Never Cut Back a Committed Deal

“At most investment-banking firms, if they had filed to do a junk underwriting for $100 million but found they could sell only $50 million, they typically would cut the deal back to whatever they could sell. But Milken had for years now made it a point of honor that he would not cut back a deal. As he would testify with apparent pride in a deposition in mid-1986, “I would say also that in my entire career on Wall Street I have never backed out of a transaction once I’ve agreed to stand up to it, no matter how onerous it turned out to be.” This policy presumably sprang not only from Milken’s sense of probity, but from his knowing it was good for business. It was meant to—and generally did—incur a sense of deep indebtedness in the client. Marshall Cogen of General Felt Industries, for example, recalls that in the hard times of 1980 Drexel filed to raise $60 million for General Felt but found they could sell less than half of that; the firm took the rest. As Cogen said in an interview in 1986, “I have never seen that done by another investment banking firm—never. Today everyone wants to bank us—Goldman, Lazard. But no one else would have raised that money back in 1980. And without it I never could have developed the base I have.””

“Milken struck a different note. He told this reporter in an interview in 1987, “I welcome competition. Other people might see things we don’t see. We might see things they don’t see. The negatives are—and I’m trying to state this in a positive way—that some deals may get done that shouldn’t get done, and then that may hurt the perception of the high-yield market. People have a tendency to remember only the ones that didn’t work out. “Financing is an art form,” Milken added. “One of the challenges is how to correctly finance a company. In certain periods of time, more covenants need to be put into deals. You have to be sure the company has the right covenant—to allow it the freedom to grow, but also to insure the integrity of the credit. Sometimes a company should issue convertible bonds instead of straight bonds. Sometimes it should issue preferred stock. Each company and each financing is different, and the process can’t be imitative.””