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A phone call about Milken
Howard Marks had joined Citibank's investment research department after graduating from the University of Chicago in 1969, because he had a good summer there the year before. He later moved from equity research to the bond department because his work in equity research was unsuccessful and he was told to get out.
In 1978, three months after he landed in the bond department, he had little to do. The department head phoned to say there was a guy named Milken in California who dealt in something called high-yield bonds, and asked whether he could figure out what that meant.
That call was luck, the right time and the right place. If it had come at lunchtime while he was out, somebody else might have gotten it and become the person he became. In 1980, he moved to California for the sunshine and palm trees.
Why was junk bond issuing rare before Milken?
Before the late 1970s, most low-rated bonds were fallen angels, issued by companies that had once been investment grade and were later downgraded. Few companies tried to issue bonds at a low rating from the start, because few buyers wanted them. Michael Milken, working at Drexel Burnham Lambert, built a market for such bonds. His case drew on a 1958 study by W. Braddock Hickman for the National Bureau of Economic Research, which found that lower-rated bonds had paid more than their default losses cost.
Why does a rating split bonds into two markets?
Rating agencies such as Standard & Poor's and Moody's grade bonds, and the line between investment grade and below sits at BBB- on S&P's scale and Baa3 at Moody's. Many pension funds, insurers, and banks operate under rules or mandates that limit how much below-investment-grade debt they may hold. Those limits shrink the pool of buyers for lower-rated bonds, which is why such bonds pay higher interest rates. The names junk bonds and high-yield bonds describe the same group of securities.
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