Speaker 1I asked them, did they go into finance to change the world? And if this was the 1970s, I would tell you that one in four would have told me they went into finance to change the world. When I speak to the incoming classes at various financial institutions, maybe 1% go into finance to change the world. Hi everybody, I'm Nikolaj
Speaker 2Tangen, the CEO of the Norwegian Southern Wealth Fund. And today, my guest changed how the world raises money. Mike Milken built the high-yield bond market, always from nothing, seeing value where other people saw only risk. And today, whole industries exist because of it. Cable, mobile, media. And many of the biggest names in finance learned the business from him. He also survived a cancer. He was told it would kill him. He's given away fortunes to medical research and education. And last year, he opened a center in Washington devoted to the American dream. Mike, a warm welcome. Thank you. Great to see you. Now, Mike, how did you come across the high-yield market?
Speaker 1Well, it wasn't by accident. There was an event that occurred on August 11, 1965 in America. And Los Angeles became called the Watts Riots. I was back from college at Berkeley, and I was in Los Angeles. And I went down the next day to try to figure out what was going on. And I met a young African-American man who told me he wouldn't have access to capital because of the color of his skin. How old were you then? I was 19 years old. And I couldn't really understand why people could possibly be denied access to capital. Because of the color of their skin. But meeting this one man changed my life. And I went back to Berkeley. And I began to study credit, credit for hundreds of years. And what I discovered was that every one thing that people said about credit was wrong.
Speaker 2And what did they say at the time?
Speaker 1They thought countries were the best credit. And then they thought individuals were the next best credit. And then they thought companies. And they thought. Companies that weren't, quote, investment grade were too risky. But 99.99% of every company in the world is non-investment grade.
Speaker 2So what did it mean? What was the truth?
Speaker 1The truth was there was research that was done. I might have been the only one that ever reviewed that research when it came out. And as a student at Berkeley, I had access to it. Or anyone else could have searched these books. And it showed that during the worldwide depression of the 30s, that the highest rate of return was the lower quality of the debt you bought. In other words, the risk premiums were too large. So adjusted for risk, you got a higher rate of return. It also showed that the worst credit in history was sovereign debt. That was considered the best credit. And back then, you didn't. You didn't even have to put up reserves if you bought sovereign debt. Because it was considered riskless. And most countries were rated AAA regardless of what the facts were. Venezuela was rated AAA with 30% unemployment. So whether it was the Secretary of the Treasury or whether it was a person at the Fed, they were saying things that were just factually not accurate.
Speaker 2So Mike, when you then started at Drexel, what did you do with this wisdom?
Speaker 1Well, I first started as a consultant. How do you change people's views when they know they're just right? And you generally don't, whether I'm working in education or healthcare or other issues, you don't change your views by raising your voice. And there was a book published by a friend of mine a long time ago called Factfulness. And he, in fact, passed away shortly before the book was published by his daughter and son-in-law. But he developed this technique that, he would ask questions. And so simple, multiple choice questions. And you wouldn't be embarrassed by raising your hand or turning in your answers, but you could discover the answers yourself when they were made available. And now start to wonder, why do you believe this when the facts are different? And so over the years, we've probably prepared 100,000 slides and questions to give to people on different things and let them have self-discovery. But back there in the early 1970s, it required a great deal of travel, visits. With my own firm, I prepared a test where I took all the stocks they were recommending and all the stocks they were recommending selling. Back in the early 70s, you were allowed to put out sell recommendations. Today, there's a lot of pressure of not putting them out. So, and they discovered that. The debt of companies they were recommending to buy was non-investment grade. And the debt of companies they were recommending to sell was investment grade. And then I quietly reminded them that the debt is senior to the equity. So if they like the equity of these companies, maybe they should look at the debt. So there were a number of efforts over a four to five year period of time to get people to see the world differently. But the major, the big event that occurred, which I often referred to as the most important period since the depression for financial markets occurred in 1974. When the stock market went down 50%, interest rates doubled. There were credit controls that you could not loan money to new customers placed on the banks. And so it was a period of time where companies decided that they couldn't be dependent on financial institutions themselves. That their health in order to run their business. And as we came out of this period of time, you made 100% on your money buying straight non-investment grade debt by the end of 74 through 76. So those that didn't believe now had a wake up call because of what occurred during this period of time.
Speaker 2What were some of the first issuance of high yield bonds that you did?
Speaker 1Well, most high yield bonds were, really owned by insurance companies in the fifties and sixties. Their ratings, their internal ratings were substantially higher than the market. And as we started issuing debt in the mid 1970s, many of the insurance companies would call me up and asked me not to do this because a bond would be rated double B or single B that they had as triple B or single A on their books. And now what they considered investment grade was not. But in the seventies, I think it was the energy industry. It was the beginning of biotech. Eventually that led to creation of the cable industry. Home building went through booms and busts. So as rates went up, they'd get in trouble. As rates went down, they would boom. And so putting permanent capital into home builders allowed them to exist. Other industries were the hospitality industry. The whole casino industry was born. In the early seventies, my own firm would not allow me to raise money for this industry. By the late eighties, the second most admired company in America was a company called Mirage Casino. The element of providing money to telecommunications in the seventies, there was enormous peer pressure not to provide capital to new businesses because AT&T, the largest company in the world at the time, rated triple A, was also the largest payer of fees. And so as a result, if you financed an MCI, you would be cut off by AT&T. People don't realize a long distance phone call in the 1970s was $10 a minute. MCI's success in financing them reduced that by 75%. And for most young people today, if they're on WhatsApp, it's free. So the tremendous, dramatic change in what occurred in cable, telecommunications, cellular, none of these companies would have been receiving financing in the sixties or early seventies. And so it really began in the mid seventies. And when you look, if I look at the United States, more than 60 million jobs were created in the last 30 years of the 20th century by non investment grade companies and minus 4 million jobs, were created by investment grade companies. And so if you want to create prosperity and I wrote down this little formula in September of 65, which essentially was that access to capital financial technology served as a multiplier on the world's largest asset, human capital world, second largest asset, social capital and world's asset that you find on a balance sheet, real assets. But if you didn't have access, All those ideas. of what mobile could be, or what AI could be, all require significant investment and someone believing in the future and those ideas.
Speaker 2Now, you backed founders who subsequently became legends, you know, Malone, Turner, Murdoch, and so on. What do these people have in common?
Speaker 1My view was the most important asset of the company was the people. And I think people were infatuated by balance sheets. So understanding the vision of an individual, their passion. I spent time with a man named Gary Becker, who won a Nobel Prize for the concept of human capital. It is estimated, if I took just the United States, that the value of human and social capital is more than $2,000 trillion. The financial assets of the country are around $300 trillion. So the human capital is six or seven times minimum what all the financial assets are worth. The GDP of America is around $30 trillion. So the human capital is, say, 60 times. And so whether it's the work in medical research that I began in the early 70s or education, I always focused on the individuals and the same thing in financing, companies, and so on. And I think that's the most important thing.
Speaker 2The idea that you have traveled far beyond where you started. So now royalty stream, music rights, baseball teams, all these kinds of things are financed in this way. What has surprised you most with the development since?
Speaker 1I'm not sure anything has surprised me. You know, you have to remember there were thousands of people that worked with me who have spread out to hundreds of financial firms. We spent all those years together. They got their PAs, their PhDs with us together. But I really had six goals, which I set out in the 1960s. One of those was securitization to spread risk. And so very few people who get a car loan or a mortgage or credit cards really understand that their rate that they're borrowing at is actually substantially cheaper because all of these are securitized with hundreds or thousands of dollars. Thousands or millions of others. And the risk is spread. And so a portfolio, whether it was bonds or credit card loans or auto loans or home loans or athletic teams, reduces risk through geographic distribution, through distribution among different types of people. It's hard to discriminate in making a mortgage loan if you don't even know who you made a mortgage to that's been securitized. And so it takes out a lot of the biased insecurities. I would say if you want to talk about sports teams, what surprised me here is in order to survive traditional media today, television, cable, is highly dependent on sports. There is risk to historical media today. If those sports or other events are taken off what we think of as traditional television, their viewership will plummet and they will become whether they can survive or not is in question. And so you might notice that one of those few events in the United States that has high viewership is something called the Academy Awards. Well, beginning in 2029, YouTube will be broadcasting the Academy Awards. And so understanding these dramatic changes that have occurred, it's always new industries are always considered to be risky. In industries of the past, people underestimate the risk.
Speaker 2Mike, Drexel was very successful. And after Drexel, a lot of the people who worked there with you have gone on to start up Apollo, Ares is the CEO of Goldman's and so on. So what was it that they took away from Drexel that made them so successful?
Speaker 1I think in a belief of first financing the people and the idea, do you have confidence in them? Do you have confidence in the idea? Then realizing that your decision makes a difference. So you can see here, Apollo has been a leader in loaning money to SoftBank for their AI investments today. And so finance is important to society, to creating jobs. And so there's a link in a belief. Whoever makes a decision today to loan money to say Microsoft doesn't really make a difference. There's tens of thousands of organizations that will loan money to Microsoft. But what about the new idea? What about the entrepreneur? And so- But who did you-
Speaker 2Who did you hire? What kind of people did you hire? What were you looking for when you hired?
Speaker 1It was interesting. And so when you ask me that question, it's something I really reflect on today. When I speak to the incoming classes at various financial institutions, maybe one, two, three, four, five, 10% go into finance to change the world. Why has it changed so much, you think? Well, the enormous increase in valuations of financial institutions and money managers over the last few years and the payment of people working in this field, the considerable compensation has caused people to gravitate to work in finance who didn't maybe want to work in finance to change the world, but wanted to go into finance to make money. I maybe was involved with the financing of 3,000 companies. Only one CEO ever told me he was in it for the money. I think many of them might have been, but if they told me they were in it for the money, I wouldn't have provided capital to them.
Speaker 2Were you in it for the money?
Speaker 1No. I was in it because of this young African-American man I met who told me he wouldn't have access to capital because of the color of his skin or other minorities or women. It's interesting, when I financed the first woman to buy an S&P 500 company, it was now the mid-1980s, I got hate mail. How could you possibly do that? Mid-80s in America. And when I financed Reg Lewis, the first African-American, with $1 billion in the mid-80s, I got death threats. So people don't realize, what the world was like 40 years ago from that standpoint. And so my view was, there's not going to be a good life for my grandchildren if there aren't people providing capital, not only for cellular or mobile or et cetera, but particularly for medical research and healthcare. People talk a lot about economics, but if you really study, more than 50% of all economic growth in the world has come from advances in healthcare and public health. More than 50%.
Speaker 2When you look at financial markets today, what do you think when you look at the credit market?
Speaker 1Today, I don't believe financial institutions have done a really good job of explaining their role in society. And due to the tremendous increase in prices and affordability, the majority of the people today question the financial system or the people in that system. I remember during the financial crisis that the CEO of Goldman announced, aren't we doing God's work? Isn't this our role to finance? And he was attacked. The same thing occurred in 1994 when the CEO of Amgen, a company I'm close to, announced, aren't we doing God's work when you went from the financial system to the financial system? And I remember that. And I remember that. And I remember that. And I remember that. And I remember that. And I remember that. And I the most admired industry in the country to a piranha charging too much for your pharmaceutical products. So I think one of the lessons that I had learned today was you really needed to have a better understanding of financial literacy and a better understanding of the role. And I feel today, the majority of the population does not understand the importance of access to capital. So I think one of the lessons that I had learned today was you really need to have a better understanding of the role of people financing new businesses and new ideas, particularly in science and bioscience, or just how important the fund that you're ahead of is, is to your country's future and to the people.
Speaker 2When you look at the combination of private credits, which is where you see some losses coming up, technology companies, which are issuing more debt, government debt, you know, very high rates. How do you interpret this cocktail?
Speaker 1Well, private credit is really not much different than public non-investment grade debt. For financial firms, it's kind of a throwback to the 1950s and 60s, where the insurance companies were the largest lenders. The positive part of it is the investors, 95% to 99% are long-term investors. What you're seeing here in the redemption of the major money managers, where they have individuals who are redeeming and on a quarterly basis is a very small percentage of their assets. It might be 1%. But the best issue here is to get long-term commitments in the hands where your investors are long-term investors, pension funds, insurance companies. So it's somewhat of a throwback to the 1960s and early 70s today. And there is credit risk, which is why there's a spread. And the credit risk historically has been very low. If you look at the financial crisis of 07 to 10, the major losses on that period of time were in investment grade securities, not non-investment grade securities, particularly real estate backed securities. That were perceived to be AAA or AA or single A, but weren't, and had risk associated with them. So there's risk in all forms of assets. And are you building in a reserve for credit risk, which you need to build in? So private credit to me is really no different than public credit. For the money manager, they get to charge you more money to manage your money. If you're in private credit, maybe three to five times as much. So they have an incentive. One of the greatest risk in financial markets is mismatch of maturities and investments. So in the United States, we had two great financial franchises. One was Silicon Valley Bank, and one was Republic Bank that both had defined part of the market. They both failed, not because of the value of their assets in a credit sense, but a dramatic increase in interest rates. And they owned US government securities, but they were financing them in overnight or short-term assets. So they were losing considerable money. And a great company like Schwab saw its stock go down 40% because they discovered they had also bought intermediate US government securities and were now losing billions a year over the increase in interest rates. And so one of the keys to the strength of financial markets is to make sure, one, you can provide capital to businesses over a long period of time, so they don't have to worry about variations in interest rates. But two, that the owners of that debt have long-term liabilities, but are not being financed with certificates of positive interest, or short-term liabilities, so that they can weather volatility of interest rates. In the 1980s particularly, in the 1970s, the volatility of interest rates was one of the major causes of financial failure due to the fact that people had short-term liabilities and bought long-term assets and interest rates went up. So when I look at financial markets today, first thing when I look at it, the first thing I look at is the long-term assets and interest rates. The second thing I look at is the companies that hold or the organizations that hold these assets, do they have the capital tied up at a fixed rate for a long period of time? So that lets me understand the potential things that could go wrong. Number two, I look at the major movement of assets. So for more than 100 years, maybe for more than 150 years, the major movement of human capital was the capital. And so I look at the major movement of human capital, which is the United States. But then in 2023 or 2024, the number one destination for millionaires in the world was the UAE. US was second, Singapore was third. And so when I look at Europe today and the continual movement of entrepreneurs and wealthy individuals to Greece or Italy, UK losing considerable or the UAE. And so I look at the major movement of entrepreneurs and wealthy individuals to Greece or Italy, UK losing considerable or the UAE. And for more than Europe, the movement, you wonder, are the new companies of the future going to be based in those countries? Are they going to be born? Are they going to create in the United States the same thing as being created with people leaving California for Texas or Florida or Nevada or Tennessee? Palantir, Alex Karp not only moved from California, but he moved the headquarters of Palantir to Florida. So do these cause shifts in job creation? Elon Musk leaving California has not only cost California 10 or 20 billion already, maybe 100 billion over time, but his dramatic expansion in Texas, all those employees in Texas who are now millionaires due to SpaceX, more of these activities might have occurred in California, but they're now occurring in Texas.
Speaker 2Mike, the American dream. Last September, you opened a center devoted to the American dream, basically just across from the White House. What is this about?
Speaker 1In 2005, I became concerned about the future of the United States. I felt up until maybe 15 years ago that you could pay off the debt of the United States due to the social capital of the country and that wealthy individuals from all over the world would want to go to the United States and would be willing to pay millions of dollars for a green car that allowed them to stay in the United States and not pay taxes on their foreign earnings. The same thing that Italy and Greece offer today. But if we hurt this social capital, if we hurt the views that this is the best place for an entrepreneur to move, it would change the ability of people to want to come to the United States and the best and brightest might stay in a different country or go to a different country. When you look at the most valuable companies in the world today, the 20 most valuable companies in the world, there's a couple of them in Korea. There's another one in Taiwan, but almost every one of them is in the United States. And I think that's a good thing. I think every single other one is in the United States.
Speaker 2So what is the goal for the center?
Speaker 1The goal is essentially that we will be a beacon of hope for the one third of the population that feels they'll never achieve their Norwegian dream or South African dream or American dream. And that dream is a dream of upward mobility to achieve your fullest potential regardless of who your parents were, your religion, your race, whether you're a man or a woman or where you went to school. And so we are telling 10,000 stories of individuals and no matter what you feel your disabilities are or challenges in your life, there are others in the world that have faced those same challenges and found out a way to rise above them.
Speaker 2You have also funded a lot of efforts with within pharma and medical research. What are your main areas of focus here?
Speaker 1I think just like this young African-American man I met in 1965 by chance, I lost 10 members of my family to cancer. And so by the early 1970s, I fully accepted the fact that and studied that the main major growth of the world's economy was the extension of life. The average life expectancy in 1900 on the planet was 31 years of age. In 4 million years of evolution, we extended average life expectancy 11 years. Today, it's mid 70s. So we have extended life expanded life spans in the last 120 years by more than 40 years. And so the PR and it's not only that but we have extended life spans in the last 120 years by more than 40 years. And so the PR and it's not only that longer, you live healthier. And so therefore we've invested both philanthropically and we've invested in for-profit businesses in this area. For a period of time, the most valuable company in Europe was Nova Nordis. Today, it's a technology companies, which is the most valuable by far. But people don't really fully understand the importance of medical research and breakthroughs. The major causes of death at the start of the 20th century, were eliminated heavily by antibiotics and other types of developments that weren't the major causes of death. And major causes of death in the Western world of heart disease or cancer are being effectively, and hopefully in the next decade or two, these, the side effects of these two, heart disease and cancer, will be substantially reduced due to new developments.
Speaker 2You just turned 80 yourself. Where does your motivation come from now? Because you seem to be as hardworking as ever before.
Speaker 1I have grandchildren. Are they going to have the same opportunities I had when they grow up? So I would say to you, 97% of my efforts are really focused on what is the world, my grandchildren are going to be born in. And I remember when I was seven or eight years old, my father told me that my children, his grandchildren, would not have an opportunity unless everyone felt they had a chance. Not that they succeeded, but everyone felt they had a chance to succeed. And I think that's what drives me today. And whether it's an education today, or whether it's. Whether it's in healthcare, or whether it's finding new entrepreneurs, or whether it's in financial literacy, each of those four are the four pillars of the center in Washington. But they're also the four pillars of my life and my focus today. But I'm trying to see the world through the eyes of my grandchildren today.
Speaker 2It's interesting. I bumped into Tony Ressler the other day, who started ARIS, and he worked with you at Drexel. And he said it was impossible to outwork you, because if he came in at five, you were there at 4.30. If he came 4.30, you were there at four. And I've been observing you too, when we are at the Giving Pledge, because you sit on the front row, and you have this big canvas bag of research. And you are, at the same time as you are listening to the lectures, you are plowing through all this research. So this kind of work ethics, where did it all come from?
Speaker 1I think it started when I was very, very young. My favorite book as a little kid was, I'm sure, different than almost any other little kid. It was The Almanac. Today, you don't need an almanac, because you have the internet. But back then, I couldn't wait for the new almanac. So I could look at changes, trends, what was happening, et cetera, based on facts. And so I think from a very young age, I discovered and sent you are the head of one of the largest funds in the world. I remember it was the early 1970s, might have been 70 itself. I went to a sporting event. This was a New York Knick basketball game with the head of one of the major financial institutions. And I was trying to convince him of how attractive this non-investment grade debt was at the time. And so we were sitting there watching the game and I was constantly trying to hit him with facts, et cetera. And by the end of the third quarter in a four quarter game, he told me, I'll tell you what, just don't talk to me about it anymore. If the Knicks win, I'll buy it. And if the Knicks lose, I won't. So it made me think here, no matter how powerful my presentation was 56 years ago, how his sporting team did was when he was going to make his decision. And it made me go back and think I have to find a different way to present facts. And that's when I shifted to asking people questions and letting them answer themselves in self-discovery.
Speaker 2So my last question to you, Mike, is just what is your advice to young people?
Speaker 1My advice to young people is the most valuable thing they can do is education. And curiosity. That when they wonder why people are saying things, go and discover. Are they right? Are they wrong? But that curiosity is not tied into your age. You can have curiosity at a hundred years of age, I hope, not just 80. And young people, many of them don't have that curiosity. But if you don't have the knowledge today in the world, you're at an enormous disadvantage. And if you don't have curiosity, you're at an enormous disadvantage. And if you don't have curiosity, to try to constantly discover new things, you will often be stuck in the past and won't be a part of the future.
Speaker 2Well, Mike, you for sure have a lot of curiosity at 80. Big thanks for taking the time. It's been a true pleasure.
Speaker 1Well, thank you.
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