Junk Bonds
How Michael Milken proved the entire credit market was pricing risk wrong — and built the leveraged buyout industry on bonds nobody else would touch.
In 1984, the investment world ran on a simple rule. If you needed to borrow money, you had to be big, profitable, and trusted. Small companies couldn't compete for capital. Michael Milken looked at this system and saw something different. The market was pricing risk wrong. A company could only access the capital to survive if they offered an interest rate high enough to lure brave investors. He started buying bonds from companies nobody else would touch. Chrysler needed capital, IBM rivals needed cash. The established banks saw garbage. Milken saw arithmetic. He issued junk bonds, paying 15, 18, 20% annually. Some would default. But if 90% succeeded, the math worked.
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