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The son of an accountant, Milken grew up in California's San Fernando Valley, only about a dozen or so miles from his current headquarters. In high school, after he was benched as a member of the varsity basketball team, he became head cheerleader instead. Reflecting on those years during a recent interview with TIME, Milken mused, "When things look their worst, you always have the seed of great improvements." At Berkeley during the mid-'60s, Milken concentrated on math and business courses rather than on protest. It was there that he first considered the far-reaching idea upon which he built his empire. Milken came across a study showing that junk bonds, which at the time were often called fallen angels because they were the downgraded debt of ailing companies, actually represented a lucrative investment for those who bought them.
As a graduate business student at Pennsylvania's Wharton School, Milken made junk bonds a focus of his scholarship. Despite their reputation for high risk, he found that the securities showed a history of few defaults. Milken believed the securities' relatively high yields, typically 3% to 5% more than an investment-grade corporate bond, were more than enough compensation for that slightly increased risk.
Milken never put his big idea or his ambition aside. As a trader for the old-line Philadelphia firm of Drexel Firestone in the mid-'70s, he scorned colleagues who hewed to tradition and "spent from 11 o'clock to 2 o'clock at the racquet club." The dogged Milken soon discovered that junk bonds could provide much needed capital for medium-size companies that were unable, because of their size, to issue investment-grade debt. Other firms, notably Lehman Bros., had already tried minting bonds that were high yield from the outset. But Milken was the first to build a market for the bonds by finding hungry customers among institutional money managers, who must constantly search for higher returns on their investments.
Milken's junk bonds remained innocuous until the mid-'80s, when he began using the securities to raise mountains of money for hostile takeovers. In fact, the preferred opening salvo of corporate raiders became the dreaded letter from Drexel in which the firm stated it was "highly confident" of coming up with the necessary cash. In some cases, like T. Boone Pickens' failed bid in 1984 for Gulf Oil, Drexel charged a hefty fee for lining up money that it never had to deliver. But in many other raids, including Ronald Perelman's 1985 takeover of Revlon, Milken raised billions through his network of buyers. Before long, Milken's annual junk-bond conference became known as the Predator's Ball.