Den of Thieves [NOOK Book]

Overview

A #1 bestseller from coast to coast, Den of Thieves tells the full story of the insider-trading scandal that nearly destroyed Wall Street, the men who pulled it off, and the chase that finally brought them to justice.

Pulitzer Prize–winner James B. Stewart shows for the first time how four of the eighties’ biggest names on Wall Street—Michael Milken, Ivan Boesky, Martin Siegel, and Dennis Levine —created the greatest insider-trading ring in ...
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Den of Thieves

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Overview

A #1 bestseller from coast to coast, Den of Thieves tells the full story of the insider-trading scandal that nearly destroyed Wall Street, the men who pulled it off, and the chase that finally brought them to justice.

Pulitzer Prize–winner James B. Stewart shows for the first time how four of the eighties’ biggest names on Wall Street—Michael Milken, Ivan Boesky, Martin Siegel, and Dennis Levine —created the greatest insider-trading ring in financial history and almost walked away with billions, until a team of downtrodden detectives triumphed over some of America’s most expensive lawyers to bring this powerful quartet to justice.

Based on secret grand jury transcripts, interviews, and actual trading records, and containing explosive new revelations about Michael Milken and Ivan Boesky written especially for this paperback edition, Den of Thieves weaves all the facts into an unforgettable narrative—a portrait of human nature, big business, and crime of unparalleled proportions.

Now in paperback, the explosive #1 bestseller from the Pulitzer Prize-winning Front Page Editor of The Wall Street Journal that blows the lid off insider trading. With all the elements of a miniseries, Den of Thieves reveals how SEC agents and detectives caught the biggest crooks Wall Street has ever seen. Serial rights to The Wall Street Journal, Cosmopolitan, and The National Law Journal. 16 pages of photographs.

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Editorial Reviews

Publishers Weekly - Publisher's Weekly
This 29-week PW bestseller, a QPB main selection, tells of the rise and fall during the 1980s of the biggest insider trading ring in Wall Street history. Updated in paperback. Photos. Sept.
Library Journal
Michael Milken, Ivan Boesky, Martin Siegel, and Dennis Levine will long be remembered for the Wall Street insider trading scandals of the 1980s. Stewart, a Pulitzer Prize-winning Wall Street Journal reporter who covered the various scandals, has used his reportage as well as an exhaustive culling of court documents, testimony, and interviews with all of the participants to fashion an authoritative account of what happened. Stewart has done a thorough job in assembling the facts and has made connections that may surprise some readers. For example, Milken, the Drexel Burnham Lambert junk bond king who convinced many savings institutions and insurance companies to buy these bonds in large quantities, may have indirectly contributed not only to the bailout of various thrifts but also to the insolvency of some insurance companies. While this is a well-researched and highly readable work, there is such an abundance of financial details that a glossary of terms and related Wall Street jargon would have been helpful. This minor caveat aside, Stewart's contemporary morality tale is recommended for all business collections in public, special, and academic libraries. (Index not seen.) Previewed in Prepub Alert, LJ 5/15/91.-- Richard Drezen, Merrill Lynch Lib. , New York
Kirkus Reviews
A damningly detailed rundown on the predatory conspirators whose willful violations of securities law and ethical standards gave Wall Street a deservedly bad name during the takeover frenzy of the 1980's. Wall Street Journal editor Stewart (The Partners, The Prosecutors) was a beat reporter for much of the dirty decade. As one result, he has firsthand knowledge of the carriage-trade criminals who made a mockery of free enterprise during one of the century's greatest bull markets. Focusing on four major culprits—Ivan Boesky, Dennis Levine, Michael Milken, and Martin Siegel—the Pulitzer-winning reporter offers unsparing accounts of the havoc they wreaked on their own as well as in concert with wide-ranging rings of accomplices. Nor, it seems, was the performance of the SEC and US Justice Department particularly praiseworthy. Indeed, the author leaves little doubt that regulatory authorities and enforcement officials were usually overmatched and outmaneuvered. Stewart nonetheless devotes most of his attention to the villains of the piece, who participated in and organized the era's antisocial daisy chains. Levine, for example, latched on to Boesky, who, in need of inside information to reduce the risk of his high- stakes arbitrage trading, had lured investment banker Siegel into the game. In turn, Boesky became a pawn of Milken's, a control freak whose financial acumen was exceeded only by his talent for plotting and organizing illicit buy/sell networks. The author puts paid to any lingering notion the junk-bond king was unjustly hounded by vengeful agents of the federal government. In addition, he makes clear that, but for stubborn pride and hubris, the man who leveraged corporate American could have cut a favorable deal that greatly reduced his ten-year prison sentence. A sorry and cautionary tale of world-class scofflaws, brilliantly reported by a savvy journalist with a sure sense of right and wrong.
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Product Details

  • ISBN-13: 9781439126202
  • Publisher: Simon & Schuster
  • Publication date: 11/20/2012
  • Sold by: SIMON & SCHUSTER
  • Format: eBook
  • Pages: 592
  • Sales rank: 162,260
  • File size: 11 MB
  • Note: This product may take a few minutes to download.

Meet the Author

James B. Stewart is the author of Heart of a Soldier, the bestselling Blind Eye and Blood Sport, and the blockbuster Den of Thieves. A former Page-One editor at The Wall Street Journal, Stewart won a Pulitzer Prize in 1988 for his reporting on the stock market crash and insider trading. He is a regular contributor to SmartMoney and The New Yorker. He lives in New York.
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Read an Excerpt

Chapter 1

Martin Siegel, the youngest member of the class just graduated from the Harvard Business School, reported for work at Kidder, Peabody & Co.'s Manhattan headquarters at 20 Exchange Place in August 1971. That morning, the 23-year-old Siegel wandered through the halls looking at the portraits of Henry Kidder, Francis Peabody, Albert R. Gordon, and others that hung above the Oriental rugs and slightly threadbare carpets. Siegel tried to absorb the images of this strange and rarefied world of old money and discreet power.

He didn't have much time for reflection. He and his new wife hadn't even unpacked before he was thrown into a day-and-night project to win some new underwriting business from the Federal National Mortgage Association. Siegel's partner on the project made little impression on him, except for his name: Theodore Roosevelt IV, or maybe V; Siegel could never remember which.

In 1971, with the Vietnam War still raging and spurring opposition to the Establishment, few top students were going to business school, let alone Wall Street. Siegel, one of the top graduates in his Harvard class, had had his pick of nearly every major investment bank and securities firm. He had applied to 22; all had shown interest.

Kidder, Peabody, with about $30 million in total capital, barely ranked in the country's top 20 investment firms. In the hierarchy of Wall Street, Kidder, Peabody was in the second-tier, or "major" bracket. It didn't rank in the elite "special" bracket with Salomon Brothers, First Boston, Morgan Stanley, Merrill Lynch, or Goldman, Sachs.

Though the winds of change were apparent in 1971, Wall Street was still split between the "Jewish" and the "WASP" firms. At an earlier time, when major corporations and banks had discriminated overtly against Jews, Wall Street had rewarded merit and enterprise. Firms like Goldman, Sachs, Lehman Brothers, and Kuhn Loeb (made up historically of aristocratic Jews of German descent) had joined the ranks of the most prestigious WASP firms: Morgan Stanley -- an outgrowth of J. P. Morgan's financial empire -- First Boston, Dillon, Read, and Brown Brothers Harriman. Giant Merrill Lynch Pierce Fenner & Smith, something of an anomaly, had once been considered the "Catholic" firm. Kidder, Peabody remained firmly in the WASP camp. Siegel was the first Jew it hired in corporate finance.

Siegel was looking for variety and excitement. Only investment banking offered the prospect of an immediate market verdict on a new stock issue or the announcement of a big acquisition. He had narrowed his choices to three firms: Goldman, Sachs, Shearson Hayden Stone, and Kidder, Peabody. A Goldman recruiting partner phoned, and asked, if Goldman made him an offer, would he accept? Siegel didn't commit. Shearson Hayden Stone offered him the largest salary -- $24,000 a year.

Kidder, Peabody offered only $16,000. But Siegel saw unique opportunities there. The firm was full of old men, but had a roster of healthy blue-chip clients. Siegel envisioned a fast climb to the top.

Kidder, Peabody's aristocratic aura appealed to Siegel. One of America's oldest investment banks, it was founded in Boston as Kidder, Peabody & Co. in 1865, just before the end of the Civil War. Early on, Kidder raised capital for the railroad boom, primarily for the Atchison, Topeka & Santa Fe. Its clients also included two stalwarts of establishment respectability, United States Steel and American Telephone & Telegraph.

The modern Kidder, Peabody was dominated by Albert H. Gordon, the son of a wealthy Boston leather merchant, and graduate of Harvard College and Business School. In 1929, when the firm was devastated by the market crash, Gordon, a young bond salesman at Goldman, Sachs, stepped in with $100,000 of his own capital. Along with two partners, he acquired the firm in 1931.

The indefatigable Gordon, a physical-fitness fanatic with limitless energy and impeccable Brahmin bearing, moved the firm's headquarters to Wall Street from Boston and set about building a roster of clients. He had an advantage: Kidder, Peabody's reputation, in sharp contrast to many of its rivals, had remained remarkably unsullied in the aftermath of the crash.

The shock of the crash and the Depression had set off a reform movement in Congress culminating in Senate hearings conducted by special counsel Ferdinand Pecora beginning in 1932. Through Pecora's withering cross-examination of some of Wall Street's leading investment bankers, the American public learned about insider trading, stock-price manipulation, and profiteering through so-called investment trusts. Most of the abuses uncovered involved information bestowed on a favored few and withheld from the investing public. It was not only information that directly affected stock prices, such as the price of merger or takeover offers, but information that could more subtly be turned to a professional's advantage: the true spread between prices bid and prices asked, for example, or the identities of buyers of large blocks of stock and the motives behind their purchases.

In the wake of widespread public revulsion and populist fury, Congress passed historic legislation, the Securities Act of 1933 and the Securities Exchange Act of 1934. A new federal agency, the Securities and Exchange Commission, was created to enforce their provisions. Congress deemed the enforcement of its new securities laws to be so important that it enacted corresponding criminal statutes.

By separating banking from securities underwriting, the raising of capital, and distribution of stocks, bonds, and other securities, the securities acts set the stage for modern investment banking. Under Gordon's guidance, Kidder, Peabody concentrated on its underwriting function. The firm was a pioneer at opening branch offices in U.S. cities. The idea was, as Gordon liked to put it, to "sell your way to success."

Through most of its history, Kidder, Peabody was a tightly controlled partnership, with Gordon personally owning most of the firm and its profits. When the firm incorporated in the 1960s, the ownership changed little; Gordon simply became the firm's largest shareholder. He was parsimonious about bestowing ownership stakes on the firm's executives.

Kidder, Peabody prospered, if not spectacularly, under Gordon's conservative leadership. Determined to avoid another capital crisis, Gordon insisted that Kidder's executives plow their earnings back into the firm. This gave the firm the capital to survive the sudden drop in trading volume and profits that struck Wall Street in 1969. A Kidder vice president, Ralph DeNunzio, served as vice chairman of the New York Stock Exchange and helped arrange the merger of such old-line houses as Goodbody & Co. and du Pont. DeNunzio became chairman of the stock exchange in 1971, the same year Siegel graduated from Harvard Business School.

Martin Siegel's lineage was modest in contrast to that of the leaders of Kidder, Peabody. His father and an uncle owned three shoe stores in Boston, outlets that relied on American suppliers and catered to middle-to-working-class tastes. In the late sixties and early seventies, the stores were devastated by chains benefiting from national advertising and low-cost foreign suppliers. This was painful for Siegel, who had never seen anyone work so hard for so little as his father. As a kid growing up in Natick, a Boston suburb, he had almost never seen his father, who worked seven days a week, often spending the night in the city. Unlike his classmates' fathers, Siegel's father never played ball with him.

Siegel wasn't good at sports in school; he started first grade a year early, so his physical development lagged behind his classmates'. But starting as a freshman in high school, he excelled academically. He thought he wanted to be an astronaut. When Siegel was accepted in his junior year of high school for a work-study program at Rensselaer Polytechnic Institute, a science and engineering college, he became the first member of his family ever to attend college. He continued to do well academically even while working part-time, and entered a master's program in chemical engineering in 1968. He knew he'd never become rich toiling as an anonymous engineer in a corporate laboratory, so he applied to Harvard Business School and was accepted for the class entering in September 1969.

The turmoil sweeping American campuses during the late sixties had had remarkably little effect on Siegel, but at Harvard, he was caught up in the antiwar movement after the U.S.-led invasion of Cambodia in 1970 and the killings of students at Kent State by the Ohio National Guard. He participated in an antiwar sit-in in Harvard Yard and smoked marijuana cigarettes a few times. Still, he was annoyed when students managed to get that year's final exams canceled. He took his anyway, exercising an option to take the exams at home and submit them by mail.

For his senior thesis, Siegel tackled the mounting woes of his father's shoe store business. His solution: The stores should be transformed into specialty high-end boutiques, catering to wealthy, fashion-conscious women. This would avoid the growing competition in the rest of the market. Siegel's father agreed in principle, but then his brother, who did the buying for the stores, had a heart attack. His father didn't have the eye or instincts for high-fashion retailing, but Siegel's thesis earned "distinction-plus," Harvard's equivalent of A +.

On the Fourth of July 1970, Siegel married Janice Vahl, a music student from Rochester he'd met two years earlier. After Siegel accepted Kidder, Peabody's offer, he and Janice moved to New York, paying $212 a month for a modest one-bedroom apartment on Manhattan's East 72nd Street.

Siegel took naturally to Wall Street and investment banking; his energy and drive were, as he had predicted, a breath of fresh air at Kidder, Peabody. DeNunzio, now Kidder, Peabody's chief operating officer, seemed early on to have taken favorable notice of his new employee. He too came from a modest background and seemed far more comfortable with earthy sales and trading types than he was with upper-crust investment bankers.

Siegel began working on some merger-and-acquisition transactions, since no one else at Kidder, Peabody was eager to get involved. Hostile takeovers bore an unsavory taint. They generated bad feelings, especially toward those who represented the attackers. This sometimes alienated other clients. Many of the WASP investment banks and law firms preferred to leave such work to the other firms, many of them Jewish.

None of this bothered Siegel. His first takeover deal came just after the passage of the Williams Act, which spelled out new procedures to protect shareholders from coercive takeover tactics. The deal was an unsuccessful bid by Gulf + Western's acquisitive Charles Bluhdorn, a longtime Kidder, Peabody client, for the Great Atlantic & Pacific Tea Co. Bluhdorn, who was close to DeNunzio, praised Siegel's work, and DeNunzio made sure that Siegel was assigned to another major client, Penn Central's Victor Palmieri. In 1974, recognizing the dearth of expertise in the area, Siegel wrote a textbook on mergers and acquisitions for use within Kidder, Peabody; it was hailed by his colleagues. In only two years, he was promoted to an assistant vice president.

As Siegel's career took off, trouble developed in the rest of his life. His father's business continued to worsen; Siegel flew to Boston almost every weekend to help. His marriage suffered. Janice sang with the Bel Canto opera in New York and wanted to pursue a musical career. Siegel, who had no interest in opera, gave her little support. In February 1975 they separated.

Shortly before, his father's bank and principal lender had pulled the plug on the Siegel shoe business. Robert Siegel's company filed for bankruptcy. The once-proud and energetic retailer became, at 47, a broken man. He tried selling real estate; that didn't work out. He tried doing house repairs. Finally he landed a job selling roofing at Sears. Siegel watched with alarm as his father seemed to give up on his own life. He noticed the older man beginning to live vicariously through the sons and daughter he had once never had time for.

Siegel was haunted by the possibility that something similar might happen to him. He vowed he would never wind up a broken man.

After his father's misfortune, Siegel plunged even more completely into his work, frequently logging 100-hour weeks. Emulating Gordon, still titular head of the firm, he embraced physical fitness. One of his contemporaries at the firm, a former all-American wrestler named Scott Christie, put him through a fitness regimen at the New York Athletic Club. At one point, Christie, Siegel, and John Gordon, Al Gordon's son, were standing in a corridor at the firm when Siegel boasted that he could do 50 push-ups in a minute. Christie squeezed Siegel's bicep and rolled his eyes skeptically. "Come on, Marty." With that, in his shirt and tie, Siegel dropped to the floor. He did the 50 push-ups in less than a minute.

Handsome Martin Siegel became Kidder, Peabody's golden boy. He bought an Alfa-Romeo convertible and a beach house on Fire Island, a popular resort off Long Island. He became socially poised and gregarious. DeNunzio, awkward and physically unprepossessing himself, shrewdly recognized in Siegel a talent for getting and nurturing clients, DeNunzio's major weakness. He made Siegel a full vice president in 1974, and soon Siegel was reporting directly to DeNunzio. When Kidder, Peabody client Gould Inc. made a cash tender offer for a valve manufacturer around Christmas 1975, DeNunzio assigned Siegel to work with the legendary Lazard Freres financier Felix Rohatyn, who was representing the target company. Siegel was reticent at first; he was in awe of Rohatyn. Then, during a meeting, Rohatyn excused himself to use the bathroom. Siegel thought, "My God, he's human!" There was no reason Siegel couldn't become a legend himself, like Rohatyn.

In April 1976, takeover lawyer Joseph Flom (a founder of Skadden, Arps, Slate, Meagher & Flom) invited Siegel to give a presentation on "identifying takeover targets" at a panel discussion. Siegel was flattered, though he knew it didn't take much to be an expert. Anyone who'd handled even one post-Williams Act deal was considered qualified.

Siegel was even more flattered when he met the other participants: Ira Harris, one of Salomon Brothers's leading investment bankers; Robert Rubin, a fast-rising star at Goldman, Sachs; John Shad, head of E. F. Hutton; Arthur Long, the leading proxy solicitor; Theodore Levine, an enforcement attorney at the SEC; Arthur Fleischer, a prominent takeover lawyer at Fried, Frank, Harris, Shriver & Jacobson; and, seated right next to Siegel, Flom's principal rival in the takeover bar, Martin Lipton, a founder of Wachtell, Lipton, Rosen & Katz.

Collectively, the panel's expertise covered the emerging field of hostile takeovers, a field that was to transform the face of corporate America to a degree that none of them then dreamed possible. American industry had undergone other periods of industrial consolidation, most recently in the sixties, when the fad to diversify had led many large companies into mergers, generally financed with stock during that decade's great bull market. Those acquisitions were mostly friendly. Earlier, the monopolistic corporations of the Morgan era had been produced by numerous mergers (some of them not-so-gently coerced by the great financier himself). None of these kinds of deals were really comparable to the hostile takeover boom that began in the mid-seventies and surged in the eighties, however, except in one key respect: they offered enormous opportunities to profit on the stock market.

Siegel noticed that Lipton was scribbling notes furiously while others made their presentations. Then, when Harris's turn came to speak, Lipton shoved the notes in front of him, and Harris virtually read his presentation. So this was how the M&A "club" worked, Siegel thought.

After Siegel's presentation, Lipton stayed behind to compliment him. After this, the two talked frequently about M&A tactics and exchanged gossip. They made an unlikely pair; the glamorous Siegel and the portly Lipton with his thinning hair and heavy darkframed glasses. But Siegel recognized Lipton's mastery of the field and became an eager student.

Lipton and Flom had developed a new and lucrative retainer arrangement with their clients. Companies who wanted to ensure the firm's availability in the event they became the target of a hostile bid paid the lawyers a substantial retainer fee each year. In the event that they were attacked by another client of either Lipton or Flom, the attacking client agreed in advance to waive any conflict of interest, with the understanding that the lawyers would defend the target company.

Scores of major corporations eventually signed on with Lipton and Flom, even as some established bar members cringed. These lawyers billed strictly by the hour, eschewing even contingency fees. The Lipton and Flora retainers, since they didn't necessarily require work, were more like an insurance policy. The establishment viewed the advance waiver of conflicts with distaste. Yet clients themselves seemed unfazed, a measure of the clout Lipton and Flom could wield.

Siegel began to think Kidder, Peabody should begin to make similar deals. By the time of the panel discussion in 1976, he had become convinced that the merger wave was going to continue, even grow. Bigger rivals, such as Morgan Stanley, Salomon, and First Boston, were already developing reputations for their M&A offensive capabilities. Siegel thought Kidder, Peabody could carve out a niche on the defensive side.

He began to visit potential corporate clients, selling what he called the "Kidder, Peabody tender defense product." He argued that, with only seven days -- as provided by the Williams Act -- in which to react to a hostile takeover bid, companies had to be prepared in advance with carefully thought-out defensive strategies. This meant retaining Kidder, Peabody -- and paying a lucrative retainer like those paid to Lipton and Flom -- to ensure preparedness and the firm's availability. Lipton introduced Siegel to leading figures in the close-knit M&A community, and lent his prestige to Siegel's plan.

Siegel's real boost came in May 1977, when Business Week hailed him as the leading takeover defense expert. After describing his success in several large deals, the article also mentioned in passing that he was so good-looking he was considered a "Greta Garbo heartthrob." The article included a photograph, and suddenly Siegel was deluged with requests from women seeking dates. Siegel was amazed that the story, which wasn't given major play in the magazine, conferred such instant status and legitimacy. Kidder, Peabody's copiers went into high gear, sending out copies to prospective clients.

From 1977 on, Siegel called personally on 200 to 300 clients a year. His targets were midsize companies (typically those doing from $100 to $300 million a year in sales) that weren't being adequately serviced by the bigger investment banks. These were the companies most vulnerable to a hostile offer from a larger company. Siegel's product sold. He eventually had 250 corporations paying Kidder, Peabody an annual six-figure retainer.

His main competition came from Goldman, Sachs, the much larger, more powerful firm that had also decided to stake out takeover defense work as its special preserve, albeit for somewhat different reasons. At the time, Goldman had made it a policy to eschew the representation of hostile bidders. With the most enviable roster of large corporate clients on Wall Street, Goldman didn't want to risk alienating them by representing anyone who might be construed as a raider. Traditional investment banking services for these established clients were the bread and butter of its lucrative business.

Siegel loved beating Goldman out of a client. In 1977, Peter Sachs, then head of M&A at Goldman, flew out to the West Coast to meet with Steve Sato, the chairman of Ivac Corporation, a medical equipment manufacturer that had just become the target of a hostile attack by Colgate Palmolive. Sachs, according to the chairman, boasted of the "Goldman prowess." When Siegel went to see Sato, he spent most of the time listening to Sato's goals for the company. The chairman was of Japanese descent. Although Siegel had never eaten raw fish in his life, he joined Sato at his home for sushi. In awarding him the business, Sato told Siegel, "I can't believe that you actually listen. All Goldman told me was how great Goldman is."

Siegel found that his most effective tactic was to let Goldman make its presentation, which typically emphasized that Goldman could get the best price if the target company were sold. Then Siegel would step in. "Hire me," he'd urge. "I'll do my best to keep you independent. I want you as a future client." In fact, most of the companies ended up being sold, given the weak positions of most takeover targets, and Siegel's pitch often couldn't compete with Goldman's size, dominance, and reputation for quality. But Siegel's message frequently convinced the targets' managements that he had their interests at heart -- instead of the investment banking fees to be reaped if the company had to be sold.

In 1977, Siegel invented a brilliant but controversial tactic that also endeared him to scores of corporate managers -- the go]den parachute. The golden parachute, essentially a lucrative employment contract for top corporate officers, provided exorbitant severance payments for the officers in the event of a takeover. Supposedly, the contracts were intended to deter hostile takeovers by making them more expensive. In practice, they tended to make the officers very rich.

DeNunzio was thrilled by Siegel's success, even though Siegel was working so hard and traveling so much that he rarely saw him. DeNunzio ran Kidder, Peabody in the paternalistic way he had learned from Gordon, usually setting salaries and bonuses singlehandedly. In 1976 Siegel earned over $100,000, then considered a princely sum, especially for someone only 28. In 1977, Siegel was made a director of Kidder, Peabody, the youngest in the firm's history with the exception of A1 Gordon, who had owned the firm.

Soon after, DeNunzio called Siegel into his office. "Marty, you're a bachelor," he said. DeNunzio paused, and Siegel didn't know what was coming. "You've got an Alfa-Romeo convertible and you've got a house on Fire Island. It's too much." What was he getting at? Siegel assumed DeNunzio meant that his style was too racy for some of Kidder, Peabody's clients, or perhaps the other directors, but DeNunzio wasn't more explicit and Siegel couldn't be sure.

"There's a nice house for sale across the street from me in Greenwich," DeNunzio continued. Greenwich was the WASPiest, whitest, most exclusive suburb in Connecticut, a bastion of country clubs and conventional respectability. It was also filled with some of the dullest, most straitlaced people Siegel knew. In addition, he couldn't see living right under DeNunzio's watchful eyes.

But Siegel went out to look at the house. Afterward he got into the offending sports car and drove on Interstate 95 for exactly one-half hour. He found himself in Westport, and called a realtor from a pay phone. He'd been thinking of selling the Fire Island house anyway. The realtor took him to an old house on a small river north of town, and Siegel loved it. He bought it, and spent his weekends fixing the place up.

Siegel told DeNunzio that he was heeding his advice and buying a house in Connecticut. It was in slightly bohemian Westport, not in Greenwich. "A half hour from you is about as close as I can take," Siegel joked.

Later, when he moved to a far more lavish home right on the coast, Siegel sold the Westport house to CBS News anchor Dan Rather.

One day, not long after he had bought the house in Connecticut, Siegel's secretary told him he had a call from an Ivan Boesky. He knew Boesky only as another arbitrageur, one of the many who were calling him now that he was developing a reputation in the M&A crowd. But Siegel also knew that Boesky was a trading client of Kidder, Peabody. He took his call.

Siegel was impressed with Boesky's market acumen, his knowledge of takeover tactics and stock accumulation strategies. They became friends though they didn't actually meet for some time. In the peculiar world of Wall Street, close friendships can develop entirely on the telephone. Gradually Siegel began to see Boesky as someone he could discuss strategy with, bounce ideas off of, gossip with. He needed this information since he had no Kidder, Peabody arbitrageur to turn to. The firm had traditionally shunned arbitrage, and had no department. DeNunzio and Gordon believed arbitrageurs were unsavory, tried to get inside information, and gave rise to conflicts of interest within the firm.

Yet arbitrageurs like Boesky were becoming increasingly important to any investment banker involved in M&A. Historically arbitrageurs had traded to take advantage of price discrepancies on different markets, such as London and New York. It was conservative, nearly risk-free trading yielding small profits. But they had become progressively more daring, first buying heavily stocks that were the subjects of announced takeover bids, betting the deals would go through; eventually they started buying stocks they only suspected would be the targets of takeover bids. When they guessed right, the profits were huge.

Evaluating the effects of these massive purchases of rumored or real takeover stocks had become a crucial part of Siegel's job. Arbitrageurs were also fonts of information, from clues to the other side's tactics, to rumors of impending bids that could be used to attract defense clients.

Arbitrageurs tended to be crass, excitable, street-smart, aggressive, and driven almost solely by the pursuit of quick profits. Their days were defined by the high-pressure periods between the opening and closing bells of the stock exchange, during which they screamed orders into phones, punched stock symbols into their electronic terminals, scanned elaborate screens of constantly shifting data, and placed phone calls to every potential source of information they could imagine. After work, they tended to blow off steam by carousing in bars like Harry's, just across Hanover Square from Kidder, Peabody, or, if they'd had a good day, in expensive Manhattan restaurants.

One day in 1979, Siegel confided to Boesky that he'd fallen in love. The affair was threatening to become a minor scandal at Kidder, Peabody.

In the late seventies, the first wave of women business school graduates reached Wall Street's shores. Jane Day Stuart turned heads at Kidder, Peabody on the day she first swept through the corporate finance offices. A Columbia Business School graduate, she was smart, blonde, thin, personable, stylish, and married.

Kidder, Peabody had long maintained an unspoken policy against office affairs. A fling with a summer employee had damaged another investment banker's career. But in late 1978, Stuart and her husband were divorced. Shortly after, Siegel and Stuart played tennis. By August 1979, they were living together. When colleagues tried to warn Siegel, he brushed them aside, saying he wasn't interested in firm politics and didn't care whether he ever ran the firm.

When Henry Keller, head of corporate finance, learned of the affair, he went to DeNunzio, prompting speculation that DeNunzio would bring the relationship to an abrupt halt. DeNunzio did nothing. Unknown to many, DeNunzio's son, David, was also having an affair at the firm. DeNunzio's tolerance was interpreted as a sign of the times and a measure of Siegel's clout. DeNunzio also seemed relieved that Siegel's bachelor days appeared to be numbered.

Some of Stuart's friends and relatives in Baltimore warned her against marriage to someone Jewish, even someone as nonreligious as Siegel. But she was headstrong and in love, even though some of her male colleagues speculated unkindly that she was using her business acumen to trade up the marriage ladder. She and Siegel were quietly married in May 1981 and began drawing up plans for a new, larger house in Westport.

Soon after their marriage, Boesky called to invite Siegel and Jane Day to his house in Westchester County for dinner. It was Boesky's first social invitation to the Siegels, a small dinner for three couples: Boesky and his wife Seema; financier Theodore Forstmann, who numbered Boesky among the investors in his partnership, and his date; and the Siegels. Siegel decided to bring along a copy of his house plans to show the Boeskys.

Following Boesky's directions, the Siegels drove north from Manhattan for about 45 minutes, through the exclusive towns of Bedford and Mount Kisco. The area is one of large estates, wooded rolling hills, and some pre-Revolutionary houses. Few of the large houses are visible from public roads, and the Boesky house is set so far back in its 200 acres of property that visitors sometimes got lost winding through the maze of driveways and service roads leading from the entrance gates.

The Siegels pulled into the drive between large pillars and a gatehouse and stopped as a security guard parked in a pickup truck waved them to a halt. Siegel went over to the guard, introduced himself, and was cleared for entry -- but not before he was startled to see the blue-black steel of a large pistol in a holster strapped to the guard.

As they approached the house, the Siegels were awed. Behind a cobblestone courtyard rose a massive, red-brick Georgian-style mansion. The estate had previously been owned by Revlon founder Charles Revson. In the distance, past formal gardens studded with Greek statuary, was a large pool house. On one side was a large pool, on the other a sunken indoor squash court, and at the side, a tennis court with a bubble that could be inflated in winter for indoor play.

The Siegels were greeted at the entrance by Seema Boesky, an attractive, talkative brunette who immediately struck them as warm and friendly. She led them through rooms decorated in traditional style with beautiful wallpaper, elaborate moldings, rare Aubusson carpets, and expensive antique furniture. The walls featured what looked to Siegel's untrained eye like serious art; Seema, it turned out, was an enthusiastic collector of American paintings and antiques. They continued through the gardens and pool house, where the carpeting was embossed with a large, intertwined monogram, IFB.

Boesky was a gracious host, dressed impeccably as always in a black three-piece suit and white shirt that complemented his year-round tan. Asked why he wore the same suit every day, Boesky once replied, "I have enough decisions in my life already." Boesky's silver-blond hair was clipped and neatly parted. His prominent cheekbones and piercing eyes could make him look driven, even gaunt, but he was relaxed and affable as a dinner host, tending constantly to his guests and eating little himself.

Jane Day mentioned their house plans, and Seema exclaimed, "You've got to have a big kitchen. I'll show you mine." The Boesky kitchen was larger than the Siegels' entire Manhattan apartment. Siegel was impressed by the signs of wealth. Boesky must have been far more successful at arbitrage than even Siegel had realized. Siegel decided that he wouldn't show the house plans he'd brought along. They now seemed embarrassingly modest.

Later, after dinner, Siegel took Boesky aside and mentioned that he'd noticed that the guard at the estate entrance carried a pistol. "It's loaded," Boesky replied. "In my business, you need security."

Lance Lessman peered across the desks of the small research department in Ivan F. Boesky Co.'s offices in Manhattan's financial district. Inside Boesky's own glass-enclosed corner office, he could see his boss's eyes roving, first toward the trading floor where his buy and-sell orders were executed, then toward Lessman's research area. Suddenly Boesky's eyes locked on his.

The intercom on Lessman's desk crackled to life. "Who's buying," Boesky barked.

Lessman frantically scanned his computer screen, looking for big price and volume movements in individual stocks in order to figure out what had caught his master's interest.

"Who's buying?" Boesky practically screamed. "Why the fuck don't you know?"

Now intercoms sprang to life all over the office. Every desk had a speaker connected to a central control panel manned by Boesky himself. He could activate individual speakers or throw open the system for office-wide announcements. Now he had everyone on line.

"I want service. I want service," he repeated in ever louder and more demanding tones. "Who's buying? I want it now. Who's buying?"

Lately Boesky had been even more testy than usual. A few weeks earlier that year, 1981, Boesky had shocked the office with an abrupt announcement: He was liquidating Ivan F. Boesky Co., taking out all of his profits.

The Hunt silver panic and resulting stock market plunge had hit Boesky hard, and he had decided to cash out with his remaining profits. He wanted to take advantage of the favorable long-term capital-gains tax rates available to partners liquidating their interest. But, to get the rates, he needed someone to keep the firm going. His recent efforts to force his top lieutenants to take over the remains of the partnership and assume all its liabilities had led to screaming matches. When they balked, he fired them. During a short period that year, Boesky had lost his two top strategists, his head trader, and his head of research.

Few people really expected Boesky to be out of arbitrage for long. Despite the Hunt setbacks, he had been a phenomenal success. Ivan F. Boesky Co. had opened in 1975 with $700,000 from Boesky's mother-in-law and her husband. Now the firm's capital had grown to nearly $90 million. Arbitrage was Boesky's life. His earnings had brought him the estate in Westchester and a Manhattan townhouse. A chauffeured limousine drove him into town every morning. His efforts had also finally brought him the grudging respect of a father-in-law who had believed his daughter had married beneath her.

Boesky seemed to share his father-in-law's disdain for his own family and background. He constantly tried to burnish his resume and family connections in conversations with New York colleagues. He often implied that he had graduated from Cranbrook, a prestigious prep school outside of his native Detroit, and the University of Michigan. Others assumed he had attended Harvard, since Boesky made so much of his Harvard Club membership. He said his father ran a chain of delicatessens in Detroit.

During Boesky's childhood, his family lived in a spacious Tudor-style house in what was then considered a nice, upper-middle-class neighborhood. Ivan's father, William, had emigrated from Russia in 1912, and owned a chain of several bars, called the Brass Rail, rather than delicatessens (his uncle's business). To boost profits, the Brass Rails introduced topless dancing and strip shows. In the eyes of many, the bars hastened the decline of their neighborhoods.

Boesky worked hard while he was in school, selling ice cream from a truck. He was picked up repeatedly by the local police for staying in business past the 7 P.M. curfew imposed by his license. He did attend Cranbrook for two years, though he didn't graduate. His academic record there was undistinguished, but he excelled at wrestling, starving himself to lower his weight category and driving himself to the point where he could do an astounding 500 push-ups. He was constantly in the gym with his best friend, an Iranian exchange student named Hushang Wekili. As a sophomore, Boesky won the school's Craig trophy as outstanding wrestler.

Boesky often used wrestling analogies to describe his work as an arbitrageur. "Wrestling and arbitrage are both solitary sports in which you live or die by your deeds, and you do it very visibly," he told reporter Connie Bruck in a 1984 Atlantic Monthly interview. In wrestling he also found a metaphor for life. "There are times when I really feel like dropping, but I don't, and that kind of summoning up, I think, is what I learned [from wrestling].... There are plenty of opportunities in life to be beaten down. People feel beaten, demolished, demoralized, and they give way to it. I don't."

When Boesky chose a corporate logo for his new arbitrage operation, he had engravers copy his Cranbrook wrestling medal, showing two classical Greek men, nude, in a wrestling hold. It became the symbol for Ivan F. Boesky Corp., and Boesky was immensely proud of it. Not everyone shared his enthusiasm. "It looked like something from Caesars Palace," was one employee's comment.

After Cranbrook, Boesky transferred to inner-city Mumford High (immortalized by Eddie Murphy in Beverly Hills Cop). He never graduated from college. He did course work at Wayne State University in Detroit, the University of Michigan, and Eastern Michigan College, but he left for Iran, partly to be near his friend Wekili, just before graduating. Exactly what Boesky did in Iran remains a mystery. He later testified that he worked for the U.S. Information Agency, teaching English to Iranians. But USIA personnel records for the relevant period make no mention of any Ivan Boesky. Boesky told Siegel in one of their early conversations that he had worked in Iran as an undercover agent for the CIA.

After returning from Iran, Boesky enrolled at Detroit College of Law, a low-prestige law school that didn't require a college degree for admission. He graduated five years later, in 1964, after twice dropping out. When Boesky was 23, his father made him a partner in the Brass Rails. Boesky was rejected by all the law firms he applied to for a job.

Boesky's desultory record made it all the more surprising that he caught the eye of Seema Silberstein, whose father, Ben, was a wealthy Detroit real estate developer. But colleagues say it was Seema who fell in love with and tracked after Boesky after meeting him in June 1960. A relative of hers, a federal district court judge, hired him for a one-year clerkship. Boesky and Seema were married soon after and had their first child, Billy. When a Cranbrook wrestling teammate working at Bear, Stearns in New York told Boesky about arbitrage, he decided to make his fortune on Wall Street. Colleagues recall Boesky's feeling that Detroit was too small and confined for his ambitions.

Boesky's father-in-law installed Ivan and Seema in an elegant Park Avenue apartment. Boesky landed a job as a trainee at L. F. Rothschild that lasted a year. He moved to First Manhattan, getting his first taste of real arbitrage trading, then shifted to Kalb Voorhis. He promptly lost $20,000 in a single position and was fired. Boesky was contemptuous of a firm that put any store in the loss of such a paltry sum. After a brief period of unemployment and a foray into venture capital, he joined a small member firm of the New York Stock Exchange, Edwards & Hanly. Remarkably, given his employment history, limited experience, and track record, Edwards & Hanly gave Boesky carte blanche to establish and run an arbitrage department.

Boesky made a splash in the small world of arbitrage almost immediately. Using maximum leverage, buying on margin constantly, he managed to convert Edwards & Hanly's modest capital into $1 million and even $2 million positions, large enough to actually move individual stock prices from time to time. He was considered audacious and bold. Once, for selling stock short that he hadn't actually borrowed prior to the sale (and thus further boosting his leverage), he was sanctioned by the SEC and fined $10,000. Some of Boesky's tactics contributed to the demise of Edwards & Hanly. By 1975, the firm was bankrupt.

Tired of begging for a position at a prestige firm, Boesky decided to open his own operation, devoted primarily to arbitrage. He stunned his fellow arbs by actually taking out advertisements in The Wall Street Journal, seeking investors and extolling the profit potential in arbitrage the last thing members of the "club" wanted others focusing on, fearful that it would attract more competition. Boesky boldly allocated just 55% of the operation's profits to the investors, keeping 45% for himself. He did, however, assign investors 95% of any losses. He didn't attract enough capital to meet his ambitions. It was his wife's family's money that gave him enough to go forward.

From the first day of Ivan F. Boesky Co. in 1975, Boesky arrived at work by limousine. If he needed something fast, he wouldn't hesitate to pay private couriers. He dressed in what he deemed the image of the successful Wall Street financier: his signature three-piece black suit, starched white shirt, and gold chain dangling from the vest pocket. It looked like a Phi Beta Kappa key.

Boesky didn't waste money on the firm itself. It was housed in a single room in an aging Whitehall Street office building. The room was so small that a stock exchange auditor ordered Boesky to move into larger quarters. He hated his employees to leave their desks during lunch, so he picked up the tab for lunch orders delivered to the office, imposing a $5-per-person limit.

One of his first employees was an accountant hired to manage the firm's "back office." The son of an Armenian immigrant, Setrag Mooradian had worked at Oppenheim, Appel, & Dixon, known in the arbitrage community as OAD. The firm, more than any other, specialized in arbitrage accounting. Though he didn't tell Boesky, Mooradian had been severely sanctioned for violating capital requirements. It had made it hard for him to get a job, and he was always grateful to Boesky for hiring him.

Boesky told Mooradian to be at work every morning promptly at 7 A.M., when his own limousine would pull up to the building entrance. If Boesky wasn't going to be in the office, he'd call in at 7:01; if no one answered, he'd fly into a rage. Once, years later, Boesky called in when a fire drill was in progress. No one answered the phone immediately. The next day a memo appeared on everyone's desk. "Yesterday, at 3:15 P.M., I called in," the memo began. "My phone rang 23 times. I understand there was a fire alarm. Certainly, I don't want you to risk your lives. But I extend my appreciation to those of you who stayed behind."

Boesky disliked the idea that his employees might take a day off. He never came into the office the Friday after Thanksgiving, when most Manhattan offices are reduced to skeleton staffs. But no one else was allowed the day off. Boesky checked attendance by calling so many times -- in some cases, as many as 10 times to a single employee that the others in the office figured Boesky might as well have come to work. He also refused to hand out paychecks until after 3 P.M. on Fridays, after banks had closed. When employees complained, he explained that he didn't want the "disruption" of his staff dashing out to cash and deposit checks in the middle of the day. But they suspected he wanted the extra interest that would accumulate over the weekend.

Almost from the beginning, Boesky screamed at everyone regularly. After several such incidents, Mooradian asked Boesky to stop yelling. "I'm the boss," Boesky replied. "I'm allowed to yell." Boesky expected Mooradian to work routinely until 9 or 10 P.M. Once his wife found him still up at 5:30 A.M. trying to complete work Boesky had demanded. "He can't keep this up," Mooradian told her. But as the years went by, Boesky seemed to need less and less sleep and became even more demanding. A favorite tactic was to call Mooradian with a complex question. "I'll get back to you," Mooradian would answer. "I'll hold," Boesky would reply.

Boesky sometimes spent the workday at his estate. Near the "Wall Street" sign he had placed on a lamppost on one of the roads was an office complex with secretaries and all the electronic market and communications gear he needed to stay in constant touch with the market. "Can you believe that husband of mine?" Seema asked Mooradian. "He always dresses in a business suit to go to the office on his own property."

One morning Boesky's employees arrived at the office to discover a Wierton terrier puppy scampering about the premises. Boesky had bought the pet as a surprise for Seema, but she had banned the terrier from the house. So Boesky said the dog would live at the office, and his chauffeur, Johnny Ray, could take care of it at night and on weekends. Soon Boesky and the puppy were inseparable. He even took the dog along to meetings with investors.

Just a week later, Lessman and others heard a shriek from Boesky's office. They rushed in to discover a stricken look on Boesky's face. The puppy looked confused. In a pile right in front of Boesky's desk, on his spotless beige carpeting, the dog had demonstrated convincingly that it wasn't yet housebroken. Boesky wiped up the mess. No one ever saw the dog again.

Boesky had other idiosyncrasies, namely, his eating habits. Some days it seemed as though he ate nothing, as if he were still training for a wrestling weigh-in. For breakfast, he liked to order a single croissant. He would pick at it, then eat a single flake. One colleague recalls that once, when Boesky took a normal bite, he said, "Ivan, you little pig." Boesky looked startled and put it down.

Boesky often invited prospective investors in his partnership for lunch in the private dining room in his office. One afternoon Meshulam Riklis, the chairman of Rapid-American Corporation who bankrolled a film career for his much younger wife, Pia Zadora, was scheduled for lunch. Boesky had his people call ahead to find out what Riklis liked to eat, then ordered a lavish spread from the 21 Club. At the table, Boesky fretted that Riklis didn't seem to be enjoying the food.

"I'm due at the gym in a few hours," Riklis explained. "I have to work out with a personal trainer."

"Why work out?" Boesky asked. "Relax. Eat more."

Riklis paused. "Ivan, you have no idea what it's like to be married to a younger woman." But Riklis proceeded to eat merrily, and he invested $5 million in Boesky's partnership. Boesky ate a single grape.

As he had vowed, Boesky "retired" in early 1981, liquidating his interest in Ivan F. Boesky Co. Having failed to persuade any of his senior employees to take over (most had been fired or quit), he had recruited an arbitrageur from Morgan Stanley, Steve Royce, to take over the entity, renamed Bedford Partners. The largest investor was Seema, who rolled about $8 million of her share of Boesky Co. into the reconstituted partnership. Though Boesky had none of his own money in Bedford, he was on the phone to Royce every day, usually six to eight times, making investment decisions as though he were still in charge.

Boesky set about almost immediately raising money for a new arbitrage partnership, Ivan F. Boesky Corp. As a corporation rather than a limited partnership, the new entity had a more complicated ownership structure, divided between common stockholders and preferred stockholders. Investors received mostly preferred stock, and the profits were allocated heavily to the common stockholders (Boesky, principally) and the losses to the preferred holders.

Boesky enlisted Lessman, one of the few holdover employees from the earlier company, in his endless quest for investors' capital. Boesky's limousine took them to countless meetings with wealthy individuals and people who represented deep pockets, seeking investments of a minimum $2 million. In addition to the projected returns based on investors' performance in the prior partnership, Boesky offered a unique advantage: direct access to him. He promised to pass on market intelligence that the investors would be free to use in their own portfolios.

The campaign wasn't all that successful, despite the impressive rate of return Boesky had amassed for his previous investors. One day Lessman dared to suggest that the allocation of profits and losses turned potential investors off. "The deal stinks," Lessman said. Boesky glared.

Lessman also tried to invest some of his own money in the new corporation, telling Boesky that he had recently inherited about $500,000 and wanted to put it in the company. Boesky offered him the same stiff terms he was offering other outsiders. "But I'm working for you," Lessman protested. "Why can't I earn my share of the profits?"

Boesky's face tightened, his voice changed. "I don't need your lousy half million," he said icily.

"Then why do you need my twenty-five percent of the profits?" Lessman rejoined.

"Get out!" Boesky screamed, chasing Lessman out of the office and slamming the door with a crash.

In the end, the corporation was launched in 1981 with less than $40 million, far less than Boesky had hoped for. Boesky, Lessman, now head of research, and Michael Davidoff, a trader Boesky hired away from Bedford Partners, set up shop in an unused partner's office at the Manhattan law firm of Fried, Frank, Harris, Shriver & Jacobson, where Boesky's principal lawyer, Stephen Fraidin, was a partner. Even in those close quarters, Boesky liked to boast that no one knew everything about his operation except himself. He deliberately kept even his own employees off guard.

Lessman was instructed to answer Royce's calls and share his research with him. Late one evening, Royce called and said, "Ivan wants your position" in a particular stock. Lessman pulled it up on his computer screen and told Royce. Boesky called Lessman soon after, and Lessman mentioned in passing that Royce had called and he'd disclosed the position. There was silence on the line. Then Ivan screamed, "I should fire you for this. Don't ever give away a position again."

"I thought Royce, was in the firm," Lessman answered as Boesky slammed down the receiver.

Soon after, Royce called Lessman again one night seeking a stock position. Lessman refused, saying he'd been ordered by Boesky not to talk. The phone rang again. This time Boesky reamed out Lessman for failing to answer Royce's question. Finally Royce called asking for Boesky's position in Marathon Oil, then a potential takeover target; this was highly sensitive information. Lessman, anxious not to be caught in the middle, gave Royce an answer, but greatly understated the true position.

Then Boesky called from a dinner party. Lessman proudly told Boesky that Royce had pumped him for information, and that he'd deliberately misled him. "You asshole!" Boesky shouted. "You're making me out to be a liar!" Boesky himself, it turned out, had given Royce inconsistent but equally misleading information. Lessman's head was spinning. Why would Boesky lie to someone managing his own wife's money?

Soon after, Lessman had to call Boesky one evening at home in Bedford, and Boesky's eldest son, Billy, answered.

"It's Lance," Lessman said in a weary voice. "Your dad's really beating up on me."

Billy's reply made a deep impression on Lessman. "Seriously understand about my father," Billy said in a somber tone. "He is stark raving mad."

I. W. ("Tubby") Burnham II led his new recruit, corporate finance head Frederick H. Joseph, through the crowded trading floor of Drexel Burnham & Co. on Joseph's first day of work in 1974. There was someone, Burnham explained, that he wanted Joseph to meet right away, someone who just might help Joseph realize his outsize ambitions for his new firm.

Joseph, then 41 years old, a well-built former amateur boxer with graying hair, had landed the Drexel corporate finance job with an audacious claim: "Give me fifteen years," he had said. "I'll give you a firm as powerful and successful as Goldman, Sachs."

The proposition then seemed ludicrous, calling for nothing less than a revolution against the status quo on Wall Street. In 1974 Goldman, Sachs was at Wall Street's pinnacle. That year, Drexel Burnham had total revenues of just $1.2 million. Its capital was thin. The stock market was in a slump. And despite the illustrious Drexel name, Drexel Burnham barely ranked as a second-class citizen on Wall Street.

Drexel Burnham was essentially Burnham & Co., a retail-sales-oriented brokerage firm founded in 1935 by Tubby Burnham, a grandson of the founder of the I. W. Harper distillery, and a few remnants of old-line Drexel Firestone, which traced its lineage from the illustrious Philadelphia Drexel family and the unabashedly anti-Semitic J. P. Morgan empire.

In 1971, Burnham & Co. merged with Drexel -- an odd match. Burnham was mostly Jewish, filled with rough-and-tumble traders who survived on their selling skills. Drexel, by contrast, had an old-line aversion to hard sales tactics and a steadily dwindling roster of corporate clients who increasingly opted for firms with more aggressive distribution networks. Drexel was tottering, surviving largely on its reputation and its historical status as a major-bracket firm. Indeed, Tubby Burnham sought out Drexel as a merger partner primarily to hoist his company out of the submajor bracket and attract more underwriting work.

When Burnham visited the chairmen of Goldman, Sachs and Morgan Stanley, the eminent firms whose blessing and goodwill the merged firm would need to survive in the still-clubby world of Wall Street, they gave their approval on one condition: The venerable Drexel name had to come first, regardless of the true balance of power in the firm. Hence Drexel Burnham & Co. was born.

The survivors of the two firms still mostly shunned one another, even now, three years after the merger. As they walked through the firm, Burnham told Joseph that when he first met the head of Drexel at the time of the merger, he'd asked how many of the firm's more than 200 employees were Jews. He was told that there were a total of three. One, Burnham said, was the man he wanted Joseph to meet: Michael Milken.

Joseph shook hands with the intense, slender young man with dark, deep-set eyes. Joseph wondered briefly how someone like Milken had ever ended up at Drexel Firestone, but otherwise Milken didn't make much of an impression. They didn't work directly together. Joseph headed the more upscale investment banking area, and Milken was the head of convertibles and noninvestment-grade securities, later dubbed the high-yield department. He reported to a longtime Burnham trader, Edwin Kantor, and, as far as compensation was concerned, directly to Burnham.

To encourage Milken, who complained that he'd always been treated as a second-class citizen by the starched-shirt Drexel WASPs, Burnham let Milken set up his own semi-autonomous bond trading unit. In 1975, he gave Milken a compensation arrangement crafted to provide strong performance incentives. Like all Wall Street firms, Drexel paid relatively low salaries, and most employee compensation came in the form of bonuses. But Milken's bonus arrangement was unusually generous. Milken and his group of employees were awarded 35% of all the firm's profits attributed to their activities. Milken was given the discretion to allocate the money among his people, keeping whatever remained for himself. Burnham also gave Milken additional "finder's fees" of 15% to 30% of the profits attributable to any business brought into the firm by Milken or his people. Burnham paid out 35% of profits to the people actually doing the work and up to 30% of the profits to whomever landed the client. The firm kept as little as 35% to cover overhead and the partners' share of profits. The system for compensating Milken was a closely guarded secret at the firm.

Over the year or so after they first met, Joseph and Milken came to know each other reasonably well, mostly because Milken was eager to generate finder's fees by calling Joseph with tips for potential new corporate finance business.

Joseph wasn't a snob, but at first he tended to associate Milken with the Burnham trading crowd, many of whom knew little about the world beyond the hustle of their native Brooklyn or Queens. Joseph himself came from a modest background, growing up in Roxbury, a blue-collar neighborhood in Boston. His father drove a cab for a living, and his parents were Orthodox Jews. But Joseph had acquired a veneer of sophistication as a scholarship student at Harvard College and then Harvard Business School. He had joined E. F. Hutton & Co., hired by John Shad (future chairman of the Securities and Exchange Commission), and made partner in only four years. He had moved to Shearson, helped negotiate its merger with Hayden Stone, and been named chief operating officer, the firm's second-ranking position.

Drexel was a big step down from Shearson, but Joseph had wanted to get back into hands-on investment banking, and he had a dream of building a powerhouse firm from scratch and being identified with it for posterity. Joseph had seen enough of the changes sweeping Wall Street to believe that practically everything about the old order was vulnerable. At Drexel, however, he was certainly starting low. Drexel's corporate finance department consisted of 19 people; Joseph promptly dismissed seven of them. His first year, the department's entire bonus pool was a measly $15,000.

Joseph felt he had to overhaul the whole culture of the firm. Soon after arriving, he hosted the first of what became annual dinners for new recruits at Windows on the World atop New York's World Trade Center. He felt he had to build integrity as he instilled the drive to succeed in these new investment bankers. "You will be tempted," he warned his audience. He mentioned their access to confidential information about clients' business plans, stock and debt offerings, merger plans. "If you act on that temptation, you will be caught. I guarantee it. They will take your shoelaces. And here at Drexel, we won't give you the time of day."

It didn't take long after their initial meeting for Joseph to realize why Burnham was so eager for him to meet Milken. Milken wasn't just another trader at the firm. He was, in fact, one of the highest-paid employees. Starting with $2 million in capital in 1973, he was generating astounding 100% rates of return, earning bonus pools for himself and his people that were approaching $1 million a year. And he was doing it in an area that Joseph knew little about and considered distasteful: high-yield, unrated bonds.

The American bond market is dominated by two giant bondrating agencies, Moody's and Standard & Poor's, who for generations have guided investors seeking to gauge the risk in fixed-income investments. The value of these investments depends on an issuer's ability to make promised interest payments until the bond matures, and then repay the principal. Top blue-chip corporate debt for companies like AT&T or IBM is rated Triple A by S&P. Companies with weaker balance sheets or other problems have correspondingly lower ratings. Some companies are deemed so risky that they receive no rating at all. Interest rates on corporate debt fluctuate with market rates for U.S. Treasuries and the perceived risk of the issuer, so the lower the, debt rating, the higher the rate a company must pay in order to attract investors.

In the midseventies there wasn't all that much low-rated and unrated debt around, and investors, by and large, wouldn't touch it. The big investment banks weren't interested; it was too hard to sell, too risky for the firms' reputations, and tended to alienate the mainstream, top-rated issuers. Much of the high-yielding debt around was once-rated paper of companies that had fallen on hard times (so-called "fallen angels" in the parlance of Wall Street). Milken had been drawn to this obscure backwater of Wall Street.

Unlike Joseph, Milken had grown up in a comfortable, uppermiddle-class home. Encino, California, a town in the San Fernando Valley north of Los Angeles, had a sizable Jewish population -- the synagogue was near the Milken home but was about as homogeneous as the rest of rapidly growing Southern California. Milken's father was an accountant. Starting at age 10, Milken helped his father, sorting checks, reconciling checkbooks, later helping with tax returns. From the first grade, Milken had dazzled his classmates by doing complicated multiplications in his head.

Milken thrived at Birmingham High School in nearby Van Nuys, where he graduated in 1964. Birmingham students were almost all middle-class whites. Many of their parents, like the Milkens, had migrated from the industrial Midwest and East. They loved sports, embraced the surfing craze and bouffant hairdos, were crazy about the Beach Boys, and drove their cars endlessly around town. Milken was full of energy, more academically oriented than most, eager to be accepted by his classmates. He was elected a cheerleader, the next best thing to being a sports star. He was active in student government and was voted most popular. He dated a pretty, vivacious classmate, Lori Anne Hackel, whom he'd met in his seventh-grade social studies class. Other classmates included future movie star Sally Field and Hollywood super agent Michael Ovitz.

The University of California at Berkeley was an abrupt change for Milken. By the time he graduated in 1968, it was the epicenter of the student antiwar and counterculture movements. Milken, comfortably in the mainstream in high school, was suddenly a misfit. He was a member of a mostly Jewish fraternity, Sigma Alpha Mu, when fraternities were out of favor. He didn't drink, smoke marijuana, or use LSD. He majored in business administration rather than the more-fashionable sociology or psychology, and he studied hard. He was named to Phi Beta Kappa. His social life, for the most part, focused on Lori, who was also studying at Berkeley. They married right after graduation.

Soon after, Milken and Lori moved to Philadelphia where Michael enrolled in the University of Pennsylvania's prestigious Wharton business school. Milken worked summers and part-time during the school year at Drexel Firestone's Philadelphia office (a predecessor firm had been headquartered in Philadelphia). After graduating with all A's, Milken stayed at Drexel, commuting from a Philadelphia suburb, Cherry Hill, N.J., to Drexel's Manhattan headquarters. He seemed remarkably unsophisticated about Wall Street's pecking order, largely oblivious to considerations of prestige. He didn't have any real familiarity with the Morgan Stanleys or Goldman, Sachses of the world.

Milken was unfazed by the tradition that held that promising business graduates went into investment banking -- corporate finance, not sales and trading. At Drexel, Milken started in research and then asked to moved to sales and trading, where he gradually focused almost exclusively on the low-rated and unrated securities that would become his hallmark.

Years later, the myth grew up and was cultivated by Drexel that Milken was a "genius" who discovered the profit potential of what became universally known by the pejorative name "junk" bonds. But Milken never made any secret of the fact that the intellectual underpinnings of his interest in low-grade bonds were provided by others. W. Braddock Hickman had done a landmark analysis of low-grade and unrated bonds that Milken read while still at Berkeley. In a thorough analysis of corporate bond performance from 1900 to 1943, Hickman had demonstrated that a diversified long-term portfolio of low-grade bonds yielded a higher rate of return, without any greater risk, than a comparable portfolio of blue-chip, top-rated bonds. A later study of bonds from 1945 to 1965 reached the same conclusion.

Later, in his early conversations with Joseph, Milken, a genius salesman, constantly preached his gospel of high-yield securities. Joseph was intrigued; he asked for a copy of Hickman's study. Milken kept talking. The only problem with low-grade debt was its lack of liquidity, he argued. Most of Drexel's customers were still unwilling to invest their assets at higher yields, but Milken began to make some headway. He countered investor reluctance and risk aversion with meticulous research into the underlying business prospects of as many low-grade issuers as he could handle. He amazed Joseph with his grasp of arcane aspects of various businesses, all aimed at predicting a company's ability to make its interest and principal payments when due.

It was an enormous task; virtually no research on these companies was being done on Wall Street, where research departments focused almost exclusively on stocks of widely traded companies. Milken was handling all his own research, carrying bulging brief-cases of research reports and other data on his long commutes to and from Cherry Hill. He used his findings to persuade investors to
gamble on high-yielding securities that Milken believed would make their payments and were, as a result, undervalued.

Some of Milken's prospects were also potential corporate clients for Drexel. Insurance companies with large pools of assets were especially eager to invest profitably. Joseph went along with Mi]ken on countless visits to spread the gospel of high-yield. At each stop, Milken ran through his arguments: The bond market was too risk-averse; a well-diversified portfolio would provide a better return; liquidity was growing as more companies heeded Milken's message; and returns would comfortably exceed the risk premium. It was a simple, effective message. Increasingly, it worked.

Among Milken's early big successes was a group of wealthy, mostly Jewish financiers who had acquired insurance companies. None was a member of the Wall Street establishment. They didn't worry about the stigma associated with low-grade paper, and they liked Milken's new ideas. Saul Steinberg, Meshulam Riklis, and Carl Lindner became early converts, and Lindner, a non-Jew from Cincinnati, even became something of a father figure. As their annual returns met or exceeded Milken's predictions, they became increasingly heavy backers of Milken and clients of Drexel For his part, Milken showed no concern that Lindner was a target of an SEC investigation, had never graduated from high school, was shunned by Cincinnati society, and was viewed as a pariah by many on Wall Street. Or that Steinberg had wrested control of Reliance Insurance Co. and waged an unsuccessful hostile attack on giant Chemical Bank that had enraged the establishment banking world and its investment banking allies. Or that Riklis started as a poor Israeli immigrant who had made his money in movie theaters and liquor. They had all been rebuffed on Wall Street at various times. They would never forget that Milken sought them out as clients.

By early 1977, Milken's operation controlled a remarkable 25% of the market in high-yield securities. It was really the only firm maintaining an active market-making operation with an eye toward enhancing the liquidity of the market. (A market-maker is a key to liquidity, assuring a holder of a security that it will buy it whenever the holder wants to convert it into cash. The market-maker, in turn, resells the security, keeping as its profit any difference between the "buy" and "sell" price it obtains. The New York Stock Exchange and the NASDAQ over-the-counter market are simply institutionalized market-making organizations, which provide the additional service of published trading prices.) Other banks, such as Lehman Brothers, the market leader in high-yield bonds, would underwrite some new issues and husband those it had previously underwritten, but this was mostly a service to existing clients; other firms weren't interested in being active market-makers.

So Milken became, in effect, the market for high-yield bonds. He had an incredible memory, and he knew who owned what issues, what they had paid, their yield to maturity, and who else wanted them. Increasingly, his clients developed such confidence in his research and market acumen that when he urged them to invest in a particular issue, they did. They didn't care about the absence of published prices, or what Milken's spread was -- as long as they made money. And no one except Milken and a handful of his colleagues knew the pricing structure of this market -- including the increasingly high spreads between the buy and sell prices.

Milken could thrive to the extent he did, in part, because his market was almost entirely unregulated. His operation dealt almost entirely in what is known as "secondary offerings." In such transactions, a large insurance company may decide to unload a large bond position it acquired from the original issuer; it might have Drexel buy the block of bonds, then reoffer them to its network of bond buyers. Such offerings don't have to be registered with the SEC, and there is no published listing of the price at which such offerings are made. The world of junk bonds was the financial equivalent of the early days of the American frontier; a rough justice was extracted from the weak by the strong.

One day a salesman in Drexel's midtown Manhattan office, Gary Winnick, bought some of Milken's bond inventory for one of his clients. Winnick earned one-eighth of a point on the spread, or the difference between the price the customer paid and what Milken charged him. (A "point" is $10 for each $1,000 face amount in the price of a bond, or 1%. Thus, one-eighth of a point on a $1 million spread would be $1,250.) Winnick was furious to learn that Milken's spread had actually been 30 points, and that Milken had kept 29 7/8 for himself. Winnick was astounded that Milken would be so greedy. They were, after all, colleagues. Winnick went to Milken's boss, Kantor, and complained. But Kantor did nothing. Already, by 1976, Winnick concluded, Milken was making too much money for anyone to discipline him.

For Milken, the transaction was just another trade, and the more one could squeeze out of the person on the other side of the trade, the better. For years to come, his colleagues on the trading desk would watch in amazement at the pleasure, even glee, that Milken displayed when he squeezed an extra fraction of a point out of an unwitting trader. Only in trading could superior knowledge be wielded to extract profits with such immediate satisfaction. Few ever got the better of Milken, because he gambled only with superior knowledge; when someone did, Milken went out and tried to hire him. Warren Trepp, for example, was the head fixed-income trader at Dean Witter when he sold short some real estate investment trust securities. One of Milken's people was on the other side of the trades. The REIT values dropped severely, causing serious losses for Milken and generating a big profit for Trepp. Milken ordered his people to get the name of the Dean Witter trader, then went out and lured him to Drexel. Trepp became Milken's own head trader.

As Milken's business grew, so did Joseph's, if not at so spectacular a rate. Joseph moved quickly to improve the quality of investment bankers at Drexel, hiring several people he had earlier recruited to Shearson, among them John Kissick, Herbert Bachelor, Fred McCarthy, John Sorte and David Kay, whom he put in charge of an infant mergers-and-acquisitions department. And he hired an arrogant, chubby, headstrong young business school graduate, Leon Black. Black's father, the head of United Brands, had been caught in a scandal while Leon was at Harvard Business School and had committed suicide by jumping from his office window.

In an effort to give Drexel an "edge" at attracting investment banking business, Joseph had decided to target certain growing industries and smaller companies neglected by the major investment banks. Drexel started building up its research coverage for over-the-counter stocks, even though research brought no immediate profits to the firm. The group managed to do enough deals that, by 1977, the corporate finance bonus pool reached $1 million.

That same year, Joseph called Milken, explaining that a client, Texas International, needed to raise capital but was already so highly leveraged with debt that it would never get an investment rating. Could Drexel do a public high-yield issue, underwritten by Drexel and marketed directly to the public -- an original new issue, in other words, rather than the secondary offerings that were the mainstays of Drexel's practice?

Milken said he'd try. He proceeded to sell the $30 million issue easily, with a whopping underwriting fee of 3%. Mi]ken went on that year to do six more issues for companies that couldn't otherwise get capital. At about the same time, he sold the idea of the first high-yield mutual funds, allowing small investors to invest in a diversified portfolio of junk bonds. Milken's dream of liquidity was close to fruition. The mechanism for a revolution in finance was in place, right under the noses of the Wall Street establishment that had disdained low-grade debt.

Winnick, meanwhile, had moved at Kantor's behest to the high-grade bond desk in Drexel's downtown offices. He also traded some of Milken's high-yield products and he quickly became Drexel's top-producing salesman outside the high-yield area. He worked long hours. One Friday night he mentioned to Milken that he and his wife were looking at houses in Westchester County that weekend, and Milken said somewhat cryptically, "Don't buy anything." Shortly after, he asked Winnick to work for him -- in Century City, adjacent to Beverly Hills, in distant California.

Milken's then two-year-old son, Gregory, had health problems, and Milken's father had cancer. The decision to move surely wasn't made just because Mi]ken wanted a healthier climate and wanted to be close to his family and childhood friends, though those were factors. It was already obvious that Milken's success had little to do with Drexel, and that Drexel's success had everything to do with Milken. The hapless Burnham, the firm's titular head, knew little outside the increasingly unprofitable retail brokerage area; his shrewdest move had been to recognize Milken's potential and give him a long leash. Kantor was even less of an influence, an old-fashioned trader baffled by the computerized math and sophisticated strategies being developed by a new generation. Milken had no interest in wrangling with their likes for political influence.

Why not simply move, using Drexel as an umbrella, but effectively setting up an autonomous operation that would be under his total control? As Milken confided in Winnick and others, he had every intention of using the California base to expand junk bonds into virtually every profitable area, from underwriting and trading to mergers and acquisitions. Junk bonds were simply a fresh way to raise capital -- capital that could be employed to serve any of an investment bank's traditional functions. As long as his compensation structure stayed in place and no one at Drexel would dare to challenge it -- the bulk of the firm's profits would end up under his control. Already, his employees in New York were making so much more money than anyone else at Drexel that all of them volunteered to move.

Milken and his family bought a house once owned by Clark Gable and Carole Lombard in his hometown, Encino. Milken opened for business in small offices on the Avenue of the Stars in Century City in 1978 with 15 Drexel employees, including Winnick. The offices were already too small when they moved in; Milken sat with Trepp, his head trader, at his side. He was within earshot of all his traders and salesmen throughout the trading day.

With Milken in control, everyone conformed to his standards. The workday began promptly at 4:30 A.M. (7:30 A.M. in New York) and continued until 8 P.M. (11:00 P.M. in New York). Phones rang constantly. With his two phones, Milken often carried on multiple conversations at once. There was a cacophony on the trading floor, with questions and comments constantly shouted. After the market closed (at 1 P.M. California time), Milken scheduled meetings, racing from one conference room to another. All were filled with clients hoping for direct access to him.

Milken was sometimes in the office before the scheduled opening. When his employees arrived at 4:30, they'd often find his notes on their desks, outlining their day's agenda.

In 1981 Milken found a sales counterpart to Trepp, someone who was as good at selling as Trepp was at trading. He was James Dahl, and on the surface he had little in common with Milken or others at Drexel. Dahl was a WASP, though not a product of the Ivy League establishment but the son of a struggling real estate broker in a lower-middle-class neighborhood of Miami. He graduated from Florida State University in Tallahassee with honors and won a scholarship to the university's business school, earning an MBA. He was handsome, with longish blond hair, green eyes, a tan that gave him a Beach Boys aura, and a dazzling smile.

Milken rarely gave any signs that such qualities mattered to him, but colleagues say he seemed fascinated by aspects of Dahl he lacked -- as if the hiring of Dahl demonstrated conclusively that he could attract someone who at least looked like the embodiment of the American dream, a kind of Robert Redford of the bond world. After a series of 5 A.M. interviews, first in Los Angeles and then over breakfast at the Plaza Hotel in New York, Milken had asked Dahl about his wife, how many children he hoped to have, what he did in his spare time, his family background, and what his father had done for a living. He never asked him where he went to school, or how he'd fared academically.

Evidently Milken had concluded that Dahl had the fundamental qualities he was looking for: a real hunger to make money, and a commitment to family values. Dahl was out of work at the time, having passed through Citibank, Lehman Brothers, and a recently defunct trading subsidiary of First Penn Bank. Then he had moved to Trading Company of the West, which also failed. He'd returned to Florida, when a mutual friend arranged the introduction to Milken. Despite the track record of some of his employers, Dahl had done well for himself, earning $450,000 at the Penn Bank subsidiary. Milken hired him at $20,000 a month, with a promise that he'd sit next to the boss.

With Dahl, as with all his employees, Milken demanded total commitment and allegiance. No one left the office to eat; meals were catered every day for breakfast and lunch and often for dinner as well. To prevent any distractions, Milken hired several women to pick up dry cleaning for his traders and salesmen, go to the post office, wait at their houses for repairmen and deliveries, and take care of pets. Soon after he first came aboard, Dahl, still adjusting to the time change, started to leave the office after the markets had closed on a Friday.

"Where are you going?" Milken asked sharply.

"I'm tired, and I'm going home to read research reports," Dahl replied.

Milken was appalled at such a lack of stamina. "Read here, then go home and take a nap," he said. Dahl meekly returned to his desk.

On another occasion, Dahl was leaving the office after learning that his mother had been diagnosed with cancer. "Where are you going?" Milken again demanded.

Dahl said he was worried, his aunt and uncle had both died of cancer, he wanted to visit his mother. Milken looked disgruntled. "When are you going to be back?" he asked. He did not express any concern or sympathy.

A few years later, when Dahl's wife went into labor prematurely and the baby died after two hours, a devastated Dahl was at his desk the next morning, determined that Milken wouldn't notice his grief. He had learned that Milken expected nothing less.

No one had much private life. Ironically, given the lip service Milken paid to marital fidelity and family values, the intense, hothouse atmosphere kept employees away from their families and spawned intra-office affairs between traders and secretaries, including one between Trepp and Milken's own administrative assistant, Jeannette. Milken seemed oblivious until they announced their engagement.

One of the office's secretaries kept a diary detailing her sexual encounters with men in the office. One of the most talked-about entries described in lurid detail how she gave one salesman fellatio and used drugs. Such incidents were commonplace. Some of the trading assistants in the office even had breast implants, paid for by Drexel salesmen and traders.

On one occasion in 1984, Milken's employees hired a stripper to celebrate his birthday. She arrived during trading hours, shed all of her clothing while dancing around Milken's desk, then leaned toward him shaking her ample breasts in his face. Just then, Milken's phone rang. It was a client wanting to do a trade. To escape the stripper, Milken ducked down under the desk, still gripping his phone. The stripper followed him on hands and knees as Milken completed the trade.

Milken rarely socialized with others in the office and, indeed, spent little time with his own wife and his two sons and daughter, though he did show up for important sporting events and school occasions and coached his sons' basketball team. On a family trip to Hawaii, Milken rented three suites in the hotel: one for him and Lori, one for the children, and a third that functioned as his office. He worked every day of the vacation from 3 A.M. until 8 A.M. Hawaii time, while the markets were open in New York.

With rare exceptions, Milken only left his desk during work hours for nonbusiness reasons once a year, when he took his wife to lunch on their wedding anniversary. He usually ate at his desk, mostly junk food. He never seemed to get any exercise. Even during off hours, he was usually in his home office; calls there, even late at night and on weekends, were answered promptly. On the rare occasions when he did attend parties, he seemed awkward. At birthday parties, he spent most of his time playing with the kids.

Milken was a perfectionist and could be relentlessly critical, questioning a trade over and over, fixating on a fraction of a point. He'd ask the same question over and over, badgering a trader to make the point that the trader had been foolish or stupid. But after Trepp demonstrated to Milken that he'd been right in five disputed trades, he told Milken to "stop nagging me," and for the most part Milken did.

Dahl once asked Milken why he criticized so much and never praised anyone. "There's not enough time in the day to sit around praising each other," Milken sharply replied. "We don't need to talk about our successes. We only need to talk about our failures."

In this atmosphere, what might seem ordinary gestures of kindness elsewhere seemed memorable. Once, when Winnick was getting ready for a rare vacation to Italy, Milken sent him a bon voyage package and a note telling him to have a great trip. When they moved to the Los Angeles area, Milken extended personal loans to nearly all the employees so they could buy nice houses. When Dahl and his wife celebrated their wedding anniversary in Palm Springs, they were greeted with a large bouquet and a card reading, "Happy Anniversary. Mike and Lori." Milken made a hospital visit and offered financial help to the dying brother of a member of the office's support staff.

Trepp was constantly amazed at Milken's obsession with squeezing more profits cut of trades, and frequently had to remind him that securities dealers' guidelines permit only a 5% markup.

Milken's power over the market was so complete that he frequently
tried to mark prices up as much as 25%. One of Trepp's responsibilities as head trader was to sign the trading tickets; when Trepp saw what he considered an egregious ticket, he bounced it back to Milken. But at times, Milken did the trades anyway and someone else forged Trepp's initials; he doesn't know who.

On at least four occasions, Trepp threatened to quit over what he considered serious trading improprieties. He had loud fights with Milken, and in each case, Milken backed down. Milken never fired anyone. He was obsessed with the notion that anyone who left would reveal his secrets, the scope and success of his money-making activities.

The pressure took its toll, in varying degrees. Peter Ackerman was hired initially as a trader, but Milken's relentless criticism reduced him on one occasion to tears. Ackerman quit trading, and focused increasingly on cultivating clients, functioning more as an investment banker for Milken. He became so sycophantic toward Milken that others resented him. His nickname was "the Sniff," because, in the words of a colleague, "his nose was always up Mike's ass."

Trepp began smoking four packs of cigarettes a day. Another trader took to chewing rubber bands; another developed a serious drinking problem. Bruce Newberg, deemed a brilliant technician by many in the office, had to start taking blood pressure medication. One day Newberg started raving hysterically when his phone line went dead during an important conversation with a client. It turned out that he had chewed through the phone cord.

Winnick developed a reputation as the office hypochondriac, sometimes checking himself into the Scripps Institute in San Diego because he thought he had brain tumors and other serious ailments.

In perhaps the saddest case, Cary Maultasch developed serious psychological problems and had to see a psychiatrist. Milken allowed him to move back to New York, where he became Milken's liaison with Drexel's headquarters -- in effect, a Milken mole. Maultasch continued to handle trading for Milken; at the end of each day he shredded the records on Milken's orders so no one in New York would see the details of Milken's operation.

Milken didn't like the time his traders and salespeople spent trading for their own accounts. This was a major reason that the office formed various investment partnerships to take advantage of investment opportunities Milken encountered. He banned personal trading, but allowed each employee to invest up to an allocated amount in the partnerships. Within the office, employees could rank themselves on the "A" team or "B" team depending on the size of their partnership allocation. Some favored employees, such as Ackerman, even received partnership interests as part of their compensation. In some cases, Milken made large personal loans to employees so they could afford to invest the full amount of their allocation.

Soon after Dahl's arrival in California, Milken invited him to his home in Encino, where Milken took a rare break and lounged with Dahl by the pool. Milken told Dahl that the partnerships would make him rich. But he warned him not to live lavishly, and told him he shouldn't buy a large house, at least not yet. He said there would be plenty of time and money to do that later.

Such promises had to be accepted at face value, since access to partnership information was tightly restricted. No one knew in advance where the money would be invested. The office's computer runs were altered so that no one but Milken was privy to the partnership trading activity.

The compensation for all of this, of course, was money. While their incomes had hardly reached the stratospheric levels they would in the mid-eighties, the Drexel employees in Los Angeles were earning five times what most of their counterparts earned on Wall Street. Dahl, for example, topped $1 million in only his second year in Los Angeles. Milken himself, though no one knew it at the time, earned a staggering $45 million in 1982.

In keeping with Milken's admonitions, however, there was little to suggest to anyone outside the office that such riches were being earned. Although Trepp bought a white Rolls Royce Corniche convertible, Milken didn't want him to drive it to the office. Milken himself lived comparatively modestly. His wife wore the same simple black velvet dress to the Christmas party every year. Milken drove a slightly battered yellow Mercedes; he sold it to Dahl when it had 80,000 miles. When Armand Hammer, the famed industrialist who became one of Milken's and Drexel's most important clients, visited the office, Milken served him coffee in a Styrofoam cup. Decorations in the office consisted of some framed Olympics posters.

Milken, by his own design, made no impression whatsoever in the Hollywood social orbit or even business and professional circles. His reading consisted almost exclusively of research reports, prospectuses, and other financial documents. Milken struck his colleagues as remarkably unworldly, knowing little about art, literature, politics, or even current events outside of his immediate concerns.

Winnick, Dahl, and some of the other traders had read a Robert Ludlum thriller, The Matarese Circle, published in 1979. They were struck by Milken's resemblance to one of the main characters. The book is classic Ludlum, a wildly improbable but suspenseful tale of world conquest through multinational corporations. At the center of this conspiracy is a brilliant, driven financier, fixated on his vision of world control. His name is Guiderone, but he is known throughout the book as "the shepherd," because he was born a Corsican shepherd. His followers are so loyal they willingly sacrifice their lives to carry out his vision of world conquest.

"I've heard of him," says one of the book's characters. "A modern-day Carnegie or Rockefeller, isn't he?"

"More. Much more," replies another. "The Geneens, the Lucases, the Bluedhorns [sic], the wonderboys of Detroit and Wall Street, none of them can touch Guiderone. He's the last of the vanishing giants, a really benign monarch of industry and finance....I suppose you could call it the definitive story of the American dream."

Milken's disciples in Beverly Hills began referring to him as "the Shep," and the nickname stuck. Winnick gave Milken a copy of Ludlum's thriller, curious to see how Milken would react, whether he would see any resemblance in himself to the book's central character. But so far as he could tell, Milken never read it.

For many of the Beverly Hills employees, life in the office took a turn for the worse when Milken's younger brother, Lowell, joined the operation in 1979. Lowell, a lawyer, had been a partner in the Los Angeles law firm Irell and Manella, where he specialized in tax law. Milken had a relationship with his younger brother that was both intensely competitive -- he seemed obsessed with beating him in tennis -- and highly protective. Lowell was brought in, colleagues say, to relieve Milken from overseeing all the partnership activity and to handle tax issues. Others in the operation were struck that Milken would only trust a member of his immediate family for such a task.

Lowell seemed as driven as his brother, but he never showed flashes of warmth as Milken sometimes did. He had a lawyerly mind that struck the freewheeling traders as cold and anal. Lowell did little to mix with others. He installed a separate door in his office so that he didn't even have to walk through the trading floor. His office was grandiose by Drexel standards, with custom wood paneling and expensive art. If someone other than Milken walked into his office, Lowell would conspicuously turn the papers on his desk face down. Some of the traders would mockingly do the same whenever Lowell walked near their desks. In a typically crude stab at humor, they would also grab their crotches when Lowell's back was turned, imitating one of Lowell's nervous gestures.

Never one to miss a profit opportunity, Lowell helped arrange a move of Drexel's West Coast office from the Century City complex to Beverly Hills -- into a building owned by Lowell and Milken on Wilshire Boulevard just off Rodeo Drive. It was a shrewd investment. Drexel rented the space from them, bestowing lucrative tax advantages in the process. And the location was almost certain to appreciate in value. Just down the street from the elegant Beverly Wilshire Hotel, it was also just around the corner from chic boutiques like Giorgio and Bijan.

But the interior of Drexel's building could have been miles away from the glitz and glamour, as far as Milken was concerned. Here Milken had installed a large X-shaped trading desk. He sat at the center, within easy range of his growing number of lieutenants arrayed along the four branches of the X. The desk was equipped with the latest high-tech communications and trading data, but the office decor remained spartan. Only the address -- 9560 Wilshire Boulevard, Beverly Hills -- had cachet.

After Lowell arrived, he distributed sealed white envelopes to about a dozen employees. In them were loan statements, citing the amount Milken had loaned them for their houses, the accumulated interest, and a demand for immediate repayment. From then on, Lowell was viewed as Milken's hatchet man. Others in the office traded malicious stories about Lowell, including accounts of his relationship with his wife.

One afternoon in 1981, Milken was at work at the trading desk when he fainted and keeled over. Trepp, Dahl, Winnick, and others near him were horrified, fearful that their meal ticket had suffered a heart attack. They immediately shouted for Lowell. Lowell emerged from his office, looked at the unconscious and prostrate Milken, then turned around and went back into his office, closing the door without saying a word. The traders were dumbfounded. Milken soon revived, suffering no long-term effects from the mysterious incident.

Whatever the tensions, however, they seemed minor compared to the money being generated by the Milken operation. Milken made it a point to ensure that every employee made more money each year than he or she had the year before. By and large, Milken's people found something they genuinely liked about Milken.

Curiously, given how driven most of them were to earn large sums, it was clear to them that money alone held little interest for Milken; it was what that money could do. One day, chatting with Winnick, Milken said that one of his dreams was to boost his net worth by a factor of ten, from $3 billion, say, to $30 billion. Then, turning to the sweeping view from Century City across western Los Angeles toward the Pacific Ocean, he asked, "What do you think it'd cost to buy every building from here to the ocean?"

Milken might have realized those goals simply by continuing his lucrative dominance of secondary issues and new junk-bond issues. In Los Angeles, he had assembled a network of junk-bond customers that dwarfed his earlier sources in New York. Among the closest to him was Thomas Spiegel, the head of Columbia Savings and Loan. Spiegel venerated Milken. He worked the same arduous hours, and his office walls soon had numerous photos of Milken and his wife, posing with Spiegel at restaurants, at parties.

Charles Keating, the head of burgeoning Lincoln Savings and Loan, was another key link. Keating and Milken often discussed their families, and reinforced the importance each placed on family connections as the only true bonds in life.

But the closest of all was probably Fred Carr, the head of Executive Life Insurance Co. Carr was smart, one of the first to embrace Milken's theory of junk-bond opportunities, and an early and enthusiastic backer. To the amazement of others in the office, Milken would examine copies of Carr's and Drexel's portfolios every Friday afternoon, then, without consulting Carr, freely trade positions between the two accounts. By contrast, Milken made no secret of the fact that he thought Charlie Knapp, head of Financial Corporation of America, was a "moron."

Milken wasn't content with simply assembling the awesome buying power that large savings and loans and insurance companies offered, especially now that federal deregulation had opened up so many new opportunities in the savings and loan business. Junk bonds, in and of themselves, were enormously lucrative. But they could be harnessed to an even more potent force. Milken could see clearly what was beginning to happen on the American financial landscape. He heard about it from clients like Carl Lindner and Saul Steinberg. The big money was in the struggle for corporate control, in mergers and acquisitions and, increasingly, in a variation that seemed even more promising to Milken: the leveraged buyout, in which a public company' was taken private. With corporate control went power.

It was clearly just a matter of time before Milken, having quietly nurtured his financing network into a huge money-spewing engine, burst upon the takeover scene. Then, Milken often told Trepp, there would be no deal that he couldn't do, no company so big that it need not fear his power. "We're going to tee-up GM, Ford, and IBM," he told Trepp in tones of almost grim determination. "And make them cringe."

Copyright © 1991, 1992 by James B. Stewart
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Table of Contents


Contents

Cast of Characters

Prologue

Book One. Above the Law

Book Two. The Chase

Epilogue

Chronology

Notes and Sources

Acknowledgments

Photo Credits

Index
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First Chapter

Chapter 1 Martin Siegel, the youngest member of the class just graduated from the Harvard Business School, reported for work at Kidder, Peabody & Co.'s Manhattan headquarters at 20 Exchange Place in August 1971. That morning, the 23-year-old Siegel wandered through the halls looking at the portraits of Henry Kidder, Francis Peabody, Albert R. Gordon, and others that hung above the Oriental rugs and slightly threadbare carpets. Siegel tried to absorb the images of this strange and rarefied world of old money and discreet power.

He didn't have much time for reflection. He and his new wife hadn't even unpacked before he was thrown into a day-and-night project to win some new underwriting business from the Federal National Mortgage Association. Siegel's partner on the project made little impression on him, except for his name: Theodore Roosevelt IV, or maybe V; Siegel could never remember which.

In 1971, with the Vietnam War still raging and spurring opposition to the Establishment, few top students were going to business school, let alone Wall Street. Siegel, one of the top graduates in his Harvard class, had had his pick of nearly every major investment bank and securities firm. He had applied to 22; all had shown interest.

Kidder, Peabody, with about $30 million in total capital, barely ranked in the country's top 20 investment firms. In the hierarchy of Wall Street, Kidder, Peabody was in the second-tier, or "major" bracket. It didn't rank in the elite "special" bracket with Salomon Brothers, First Boston, Morgan Stanley, Merrill Lynch, or Goldman, Sachs.

Though the winds of change were apparent in 1971, Wall Street was still split between the "Jewish" and the "WASP" firms. At an earlier time, when major corporations and banks had discriminated overtly against Jews, Wall Street had rewarded merit and enterprise. Firms like Goldman, Sachs, Lehman Brothers, and Kuhn Loeb (made up historically of aristocratic Jews of German descent) had joined the ranks of the most prestigious WASP firms: Morgan Stanley -- an outgrowth of J. P. Morgan's financial empire -- First Boston, Dillon, Read, and Brown Brothers Harriman. Giant Merrill Lynch Pierce Fenner & Smith, something of an anomaly, had once been considered the "Catholic" firm. Kidder, Peabody remained firmly in the WASP camp. Siegel was the first Jew it hired in corporate finance.

Siegel was looking for variety and excitement. Only investment banking offered the prospect of an immediate market verdict on a new stock issue or the announcement of a big acquisition. He had narrowed his choices to three firms: Goldman, Sachs, Shearson Hayden Stone, and Kidder, Peabody. A Goldman recruiting partner phoned, and asked, if Goldman made him an offer, would he accept? Siegel didn't commit. Shearson Hayden Stone offered him the largest salary -- $24,000 a year.

Kidder, Peabody offered only $16,000. But Siegel saw unique opportunities there. The firm was full of old men, but had a roster of healthy blue-chip clients. Siegel envisioned a fast climb to the top.

Kidder, Peabody's aristocratic aura appealed to Siegel. One of America's oldest investment banks, it was founded in Boston as Kidder, Peabody & Co. in 1865, just before the end of the Civil War. Early on, Kidder raised capital for the railroad boom, primarily for the Atchison, Topeka & Santa Fe. Its clients also included two stalwarts of establishment respectability, United States Steel and American Telephone & Telegraph.

The modern Kidder, Peabody was dominated by Albert H. Gordon, the son of a wealthy Boston leather merchant, and graduate of Harvard College and Business School. In 1929, when the firm was devastated by the market crash, Gordon, a young bond salesman at Goldman, Sachs, stepped in with $100,000 of his own capital. Along with two partners, he acquired the firm in 1931.

The indefatigable Gordon, a physical-fitness fanatic with limitless energy and impeccable Brahmin bearing, moved the firm's headquarters to Wall Street from Boston and set about building a roster of clients. He had an advantage: Kidder, Peabody's reputation, in sharp contrast to many of its rivals, had remained remarkably unsullied in the aftermath of the crash.

The shock of the crash and the Depression had set off a reform movement in Congress culminating in Senate hearings conducted by special counsel Ferdinand Pecora beginning in 1932. Through Pecora's withering cross-examination of some of Wall Street's leading investment bankers, the American public learned about insider trading, stock-price manipulation, and profiteering through so-called investment trusts. Most of the abuses uncovered involved information bestowed on a favored few and withheld from the investing public. It was not only information that directly affected stock prices, such as the price of merger or takeover offers, but information that could more subtly be turned to a professional's advantage: the true spread between prices bid and prices asked, for example, or the identities of buyers of large blocks of stock and the motives behind their purchases.

In the wake of widespread public revulsion and populist fury, Congress passed historic legislation, the Securities Act of 1933 and the Securities Exchange Act of 1934. A new federal agency, the Securities and Exchange Commission, was created to enforce their provisions. Congress deemed the enforcement of its new securities laws to be so important that it enacted corresponding criminal statutes.

By separating banking from securities underwriting, the raising of capital, and distribution of stocks, bonds, and other securities, the securities acts set the stage for modern investment banking. Under Gordon's guidance, Kidder, Peabody concentrated on its underwriting function. The firm was a pioneer at opening branch offices in U.S. cities. The idea was, as Gordon liked to put it, to "sell your way to success."

Through most of its history, Kidder, Peabody was a tightly controlled partnership, with Gordon personally owning most of the firm and its profits. When the firm incorporated in the 1960s, the ownership changed little; Gordon simply became the firm's largest shareholder. He was parsimonious about bestowing ownership stakes on the firm's executives.

Kidder, Peabody prospered, if not spectacularly, under Gordon's conservative leadership. Determined to avoid another capital crisis, Gordon insisted that Kidder's executives plow their earnings back into the firm. This gave the firm the capital to survive the sudden drop in trading volume and profits that struck Wall Street in 1969. A Kidder vice president, Ralph DeNunzio, served as vice chairman of the New York Stock Exchange and helped arrange the merger of such old-line houses as Goodbody & Co. and du Pont. DeNunzio became chairman of the stock exchange in 1971, the same year Siegel graduated from Harvard Business School.

Martin Siegel's lineage was modest in contrast to that of the leaders of Kidder, Peabody. His father and an uncle owned three shoe stores in Boston, outlets that relied on American suppliers and catered to middle-to-working-class tastes. In the late sixties and early seventies, the stores were devastated by chains benefiting from national advertising and low-cost foreign suppliers. This was painful for Siegel, who had never seen anyone work so hard for so little as his father. As a kid growing up in Natick, a Boston suburb, he had almost never seen his father, who worked seven days a week, often spending the night in the city. Unlike his classmates' fathers, Siegel's father never played ball with him.

Siegel wasn't good at sports in school; he started first grade a year early, so his physical development lagged behind his classmates'. But starting as a freshman in high school, he excelled academically. He thought he wanted to be an astronaut. When Siegel was accepted in his junior year of high school for a work-study program at Rensselaer Polytechnic Institute, a science and engineering college, he became the first member of his family ever to attend college. He continued to do well academically even while working part-time, and entered a master's program in chemical engineering in 1968. He knew he'd never become rich toiling as an anonymous engineer in a corporate laboratory, so he applied to Harvard Business School and was accepted for the class entering in September 1969.

The turmoil sweeping American campuses during the late sixties had had remarkably little effect on Siegel, but at Harvard, he was caught up in the antiwar movement after the U.S.-led invasion of Cambodia in 1970 and the killings of students at Kent State by the Ohio National Guard. He participated in an antiwar sit-in in Harvard Yard and smoked marijuana cigarettes a few times. Still, he was annoyed when students managed to get that year's final exams canceled. He took his anyway, exercising an option to take the exams at home and submit them by mail.

For his senior thesis, Siegel tackled the mounting woes of his father's shoe store business. His solution: The stores should be transformed into specialty high-end boutiques, catering to wealthy, fashion-conscious women. This would avoid the growing competition in the rest of the market. Siegel's father agreed in principle, but then his brother, who did the buying for the stores, had a heart attack. His father didn't have the eye or instincts for high-fashion retailing, but Siegel's thesis earned "distinction-plus," Harvard's equivalent of A +.

On the Fourth of July 1970, Siegel married Janice Vahl, a music student from Rochester he'd met two years earlier. After Siegel accepted Kidder, Peabody's offer, he and Janice moved to New York, paying $212 a month for a modest one-bedroom apartment on Manhattan's East 72nd Street.

Siegel took naturally to Wall Street and investment banking; his energy and drive were, as he had predicted, a breath of fresh air at Kidder, Peabody. DeNunzio, now Kidder, Peabody's chief operating officer, seemed early on to have taken favorable notice of his new employee. He too came from a modest background and seemed far more comfortable with earthy sales and trading types than he was with upper-crust investment bankers.

Siegel began working on some merger-and-acquisition transactions, since no one else at Kidder, Peabody was eager to get involved. Hostile takeovers bore an unsavory taint. They generated bad feelings, especially toward those who represented the attackers. This sometimes alienated other clients. Many of the WASP investment banks and law firms preferred to leave such work to the other firms, many of them Jewish.

None of this bothered Siegel. His first takeover deal came just after the passage of the Williams Act, which spelled out new procedures to protect shareholders from coercive takeover tactics. The deal was an unsuccessful bid by Gulf + Western's acquisitive Charles Bluhdorn, a longtime Kidder, Peabody client, for the Great Atlantic & Pacific Tea Co. Bluhdorn, who was close to DeNunzio, praised Siegel's work, and DeNunzio made sure that Siegel was assigned to another major client, Penn Central's Victor Palmieri. In 1974, recognizing the dearth of expertise in the area, Siegel wrote a textbook on mergers and acquisitions for use within Kidder, Peabody; it was hailed by his colleagues. In only two years, he was promoted to an assistant vice president.

As Siegel's career took off, trouble developed in the rest of his life. His father's business continued to worsen; Siegel flew to Boston almost every weekend to help. His marriage suffered. Janice sang with the Bel Canto opera in New York and wanted to pursue a musical career. Siegel, who had no interest in opera, gave her little support. In February 1975 they separated.

Shortly before, his father's bank and principal lender had pulled the plug on the Siegel shoe business. Robert Siegel's company filed for bankruptcy. The once-proud and energetic retailer became, at 47, a broken man. He tried selling real estate; that didn't work out. He tried doing house repairs. Finally he landed a job selling roofing at Sears. Siegel watched with alarm as his father seemed to give up on his own life. He noticed the older man beginning to live vicariously through the sons and daughter he had once never had time for.

Siegel was haunted by the possibility that something similar might happen to him. He vowed he would never wind up a broken man.

After his father's misfortune, Siegel plunged even more completely into his work, frequently logging 100-hour weeks. Emulating Gordon, still titular head of the firm, he embraced physical fitness. One of his contemporaries at the firm, a former all-American wrestler named Scott Christie, put him through a fitness regimen at the New York Athletic Club. At one point, Christie, Siegel, and John Gordon, Al Gordon's son, were standing in a corridor at the firm when Siegel boasted that he could do 50 push-ups in a minute. Christie squeezed Siegel's bicep and rolled his eyes skeptically. "Come on, Marty." With that, in his shirt and tie, Siegel dropped to the floor. He did the 50 push-ups in less than a minute.

Handsome Martin Siegel became Kidder, Peabody's golden boy. He bought an Alfa-Romeo convertible and a beach house on Fire Island, a popular resort off Long Island. He became socially poised and gregarious. DeNunzio, awkward and physically unprepossessing himself, shrewdly recognized in Siegel a talent for getting and nurturing clients, DeNunzio's major weakness. He made Siegel a full vice president in 1974, and soon Siegel was reporting directly to DeNunzio. When Kidder, Peabody client Gould Inc. made a cash tender offer for a valve manufacturer around Christmas 1975, DeNunzio assigned Siegel to work with the legendary Lazard Freres financier Felix Rohatyn, who was representing the target company. Siegel was reticent at first; he was in awe of Rohatyn. Then, during a meeting, Rohatyn excused himself to use the bathroom. Siegel thought, "My God, he's human!" There was no reason Siegel couldn't become a legend himself, like Rohatyn.

In April 1976, takeover lawyer Joseph Flom (a founder of Skadden, Arps, Slate, Meagher & Flom) invited Siegel to give a presentation on "identifying takeover targets" at a panel discussion. Siegel was flattered, though he knew it didn't take much to be an expert. Anyone who'd handled even one post-Williams Act deal was considered qualified.

Siegel was even more flattered when he met the other participants: Ira Harris, one of Salomon Brothers's leading investment bankers; Robert Rubin, a fast-rising star at Goldman, Sachs; John Shad, head of E. F. Hutton; Arthur Long, the leading proxy solicitor; Theodore Levine, an enforcement attorney at the SEC; Arthur Fleischer, a prominent takeover lawyer at Fried, Frank, Harris, Shriver & Jacobson; and, seated right next to Siegel, Flom's principal rival in the takeover bar, Martin Lipton, a founder of Wachtell, Lipton, Rosen & Katz.

Collectively, the panel's expertise covered the emerging field of hostile takeovers, a field that was to transform the face of corporate America to a degree that none of them then dreamed possible. American industry had undergone other periods of industrial consolidation, most recently in the sixties, when the fad to diversify had led many large companies into mergers, generally financed with stock during that decade's great bull market. Those acquisitions were mostly friendly. Earlier, the monopolistic corporations of the Morgan era had been produced by numerous mergers (some of them not-so-gently coerced by the great financier himself). None of these kinds of deals were really comparable to the hostile takeover boom that began in the mid-seventies and surged in the eighties, however, except in one key respect: they offered enormous opportunities to profit on the stock market.

Siegel noticed that Lipton was scribbling notes furiously while others made their presentations. Then, when Harris's turn came to speak, Lipton shoved the notes in front of him, and Harris virtually read his presentation. So this was how the M&A "club" worked, Siegel thought.

After Siegel's presentation, Lipton stayed behind to compliment him. After this, the two talked frequently about M&A tactics and exchanged gossip. They made an unlikely pair; the glamorous Siegel and the portly Lipton with his thinning hair and heavy darkframed glasses. But Siegel recognized Lipton's mastery of the field and became an eager student.

Lipton and Flom had developed a new and lucrative retainer arrangement with their clients. Companies who wanted to ensure the firm's availability in the event they became the target of a hostile bid paid the lawyers a substantial retainer fee each year. In the event that they were attacked by another client of either Lipton or Flom, the attacking client agreed in advance to waive any conflict of interest, with the understanding that the lawyers would defend the target company.

Scores of major corporations eventually signed on with Lipton and Flom, even as some established bar members cringed. These lawyers billed strictly by the hour, eschewing even contingency fees. The Lipton and Flora retainers, since they didn't necessarily require work, were more like an insurance policy. The establishment viewed the advance waiver of conflicts with distaste. Yet clients themselves seemed unfazed, a measure of the clout Lipton and Flom could wield.

Siegel began to think Kidder, Peabody should begin to make similar deals. By the time of the panel discussion in 1976, he had become convinced that the merger wave was going to continue, even grow. Bigger rivals, such as Morgan Stanley, Salomon, and First Boston, were already developing reputations for their M&A offensive capabilities. Siegel thought Kidder, Peabody could carve out a niche on the defensive side.

He began to visit potential corporate clients, selling what he called the "Kidder, Peabody tender defense product." He argued that, with only seven days -- as provided by the Williams Act -- in which to react to a hostile takeover bid, companies had to be prepared in advance with carefully thought-out defensive strategies. This meant retaining Kidder, Peabody -- and paying a lucrative retainer like those paid to Lipton and Flom -- to ensure preparedness and the firm's availability. Lipton introduced Siegel to leading figures in the close-knit M&A community, and lent his prestige to Siegel's plan.

Siegel's real boost came in May 1977, when Business Week hailed him as the leading takeover defense expert. After describing his success in several large deals, the article also mentioned in passing that he was so good-looking he was considered a "Greta Garbo heartthrob." The article included a photograph, and suddenly Siegel was deluged with requests from women seeking dates. Siegel was amazed that the story, which wasn't given major play in the magazine, conferred such instant status and legitimacy. Kidder, Peabody's copiers went into high gear, sending out copies to prospective clients.

From 1977 on, Siegel called personally on 200 to 300 clients a year. His targets were midsize companies (typically those doing from $100 to $300 million a year in sales) that weren't being adequately serviced by the bigger investment banks. These were the companies most vulnerable to a hostile offer from a larger company. Siegel's product sold. He eventually had 250 corporations paying Kidder, Peabody an annual six-figure retainer.

His main competition came from Goldman, Sachs, the much larger, more powerful firm that had also decided to stake out takeover defense work as its special preserve, albeit for somewhat different reasons. At the time, Goldman had made it a policy to eschew the representation of hostile bidders. With the most enviable roster of large corporate clients on Wall Street, Goldman didn't want to risk alienating them by representing anyone who might be construed as a raider. Traditional investment banking services for these established clients were the bread and butter of its lucrative business.

Siegel loved beating Goldman out of a client. In 1977, Peter Sachs, then head of M&A at Goldman, flew out to the West Coast to meet with Steve Sato, the chairman of Ivac Corporation, a medical equipment manufacturer that had just become the target of a hostile attack by Colgate Palmolive. Sachs, according to the chairman, boasted of the "Goldman prowess." When Siegel went to see Sato, he spent most of the time listening to Sato's goals for the company. The chairman was of Japanese descent. Although Siegel had never eaten raw fish in his life, he joined Sato at his home for sushi. In awarding him the business, Sato told Siegel, "I can't believe that you actually listen. All Goldman told me was how great Goldman is."

Siegel found that his most effective tactic was to let Goldman make its presentation, which typically emphasized that Goldman could get the best price if the target company were sold. Then Siegel would step in. "Hire me," he'd urge. "I'll do my best to keep you independent. I want you as a future client." In fact, most of the companies ended up being sold, given the weak positions of most takeover targets, and Siegel's pitch often couldn't compete with Goldman's size, dominance, and reputation for quality. But Siegel's message frequently convinced the targets' managements that he had their interests at heart -- instead of the investment banking fees to be reaped if the company had to be sold.

In 1977, Siegel invented a brilliant but controversial tactic that also endeared him to scores of corporate managers -- the go]den parachute. The golden parachute, essentially a lucrative employment contract for top corporate officers, provided exorbitant severance payments for the officers in the event of a takeover. Supposedly, the contracts were intended to deter hostile takeovers by making them more expensive. In practice, they tended to make the officers very rich.

DeNunzio was thrilled by Siegel's success, even though Siegel was working so hard and traveling so much that he rarely saw him. DeNunzio ran Kidder, Peabody in the paternalistic way he had learned from Gordon, usually setting salaries and bonuses singlehandedly. In 1976 Siegel earned over $100,000, then considered a princely sum, especially for someone only 28. In 1977, Siegel was made a director of Kidder, Peabody, the youngest in the firm's history with the exception of A1 Gordon, who had owned the firm.

Soon after, DeNunzio called Siegel into his office. "Marty, you're a bachelor," he said. DeNunzio paused, and Siegel didn't know what was coming. "You've got an Alfa-Romeo convertible and you've got a house on Fire Island. It's too much." What was he getting at? Siegel assumed DeNunzio meant that his style was too racy for some of Kidder, Peabody's clients, or perhaps the other directors, but DeNunzio wasn't more explicit and Siegel couldn't be sure.

"There's a nice house for sale across the street from me in Greenwich," DeNunzio continued. Greenwich was the WASPiest, whitest, most exclusive suburb in Connecticut, a bastion of country clubs and conventional respectability. It was also filled with some of the dullest, most straitlaced people Siegel knew. In addition, he couldn't see living right under DeNunzio's watchful eyes.

But Siegel went out to look at the house. Afterward he got into the offending sports car and drove on Interstate 95 for exactly one-half hour. He found himself in Westport, and called a realtor from a pay phone. He'd been thinking of selling the Fire Island house anyway. The realtor took him to an old house on a small river north of town, and Siegel loved it. He bought it, and spent his weekends fixing the place up.

Siegel told DeNunzio that he was heeding his advice and buying a house in Connecticut. It was in slightly bohemian Westport, not in Greenwich. "A half hour from you is about as close as I can take," Siegel joked.

Later, when he moved to a far more lavish home right on the coast, Siegel sold the Westport house to CBS News anchor Dan Rather.

One day, not long after he had bought the house in Connecticut, Siegel's secretary told him he had a call from an Ivan Boesky. He knew Boesky only as another arbitrageur, one of the many who were calling him now that he was developing a reputation in the M&A crowd. But Siegel also knew that Boesky was a trading client of Kidder, Peabody. He took his call.

Siegel was impressed with Boesky's market acumen, his knowledge of takeover tactics and stock accumulation strategies. They became friends though they didn't actually meet for some time. In the peculiar world of Wall Street, close friendships can develop entirely on the telephone. Gradually Siegel began to see Boesky as someone he could discuss strategy with, bounce ideas off of, gossip with. He needed this information since he had no Kidder, Peabody arbitrageur to turn to. The firm had traditionally shunned arbitrage, and had no department. DeNunzio and Gordon believed arbitrageurs were unsavory, tried to get inside information, and gave rise to conflicts of interest within the firm.

Yet arbitrageurs like Boesky were becoming increasingly important to any investment banker involved in M&A. Historically arbitrageurs had traded to take advantage of price discrepancies on different markets, such as London and New York. It was conservative, nearly risk-free trading yielding small profits. But they had become progressively more daring, first buying heavily stocks that were the subjects of announced takeover bids, betting the deals would go through; eventually they started buying stocks they only suspected would be the targets of takeover bids. When they guessed right, the profits were huge.

Evaluating the effects of these massive purchases of rumored or real takeover stocks had become a crucial part of Siegel's job. Arbitrageurs were also fonts of information, from clues to the other side's tactics, to rumors of impending bids that could be used to attract defense clients.

Arbitrageurs tended to be crass, excitable, street-smart, aggressive, and driven almost solely by the pursuit of quick profits. Their days were defined by the high-pressure periods between the opening and closing bells of the stock exchange, during which they screamed orders into phones, punched stock symbols into their electronic terminals, scanned elaborate screens of constantly shifting data, and placed phone calls to every potential source of information they could imagine. After work, they tended to blow off steam by carousing in bars like Harry's, just across Hanover Square from Kidder, Peabody, or, if they'd had a good day, in expensive Manhattan restaurants.

One day in 1979, Siegel confided to Boesky that he'd fallen in love. The affair was threatening to become a minor scandal at Kidder, Peabody.

In the late seventies, the first wave of women business school graduates reached Wall Street's shores. Jane Day Stuart turned heads at Kidder, Peabody on the day she first swept through the corporate finance offices. A Columbia Business School graduate, she was smart, blonde, thin, personable, stylish, and married.

Kidder, Peabody had long maintained an unspoken policy against office affairs. A fling with a summer employee had damaged another investment banker's career. But in late 1978, Stuart and her husband were divorced. Shortly after, Siegel and Stuart played tennis. By August 1979, they were living together. When colleagues tried to warn Siegel, he brushed them aside, saying he wasn't interested in firm politics and didn't care whether he ever ran the firm.

When Henry Keller, head of corporate finance, learned of the affair, he went to DeNunzio, prompting speculation that DeNunzio would bring the relationship to an abrupt halt. DeNunzio did nothing. Unknown to many, DeNunzio's son, David, was also having an affair at the firm. DeNunzio's tolerance was interpreted as a sign of the times and a measure of Siegel's clout. DeNunzio also seemed relieved that Siegel's bachelor days appeared to be numbered.

Some of Stuart's friends and relatives in Baltimore warned her against marriage to someone Jewish, even someone as nonreligious as Siegel. But she was headstrong and in love, even though some of her male colleagues speculated unkindly that she was using her business acumen to trade up the marriage ladder. She and Siegel were quietly married in May 1981 and began drawing up plans for a new, larger house in Westport.

Soon after their marriage, Boesky called to invite Siegel and Jane Day to his house in Westchester County for dinner. It was Boesky's first social invitation to the Siegels, a small dinner for three couples: Boesky and his wife Seema; financier Theodore Forstmann, who numbered Boesky among the investors in his partnership, and his date; and the Siegels. Siegel decided to bring along a copy of his house plans to show the Boeskys.

Following Boesky's directions, the Siegels drove north from Manhattan for about 45 minutes, through the exclusive towns of Bedford and Mount Kisco. The area is one of large estates, wooded rolling hills, and some pre-Revolutionary houses. Few of the large houses are visible from public roads, and the Boesky house is set so far back in its 200 acres of property that visitors sometimes got lost winding through the maze of driveways and service roads leading from the entrance gates.

The Siegels pulled into the drive between large pillars and a gatehouse and stopped as a security guard parked in a pickup truck waved them to a halt. Siegel went over to the guard, introduced himself, and was cleared for entry -- but not before he was startled to see the blue-black steel of a large pistol in a holster strapped to the guard.

As they approached the house, the Siegels were awed. Behind a cobblestone courtyard rose a massive, red-brick Georgian-style mansion. The estate had previously been owned by Revlon founder Charles Revson. In the distance, past formal gardens studded with Greek statuary, was a large pool house. On one side was a large pool, on the other a sunken indoor squash court, and at the side, a tennis court with a bubble that could be inflated in winter for indoor play.

The Siegels were greeted at the entrance by Seema Boesky, an attractive, talkative brunette who immediately struck them as warm and friendly. She led them through rooms decorated in traditional style with beautiful wallpaper, elaborate moldings, rare Aubusson carpets, and expensive antique furniture. The walls featured what looked to Siegel's untrained eye like serious art; Seema, it turned out, was an enthusiastic collector of American paintings and antiques. They continued through the gardens and pool house, where the carpeting was embossed with a large, intertwined monogram, IFB.

Boesky was a gracious host, dressed impeccably as always in a black three-piece suit and white shirt that complemented his year-round tan. Asked why he wore the same suit every day, Boesky once replied, "I have enough decisions in my life already." Boesky's silver-blond hair was clipped and neatly parted. His prominent cheekbones and piercing eyes could make him look driven, even gaunt, but he was relaxed and affable as a dinner host, tending constantly to his guests and eating little himself.

Jane Day mentioned their house plans, and Seema exclaimed, "You've got to have a big kitchen. I'll show you mine." The Boesky kitchen was larger than the Siegels' entire Manhattan apartment. Siegel was impressed by the signs of wealth. Boesky must have been far more successful at arbitrage than even Siegel had realized. Siegel decided that he wouldn't show the house plans he'd brought along. They now seemed embarrassingly modest.

Later, after dinner, Siegel took Boesky aside and mentioned that he'd noticed that the guard at the estate entrance carried a pistol. "It's loaded," Boesky replied. "In my business, you need security."

Lance Lessman peered across the desks of the small research department in Ivan F. Boesky Co.'s offices in Manhattan's financial district. Inside Boesky's own glass-enclosed corner office, he could see his boss's eyes roving, first toward the trading floor where his buy and-sell orders were executed, then toward Lessman's research area. Suddenly Boesky's eyes locked on his.

The intercom on Lessman's desk crackled to life. "Who's buying," Boesky barked.

Lessman frantically scanned his computer screen, looking for big price and volume movements in individual stocks in order to figure out what had caught his master's interest.

"Who's buying?" Boesky practically screamed. "Why the fuck don't you know?"

Now intercoms sprang to life all over the office. Every desk had a speaker connected to a central control panel manned by Boesky himself. He could activate individual speakers or throw open the system for office-wide announcements. Now he had everyone on line.

"I want service. I want service," he repeated in ever louder and more demanding tones. "Who's buying? I want it now. Who's buying?"

Lately Boesky had been even more testy than usual. A few weeks earlier that year, 1981, Boesky had shocked the office with an abrupt announcement: He was liquidating Ivan F. Boesky Co., taking out all of his profits.

The Hunt silver panic and resulting stock market plunge had hit Boesky hard, and he had decided to cash out with his remaining profits. He wanted to take advantage of the favorable long-term capital-gains tax rates available to partners liquidating their interest. But, to get the rates, he needed someone to keep the firm going. His recent efforts to force his top lieutenants to take over the remains of the partnership and assume all its liabilities had led to screaming matches. When they balked, he fired them. During a short period that year, Boesky had lost his two top strategists, his head trader, and his head of research.

Few people really expected Boesky to be out of arbitrage for long. Despite the Hunt setbacks, he had been a phenomenal success. Ivan F. Boesky Co. had opened in 1975 with $700,000 from Boesky's mother-in-law and her husband. Now the firm's capital had grown to nearly $90 million. Arbitrage was Boesky's life. His earnings had brought him the estate in Westchester and a Manhattan townhouse. A chauffeured limousine drove him into town every morning. His efforts had also finally brought him the grudging respect of a father-in-law who had believed his daughter had married beneath her.

Boesky seemed to share his father-in-law's disdain for his own family and background. He constantly tried to burnish his resume and family connections in conversations with New York colleagues. He often implied that he had graduated from Cranbrook, a prestigious prep school outside of his native Detroit, and the University of Michigan. Others assumed he had attended Harvard, since Boesky made so much of his Harvard Club membership. He said his father ran a chain of delicatessens in Detroit.

During Boesky's childhood, his family lived in a spacious Tudor-style house in what was then considered a nice, upper-middle-class neighborhood. Ivan's father, William, had emigrated from Russia in 1912, and owned a chain of several bars, called the Brass Rail, rather than delicatessens (his uncle's business). To boost profits, the Brass Rails introduced topless dancing and strip shows. In the eyes of many, the bars hastened the decline of their neighborhoods.

Boesky worked hard while he was in school, selling ice cream from a truck. He was picked up repeatedly by the local police for staying in business past the 7 P.M. curfew imposed by his license. He did attend Cranbrook for two years, though he didn't graduate. His academic record there was undistinguished, but he excelled at wrestling, starving himself to lower his weight category and driving himself to the point where he could do an astounding 500 push-ups. He was constantly in the gym with his best friend, an Iranian exchange student named Hushang Wekili. As a sophomore, Boesky won the school's Craig trophy as outstanding wrestler.

Boesky often used wrestling analogies to describe his work as an arbitrageur. "Wrestling and arbitrage are both solitary sports in which you live or die by your deeds, and you do it very visibly," he told reporter Connie Bruck in a 1984 Atlantic Monthly interview. In wrestling he also found a metaphor for life. "There are times when I really feel like dropping, but I don't, and that kind of summoning up, I think, is what I learned [from wrestling].... There are plenty of opportunities in life to be beaten down. People feel beaten, demolished, demoralized, and they give way to it. I don't."

When Boesky chose a corporate logo for his new arbitrage operation, he had engravers copy his Cranbrook wrestling medal, showing two classical Greek men, nude, in a wrestling hold. It became the symbol for Ivan F. Boesky Corp., and Boesky was immensely proud of it. Not everyone shared his enthusiasm. "It looked like something from Caesars Palace," was one employee's comment.

After Cranbrook, Boesky transferred to inner-city Mumford High (immortalized by Eddie Murphy in Beverly Hills Cop). He never graduated from college. He did course work at Wayne State University in Detroit, the University of Michigan, and Eastern Michigan College, but he left for Iran, partly to be near his friend Wekili, just before graduating. Exactly what Boesky did in Iran remains a mystery. He later testified that he worked for the U.S. Information Agency, teaching English to Iranians. But USIA personnel records for the relevant period make no mention of any Ivan Boesky. Boesky told Siegel in one of their early conversations that he had worked in Iran as an undercover agent for the CIA.

After returning from Iran, Boesky enrolled at Detroit College of Law, a low-prestige law school that didn't require a college degree for admission. He graduated five years later, in 1964, after twice dropping out. When Boesky was 23, his father made him a partner in the Brass Rails. Boesky was rejected by all the law firms he applied to for a job.

Boesky's desultory record made it all the more surprising that he caught the eye of Seema Silberstein, whose father, Ben, was a wealthy Detroit real estate developer. But colleagues say it was Seema who fell in love with and tracked after Boesky after meeting him in June 1960. A relative of hers, a federal district court judge, hired him for a one-year clerkship. Boesky and Seema were married soon after and had their first child, Billy. When a Cranbrook wrestling teammate working at Bear, Stearns in New York told Boesky about arbitrage, he decided to make his fortune on Wall Street. Colleagues recall Boesky's feeling that Detroit was too small and confined for his ambitions.

Boesky's father-in-law installed Ivan and Seema in an elegant Park Avenue apartment. Boesky landed a job as a trainee at L. F. Rothschild that lasted a year. He moved to First Manhattan, getting his first taste of real arbitrage trading, then shifted to Kalb Voorhis. He promptly lost $20,000 in a single position and was fired. Boesky was contemptuous of a firm that put any store in the loss of such a paltry sum. After a brief period of unemployment and a foray into venture capital, he joined a small member firm of the New York Stock Exchange, Edwards & Hanly. Remarkably, given his employment history, limited experience, and track record, Edwards & Hanly gave Boesky carte blanche to establish and run an arbitrage department.

Boesky made a splash in the small world of arbitrage almost immediately. Using maximum leverage, buying on margin constantly, he managed to convert Edwards & Hanly's modest capital into $1 million and even $2 million positions, large enough to actually move individual stock prices from time to time. He was considered audacious and bold. Once, for selling stock short that he hadn't actually borrowed prior to the sale (and thus further boosting his leverage), he was sanctioned by the SEC and fined $10,000. Some of Boesky's tactics contributed to the demise of Edwards & Hanly. By 1975, the firm was bankrupt.

Tired of begging for a position at a prestige firm, Boesky decided to open his own operation, devoted primarily to arbitrage. He stunned his fellow arbs by actually taking out advertisements in The Wall Street Journal, seeking investors and extolling the profit potential in arbitrage the last thing members of the "club" wanted others focusing on, fearful that it would attract more competition. Boesky boldly allocated just 55% of the operation's profits to the investors, keeping 45% for himself. He did, however, assign investors 95% of any losses. He didn't attract enough capital to meet his ambitions. It was his wife's family's money that gave him enough to go forward.

From the first day of Ivan F. Boesky Co. in 1975, Boesky arrived at work by limousine. If he needed something fast, he wouldn't hesitate to pay private couriers. He dressed in what he deemed the image of the successful Wall Street financier: his signature three-piece black suit, starched white shirt, and gold chain dangling from the vest pocket. It looked like a Phi Beta Kappa key.

Boesky didn't waste money on the firm itself. It was housed in a single room in an aging Whitehall Street office building. The room was so small that a stock exchange auditor ordered Boesky to move into larger quarters. He hated his employees to leave their desks during lunch, so he picked up the tab for lunch orders delivered to the office, imposing a $5-per-person limit.

One of his first employees was an accountant hired to manage the firm's "back office." The son of an Armenian immigrant, Setrag Mooradian had worked at Oppenheim, Appel, & Dixon, known in the arbitrage community as OAD. The firm, more than any other, specialized in arbitrage accounting. Though he didn't tell Boesky, Mooradian had been severely sanctioned for violating capital requirements. It had made it hard for him to get a job, and he was always grateful to Boesky for hiring him.

Boesky told Mooradian to be at work every morning promptly at 7 A.M., when his own limousine would pull up to the building entrance. If Boesky wasn't going to be in the office, he'd call in at 7:01; if no one answered, he'd fly into a rage. Once, years later, Boesky called in when a fire drill was in progress. No one answered the phone immediately. The next day a memo appeared on everyone's desk. "Yesterday, at 3:15 P.M., I called in," the memo began. "My phone rang 23 times. I understand there was a fire alarm. Certainly, I don't want you to risk your lives. But I extend my appreciation to those of you who stayed behind."

Boesky disliked the idea that his employees might take a day off. He never came into the office the Friday after Thanksgiving, when most Manhattan offices are reduced to skeleton staffs. But no one else was allowed the day off. Boesky checked attendance by calling so many times -- in some cases, as many as 10 times to a single employee that the others in the office figured Boesky might as well have come to work. He also refused to hand out paychecks until after 3 P.M. on Fridays, after banks had closed. When employees complained, he explained that he didn't want the "disruption" of his staff dashing out to cash and deposit checks in the middle of the day. But they suspected he wanted the extra interest that would accumulate over the weekend.

Almost from the beginning, Boesky screamed at everyone regularly. After several such incidents, Mooradian asked Boesky to stop yelling. "I'm the boss," Boesky replied. "I'm allowed to yell." Boesky expected Mooradian to work routinely until 9 or 10 P.M. Once his wife found him still up at 5:30 A.M. trying to complete work Boesky had demanded. "He can't keep this up," Mooradian told her. But as the years went by, Boesky seemed to need less and less sleep and became even more demanding. A favorite tactic was to call Mooradian with a complex question. "I'll get back to you," Mooradian would answer. "I'll hold," Boesky would reply.

Boesky sometimes spent the workday at his estate. Near the "Wall Street" sign he had placed on a lamppost on one of the roads was an office complex with secretaries and all the electronic market and communications gear he needed to stay in constant touch with the market. "Can you believe that husband of mine?" Seema asked Mooradian. "He always dresses in a business suit to go to the office on his own property."

One morning Boesky's employees arrived at the office to discover a Wierton terrier puppy scampering about the premises. Boesky had bought the pet as a surprise for Seema, but she had banned the terrier from the house. So Boesky said the dog would live at the office, and his chauffeur, Johnny Ray, could take care of it at night and on weekends. Soon Boesky and the puppy were inseparable. He even took the dog along to meetings with investors.

Just a week later, Lessman and others heard a shriek from Boesky's office. They rushed in to discover a stricken look on Boesky's face. The puppy looked confused. In a pile right in front of Boesky's desk, on his spotless beige carpeting, the dog had demonstrated convincingly that it wasn't yet housebroken. Boesky wiped up the mess. No one ever saw the dog again.

Boesky had other idiosyncrasies, namely, his eating habits. Some days it seemed as though he ate nothing, as if he were still training for a wrestling weigh-in. For breakfast, he liked to order a single croissant. He would pick at it, then eat a single flake. One colleague recalls that once, when Boesky took a normal bite, he said, "Ivan, you little pig." Boesky looked startled and put it down.

Boesky often invited prospective investors in his partnership for lunch in the private dining room in his office. One afternoon Meshulam Riklis, the chairman of Rapid-American Corporation who bankrolled a film career for his much younger wife, Pia Zadora, was scheduled for lunch. Boesky had his people call ahead to find out what Riklis liked to eat, then ordered a lavish spread from the 21 Club. At the table, Boesky fretted that Riklis didn't seem to be enjoying the food.

"I'm due at the gym in a few hours," Riklis explained. "I have to work out with a personal trainer."

"Why work out?" Boesky asked. "Relax. Eat more."

Riklis paused. "Ivan, you have no idea what it's like to be married to a younger woman." But Riklis proceeded to eat merrily, and he invested $5 million in Boesky's partnership. Boesky ate a single grape.

As he had vowed, Boesky "retired" in early 1981, liquidating his interest in Ivan F. Boesky Co. Having failed to persuade any of his senior employees to take over (most had been fired or quit), he had recruited an arbitrageur from Morgan Stanley, Steve Royce, to take over the entity, renamed Bedford Partners. The largest investor was Seema, who rolled about $8 million of her share of Boesky Co. into the reconstituted partnership. Though Boesky had none of his own money in Bedford, he was on the phone to Royce every day, usually six to eight times, making investment decisions as though he were still in charge.

Boesky set about almost immediately raising money for a new arbitrage partnership, Ivan F. Boesky Corp. As a corporation rather than a limited partnership, the new entity had a more complicated ownership structure, divided between common stockholders and preferred stockholders. Investors received mostly preferred stock, and the profits were allocated heavily to the common stockholders (Boesky, principally) and the losses to the preferred holders.

Boesky enlisted Lessman, one of the few holdover employees from the earlier company, in his endless quest for investors' capital. Boesky's limousine took them to countless meetings with wealthy individuals and people who represented deep pockets, seeking investments of a minimum $2 million. In addition to the projected returns based on investors' performance in the prior partnership, Boesky offered a unique advantage: direct access to him. He promised to pass on market intelligence that the investors would be free to use in their own portfolios.

The campaign wasn't all that successful, despite the impressive rate of return Boesky had amassed for his previous investors. One day Lessman dared to suggest that the allocation of profits and losses turned potential investors off. "The deal stinks," Lessman said. Boesky glared.

Lessman also tried to invest some of his own money in the new corporation, telling Boesky that he had recently inherited about $500,000 and wanted to put it in the company. Boesky offered him the same stiff terms he was offering other outsiders. "But I'm working for you," Lessman protested. "Why can't I earn my share of the profits?"

Boesky's face tightened, his voice changed. "I don't need your lousy half million," he said icily.

"Then why do you need my twenty-five percent of the profits?" Lessman rejoined.

"Get out!" Boesky screamed, chasing Lessman out of the office and slamming the door with a crash.

In the end, the corporation was launched in 1981 with less than $40 million, far less than Boesky had hoped for. Boesky, Lessman, now head of research, and Michael Davidoff, a trader Boesky hired away from Bedford Partners, set up shop in an unused partner's office at the Manhattan law firm of Fried, Frank, Harris, Shriver & Jacobson, where Boesky's principal lawyer, Stephen Fraidin, was a partner. Even in those close quarters, Boesky liked to boast that no one knew everything about his operation except himself. He deliberately kept even his own employees off guard.

Lessman was instructed to answer Royce's calls and share his research with him. Late one evening, Royce called and said, "Ivan wants your position" in a particular stock. Lessman pulled it up on his computer screen and told Royce. Boesky called Lessman soon after, and Lessman mentioned in passing that Royce had called and he'd disclosed the position. There was silence on the line. Then Ivan screamed, "I should fire you for this. Don't ever give away a position again."

"I thought Royce, was in the firm," Lessman answered as Boesky slammed down the receiver.

Soon after, Royce called Lessman again one night seeking a stock position. Lessman refused, saying he'd been ordered by Boesky not to talk. The phone rang again. This time Boesky reamed out Lessman for failing to answer Royce's question. Finally Royce called asking for Boesky's position in Marathon Oil, then a potential takeover target; this was highly sensitive information. Lessman, anxious not to be caught in the middle, gave Royce an answer, but greatly understated the true position.

Then Boesky called from a dinner party. Lessman proudly told Boesky that Royce had pumped him for information, and that he'd deliberately misled him. "You asshole!" Boesky shouted. "You're making me out to be a liar!" Boesky himself, it turned out, had given Royce inconsistent but equally misleading information. Lessman's head was spinning. Why would Boesky lie to someone managing his own wife's money?

Soon after, Lessman had to call Boesky one evening at home in Bedford, and Boesky's eldest son, Billy, answered.

"It's Lance," Lessman said in a weary voice. "Your dad's really beating up on me."

Billy's reply made a deep impression on Lessman. "Seriously understand about my father," Billy said in a somber tone. "He is stark raving mad."

I. W. ("Tubby") Burnham II led his new recruit, corporate finance head Frederick H. Joseph, through the crowded trading floor of Drexel Burnham & Co. on Joseph's first day of work in 1974. There was someone, Burnham explained, that he wanted Joseph to meet right away, someone who just might help Joseph realize his outsize ambitions for his new firm.

Joseph, then 41 years old, a well-built former amateur boxer with graying hair, had landed the Drexel corporate finance job with an audacious claim: "Give me fifteen years," he had said. "I'll give you a firm as powerful and successful as Goldman, Sachs."

The proposition then seemed ludicrous, calling for nothing less than a revolution against the status quo on Wall Street. In 1974 Goldman, Sachs was at Wall Street's pinnacle. That year, Drexel Burnham had total revenues of just $1.2 million. Its capital was thin. The stock market was in a slump. And despite the illustrious Drexel name, Drexel Burnham barely ranked as a second-class citizen on Wall Street.

Drexel Burnham was essentially Burnham & Co., a retail-sales-oriented brokerage firm founded in 1935 by Tubby Burnham, a grandson of the founder of the I. W. Harper distillery, and a few remnants of old-line Drexel Firestone, which traced its lineage from the illustrious Philadelphia Drexel family and the unabashedly anti-Semitic J. P. Morgan empire.

In 1971, Burnham & Co. merged with Drexel -- an odd match. Burnham was mostly Jewish, filled with rough-and-tumble traders who survived on their selling skills. Drexel, by contrast, had an old-line aversion to hard sales tactics and a steadily dwindling roster of corporate clients who increasingly opted for firms with more aggressive distribution networks. Drexel was tottering, surviving largely on its reputation and its historical status as a major-bracket firm. Indeed, Tubby Burnham sought out Drexel as a merger partner primarily to hoist his company out of the submajor bracket and attract more underwriting work.

When Burnham visited the chairmen of Goldman, Sachs and Morgan Stanley, the eminent firms whose blessing and goodwill the merged firm would need to survive in the still-clubby world of Wall Street, they gave their approval on one condition: The venerable Drexel name had to come first, regardless of the true balance of power in the firm. Hence Drexel Burnham & Co. was born.

The survivors of the two firms still mostly shunned one another, even now, three years after the merger. As they walked through the firm, Burnham told Joseph that when he first met the head of Drexel at the time of the merger, he'd asked how many of the firm's more than 200 employees were Jews. He was told that there were a total of three. One, Burnham said, was the man he wanted Joseph to meet: Michael Milken.

Joseph shook hands with the intense, slender young man with dark, deep-set eyes. Joseph wondered briefly how someone like Milken had ever ended up at Drexel Firestone, but otherwise Milken didn't make much of an impression. They didn't work directly together. Joseph headed the more upscale investment banking area, and Milken was the head of convertibles and noninvestment-grade securities, later dubbed the high-yield department. He reported to a longtime Burnham trader, Edwin Kantor, and, as far as compensation was concerned, directly to Burnham.

To encourage Milken, who complained that he'd always been treated as a second-class citizen by the starched-shirt Drexel WASPs, Burnham let Milken set up his own semi-autonomous bond trading unit. In 1975, he gave Milken a compensation arrangement crafted to provide strong performance incentives. Like all Wall Street firms, Drexel paid relatively low salaries, and most employee compensation came in the form of bonuses. But Milken's bonus arrangement was unusually generous. Milken and his group of employees were awarded 35% of all the firm's profits attributed to their activities. Milken was given the discretion to allocate the money among his people, keeping whatever remained for himself. Burnham also gave Milken additional "finder's fees" of 15% to 30% of the profits attributable to any business brought into the firm by Milken or his people. Burnham paid out 35% of profits to the people actually doing the work and up to 30% of the profits to whomever landed the client. The firm kept as little as 35% to cover overhead and the partners' share of profits. The system for compensating Milken was a closely guarded secret at the firm.

Over the year or so after they first met, Joseph and Milken came to know each other reasonably well, mostly because Milken was eager to generate finder's fees by calling Joseph with tips for potential new corporate finance business.

Joseph wasn't a snob, but at first he tended to associate Milken with the Burnham trading crowd, many of whom knew little about the world beyond the hustle of their native Brooklyn or Queens. Joseph himself came from a modest background, growing up in Roxbury, a blue-collar neighborhood in Boston. His father drove a cab for a living, and his parents were Orthodox Jews. But Joseph had acquired a veneer of sophistication as a scholarship student at Harvard College and then Harvard Business School. He had joined E. F. Hutton & Co., hired by John Shad (future chairman of the Securities and Exchange Commission), and made partner in only four years. He had moved to Shearson, helped negotiate its merger with Hayden Stone, and been named chief operating officer, the firm's second-ranking position.

Drexel was a big step down from Shearson, but Joseph had wanted to get back into hands-on investment banking, and he had a dream of building a powerhouse firm from scratch and being identified with it for posterity. Joseph had seen enough of the changes sweeping Wall Street to believe that practically everything about the old order was vulnerable. At Drexel, however, he was certainly starting low. Drexel's corporate finance department consisted of 19 people; Joseph promptly dismissed seven of them. His first year, the department's entire bonus pool was a measly $15,000.

Joseph felt he had to overhaul the whole culture of the firm. Soon after arriving, he hosted the first of what became annual dinners for new recruits at Windows on the World atop New York's World Trade Center. He felt he had to build integrity as he instilled the drive to succeed in these new investment bankers. "You will be tempted," he warned his audience. He mentioned their access to confidential information about clients' business plans, stock and debt offerings, merger plans. "If you act on that temptation, you will be caught. I guarantee it. They will take your shoelaces. And here at Drexel, we won't give you the time of day."

It didn't take long after their initial meeting for Joseph to realize why Burnham was so eager for him to meet Milken. Milken wasn't just another trader at the firm. He was, in fact, one of the highest-paid employees. Starting with $2 million in capital in 1973, he was generating astounding 100% rates of return, earning bonus pools for himself and his people that were approaching $1 million a year. And he was doing it in an area that Joseph knew little about and considered distasteful: high-yield, unrated bonds.

The American bond market is dominated by two giant bondrating agencies, Moody's and Standard & Poor's, who for generations have guided investors seeking to gauge the risk in fixed-income investments. The value of these investments depends on an issuer's ability to make promised interest payments until the bond matures, and then repay the principal. Top blue-chip corporate debt for companies like AT&T or IBM is rated Triple A by S&P. Companies with weaker balance sheets or other problems have correspondingly lower ratings. Some companies are deemed so risky that they receive no rating at all. Interest rates on corporate debt fluctuate with market rates for U.S. Treasuries and the perceived risk of the issuer, so the lower the, debt rating, the higher the rate a company must pay in order to attract investors.

In the midseventies there wasn't all that much low-rated and unrated debt around, and investors, by and large, wouldn't touch it. The big investment banks weren't interested; it was too hard to sell, too risky for the firms' reputations, and tended to alienate the mainstream, top-rated issuers. Much of the high-yielding debt around was once-rated paper of companies that had fallen on hard times (so-called "fallen angels" in the parlance of Wall Street). Milken had been drawn to this obscure backwater of Wall Street.

Unlike Joseph, Milken had grown up in a comfortable, uppermiddle-class home. Encino, California, a town in the San Fernando Valley north of Los Angeles, had a sizable Jewish population -- the synagogue was near the Milken home but was about as homogeneous as the rest of rapidly growing Southern California. Milken's father was an accountant. Starting at age 10, Milken helped his father, sorting checks, reconciling checkbooks, later helping with tax returns. From the first grade, Milken had dazzled his classmates by doing complicated multiplications in his head.

Milken thrived at Birmingham High School in nearby Van Nuys, where he graduated in 1964. Birmingham students were almost all middle-class whites. Many of their parents, like the Milkens, had migrated from the industrial Midwest and East. They loved sports, embraced the surfing craze and bouffant hairdos, were crazy about the Beach Boys, and drove their cars endlessly around town. Milken was full of energy, more academically oriented than most, eager to be accepted by his classmates. He was elected a cheerleader, the next best thing to being a sports star. He was active in student government and was voted most popular. He dated a pretty, vivacious classmate, Lori Anne Hackel, whom he'd met in his seventh-grade social studies class. Other classmates included future movie star Sally Field and Hollywood super agent Michael Ovitz.

The University of California at Berkeley was an abrupt change for Milken. By the time he graduated in 1968, it was the epicenter of the student antiwar and counterculture movements. Milken, comfortably in the mainstream in high school, was suddenly a misfit. He was a member of a mostly Jewish fraternity, Sigma Alpha Mu, when fraternities were out of favor. He didn't drink, smoke marijuana, or use LSD. He majored in business administration rather than the more-fashionable sociology or psychology, and he studied hard. He was named to Phi Beta Kappa. His social life, for the most part, focused on Lori, who was also studying at Berkeley. They married right after graduation.

Soon after, Milken and Lori moved to Philadelphia where Michael enrolled in the University of Pennsylvania's prestigious Wharton business school. Milken worked summers and part-time during the school year at Drexel Firestone's Philadelphia office (a predecessor firm had been headquartered in Philadelphia). After graduating with all A's, Milken stayed at Drexel, commuting from a Philadelphia suburb, Cherry Hill, N.J., to Drexel's Manhattan headquarters. He seemed remarkably unsophisticated about Wall Street's pecking order, largely oblivious to considerations of prestige. He didn't have any real familiarity with the Morgan Stanleys or Goldman, Sachses of the world.

Milken was unfazed by the tradition that held that promising business graduates went into investment banking -- corporate finance, not sales and trading. At Drexel, Milken started in research and then asked to moved to sales and trading, where he gradually focused almost exclusively on the low-rated and unrated securities that would become his hallmark.

Years later, the myth grew up and was cultivated by Drexel that Milken was a "genius" who discovered the profit potential of what became universally known by the pejorative name "junk" bonds. But Milken never made any secret of the fact that the intellectual underpinnings of his interest in low-grade bonds were provided by others. W. Braddock Hickman had done a landmark analysis of low-grade and unrated bonds that Milken read while still at Berkeley. In a thorough analysis of corporate bond performance from 1900 to 1943, Hickman had demonstrated that a diversified long-term portfolio of low-grade bonds yielded a higher rate of return, without any greater risk, than a comparable portfolio of blue-chip, top-rated bonds. A later study of bonds from 1945 to 1965 reached the same conclusion.

Later, in his early conversations with Joseph, Milken, a genius salesman, constantly preached his gospel of high-yield securities. Joseph was intrigued; he asked for a copy of Hickman's study. Milken kept talking. The only problem with low-grade debt was its lack of liquidity, he argued. Most of Drexel's customers were still unwilling to invest their assets at higher yields, but Milken began to make some headway. He countered investor reluctance and risk aversion with meticulous research into the underlying business prospects of as many low-grade issuers as he could handle. He amazed Joseph with his grasp of arcane aspects of various businesses, all aimed at predicting a company's ability to make its interest and principal payments when due.

It was an enormous task; virtually no research on these companies was being done on Wall Street, where research departments focused almost exclusively on stocks of widely traded companies. Milken was handling all his own research, carrying bulging brief-cases of research reports and other data on his long commutes to and from Cherry Hill. He used his findings to persuade investors to gamble on high-yielding securities that Milken believed would make their payments and were, as a result, undervalued.

Some of Milken's prospects were also potential corporate clients for Drexel. Insurance companies with large pools of assets were especially eager to invest profitably. Joseph went along with Mi]ken on countless visits to spread the gospel of high-yield. At each stop, Milken ran through his arguments: The bond market was too risk-averse; a well-diversified portfolio would provide a better return; liquidity was growing as more companies heeded Milken's message; and returns would comfortably exceed the risk premium. It was a simple, effective message. Increasingly, it worked.

Among Milken's early big successes was a group of wealthy, mostly Jewish financiers who had acquired insurance companies. None was a member of the Wall Street establishment. They didn't worry about the stigma associated with low-grade paper, and they liked Milken's new ideas. Saul Steinberg, Meshulam Riklis, and Carl Lindner became early converts, and Lindner, a non-Jew from Cincinnati, even became something of a father figure. As their annual returns met or exceeded Milken's predictions, they became increasingly heavy backers of Milken and clients of Drexel For his part, Milken showed no concern that Lindner was a target of an SEC investigation, had never graduated from high school, was shunned by Cincinnati society, and was viewed as a pariah by many on Wall Street. Or that Steinberg had wrested control of Reliance Insurance Co. and waged an unsuccessful hostile attack on giant Chemical Bank that had enraged the establishment banking world and its investment banking allies. Or that Riklis started as a poor Israeli immigrant who had made his money in movie theaters and liquor. They had all been rebuffed on Wall Street at various times. They would never forget that Milken sought them out as clients.

By early 1977, Milken's operation controlled a remarkable 25% of the market in high-yield securities. It was really the only firm maintaining an active market-making operation with an eye toward enhancing the liquidity of the market. (A market-maker is a key to liquidity, assuring a holder of a security that it will buy it whenever the holder wants to convert it into cash. The market-maker, in turn, resells the security, keeping as its profit any difference between the "buy" and "sell" price it obtains. The New York Stock Exchange and the NASDAQ over-the-counter market are simply institutionalized market-making organizations, which provide the additional service of published trading prices.) Other banks, such as Lehman Brothers, the market leader in high-yield bonds, would underwrite some new issues and husband those it had previously underwritten, but this was mostly a service to existing clients; other firms weren't interested in being active market-makers.

So Milken became, in effect, the market for high-yield bonds. He had an incredible memory, and he knew who owned what issues, what they had paid, their yield to maturity, and who else wanted them. Increasingly, his clients developed such confidence in his research and market acumen that when he urged them to invest in a particular issue, they did. They didn't care about the absence of published prices, or what Milken's spread was -- as long as they made money. And no one except Milken and a handful of his colleagues knew the pricing structure of this market -- including the increasingly high spreads between the buy and sell prices.

Milken could thrive to the extent he did, in part, because his market was almost entirely unregulated. His operation dealt almost entirely in what is known as "secondary offerings." In such transactions, a large insurance company may decide to unload a large bond position it acquired from the original issuer; it might have Drexel buy the block of bonds, then reoffer them to its network of bond buyers. Such offerings don't have to be registered with the SEC, and there is no published listing of the price at which such offerings are made. The world of junk bonds was the financial equivalent of the early days of the American frontier; a rough justice was extracted from the weak by the strong.

One day a salesman in Drexel's midtown Manhattan office, Gary Winnick, bought some of Milken's bond inventory for one of his clients. Winnick earned one-eighth of a point on the spread, or the difference between the price the customer paid and what Milken charged him. (A "point" is $10 for each $1,000 face amount in the price of a bond, or 1%. Thus, one-eighth of a point on a $1 million spread would be $1,250.) Winnick was furious to learn that Milken's spread had actually been 30 points, and that Milken had kept 29 7/8 for himself. Winnick was astounded that Milken would be so greedy. They were, after all, colleagues. Winnick went to Milken's boss, Kantor, and complained. But Kantor did nothing. Already, by 1976, Winnick concluded, Milken was making too much money for anyone to discipline him.

For Milken, the transaction was just another trade, and the more one could squeeze out of the person on the other side of the trade, the better. For years to come, his colleagues on the trading desk would watch in amazement at the pleasure, even glee, that Milken displayed when he squeezed an extra fraction of a point out of an unwitting trader. Only in trading could superior knowledge be wielded to extract profits with such immediate satisfaction. Few ever got the better of Milken, because he gambled only with superior knowledge; when someone did, Milken went out and tried to hire him. Warren Trepp, for example, was the head fixed-income trader at Dean Witter when he sold short some real estate investment trust securities. One of Milken's people was on the other side of the trades. The REIT values dropped severely, causing serious losses for Milken and generating a big profit for Trepp. Milken ordered his people to get the name of the Dean Witter trader, then went out and lured him to Drexel. Trepp became Milken's own head trader.

As Milken's business grew, so did Joseph's, if not at so spectacular a rate. Joseph moved quickly to improve the quality of investment bankers at Drexel, hiring several people he had earlier recruited to Shearson, among them John Kissick, Herbert Bachelor, Fred McCarthy, John Sorte and David Kay, whom he put in charge of an infant mergers-and-acquisitions department. And he hired an arrogant, chubby, headstrong young business school graduate, Leon Black. Black's father, the head of United Brands, had been caught in a scandal while Leon was at Harvard Business School and had committed suicide by jumping from his office window.

In an effort to give Drexel an "edge" at attracting investment banking business, Joseph had decided to target certain growing industries and smaller companies neglected by the major investment banks. Drexel started building up its research coverage for over-the-counter stocks, even though research brought no immediate profits to the firm. The group managed to do enough deals that, by 1977, the corporate finance bonus pool reached $1 million.

That same year, Joseph called Milken, explaining that a client, Texas International, needed to raise capital but was already so highly leveraged with debt that it would never get an investment rating. Could Drexel do a public high-yield issue, underwritten by Drexel and marketed directly to the public -- an original new issue, in other words, rather than the secondary offerings that were the mainstays of Drexel's practice?

Milken said he'd try. He proceeded to sell the $30 million issue easily, with a whopping underwriting fee of 3%. Mi]ken went on that year to do six more issues for companies that couldn't otherwise get capital. At about the same time, he sold the idea of the first high-yield mutual funds, allowing small investors to invest in a diversified portfolio of junk bonds. Milken's dream of liquidity was close to fruition. The mechanism for a revolution in finance was in place, right under the noses of the Wall Street establishment that had disdained low-grade debt.

Winnick, meanwhile, had moved at Kantor's behest to the high-grade bond desk in Drexel's downtown offices. He also traded some of Milken's high-yield products and he quickly became Drexel's top-producing salesman outside the high-yield area. He worked long hours. One Friday night he mentioned to Milken that he and his wife were looking at houses in Westchester County that weekend, and Milken said somewhat cryptically, "Don't buy anything." Shortly after, he asked Winnick to work for him -- in Century City, adjacent to Beverly Hills, in distant California.

Milken's then two-year-old son, Gregory, had health problems, and Milken's father had cancer. The decision to move surely wasn't made just because Mi]ken wanted a healthier climate and wanted to be close to his family and childhood friends, though those were factors. It was already obvious that Milken's success had little to do with Drexel, and that Drexel's success had everything to do with Milken. The hapless Burnham, the firm's titular head, knew little outside the increasingly unprofitable retail brokerage area; his shrewdest move had been to recognize Milken's potential and give him a long leash. Kantor was even less of an influence, an old-fashioned trader baffled by the computerized math and sophisticated strategies being developed by a new generation. Milken had no interest in wrangling with their likes for political influence.

Why not simply move, using Drexel as an umbrella, but effectively setting up an autonomous operation that would be under his total control? As Milken confided in Winnick and others, he had every intention of using the California base to expand junk bonds into virtually every profitable area, from underwriting and trading to mergers and acquisitions. Junk bonds were simply a fresh way to raise capital -- capital that could be employed to serve any of an investment bank's traditional functions. As long as his compensation structure stayed in place and no one at Drexel would dare to challenge it -- the bulk of the firm's profits would end up under his control. Already, his employees in New York were making so much more money than anyone else at Drexel that all of them volunteered to move.

Milken and his family bought a house once owned by Clark Gable and Carole Lombard in his hometown, Encino. Milken opened for business in small offices on the Avenue of the Stars in Century City in 1978 with 15 Drexel employees, including Winnick. The offices were already too small when they moved in; Milken sat with Trepp, his head trader, at his side. He was within earshot of all his traders and salesmen throughout the trading day.

With Milken in control, everyone conformed to his standards. The workday began promptly at 4:30 A.M. (7:30 A.M. in New York) and continued until 8 P.M. (11:00 P.M. in New York). Phones rang constantly. With his two phones, Milken often carried on multiple conversations at once. There was a cacophony on the trading floor, with questions and comments constantly shouted. After the market closed (at 1 P.M. California time), Milken scheduled meetings, racing from one conference room to another. All were filled with clients hoping for direct access to him.

Milken was sometimes in the office before the scheduled opening. When his employees arrived at 4:30, they'd often find his notes on their desks, outlining their day's agenda.

In 1981 Milken found a sales counterpart to Trepp, someone who was as good at selling as Trepp was at trading. He was James Dahl, and on the surface he had little in common with Milken or others at Drexel. Dahl was a WASP, though not a product of the Ivy League establishment but the son of a struggling real estate broker in a lower-middle-class neighborhood of Miami. He graduated from Florida State University in Tallahassee with honors and won a scholarship to the university's business school, earning an MBA. He was handsome, with longish blond hair, green eyes, a tan that gave him a Beach Boys aura, and a dazzling smile.

Milken rarely gave any signs that such qualities mattered to him, but colleagues say he seemed fascinated by aspects of Dahl he lacked -- as if the hiring of Dahl demonstrated conclusively that he could attract someone who at least looked like the embodiment of the American dream, a kind of Robert Redford of the bond world. After a series of 5 A.M. interviews, first in Los Angeles and then over breakfast at the Plaza Hotel in New York, Milken had asked Dahl about his wife, how many children he hoped to have, what he did in his spare time, his family background, and what his father had done for a living. He never asked him where he went to school, or how he'd fared academically.

Evidently Milken had concluded that Dahl had the fundamental qualities he was looking for: a real hunger to make money, and a commitment to family values. Dahl was out of work at the time, having passed through Citibank, Lehman Brothers, and a recently defunct trading subsidiary of First Penn Bank. Then he had moved to Trading Company of the West, which also failed. He'd returned to Florida, when a mutual friend arranged the introduction to Milken. Despite the track record of some of his employers, Dahl had done well for himself, earning $450,000 at the Penn Bank subsidiary. Milken hired him at $20,000 a month, with a promise that he'd sit next to the boss.

With Dahl, as with all his employees, Milken demanded total commitment and allegiance. No one left the office to eat; meals were catered every day for breakfast and lunch and often for dinner as well. To prevent any distractions, Milken hired several women to pick up dry cleaning for his traders and salesmen, go to the post office, wait at their houses for repairmen and deliveries, and take care of pets. Soon after he first came aboard, Dahl, still adjusting to the time change, started to leave the office after the markets had closed on a Friday.

"Where are you going?" Milken asked sharply.

"I'm tired, and I'm going home to read research reports," Dahl replied.

Milken was appalled at such a lack of stamina. "Read here, then go home and take a nap," he said. Dahl meekly returned to his desk.

On another occasion, Dahl was leaving the office after learning that his mother had been diagnosed with cancer. "Where are you going?" Milken again demanded.

Dahl said he was worried, his aunt and uncle had both died of cancer, he wanted to visit his mother. Milken looked disgruntled. "When are you going to be back?" he asked. He did not express any concern or sympathy.

A few years later, when Dahl's wife went into labor prematurely and the baby died after two hours, a devastated Dahl was at his desk the next morning, determined that Milken wouldn't notice his grief. He had learned that Milken expected nothing less.

No one had much private life. Ironically, given the lip service Milken paid to marital fidelity and family values, the intense, hothouse atmosphere kept employees away from their families and spawned intra-office affairs between traders and secretaries, including one between Trepp and Milken's own administrative assistant, Jeannette. Milken seemed oblivious until they announced their engagement.

One of the office's secretaries kept a diary detailing her sexual encounters with men in the office. One of the most talked-about entries described in lurid detail how she gave one salesman fellatio and used drugs. Such incidents were commonplace. Some of the trading assistants in the office even had breast implants, paid for by Drexel salesmen and traders.

On one occasion in 1984, Milken's employees hired a stripper to celebrate his birthday. She arrived during trading hours, shed all of her clothing while dancing around Milken's desk, then leaned toward him shaking her ample breasts in his face. Just then, Milken's phone rang. It was a client wanting to do a trade. To escape the stripper, Milken ducked down under the desk, still gripping his phone. The stripper followed him on hands and knees as Milken completed the trade.

Milken rarely socialized with others in the office and, indeed, spent little time with his own wife and his two sons and daughter, though he did show up for important sporting events and school occasions and coached his sons' basketball team. On a family trip to Hawaii, Milken rented three suites in the hotel: one for him and Lori, one for the children, and a third that functioned as his office. He worked every day of the vacation from 3 A.M. until 8 A.M. Hawaii time, while the markets were open in New York.

With rare exceptions, Milken only left his desk during work hours for nonbusiness reasons once a year, when he took his wife to lunch on their wedding anniversary. He usually ate at his desk, mostly junk food. He never seemed to get any exercise. Even during off hours, he was usually in his home office; calls there, even late at night and on weekends, were answered promptly. On the rare occasions when he did attend parties, he seemed awkward. At birthday parties, he spent most of his time playing with the kids.

Milken was a perfectionist and could be relentlessly critical, questioning a trade over and over, fixating on a fraction of a point. He'd ask the same question over and over, badgering a trader to make the point that the trader had been foolish or stupid. But after Trepp demonstrated to Milken that he'd been right in five disputed trades, he told Milken to "stop nagging me," and for the most part Milken did.

Dahl once asked Milken why he criticized so much and never praised anyone. "There's not enough time in the day to sit around praising each other," Milken sharply replied. "We don't need to talk about our successes. We only need to talk about our failures."

In this atmosphere, what might seem ordinary gestures of kindness elsewhere seemed memorable. Once, when Winnick was getting ready for a rare vacation to Italy, Milken sent him a bon voyage package and a note telling him to have a great trip. When they moved to the Los Angeles area, Milken extended personal loans to nearly all the employees so they could buy nice houses. When Dahl and his wife celebrated their wedding anniversary in Palm Springs, they were greeted with a large bouquet and a card reading, "Happy Anniversary. Mike and Lori." Milken made a hospital visit and offered financial help to the dying brother of a member of the office's support staff.

Trepp was constantly amazed at Milken's obsession with squeezing more profits cut of trades, and frequently had to remind him that securities dealers' guidelines permit only a 5% markup.

Milken's power over the market was so complete that he frequently tried to mark prices up as much as 25%. One of Trepp's responsibilities as head trader was to sign the trading tickets; when Trepp saw what he considered an egregious ticket, he bounced it back to Milken. But at times, Milken did the trades anyway and someone else forged Trepp's initials; he doesn't know who.

On at least four occasions, Trepp threatened to quit over what he considered serious trading improprieties. He had loud fights with Milken, and in each case, Milken backed down. Milken never fired anyone. He was obsessed with the notion that anyone who left would reveal his secrets, the scope and success of his money-making activities.

The pressure took its toll, in varying degrees. Peter Ackerman was hired initially as a trader, but Milken's relentless criticism reduced him on one occasion to tears. Ackerman quit trading, and focused increasingly on cultivating clients, functioning more as an investment banker for Milken. He became so sycophantic toward Milken that others resented him. His nickname was "the Sniff," because, in the words of a colleague, "his nose was always up Mike's ass."

Trepp began smoking four packs of cigarettes a day. Another trader took to chewing rubber bands; another developed a serious drinking problem. Bruce Newberg, deemed a brilliant technician by many in the office, had to start taking blood pressure medication. One day Newberg started raving hysterically when his phone line went dead during an important conversation with a client. It turned out that he had chewed through the phone cord.

Winnick developed a reputation as the office hypochondriac, sometimes checking himself into the Scripps Institute in San Diego because he thought he had brain tumors and other serious ailments.

In perhaps the saddest case, Cary Maultasch developed serious psychological problems and had to see a psychiatrist. Milken allowed him to move back to New York, where he became Milken's liaison with Drexel's headquarters -- in effect, a Milken mole. Maultasch continued to handle trading for Milken; at the end of each day he shredded the records on Milken's orders so no one in New York would see the details of Milken's operation.

Milken didn't like the time his traders and salespeople spent trading for their own accounts. This was a major reason that the office formed various investment partnerships to take advantage of investment opportunities Milken encountered. He banned personal trading, but allowed each employee to invest up to an allocated amount in the partnerships. Within the office, employees could rank themselves on the "A" team or "B" team depending on the size of their partnership allocation. Some favored employees, such as Ackerman, even received partnership interests as part of their compensation. In some cases, Milken made large personal loans to employees so they could afford to invest the full amount of their allocation.

Soon after Dahl's arrival in California, Milken invited him to his home in Encino, where Milken took a rare break and lounged with Dahl by the pool. Milken told Dahl that the partnerships would make him rich. But he warned him not to live lavishly, and told him he shouldn't buy a large house, at least not yet. He said there would be plenty of time and money to do that later.

Such promises had to be accepted at face value, since access to partnership information was tightly restricted. No one knew in advance where the money would be invested. The office's computer runs were altered so that no one but Milken was privy to the partnership trading activity.

The compensation for all of this, of course, was money. While their incomes had hardly reached the stratospheric levels they would in the mid-eighties, the Drexel employees in Los Angeles were earning five times what most of their counterparts earned on Wall Street. Dahl, for example, topped $1 million in only his second year in Los Angeles. Milken himself, though no one knew it at the time, earned a staggering $45 million in 1982.

In keeping with Milken's admonitions, however, there was little to suggest to anyone outside the office that such riches were being earned. Although Trepp bought a white Rolls Royce Corniche convertible, Milken didn't want him to drive it to the office. Milken himself lived comparatively modestly. His wife wore the same simple black velvet dress to the Christmas party every year. Milken drove a slightly battered yellow Mercedes; he sold it to Dahl when it had 80,000 miles. When Armand Hammer, the famed industrialist who became one of Milken's and Drexel's most important clients, visited the office, Milken served him coffee in a Styrofoam cup. Decorations in the office consisted of some framed Olympics posters.

Milken, by his own design, made no impression whatsoever in the Hollywood social orbit or even business and professional circles. His reading consisted almost exclusively of research reports, prospectuses, and other financial documents. Milken struck his colleagues as remarkably unworldly, knowing little about art, literature, politics, or even current events outside of his immediate concerns.

Winnick, Dahl, and some of the other traders had read a Robert Ludlum thriller, The Matarese Circle, published in 1979. They were struck by Milken's resemblance to one of the main characters. The book is classic Ludlum, a wildly improbable but suspenseful tale of world conquest through multinational corporations. At the center of this conspiracy is a brilliant, driven financier, fixated on his vision of world control. His name is Guiderone, but he is known throughout the book as "the shepherd," because he was born a Corsican shepherd. His followers are so loyal they willingly sacrifice their lives to carry out his vision of world conquest.

"I've heard of him," says one of the book's characters. "A modern-day Carnegie or Rockefeller, isn't he?"

"More. Much more," replies another. "The Geneens, the Lucases, the Bluedhorns [sic], the wonderboys of Detroit and Wall Street, none of them can touch Guiderone. He's the last of the vanishing giants, a really benign monarch of industry and finance....I suppose you could call it the definitive story of the American dream."

Milken's disciples in Beverly Hills began referring to him as "the Shep," and the nickname stuck. Winnick gave Milken a copy of Ludlum's thriller, curious to see how Milken would react, whether he would see any resemblance in himself to the book's central character. But so far as he could tell, Milken never read it.

For many of the Beverly Hills employees, life in the office took a turn for the worse when Milken's younger brother, Lowell, joined the operation in 1979. Lowell, a lawyer, had been a partner in the Los Angeles law firm Irell and Manella, where he specialized in tax law. Milken had a relationship with his younger brother that was both intensely competitive -- he seemed obsessed with beating him in tennis -- and highly protective. Lowell was brought in, colleagues say, to relieve Milken from overseeing all the partnership activity and to handle tax issues. Others in the operation were struck that Milken would only trust a member of his immediate family for such a task.

Lowell seemed as driven as his brother, but he never showed flashes of warmth as Milken sometimes did. He had a lawyerly mind that struck the freewheeling traders as cold and anal. Lowell did little to mix with others. He installed a separate door in his office so that he didn't even have to walk through the trading floor. His office was grandiose by Drexel standards, with custom wood paneling and expensive art. If someone other than Milken walked into his office, Lowell would conspicuously turn the papers on his desk face down. Some of the traders would mockingly do the same whenever Lowell walked near their desks. In a typically crude stab at humor, they would also grab their crotches when Lowell's back was turned, imitating one of Lowell's nervous gestures.

Never one to miss a profit opportunity, Lowell helped arrange a move of Drexel's West Coast office from the Century City complex to Beverly Hills -- into a building owned by Lowell and Milken on Wilshire Boulevard just off Rodeo Drive. It was a shrewd investment. Drexel rented the space from them, bestowing lucrative tax advantages in the process. And the location was almost certain to appreciate in value. Just down the street from the elegant Beverly Wilshire Hotel, it was also just around the corner from chic boutiques like Giorgio and Bijan.

But the interior of Drexel's building could have been miles away from the glitz and glamour, as far as Milken was concerned. Here Milken had installed a large X-shaped trading desk. He sat at the center, within easy range of his growing number of lieutenants arrayed along the four branches of the X. The desk was equipped with the latest high-tech communications and trading data, but the office decor remained spartan. Only the address -- 9560 Wilshire Boulevard, Beverly Hills -- had cachet.

After Lowell arrived, he distributed sealed white envelopes to about a dozen employees. In them were loan statements, citing the amount Milken had loaned them for their houses, the accumulated interest, and a demand for immediate repayment. From then on, Lowell was viewed as Milken's hatchet man. Others in the office traded malicious stories about Lowell, including accounts of his relationship with his wife.

One afternoon in 1981, Milken was at work at the trading desk when he fainted and keeled over. Trepp, Dahl, Winnick, and others near him were horrified, fearful that their meal ticket had suffered a heart attack. They immediately shouted for Lowell. Lowell emerged from his office, looked at the unconscious and prostrate Milken, then turned around and went back into his office, closing the door without saying a word. The traders were dumbfounded. Milken soon revived, suffering no long-term effects from the mysterious incident.

Whatever the tensions, however, they seemed minor compared to the money being generated by the Milken operation. Milken made it a point to ensure that every employee made more money each year than he or she had the year before. By and large, Milken's people found something they genuinely liked about Milken.

Curiously, given how driven most of them were to earn large sums, it was clear to them that money alone held little interest for Milken; it was what that money could do. One day, chatting with Winnick, Milken said that one of his dreams was to boost his net worth by a factor of ten, from $3 billion, say, to $30 billion. Then, turning to the sweeping view from Century City across western Los Angeles toward the Pacific Ocean, he asked, "What do you think it'd cost to buy every building from here to the ocean?"

Milken might have realized those goals simply by continuing his lucrative dominance of secondary issues and new junk-bond issues. In Los Angeles, he had assembled a network of junk-bond customers that dwarfed his earlier sources in New York. Among the closest to him was Thomas Spiegel, the head of Columbia Savings and Loan. Spiegel venerated Milken. He worked the same arduous hours, and his office walls soon had numerous photos of Milken and his wife, posing with Spiegel at restaurants, at parties.

Charles Keating, the head of burgeoning Lincoln Savings and Loan, was another key link. Keating and Milken often discussed their families, and reinforced the importance each placed on family connections as the only true bonds in life.

But the closest of all was probably Fred Carr, the head of Executive Life Insurance Co. Carr was smart, one of the first to embrace Milken's theory of junk-bond opportunities, and an early and enthusiastic backer. To the amazement of others in the office, Milken would examine copies of Carr's and Drexel's portfolios every Friday afternoon, then, without consulting Carr, freely trade positions between the two accounts. By contrast, Milken made no secret of the fact that he thought Charlie Knapp, head of Financial Corporation of America, was a "moron."

Milken wasn't content with simply assembling the awesome buying power that large savings and loans and insurance companies offered, especially now that federal deregulation had opened up so many new opportunities in the savings and loan business. Junk bonds, in and of themselves, were enormously lucrative. But they could be harnessed to an even more potent force. Milken could see clearly what was beginning to happen on the American financial landscape. He heard about it from clients like Carl Lindner and Saul Steinberg. The big money was in the struggle for corporate control, in mergers and acquisitions and, increasingly, in a variation that seemed even more promising to Milken: the leveraged buyout, in which a public company' was taken private. With corporate control went power.

It was clearly just a matter of time before Milken, having quietly nurtured his financing network into a huge money-spewing engine, burst upon the takeover scene. Then, Milken often told Trepp, there would be no deal that he couldn't do, no company so big that it need not fear his power. "We're going to tee-up GM, Ford, and IBM," he told Trepp in tones of almost grim determination. "And make them cringe."

Copyright © 1991, 1992 by James B. Stewart

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  • Anonymous

    Posted June 23, 2013

    Direwolf

    "Isn't it great?" She asks. The den was small, but still quite spacious. There was a large bed made or pelts and moss, a small pool of water in the back.

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  • Anonymous

    Posted February 23, 2006

    Gripping Insider Account

    This classic account of insider trading during the greed decade remains as riveting today as the day it was published. Prize-winning journalist James B. Stewart manages to turn an account of the arcane market manipulation that led to the 1987 crash into a page-turner with all the suspense of a detective novel. And while the main villains here - Michael Milken and Ivan Boesky - have faded off the public radar, their philosophical descendants at Enron, Tyco and Adelphia remind investors that greed and market manipulation will never go out of style. Stewart¿s richly detailed book is must reading for those who trust their careers or their savings to the markets. We recommend this withering account of over-the-top greed to anyone who works or invests on Wall Street.

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  • Anonymous

    Posted August 26, 2003

    Greed is constant, only the names change

    Two interesting themes run through Stewart's book. One is that greed and corruption ran riot in the 1980s, only to get caught in the law-enforcement net. Yet the book's hopeful 'crime doesn't pay' message does not mesh with the 1990s, when greed and corruption reached even higher levels. The second theme is about what lesson was learned from Milken's escapades. Stewart tries to argue that Wall Street got carried away, but then how to explain the '90s? The real lesson learned on Wall Street is that sometimes an employee is TBTF - Too Big To Fire. Milken's power within Drexel was so great that CEO Fred Joseph could not save the firm from bankruptcy once Milken's crimes came under scrutiny. To fire Milken would have destroyed the firm because Milken's allies at Drexel were so powerful. To defend Milken compromised the firm and thus sowed the seeds of its destruction as well. The message to CEO's in America was: no subordinate should be TBTF. Only the CEO should be TBTF. Underlings like Fastow, Sullivan, Grubman, Blodget and Quattrone were quickly thrown overboard. One can only hope that when the scandals of the late '90s have played out that Skilling, Lay, Ebbers et. al. end up behind bars.

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