
It is upon the success of this mini counter-revolution against Roosevelt, so to speak, that the Clinton, Bush and Obama presidencies are built, and the consequences of which we are living today.
James B Stewart was a reporter for the Wall Street Journal, and represents the best of that paper’s reporters. In this meticulously-researched history, Stewart has dug out of the 80s dust-bin the financial creatures of that time - specifically Michael Milken and Ivan Boesky – the junk bond kings. Stewart judges Milken to be the most prominent financier of the 1980s, who was treated as a ‘national treasure’ by the finance industry. What is significant about that is that Milken ended up going to jail for 10 years for 6 felonies, and paying a fine the size of Guatemala. The most prominent financier? Tells you something. Boesky is now mostly remembered for being the model for Gordon Gekko, and actually making a defense of greed a part of a 1986 talk he gave at Drexel’s annual event, the “Predators Ball.”
‘Junk” bonds (now politely called ‘high yield’ bonds) are risky corporate bonds issued by companies with weak finances. Miliken bet that the companies would not go bankrupt, and so created their debt to be bought by others. He convinced so many other people and companies to issue and to buy junk bonds that his firm, Drexel (Burnham Lambert) became a power-house on Wall Street. Using that financial base, he began to buy or ‘raid’ companies in mostly hostile takeovers, thus initiating a wave of mergers across the United States. In the process, Drexel made millions in corporate finance fees. People like Henry Kravis, Ronald Perelman, Carl Icahn, Rupert Murdoch, Irwin Jacobs, Kirk Kerkorian, Ted Turner and Felix Rohatyn became famous ‘arbitrageurs’ during this time, who also rolled companies for profit. They paid no heed to the consequences – to the real economy, or to the working class.
What is consistent across the junk bond/takeover/S&L 80s, the ‘tech wreck’ of the 90s, the Enron/World Com pyramid schemes, and the real-estate/CDO bubble of the Oughts is that someone on Wall Street convinces others that their product has more value than it does, and the bubble cometh. It is basically a con-job, and this repetitive con-job is the real foundation of American finance capital at this point.
The “den of thieves’ was a large circle of people on Wall Street – principally Martin Siegel, first at Kidder Peabody; Dennis Levine at Drexel-NY; Milken at Drexel-Beverly Hills and Boesky at his own corporation- who traded inside information, which allowed them to make bets on the market or coerce companies into acting they way they wanted. Along with paying for and profiting off inside information, they arranged ‘parking’ schemes to keep assets off companies books, created dummy companies to hide losses or assets, hid profits in order to pay no taxes, evaded net capital rules, bribed and black-mailed companies to buy bonds, and made deliberately false statements. More colloquially called ‘lies.’
Levine, a greedy and lazy fatty, eventually gets caught by the SEC in insider trading through a bank in the Caribbean, Bank Leu, based on his profitable bets on stocks. Levine traded right before certain announcements that would drive the price up, and then sold. The SEC started to notice the pattern. Levine pleads guilty, spilling the beans on others, and the whole den unravels, though it takes years – from the lowest, Levine, to the highest, Milken. Rudi Giuliani makes an appearance as the head of the New York DA’s office, who prosecutes the insider-trading schemes in a hot or cold way, depending on his political fortunes. Milken is defended by Drexel, which pays his monthly millions-of-dollars legal bills and his monthly millions-of-dollars public relations bills, until the chairman, Fred Joseph, sees enough evidence to pull the plug. Far too late, of course. The firm doing Milken’s PR work, Robinson Lake, had worked on the Reagan campaign, and were a forerunner of the ‘dirty’ politics propaganda we are now so familiar with from the Republican right. All of the ring goes to jail, and the government collects almost a billion in fines. Only one – Siegel- seems to regret what he did, and works for the government to help the prosecution case. In October 1989, the junk bond market itself collapses, sending the DOW into a 200-point decline, as companies over-leveraged on junk bonds finally do declare bankruptcy. And finally Drexel itself declares bankruptcy for the same reason, in February 1990.
Stewart’s analysis of the events showed that all the S&Ls that Milken convinced to buy junk bonds, like Columbia Savings, were taken over by the government, and then rescued by tax-payers for billions of dollars. The law that allowed S&L’s to invest in risky investments was passed during the Reagan administration. The S&L crisis was the other, interconnected nightmare during the 80s and early 90s that is supposed to be part of our collective Lady Gaga amnesia.
At the end, the returns on junk bonds were about equal to a low-risk money market fund – directly contradicting Milken’s siren song of mega-cash, even on his own terms. Only the firms made money off the boom. Companies merged and went out of existence, factories closed and workers were sent home, while assets were swapped like whores at a drunken billionaires’ yacht party – all to enrich individuals on Wall Street.
The lesson of this book is that the recent real estate bubble and CDO boom weren't born yesterday, but are rooted in the overwhelming domination of the economy, the press and the political machines by the finance industry over the last 30 years. Stewart’s story reads more like a financial detective story, structured by the rise and fall of some shitheads, and its natural structure provides a plot with which few potboilers can compete. Reality many times trumps fiction.
And I bought it at Mayday Books used book section.
Red Frog, 9/1/2010