Donald Trump extended clemency to several high-profile white-collar criminals on Tuesday, pardoning one-time “junk-bond king” Michael Milken and commuting the sentence of former Illinois governor Rod Blagojevich . . .

. . . Mr Milken, 73, was sentenced in 1990 to 10 years in prison after pleading guilty to racketeering and securities fraud charges. He ultimately served 22 months in jail, after co-operating with federal investigators. The Securities and Exchange Commission permanently barred Mr Milken from the securities industry in 1991, and he has spent the three decades working as a philanthropist.

The White House’s reasoning for pardoning the greatest pusher of non-investment grade paper? If we must:

Michael Milken, one of America’s greatest financiers, pioneered the use of high-yield bonds in corporate finance. His innovative work greatly expanded access to capital for emerging companies. By enabling smaller players to access the financing they needed to compete, Mr. Milken’s efforts helped create entire industries, such as wireless communications and cable television, and transformed others, like home building.

So who were these smaller players? Well, for those of you who have studied Milken’s, and by extension his employer Drexel Burnham’s, rise and fall during the 1980s, you might remember they included such small fry as billionaire Carl Icahn and triple-comma-club-compatriot Henry Kravis.

Some of the companies Milken financed were also small, if by small you mean they had no operations and therefore no clear path to pay back the debt. From Connie Bruck’s book on Drexel, Predator’s Ball:

Milken had a done a $135m blind pool for Banner Industries, controlled by Jeffrey Steiner. Here the [Drexel underwriting] committee had argued that they ought not to be doing a blind pool for an individual like Steiner — a former oil trader and arbitrageur who had a zero record as either a raider or an operator of companies — but should instead wait until he had chosen his target and then finance its acquisition.

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What’s $135m between friends eh? Go buy a business. Why not?

Milken had done a $640m deal for Ivan Boesky’s arbitrage partnership. This had been one of the most hotly disputed deals within the firm. The arguments against doing it were compelling. It was a very large private placement with no registration rights, because Boesky’s business changed too rapidly to be able to comply with the disclosure demands of a public offering. Therefore, if Boesky got into financial trouble, there would be no public market for the debt and only the thinly traded (though not so thinly as it was supposed to be) private market to rely on. Holders who wanted to unload their securities would look to Drexel. It would be placing hundreds of millions more in the hands of an arbitrageur who many thought was already overcapitalised.

Placing a bond deal for which only you could realistically create secondary liquidity, for someone who didn’t really need the money, is innovative, granted.



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