Den of Thieves. By James B Stewart. Simon and Schuster; 493pp; £16.99. Review by Robert Dawson.
Wall Street, 1985. An investment banker swaggers in for his annual bonus review. His boss, confident he is about to bestow upon this star employees sum beyond his wildest dreams, announces a figure of one million dollars. "That," he replies, "is an insult," before standing up and stalking out of the office."
Den of Thieves is the story of this era, when all sense of proportion fell by the wayside. It follows the ring of insiders who savaged corporate America with a series of hostile takeovers, and in the process pocketed millions on the side. It is a modern morality tale, in which the underfunded, understaffed heroes from the Securities and Exchange Commission (SEC) enter battle with - and finally slay - the powerful Drexel Burnham Lambert armed with its expensive lawyers and glitzy PR machine.
We are never allowed to forget who picked up the tab for the antics of all these high rollers. "Thousands of workers lost their jobs, companies loaded up with debt to pay for the deals, profits were sacrificed to pay interest costs on the borrowings, and many companies were eventually forced into bankruptcies or restructurings."
Significant details reveal just how corrupt the securities industry, with its farcical Chinese walls and ineffectual self-regulation, had become. An arbitrageur complains how his time on Wall Street has ruined him for the pleasures of Las Vegas casinos. He can no longer handle a system where the odds are not heavily stacked in his favour.
How did this all happen? The key is Michael Milken and his Drexel-backed junk bonds. Early in his career Milken became a disciple of one W Braddock Hickman, who demonstrated, in an analysis of low-grade and unrated bonds, that a diversified long-term portfolio of such bonds yielded a high rate of return, without greater risk, than a comparable portfolio of bluechip top-rated bonds. This thesis subsequently became the gospel according to Drexel, and suddenly junk was all the rage. Combined with the bank's "highly confident" letters, it paved the way for raiders like Carl Icahn and T Boone Pickens - or indeed anyone favoured by Milken - to raise billions and embark on a spree.
The snag was that the whole edifice was based on a myth. Once the dust had cleared, it was seen that, throughout the 1980s, the average junk-bond fund gave poorer returns than either stocks or the investment-grade bonds so ridiculed by Milken. As for the claim that the companies issuing junk bonds never defaulted - No they didn't, just so long as Milken was around to stave off potential disasters with new issues. It was a house of cards, which eventually had to collapse. Milken had made himself and Drexel a fortune by working a supposed anomaly in the risk/return trade-off. The anomaly didn't exist. Milken's genius lay in convincing so many people that it did.
Just as the bankers' arrogance is becoming wearingly depressing, the story shifts to the SEC. In step John Shad and Gary Lynch, and the chase is on. Den of Thieves takes the reader into a world of wire taps, blackmail, plea bargains, the betrayal of friends, and even a deranged investor stalking Boesky with a shotgun, hellbent on revenge.
My one concern with this meticulously researched and well written book is an uneasy sense of an ever so subtle anti-semitic subtext. Granted, the key characters in what is possibly the biggest fraud ever perpetrated in American history were all Jews, but at times the book veers uncomfortably close to the cops-and-robbers thriller, with the wholesome white American hero despatching a gang of slimy villains. (Stewart describes Lynch rather as if trying to sell the role of Kevin Costner). We are constantly reminded of how the crooks are not quite "one of us." There's Milken with his designer hairpiece, Boesky and his menacing black three-piece suits, "overweight, overeager, ineffectual, self-promoting" Dennis Levine, playboy Marty Siegel - it's all too easy to parade them as an aberration, a warning of what happens when the Establishment lowers its guard.
The truth, as Stewart readily concedes, is that during the 1980s insider trading, stock parking and other frauds were rife. It was "agreed coupled with market power unrestrained by normal checks and balances of the free market," To a large extent the Ivy Leaguers were protected by the code of silence bred into them. Thus the SEC was left to concentrate on those who, lacking this cultural ethos, were prepared to save their skins by selling out bigger fish. The trail eventually led to Milken. Whether it led to the whole truth is another matter altogether.