How the Corporate Raiders Led to Trump

Michael Milken — whose big financial confab last week reflected worries about Trump’s tariffs — contributed to the rise of Trump.

Friends,

The annual Milken Institute Global Conference — a “who’s who” of finance — met last week in LA.

You should know how it relates to Trump.

The confab itself was a mass freakout about Trump’s tariffs. Financial deals are on hold. Investors are flummoxed. Many are looking to plunk down more of their money outside the United States.

Michael Milken himself made a speech about the “American dream” but said nothing about our loss of democracy and the rule of law — which are behind the freakout.

If we still had democracy and the rule of law, Trump couldn’t single-handedly make tariff policy.

The irony is that Milken is the father of the high-yield (“junk”) bond market — and in 1990 pleaded guilty to securities fraud and conspiracy, served just under two years of a 10-year prison sentence and was banned from the securities industry for life, and was pardoned by Trump in 2020.

Milken’s junk bonds financed hostile takeovers of American corporations by people euphemistically called “corporate raiders,” starting in the 1980s.

The raiders made fortunes, Wall Street became the most powerful force in the American economy, and CEOs began to devote themselves entirely and obsessively to maximizing the value of their corporations’ shares of stock.

In the 1950s, when banking was a dull and quiet profession, the financial sector accounted for 15 percent of corporate profits. By 2010, it had grown to 50 percent. In the 1950s, finance was the handmaiden of corporations. Today, corporations are the handmaiden of finance.

Before Milken and hostile takeovers, large corporations had responsibilities to all their “stakeholders,” including their workers and communities — not just their shareholders.

This sentiment may seem quaint today, but in the three decades after World War II, it laid the basis for rapid economic growth and, with strong unions, an equally rapid expansion of the American middle class.

By contrast, the corporate raiders— Milken, Ivan Boesky, Carl Icahn, and a handful of others —believed the only legitimate goal of the corporation was and is to maximize share prices.

They targeted companies that could deliver higher returns to shareholders if the companies abandoned their other stakeholders — by busting unions, cutting workers’ pay or firing them, automating as many jobs as possible, and abandoning their original communities by shuttering factories and moving jobs to states with lower labor costs, or moving them abroad.

In recent years, raiders have morphed into “private equity managers” and “activist investors,” but they’re really no different from Milken and the other raiders of the 1980s.

They buy struggling companies with borrowed money, often using the companies’ assets as collateral for the loans. They then make the purchased company profitable by cutting payrolls, outsourcing jobs, and selling off some of its assets. And then resell what’s left of the company and pocket the returns.

Shareholders who sell out often do well. The raiders or private equity mavens do even better. Giant compensation packages now go to the top executives whose pay is linked to share prices.

The losers are workers who lose good jobs, communities that lose their core businesses, and a nation that has to cope with ever angrier politics.

Some economists say shareholder capitalism is more “efficient” than stakeholder capitalism because economic resources are moved to where they’re most productive, enabling the economy to grow faster. In stakeholder capitalism, they say, CEOs employed workers they didn’t need, paid them too much, and were too tied to their communities.

Rubbish. Shareholders are not the only ones who invest in corporations and bear some of the risk. Workers who have been with a company for years often develop skills and knowledge unique to it. Others may have moved their families to take a job with the company. The city and state have invested in roads and other infrastructure to accommodate the corporation.

When a firm decamps, these investments lose their value. In standard microeconomics, the costs to workers and communities abandoned by profit-maximizing corporations are deemed “externalities” — social costs lying outside the deals struck between managers and investors. But why should these costs not be included in deciding whether the deals are good?

Over the last four decades, such “externalities” have grown so large as to swamp so-called “efficiencies.” Entire regions of America have been denuded of good jobs, leaving behind (mostly) men without college degrees.

The results: rising rates of drug addiction, family violence, child abuse, deaths of despair, and an increasingly angry working class susceptible to a demagogue like Trump.

The typical worker today is barely better off than his or her equivalent 40 years ago, adjusted for inflation. Most are less economically secure. Few own any shares of stock. The nation’s economic gains, once distributed broadly to the working and middle classes, have been siphoned to the top.

Michael Milken isn’t responsible for all this, of course. But the financiers who attended this year’s Milken Institute Global Conference — and who are now worried sick about the economic consequences of Trump’s tariffs — should know how Milken and other corporate raiders changed American capitalism, and how those changes led to an angry and disaffected working class, which in turn led to Trump.

One reform needed after the Trump dictatorship is over is a return to stakeholder capitalism.

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