Pod Insights Capital Allocators Top 5 of 2024: #2: Michael Milken - EP.371 About this episode We're counting down the top 5 episodes of 2024.
Clocking in at number two is Mike Milken, Episode 3 71. Mike single-handedly developed the high yield market, which has fueled the growth of private equity ever since. When paired with the subsequent episode with his longtime attorney, Richard Sandler, the conversations offer a fresh perspective on Mike's legacy.
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0:00 Ted Seides? We're counting down the top five episodes of 2024 and are down to number two. Clocking in at number two is Mike Milken, episode 371. Mike single-handedly developed the high-yield market, which has fueled the growth of private equity ever since. When paired with the subsequent episode with his longtime attorney, Richard Sandler, the conversations offer a fresh perspective on Mike's legacy. Please enjoy this replay of my conversation with Mike Milken.
0:34 Speaker 01 Before we get going, we have some exciting news at Capital Allocators. We're hiring. We are looking for a head of business development to really lead all relationship building efforts with you, our community, the followers in the institutional investment space. The role will involve all aspects of external facing engagements. That's our gatherings, whether it's our summits or our universities, from planning to leading correspondence with managers and allocators, to marketing the events that have open registration, to hosting. The role will also collaborate with existing sponsors and establish new sponsor relationships. And then the role will take on any new initiatives that arise. We're always experimenting with new things and we anticipate this
1:17 Speaker 01 person being a leader in those new initiatives. Ideal candidates are someone with five to 10 years of experience in financial services or investment management, especially in client-facing roles. That could be investor relations, gap intro, maybe it's software sales, institutional investors. Really, what's most important is that this person is passionate about our mission of bridging knowledge gaps and making valuable connections for institutional investors. And without question, they are a fan of the podcast. The job spec is in the show notes if you're interested in learning more and applying. It's also on our website at capitalallocators.com/about. That's capitalallocators.com/about. Scroll all the way to the bottom of the page. Thanks so much for spreading the word about Capital Allocators and our Head of Business Development job opening.
2:08 Ted Seides? Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.
2:33 Speaker 02 All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.
2:54 Ted Seides? My guest on today's show is Michael Milken, legendary financier and philanthropist. Mike is best known for his role in creating the high-yield bond market in the 1970s and 80s at Drexel Burnham Lambert, his plea in a controversial prosecution, and his remarkable philanthropic efforts over 50 years supporting medical research, education, and public health. Under Mike's leadership, Upstart Drexel became the most successful securities firm on Wall Street, enabled capital to become available for the 99% of companies that could not previously access the public markets, and turned into the greatest breeding ground for talent in the industry.
3:36 Ted Seides? Approximately 70 investment firms are headed by leaders who worked for Mike, including founders and leaders at Apollo, Ares, Blackstone, Canyon, Cerberus, Crescent, Golden Tree, Goldman Sachs, Jefferies, Leonard Green, and Molus. Our conversation begins with Mike's childhood and his early interest in democratizing access to capital. We discuss his career goals, the importance of capital structure, and his perspectives on markets today. We then turn to Mike's long history of philanthropic work to improve education and advance medical research, as described in his book, Faster Cures: Accelerating the Future of Health.
4:19 Ted Seides? I should note that we do not discuss Mike's legal controversy post-Drexel or his pardon in 2020. However, next week, Mike's longtime personal attorney, Richard Sandler, will join me to discuss just that. Please enjoy. My conversation with Michael Milken. Michael, thanks so much for joining me.
4:42 Speaker 03 It's great to be with you.
4:44 Ted Seides? I'd love you to take me all the way back to your childhood and would love to hear what really captured your attention when you were a kid.
4:52 Speaker 03 I think knowledge captured my attention a great deal. Facts. My favorite book was the almanac. It gave you all this data and it came once a year and I used to put it under my pillow at night. So after I was supposed to be asleep, I'd often would bring it out with a flashlight and read it. And then when you got two almanacs, you could look at the changes from year to year. And I didn't know that that was the first derivative when I was young, six or seven or eight. And then later, if you got more almanacs, you could look at it over time. And that was the second derivative that you learned about when I was a little
5:34 Speaker 03 older. But I was fascinated about why people had strong opinions. And at my dinner table in my family, we constantly discussed issues and you had to, at a very young age, be able to back them up with facts. And so my parents had these bridge parties once a month at their house and other people's house. And I so look forward to them because in bridge, one player sits out every hand and it gives me a chance to quiz that adult, ask the adult what they believe in, et cetera. And for a while, I got to stay up, starting about
6:13 Speaker 03 eight and got to ask questions of the adults that came over. There were 24 adults or 28 adults. And it was a great opportunity not to share my knowledge, but to see what they believed and what they knew.
6:29 Ted Seides? Where do you think you got that curiosity about those types of facts to interact with adults at that young age?
6:37 Speaker 03 I'm not sure, but I was always the student "why." In elementary school, I was always the one that had his hand up, asking, "Why? Why is that true?" A lot of times, you find in education that your teachers aren't necessarily current on facts, and so you can surprise them. And at a very young age, I had concluded that adults had strong opinions, but very few of them ever did research. And if you asked them, "Where did you hear that?", they would tell you someone else told them, and then someone else, but you couldn't find anyone that actually did research. And that's one of the reasons why rumor start or misinformation occurs.
7:21 Speaker 03 So I used these evenings, yes, I discovered very early that not every adult could tell me every state, or every capital, or the highest mountain. But what I discovered is they had a lot of opinions based on facts that were not accurate. And so my conclusion was, if we could do research and understand facts, we'd have a real opportunity to change things by presenting those facts. Where did that take you in your studies as an undergraduate and graduate student? As a high school student, I had many activities, like all the others, many other kids, athletics, etc. But I was very advanced in math at a very young age.
8:05 Speaker 03 I had written a letter to the president when I was 11 years old, after Sputnik went up to run the space program. My qualifications, never missing a math or science problem at that time, and I really never got a return call. But I would say, I went to Berkeley with the idea that maybe someday I'd run the space program. I had the most Nobel Prize winners in science. Started out with math or physics courses, etc.
8:35 Speaker 03 But shortly after I arrived at Berkeley, there was the free speech movement in November of 1964, so long ago. But my career changed and my interest in undergrad changed with the Watts riots that occurred on August 11, 1965, in Los Angeles. And my opportunity to meet a young African American man who had watched the building he worked in burn down. He was married, had a child, had no savings, and now had no job. And he told me that he would never have access to capital or money to go into business because of the color of his skin. His father never did.
9:17 Speaker 03 And he saw that business as someone else's business, not his business. So I decided to go change my major at Berkeley to finance. It didn't make any sense to me that we weren't loaning money to people based on their ability. And so switched to business at Berkeley and began to study credit, really in September of 65.
9:38 Ted Seides? What was it about credit that led you to dive in and do this independent research?
9:44 Speaker 03 Well, the fact that this individual felt he couldn't borrow money because of the color of his skin was obviously very irrational to me. Gary Becker, who became a very close friend and eventually won a Nobel Prize based on human capital in 1992, many years later, had written this piece in the 1960s on why irrational behavior could be rational as to how people view the world. And so I started studying credit. And as a sophomore, discovered that what everyone said about credit was wrong. And there was a book by Bradford Hitman on long-term corporate bond and investor experience. And
10:28 Speaker 03 The riskiest credits were perceived as the best, and the best credits were perceived as the worst. Whether you were the head of the Federal Reserve, or whether you were a Secretary of the Treasury, or a major money manager, what you were saying was based on incorrect evidence. And this book, which covered every single bond issued from 1900 to 1944 through the Depression, clearly showed that the risk premium was greater than the risk, and even during the Depression. So you can imagine what it's like during good economic times, or non-depressed economic times. It was self-discovery, and that passion
11:10 Speaker 03 has carried me today, almost 60 years later.
11:16 Ted Seides? So as a student, figuring out this original research, you could cry from the rooftops, but I imagine people still looked at you as a student. And I'm curious what you did with that to get to where you got to at Drexel.
11:31 Speaker 03 Well, I first started talking to my professors, and showing them that what they were saying might be incorrect if it was based on data, not what people thought. And I made the decision to go to Wharton for graduate school, primarily because I had the luxury. At Wharton, you could waive courses based on experience. And so I was able to take three majors at Wharton. One was finance, one was operations research, and one was information systems. Shortly after arriving at Wharton, I started working for Drexel as a consultant. One of my professors suggested that I might be able to help the firm. At that time, in the late 1960s,
12:16 Speaker 03 investment banking's brokerage firms were under severe financial trouble because of the physical delivery of a certificate. So you actually had to move it. If you had PAVE in Portland, Oregon, you had to get it from New York to Portland, Oregon. And quite often, you might have something called DK. They didn't know it'd go all the way back to New York, etc. And so eventually, the interest expense...
12:45 Speaker 03 Was exceeding the revenue for firms. And so my agreement with Drexel is I would help solve the delivery problem for them and others with my operations, research and information systems background. And I would be able to go over my research with them. At that time, the firm was the leading research firm headed by Paul Miller and Clay Anderson and Jay Sharid. And so I felt that the fundamental basis of investing was research. And in the 60s, you had fixed commissions. So if you wanted to buy a million dollars' worth of stock, you paid 1%. And the highest paid individuals were salespeople.
13:27 Speaker 03 And so my view was the foundation of the firm was research and we needed to invert the pyramid where research is the foundation of financial investing and advising, then trading, and then if you can trade it and buy it, you can work on selling it. And so Drexel served as a great opportunity since they were a research-based firm, primarily equities at that time. And shortly thereafter, I became the head of fixed income research and then the head of all fixed income at Drexel.
14:00 Ted Seides? So you famously brought this interaction with this one individual who didn't have access to credit into really the genesis of the high-yield markets. I'd love to hear how you were able to do that from scratch.
14:15 Speaker 03 At Berkeley, I'd done my credit work and at Wharton, I had done my capital structure work. So I had set out with really five missions when I went full-time. And I remember writing this letter that other people that were, quote, "validatorians" of their business school class, that many others had chosen different routes, consulting, government, et cetera. But I decided to go to Wall Street because this is where you allocated capital. And so I had set out five goals. One, the democratization of capital. So ten banks couldn't decide whether you could have a business or grow it, but thousands of potential investors.
14:57 Speaker 03 So you had to provide education, knowledge, data, to get thousands of investors involved in it. Two, you had to have the right capital structure. And depending on the industry, the firm, the people, I created this six elements of capital structure. One, understanding the management. Two, the industry. Three, the economy. Four, capital markets. Those are what you study in business school. And you learn the best time to finance is when you don't need money and the worst time to finance is when you need money. And lastly, the two that you really don't learn in school. One is regulation. Because you can put regulations into effect
15:40 Speaker 03 that put any company out of business and any industry out of business. You saw what China has done with their education industry by essentially putting it out of business in the last two to three years, which was a major industry in China. And lastly, society. Does society think what you're doing is of value for society or not of value for society? In the late 1930s, there was work published telling there was a link between smoking and your health and smoking could give you cancer. But by 86, Marlboro was still the most valuable brand in America. And in 89, at one point, Philip Morris, now Altria,
16:23 Speaker 03 was the most valuable company in the world. But shortly thereafter, the data came out and it was widespread and you had whistleblowers relating to smoking and health. And therefore, it was not perceived by the marketplace or investors anymore as a company that was providing value to the markets. And so the second area was how are you going to finance? Your third was essentially to create...
16:51 Speaker 03 A trading market so that you can buy and sell securities. So your willingness in your career to buy something at Yale might have been based on the liquidity of that investment. Often, when you make an investment, you think, what's your exit? So you had to be a market maker. And we eventually made markets in 7,000 different securities. Next, the alignment of management, employees, and shareholders. I would say to you, in the 1960s and 70s, quite often, the utility curve of the CEO did not overlap with the utility curve of shareholders or even their own employees. And as a result, you had this movement
17:36 Speaker 03 that began in the 1970s in private equity, a continues today that has linked them. So that was another. And my last goal was diversification. So if you created a portfolio of dozens or hundreds of securities in a marketplace, you were not necessarily dependent on any one credit. And that became things like CLOs today. And we've securitized credit cards and auto loans, et cetera. So those five goals I had set out in 1970, and all five of them have been achieved by myself and thousands of others today in the marketplace.
18:17 Speaker 03 And I would say you really needed dramatic events to occur. A lot of people, when I made presentations, would say, "That's great," but that wasn't going to convince them. And so, at the end of '74, if you bought a portfolio of non-investment-grade debt, by the end of '76, you made 100% on your money unleveraged.
18:42 Speaker 03 So everyone that you told what they should be doing in January, February, or March of seventy-four that didn't do it, you now had the credibility. Okay, I didn't double my money, I didn't make investments. I was on a panel in nineteen seventy-four at the Institutional Investor Conference with a professor that's very famous today and has ratios that are famous today, and he predicted seven hundred of the two thousand largest companies in America were going to go bankrupt, including states like New York and cities like New York City. And I said, based on history, which I had studied for two hundred years, including the Depression, that was not going to happen.
19:27 Speaker 03 We were on a panel together in seventy-seven, and he pointed out that he had predicted the four major bankruptcies that had occurred between seventy-four and seventy-six. The two of us probably were the only ones in the room in seventy-four and seventy-seven, and he hadn't stated that he predicted seven hundred to get four right. So this period of time changed the views, and the other dramatic thing that changed was something called the nifty fifty. And this is idea that you could buy fifty stocks, they were so great, that you never had to sell them, you could hold them forever. And the average P/E ratio was sixty-six times of these great companies, and many of them
20:12 Speaker 03 were great, like Disney and Walmart, but many of them were Polaroid and Kodak and others. The basis of bank trust investing was buying this nifty fifty. So you would never be fired if you lost money in IBM. Okay, if you made another investment, you could have been irresponsible. Adjusted for inflation, you lost 90% of your money in the next decade. And this led to the growth of money management, Fidelity, and all the other money managers, where people said, "Well, gosh, if I'm losing money with trust banks and it's not safe, I need to find other alternatives."
20:53 Speaker 03 And this caused an explosion in equity mutual funds, debt mutual funds, high-yield convertible securities, et cetera. And so, yes, you could be right on your research, but it takes these events to occur for people not necessarily to believe and invest with you, but to understand what you told them before it happened, when it happened. You don't get any credibility if you told them you said that before, but they never heard it. So I'd say that led the basis. And then, in the late 70s, we began the initial issuance of non-investment-grade debt for both public companies and private companies.
21:31 Ted Seides? As you look forward to today, so much of the private equity market and increasingly private credit is fueled by those same initiatives you started decades ago. I'd love to get your perspective, where you see those types of innovations, and where you see just an extrapolation of what you started long ago?
21:54 Speaker 03 I'd say first, many people try to separate this, but to me, there's no difference between private credit, public credit, term loans, et cetera. 99.5 or something of all the companies in the world are non-investment-grade debt companies. Very few are investment-grade. And therefore, you can imagine my excitement when everyone is focused on 500 companies and I have 10 million to figure out what to do. And for the rating agencies, the past is always AAA, and the future always has risk. You tend to rate older companies higher. We study that in credit.
22:34 Speaker 03 So what I see is really the evolution of the results over a very long period of time here. Going back particularly to the work that I had done in the 60s. So we're 60 years later now. The rates of return have been significant and have exceeded higher rated debt and often equity rates of return. So whether it's private credit, whether it's public credit, whether it's term loans today, you have thousands and thousands of institutions that can make their own credit decisions as to who to invest in. And I would say that hasn't changed. The original work we did on securitization of companies debt
23:18 Speaker 03 had then went to mortgages where I would take thousand mortgages or 100,000 mortgages and securitize them. But that's gone farther than I had planned. Whether it's accounts receivable, financing, whether it's letters of credit. Today, the idea that you can spread risk by having numerous investments that look similar as car loans have or credit card loans have. This is extended to the securitization of, for example, royalty streams, franchise fees, et cetera. Companies and organizations have been able to borrow substantially lower.
24:00 Speaker 03 If you look at one of the greatest purchases in sports, the Los Angeles Dodgers, for example. They were able to securitize the media stream from an investment grade company. In that case, it was Time Warner Cable, today Charter, for the next 30 years that paid whether you played baseball or didn't. And so they were able to discount the cash flow from the media stream from an investment grade credit. And the present value of that exceeded what they paid for the baseball team. So you got the baseball team for close to nothing. But it is this securitization.
24:40 Speaker 03 And the trade off in the credit markets, where you have strong credits or weak credits, where you're borrowing from another credit. In the 74 period, 50 years ago, when they put on credit controls and you couldn't loan money to a company you didn't currently loan it to because of the oil shock and because of inflation. You often found suppliers that were good credits loaning money to the buyer to finance their purchase. You found end users, customers, loaning money to the manufacturers to manufacture the product. The securitization of credit has allowed millions and hundreds of millions of homeowners throughout the world to buy a home.
25:23 Speaker 03 Tens of millions of owners of cars to buy a car versus an individual loan. And so, computers have helped and the technology has helped to do this. But it's allowed people to borrow longer and borrow at lower rates.
25:39 Ted Seides? So alongside of the innovation in financial technology you started long ago, your time at Drexel had a group of people working with you that have become, by a large amount, the leaders in the space today. And if I just run off the founders of Apollo, Aries, Blackstone, Canyon, Crescent, Molus, Richard Handler, CEO, Jefferies, David Solomon at Goldman Sachs. I'd love to hear your perspective on talent. How did you think about assessing talent?
26:11 Speaker 03 Well, I had a number of things I did, but I would stress to you, we had a mission. You felt like you were creating jobs. You were building industries. I remember not one person believed in cellular mobile, not one. It's hard for someone in 2024 to believe that. But if we're talking early 1980s, John Kluge, who we financed, believed in it. Craig McCall believed in it. And many people like Craig, I did not have a relationship with. After he knocked on every door and someone told him they would not loan money against Mobil, I mentioned to him, "Why are you going to a veterinarian if you need brain surgery
26:52 Speaker 03 here?" And so, I would say to you, the mission of financing businesses of the future, of creating opportunities, of identifying people with talent and giving them capital, what's dramatically misunderstood is the importance of your managers, your leaders in businesses. People looking at the numbers often don't understand by far the most valuable asset, and that is the human capital. In 1965, after the Watts riots, I wrote down this formula essentially, that prosperity is financial technology, thousands of different types of financial instruments, serve as
27:36 Speaker 03 a multiplier effect on the world's largest asset, human capital, the world's second largest asset, social capital, and then what you find on a balance sheet, real assets. And the human capital in the United States, if it had to be measured, I would say it would be around 1,500 trillion. So we're talking 60 to 70 times the GDP of the country. And Steve Jobs often wrote early in his career, "It's not the capital you have, and it's not the amount of money you're spending on research, it's the people you have and how you lead them." And IBM was outspending him 50 to 1 at one point.
28:17 Speaker 03 And so, the key, I think, is people, and it's the same on a football team and a basketball team. It's easy to see on a basketball court. I grew up in LA, went to graduate school in Philadelphia, of course, learned to hate the Celtics at a very young age. Philadelphia had maybe more talent, and Lakers had more talent, but Boston always won, and they worked as a team. So, in looking for people, you want to find people that want to play as a team. You also want to find people that know when they have a losing hand and drop out. So, one of the things I liked to do was play cards late at night with people, before we hired them, when they were tired.
29:00 Speaker 03 And then you would egg them on, you know, "I heard you're the greatest trader. Why are you dropping out of this hand?" Now, if they'll let social interaction influence their decisions, then, gosh, we can't afford to have them as a trader. I used to like to drive with people. I often would schedule to go someplace with a person. We were interviewing and we'd drive together. And I would wait till it was so late, you could never get there on time if you went in a straight line. And I wanted to see, do they just get on the road and stay on the road? Or are they trying to find alternative routes to get from point A to point B faster?
29:41 Speaker 03 And so, generally, I did not hire anyone that drove in a straight line and did not change routes or did not drop out of hands when they had no chance of winning. And then I wanted to meet their family. I don't even know if you're allowed to do that today in hiring people. But a lot of times, people can present themselves as someone when you're interviewing them. But if you can go out with their family, go to dinner, meet their kids, et cetera, you can see maybe what type of person they are. And the other thing I wanted to do was make sure a person really wanted this as a career. That they really wanted to serve their clients, to finance industries, businesses,
30:25 Speaker 03 and were willing to make sacrifices of time and things if need be to do that. Not everyone really wants it. They might want it, but they really aren't going to be there at 4:00 or 5:00 in the morning. So, I often, when I interviewed people, would tell them to meet me at 4:00 in the morning or 4:30 in the morning, just to see whether they really wanted it. And I think each of those individuals and thousands of others, I think there's 72 private equity firms now headed by people that work with me. We gave them a PhD in finance, okay? So, they got their PhD in how to build capital structure. What is credit?
31:06 Speaker 03 Not to be influenced by extraneous things that aren't real. Not live by regression analysis. When you go to school and graduate school, a lot of times, you learn regression analysis. What is regression analysis? It tells you the future is going to be like the past. But technology today has so dramatically changed the future that those that are using regression analysis really are not the best performing managers today. And I find today that many, many people are still thinking the future is going to be like the past. The dramatic changes in demographics,
31:49 Speaker 03 I don't think investors have really focused on. So over the last few years, you've had significant weakness in Chinese real estate markets. Now, when should you have started to figure this out? First, the government was fueling the growth of their GDP by funding real estate. But second, they've gone from having 23 to 25 million children born a year to less than 10. So they've had a 60% reduction in the number of children born. And if this continued in the future, they would lose 400 to 600 million people. So you could look at Japan, where two people die for everyone that's born. And you can buy in rural areas today
32:34 Speaker 03 entire towns for 250,000 because the people are gone and the young people want to live in the cities. So if you're building all this real estate and your population is going down every year, eventually you're going to need less real estate. So when do you see that trend? But that started a decade ago. It didn't start two years ago.
32:57 Ted Seides? Once you sussed out some of these important characteristics of the people, their motivation, having the right skills, the right vision that was aligned with yours, how did you get them to join you?
33:10 Speaker 03 If you're on a mission, if you stand for something, a lot of people will join you. You're trying very hard not to hire a person that's going to be a mercenary, that's in it for the money. Now, we probably financed 3,000 different companies. I only had one CEO ever tell me he was in it for the money. Now, many of them might have thought that, but if they told me, they would have thought, well, maybe I wouldn't have financed it. And I think when you look at the people that have built industries, built companies, it was passion. And their rewards were their success. I remember with Craig McCall, I told Craig, when he came to see me, he was really the
33:52 Speaker 03 person that changed the course of mobile in this country. But his family had built radio stations, cable, paging, other industries. And I told him that he's going to have to sell everything his family had done, that this was going to become so capital intensive, less we could leverage, but he would need to have equity, that if he truly believed that mobile was the future, then he essentially, unless he wanted to be diluted to little to no ownership, was going to have to make the decision to bet on mobile and give up what the family had done, which he did.
34:32 Ted Seides? What are some of your other favorite stories of backing entrepreneurs back then?
34:37 Speaker 03 Well, some of the best things you do are things you don't do. People think there's a commonality of interest. So with an investment banking firm, you have a merger and acquisitions department. They get paid when you do a transaction. So often, the people that are the best is getting people to do things, so they can get them to do things. And I would often ask them, have you ever seen a deal you don't like? Okay, you like every deal. Now, they get paid upfront. Our clients, our investors, get paid on the back end, long term. Did the investment work out? Did it pay interest? Many of the stories that I enjoy the most are rebuilding stories.
35:22 Speaker 03 In the case of Toys R Us, they came out of interstate department stores in the 1970s, where you were building. They had a great company hidden inside a company that was losing a lot of money. And it was hard to see interstate department stores jewel, which was Toys R Us, which at that time, in the 70s, was very small compared to the overall company. One of the great opportunities that never occurred, occurred with Lockheed in the early 1970s. And you had Textron and Linton offered to buy Lockheed. The debt of Lockheed was trading at 15 cents on the dollar. And if you and I had ever sat down and said,
36:06 Speaker 03 "We're gonna have a meeting in the mid 1960s with our board of directors, and you were the chairman, and you told them today, 'We have five years to go bankrupt. I want you to come back and give me your best ideas on how we can go bankrupt.'" And Lockheed executed maybe 10 things. One, they went into commercial aircraft they weren't in and lost billions of dollars. Two, just in case they had demand for the commercial aircraft, they didn't go with United Aircraft or GE for engines. They went with Rolls Royce. And Rolls Royce went bankrupt. People weren't willing to buy airplanes that didn't have engines. They built their plant over the major earthquake zone in the United States in case you could catch an earthquake.
36:51 Speaker 03 They borrowed short. They paid dividends. They didn't want any long-term debt. They had a backup contract, a Navy contract, in an area they had no expertise, and they lost 700 or 800 million as a backup plan. And then they bribed some of the royal families in Europe so that you wouldn't even want to save them if you had to. And at the end, they took every strike with every labor union. So even their own employees didn't want. But they were one of the largest government contractors. The government was very dependent on them. They were making a lot of money in that business. But it was blurred by all those other things. And Textron made an offer to buy them and its stock got obliterated
37:34 Speaker 03 because the market thought they were under their mind. And the company eventually survived and built. And the debt that traded at 15 cents a dollar never missed an interest or a principal payment. And today, I believe, is the largest government contractor. So many of the stories are rebuilding stories that you see when you look back. And whether it was cable, whether it was entertainment, whether it was media, whether it was home builders. Home builders were constantly boom and bust. They borrowed short. When things were great, they made money. And when things were bad, they went bankrupt. And one of those companies, MDC and Larry Mizell, just was sold the other day to a Japanese company
38:18 Speaker 03 for the highest price it ever traded. I believe if you feel you have a mission and a purpose, then you can get a lot of people to join you on that mission.
38:28 Ted Seides? When you start talking about that Lockheed example, how do you think about the optimal capital structure for businesses?
38:34 Speaker 03 Some businesses are highly volatile. You had almost a decade that if you weren't in technology and you weren't in real estate and you weren't in retail, almost no company went bankrupt in 10 years. If you're a supermarket, you might have a totally different capital structure than if you're a tech company. And so for some companies, even a dollar in debt is too much because of the volatility and risk in the business. For others, that has very low volatility in their business, you can have a higher capital structure. And part of the efforts and the work that I did that, say, went for my thesis in graduate school was understanding that you could manage
39:18 Speaker 03 the capital structure of a company the same way you can manage the operating side of the businesses. And in the 1970s, because there was so much stress in the early 80s, interest rates overnight going to 21%, etc. Often, the chief financial officer became the CEO.
39:40 Speaker 03 Today, when we think of the challenges, I think you're going to find many of the people that were the head human resource manager eventually goes to become CEOs. And can you attract the best in prime? Can you retain those people? Do they believe in your mission? Do they want to work for you? Are they proud working for your company? Many companies have the wrong capital structure. Today, almost 50% of the 20,000 largest companies in America are owned by private equity. Many of these capital structures were built in 2017, 18, 19, 2021, when interest rates were very low.
40:24 Speaker 03 So many of them today have the wrong capital structure at the wrong time. So you leveraged seven to one. And if I loaned you money at 15%, say in 1983, and you were leveraged three to one, you were paying 45% of your cash flow out in interest. Well, if you borrowed seven times and you borrowed at six, you were paying 42. But if you have to refinance at 10, there goes all your free cash flow. And so we're going to see in the next few years opportunities to exchange debt for equity and recapitalize good companies in good industries. And the owner will either put in more equity
41:06 Speaker 03 or approach the creditors about exchanging some of their debt for equity.
41:11 Ted Seides? You've seen these cycles in the past. And I'm curious, with so much capital that's come into the hands of private equity managers and credit, how do you think this shakes out over the next five or 10 years?
41:24 Speaker 03 I think for the last decade, in many ways, 50% of every company sold by private equity was sold to another private equity firm. Today, if you have longer term debt, you can't really sell the company unless you're selling it to an investment grade type credit. So I think you're going to see a private equity company buy part of another company to provide some liquidity. So I think you're not necessarily selling the company. You're going to bring new capital in so you can get distributions. I think that will play out. The sophistication today of your private equity. Many of your private equity firms are larger credit firms today, and private equity is a smaller part of their business.
42:09 Speaker 03 They're very sophisticated, and in my opinion, they will be buying up the debt of many companies to exchange it for equity as a way of buying, and I see that occurring over time in the future. One of the things I learned over the years, the six lessons of credit that occurred. One, it's credit, not leverage. And so, leading into the financial problems of '08 and '09, you saw companies dramatically leverage themselves up to get the same equity rates of return, but they weren't the same credit. And you saw people leverage 10, 20, 50 to 1 in some of these financial institutions. Now, that isn't the case today. Second, I really have never met a person
42:53 Speaker 03 over a long period of time who's generated a high rate of return by guessing where interest rates are going. So, yes, you're right once, yes, you're right twice, but not in the long run. So, making investments, whether interest rates go up or down, is a key decision. Three, rating agency ratings are a trailing measure, not a forward-looking measure. And you might rate a company whose future doesn't look bright or is going to be disintermediated high based on the past, or you might rate a company low. I mean, Tesla was non-investment-grade debt, even as it was approaching a trillion dollars in market cap. So, it just took a long time to get there.
43:38 Speaker 03 Four, most loans to real estate are non-investment-grade. And if you want to identify the major financial problems of the last 20 to 30 years, you can be traced down to this belief in over-investment in real estate and the belief that you can leverage it up. There's maybe three companies in America that are rated AAA, AAA. S and P rated in a period of time 15,000 structures, AAA, almost all of them real estate, and in some cases, you lost 100% of your money in AAA. Sovereign debt has not been a good credit over time.
44:19 Speaker 03 And the final conclusion is debt markets underpin equity markets. If I'm able to get significant double-digit returns in debt, and I have actual assumptions of seven or eight, I don't really need to go to equities. And I think we learn that time and time again.
44:36 Ted Seides? As you've taken and distilled all these lessons over time, I'm really curious how you've thought about backing participants in the market with your own capital, with your family office capital. What are those key criteria you've used to determine how these folks will invest your capital?
44:54 Speaker 03 I start with the individual and do I have confidence? How does the individual see the world? Do they have blinders on? Are they willing to see the world? Can they change in any business? There are changes. What you expect might not occur. The unexpected occurred. Covid occurs. Can you adjust? The very first decision we make is on people. After that, we can make a decision on industry, structure, where in the capital structure you come in. So I have many things on my plate, not the least of which is medical research. Most people don't realize when I am there that the number one driver of economic growth
45:39 Speaker 03 in the last 200 years is public health and medical research. And so more than 50% of all economic growth can be attached to public health and medical research. I don't sit in a trading desk. I can't look at it on a day-to-day basis. So we are dependent on individuals.
45:59 Speaker 03 That we see if there's a change, they recognize the change from that standpoint. And so we really invest in people.
46:07 Ted Seides? So democratization of finance has been a key underpinning of so much of your life. There was a point in time, a long time ago, where health became a real issue for you. And you spent a tremendous amount of time, and the subject of this book Faster Cures, on medical research, and I'd love to hear some about that journey.
46:30 Speaker 03 I think it was John Lennon had in a song, "You have a plan, a life plan, and then, world, things happen." So I had lost 10 relatives to cancer. Our children had serious health challenges. In the mid 70s, when all my economic theories proved to be correct, we were faced with all these health. So I've been involved now for 50 years in medical research, trying to apply the same thing we applied in finance and the economy for medical research, sharing information, sharing data, getting people to work together, having it be fact-based, and bringing capital.
47:13 Speaker 03 And so I've been funding cancer research for 20 years when I was diagnosed with cancer. And yes, they told me I had 18 months to live 30 and a half years ago. Yes, you had to find a way to deal with that issue. And I focused very heavily on science. I had never done any work in prostate cancer, the form of cancer I had. I'd done a lot of work in breast cancer, melanoma, pediatric neurology, but not in this area. And so it took me 30 days to figure out a strategy, and then implementing a new organization we called CAPCURE, C-A-P-C-U-R-E, C-A all cancers, P prostate cancer, and cure all life-threatening diseases.
47:58 Speaker 03 The first step we analyzed was to tell people, "We're not going to be a threat. We're going to increase funding for all diseases." We didn't want people to think we're going to divert funds. And we spent a number of years trying to figure out how to double the National Institute of Health's budget, the largest funder of medical research. And eventually put on a march, a half million people in the country. And today, the US government has invested an incremental $500 billion in medical research. And part of the side of that was why we found a vaccine in less than a year. In the RNA work, and people don't realize, but it was only seven weeks, 63 days, between
48:43 Speaker 03 the sequencing of the DNA of the virus and the first human being that Moderna gave the vaccine to. And so, it's an area I've dedicated my life for 20 years to as a philanthropist. And now I've dedicated the last 30 years as an activist and philanthropist. And I think these are issues that are important in life. There are issues in the stock market that goes up and down, or bonds, etc., but things that are life and death. And I would say to you, one of the biggest mistakes that most people do that are diagnosed with a potential life-threatening disease is they don't do enough at the beginning.
49:27 Speaker 03 So at the beginning, they do the least possible and hope it works out. When they have recurrence at the end, they're willing to do anything to stay alive. And if you did a little more at the beginning, you wouldn't maybe have a recurrence later. And I'd say the other thing we learned is prevention and wellness. We've invested hundreds of millions in studying your microbiome today. And we know that we can change your genes today with CRISPR, but we don't know what happens. So it might be decades before that technique is well used. But we can change how your genes are expressed by changing your lifestyle, what you eat,
50:10 Speaker 03 what you drink, and what you do. And therefore, even if you have a high probability of getting a life-threatening disease, you might not by changing how your genes are expressed. So prevention is one of the great. Ideas today that we all could employ. And I, let's say, became extreme in this area of what I did. For two years, I did not eat anything except raw vegetables and raw fruit because I didn't know if cooking or anything changed the molecular makeup. And it might not work, but it wasn't going to hurt me.
50:44 Ted Seides? When someone comes to you with some type of cancer, and it's early, and they have the opportunity to do something early, are there two or three things that you've learned from your research that are the most important actions for someone to take?
50:59 Speaker 03 First, let's find out what your disease really is. So if someone tells you you have breast cancer, there's many kinds of breast cancer. If someone tells you have prostate cancer, there's many kinds. What do you actually have? Not a generic name. So you can sequence your own genome today. Maybe for $100, not $3 billion, which it cost and took 13 years, spent in an hour. Two, you can sequence your microbiome. And three, you can sequence your disease. So let's find out exactly what disease you have, what form, what is the mutation? And my guess is in 10 years, a person will say, I have an XYZ mutation.
51:43 Speaker 03 They're not going to say, I have this disease that's been identified in a part of my body. Once you know that, things that look like they're not aggressive can be aggressive. Things that look like they're aggressive might be non-aggressive. And for some people, doing nothing is an alternative than understanding where the leading research is. You might have an institutions that are, say, the number one institution in the country in cancer overall, but in a particular form of cancer, they're 40th. And then you want to make sure, like anything, that if you talk to a surgeon, they're likely to suggest surgery. If you talk to a radiologist, they're going to suggest that.
52:26 Speaker 03 And so let's get a few opinions from individuals. And so those are some of the steps. And nutrition, personal discipline is hard. Not everyone can do that. But for many people with what appears to be serious disease, if you're willing to change your lifestyle, you can do what's called active surveillance.
52:51 Speaker 03 And so you can wait and see if you're willing to see by changing your microbiome, it changes. And so, understanding your metabolism and things has a major effect on your outcome. And today, they've now approved giving the microbiome of one person who responded well to treatment to another person that didn't respond well, and see if they can respond well. So, we've learned today that this exists, it's available, and the promise of science today is so unbelievable in so many ways. There's so much exciting things happening.
53:29 Ted Seides? The third prong alongside of finance and healthcare across your life has been education. And, again, would just love to hear some of your thoughts on the work you've done in and around education.
53:43 Speaker 03 Well, we've been active for 50 years, but when you think about it, most people, when they think about what made the United States the United States, they think of freedom, democracy, Bill of Rights, Declaration of Independence, immigration, et cetera. But between 1870 and 1960, the United States added one year of formal schooling every decade. And by 1960, the US was the most educated country in the world by two years more than any other country. Since then, other countries have caught us and passed it. And so, the recent studies shows in K-12 education that US now ranks 31st in the world.
54:26 Speaker 03 To me, you want to be able to do something, you want to execute, you want people to come up with new ideas, new industries, entrepreneurs. It all starts with education. And we discovered, outside of the parents or the guardians, the most important thing was the teacher in the classroom. So we started these awards programs, and my brother's overseen them all these years, to try to lift the self-image of the education profession. Today, we probably have given 3,000 of all these awards over the last 38 years. We've launched online schools, a company that became a whole new industry, virtual charter
55:11 Speaker 03 schools, in the 1990s. It's a public company called Strive today, but millions of kids. If you're in a school area where it isn't safe to go to school, you can get your classes online. The state and these virtual charter schools will treat you like you're a public school student. You get your computer free, broadband free, teachers free, mentors free, all courses, and we built out every lesson for every day. For college, we created an industry that's widespread now, and that's going to college online. And so, at the peak, our company, we represented 30 different universities, University of Florida, Vanderbilt, and others. And so, you're actually going to us.
55:53 Speaker 03 We ended up selling that company to persons. And likewise, we launched a very catchy organization called Mike's Math Club, where we gave special skills to kids beginning in elementary school, so that they would love math and we would empower them, so they could multiply two-digit or three-digit numbers in their head faster than a calculator. They would know 106 times 104 is 11,024 before you could pick that up in a calculator, and getting them to love math. And one of the highest-paid professions in America are people that are mathematicians. And the financial world today has changed dramatically.
56:37 Speaker 03 I had to look hard in the 1960s to find another person who was a math major in finance. Today, you don't have to look anywhere, they're inside every company. And so, when you think about the United States and the future of this country... It is so important today that we educate our children to the level of world standards. And we let our children down by making them think they excel when our standard is a 90% tile here in the US in math might be a 40% tile in another country. As many people know, we've had massive grade inflation while we've seen test scores drop.
57:21 Speaker 03 And so the world looks at America as the ideal of the America, as America as a meritocracy, that you can succeed, have access to capital, regardless of who your parents are, where you were born, your religion, your race, and you'd have a chance to succeed, and if you failed, a chance to try again. The foundation of our country is education, and we're really the first country to decide we're going to offer education to all of our citizens. And when you look at our country today, 50% of every software engineer or scientist in Silicon Valley in the last 30 or 40 years was not born in the United States.
58:06 Speaker 03 60% of many of our medical research not born in the United States. 77% of everyone in PhD programs in AI not born in the United States. We have been the beneficiary of immigration, so we need to revitalize this commitment in education.
58:25 Ted Seides? As you look out across each of these, across finance, healthcare, and education, what opportunities are you most excited about?
58:35 Speaker 03 I'm excited about the leveling of the playing field. If I don't know who I'm making a loan to, it's pretty hard to discriminate. So if I'm buying a securitized mortgage, okay, and there's 1,000 people that are borrowers, I don't know whether they're born in the United States, Mexico, Dominican Republic, Nigeria, wherever they might have been born. I don't know where their parents are, I don't know where they went to school. And so securitization is a democratization of access to capital in that sense. So I'm excited about that and how that works. Number two, technology, the ability today to drive costs down.
59:20 Speaker 03 So there weren't too many people lined up in the 1990s to say, okay, sequence my genome here. I'll give you a billion dollars and I'll come back in 10 years and we'll figure out what the issues are. At $100, at $20, at $50, it's now available to all of us. Amazon and companies like Amazon now allow us to deliver goods to places that were food wastelands in the country and places you didn't have access to product and services. Today, they can be delivered to your door wherever you might be. The internet, a great leveler of civilization.
1:00:04 Speaker 03 You might be in a school, there's no physics teacher in your high school, but you can take the class online and get credit in your school today. I feel technology affords this. I couldn't be more excited about focused ultrasound. Now, I'm a Star Trek kid from the 60s. The idea that you can have non-evasive surgery. So we went to minimally invasive surgery, where you're in the hospital, less damage to your body, etc., and you can't even find the scar when they took your appendix out. But now we have non-evasive surgery, shooting your body with sound waves and knocking out the bad cells, so it's like going to a dentist.
1:00:48 Speaker 03 We're going to be able to clean out the bad cells in your body. So you go, it's an outpatient, you go, they zap the things you don't want in your body and you go home. And periodically, you go in for a checkup to make sure you can do that again. But it's now been approved for 50 or 60 diseases. I have a good friend who had terrible tremors all these years. He went in, when he walked out, he had no tremors. So there's enormous potential. It's been approved for Parkinson's and other diseases. When you think back, that life expectancy on planet Earth was 31 years of age in 1900, and today, it's mid 70s.
1:01:34 Speaker 03 It took four million years of evolution to extend life expectancy by 11 years. In the last 120, we've upped by 40. 20% of all people in the United States died before their fifth birthday. In the world, in the start of the 20th century, half. So if you wanted to have six children, you needed to have 12. If you wanted to have three, you have six. And so the enormous population explosion and things happening in Sub-Saharan Africa today, there's a byproduct of the breakthrough of many of these medical treatments. A woman today has a 2% chance of passing AIDS on to her child,
1:02:18 Speaker 03 down from 95% 20 years ago. So I think if you're a good investor, the very first speech I gave on Wall Street in the late 60s was the best investor was a social scientist. And if you ask me again today, I would tell you the best investor is the social scientist, understanding where the world is going.
1:02:40 Ted Seides? As you look back on all these things you've done, what are you most proud of?
1:02:45 Speaker 03 Well, I'm proud of my wife, who I met in 7th grade 65 years ago in our relationship. I'm proud that our kids are responsible members of society. And we've been blessed with 10 grandchildren. So what is your greatest legacy? Your greatest legacy, in my opinion, is your children. Will they be productive members of society, will your grandchildren? I think seeing the death rate from many of the diseases we dealt with, dropped by 50, 60, 70%. I was in Houston a few years ago and met with 47 patients. They were stage 4 melanoma, average life expectancy under six months,
1:03:30 Speaker 03 who are all in total remission. And so we worked for 10 years on these checkpoint inhibitors in prostate cancer. They were not successful for a number of reasons. We're working on different strategies today. But a 50% drop, almost overnight, in deaths from melanoma, deaths from prostate cancer and others that are with us today. Sickle cell anemia and other things using CRISPR is going to be approved. You're going to eliminate this disease, eliminate it. And I would say seeing a vaccine go into a human being, not in a decade, but in nine weeks, that worked bodes well for the future.
1:04:14 Speaker 03 As it relates to so many things, social media and technology, it brings blessings and it also brings many challenges. But being able to live a healthy, long life will allow us to have the ability, and I feel it's our generation's responsibility, to eliminate many of these diseases as a cause of death. And I do believe the thousands and thousands of people that had a chance to work with, who all have their PhDs in finance today, are out there financing good ideas and businesses of the future.
1:04:55 Ted Seides? Mike, I want to ask you a couple of fun closing questions before we wrap up. What is your favorite hobby or activity outside of work and family?
1:05:04 Speaker 03 Visiting early childcare centers or elementary schools. Young kids have no filtering mechanism. So when you talk to them, they tell you exactly what they think, what happened in their house last night. And I always feel the future of a country can be seen by visiting the schools. So when I first started going to China and the Middle East, I always would go and visit their elementary schools, sometimes middle and high schools, just to see what the kids thought, what they're learning, what they believe in. And so it is invigorating.
1:05:38 Ted Seides? What's one fact that most people don't know about you?
1:05:43 Speaker 03 I think most people don't know that I was voted the friendliest and my wife was voted the most likely to succeed in our high school graduating class. Yes, I was the head cheerleader and Sally Fields, he was my head song leader, but my wife was the one voted the most likely to succeed. So we met in seventh grade and I've stayed close to her ever since.
1:06:11 Ted Seides? What's your biggest pet peeve?
1:06:14 Speaker 03 I think one of my biggest pet peeves is lack of prevention. So, most of the money in health and medical is spent on care or cure. And if we dealt with it early, you could prevent these things from happening. So, we spend very little on prevention. We're trying to build in to insurance companies and companies today that they will pay for exercise or other types of things. Many companies today make their healthier food offerings cheaper in the corporate cafeteria than they do others.
1:06:54 Speaker 03 So, I think we have so much knowledge today of what sugar does to your body and other things do to your body. We can see what's happened in China, where almost 40 years ago, no one had diabetes. And now, they have the most people with diabetes in the world due to 20,000 fast food restaurants, increased carbs, increased sugar, and aggressive protein diets. So, I think it's a pet peeve when you see people who got a disease that probably wouldn't have. There's a high correlation between heart attack, diabetes, strokes, and being overweight.
1:07:36 Speaker 03 We did a study back as far as 20 years ago, showing that just the change in weight in America cost the country one and a half trillion a year. People don't remember in their very first Super Bowls, there wasn't one lineman that weighed 300 pounds. And if you look at that today, you can find a high school where every lineman weighs 300 pounds, and you just can imagine what's going to happen to them in their lifetime.
1:08:03 Ted Seides? Which two people have had the biggest impact on your professional life?
1:08:08 Speaker 03 I'd say Gary Becker would be one. He wrote these things in the 60s that I read. He was really the father of the concept of human capital, that the assets not on the balance sheet were the major assets, that maybe 75 to 90% of the assets of a country, a state, a city, are the productivity of the people. We became close friends. He did get prostate cancer. Unfortunately, died of cancer about a decade ago. But whereas his work was primarily in the academic area, I applied these concepts, both at our Milken Institute, our foundations, and in business. And the second one was the young man, I don't remember his name, that I met that day,
1:08:54 Speaker 03 August 12th, 1965. And then Watts Riot started August 11th, 65. Laurie and I got married August 11th, 1968. So I would never forget what occurred that day. And I'd say those two people have had a dramatic effect on the path I have chosen over the last 60 years.
1:09:17 Ted Seides? What's the best advice you ever received?
1:09:20 Speaker 03 There's many. I would say studying the data, going into debate at a young age. If you compete in debate, and I'd encourage everyone to encourage their kids, you have to debate both sides. You have to know both arguments. You have to see the world. And I think one of the things that's really propelled me over the years is seeing the world through other people's eyes so that I can understand their views of the world, why they feel that well. But that was great advice, going into speech and competing in the National Forensic League at a very young age.
1:10:00 Ted Seides? Any others that come to mind?
1:10:01 Speaker 03 Well, there's many. You Are What You Eat. I began to meditate in 93. And I probably ate more hot dogs, that's what people don't know about me, than anyone, except those that have won the Nathan's Hot Dog Contest. When I was at Berkeley, they opened what I call the Shrine Top Dog. And anyone who's ever gone to Berkeley knows Top Dog. And I did not go to sleep once at Berkeley without having two to 12 Top Dogs before I went.
1:10:35 Speaker 03 So giving up hot dogs was a very difficult thing for me. And I've had many friends who have unfortunately died from cancer that couldn't give up their favorite foods. So I think the advice that you are what you eat has allowed me to be here today. And I'm the happiest guy to be with you today, 30 years later.
1:10:57 Ted Seides? All right, Michael, one more. What life lesson have you learned that you wish you knew a lot earlier in life?
1:11:03 Speaker 03 I'd say simply distributing more information widely. I gave thousands and thousands of speeches, but I didn't really give interviews. I didn't really go on television. I had a mission. And so when people don't really know who you are, anyone else can make up any caricature in the world. If you're going to go try to change the world, you need to be a public person. And I was a private person. One of the great politicians of the 20th and early 21st century, Willie Brown, told me, unless you've defined who you are early, it's too late if some event occurs.
1:11:45 Speaker 03 And I think had we been more public, had I gone on television more or done more interviews, and I declined them all, it would have been different. And I think the course of history would have been different. And so I wrote a note to Bill Gates when they were going after Microsoft as a monopoly in the 90s and told him, he should get out there, talk, interview, get on shows, so they don't think he's some mastermind nerd that's going to control the world. I think changing the financial system, giving people access to capital, obviously is not great for those that had access to capital. They now have to compete. And so I think it was a big mistake I had made, and I'd give that advice.
1:12:30 Speaker 03 If you are on a mission, you should publicly have people understand where you're going, how you're going to get there. Doing that internally, even if you have 10,000 employees, is not enough. You have to publicly have people, if you're going to dramatically change something, come along with you during that period of time.
1:12:48 Ted Seides? Well, Mike, I'm very grateful you came to that lesson. So you would take the time to spend with me today and share so much of your story. So really appreciate the time.
1:12:56 Speaker 03 Thank you. All the best.
1:12:59 Ted Seides? Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.
Previous Top 5 of 2024: #3: Cliff Asness - EP.385 Next Top 5 of 2024: #1: Scott Bessent - EP.415 Page updated November 5, 2026 · transcript and summary are machine-generated
