Mike Milken: Access to Capital, the American Dream, and Why Risk Is Misunderstood

I asked them, did they go into finance to change the world? And if this was the 1970s, I would tell you that one in four would have told me they went into finance to change the world. When I speak to the incoming classes at various financial institutions, maybe 1% go into finance to change the world. Hi, everybody. I'm Nikolaj Tangen, the CEO of the Norwegian sovereign wealth fund. And today, my guest changed how the world raises money. Mike Milken built a high yield bond market, always from nothing, seeing value where other people saw only risk. And today, whole industries exist because of it: cable, mobile, media. And many of the biggest names in finance learnt the business from him. He also survived a cancer he was told would kill him. He has given away fortunes to medical research and education. And last year, he opened a center in Washington devoted to the American dream. Mike, a warm welcome. Thank you. Great to see you. Now, Mike, how did you come across the high yield market? Well, it wasn't by accident. There is an event that occurred on 08/11/1965 in America in Los Angeles called became called the Watts Riots. And I was back from college at Berkeley and I was in Los Angeles and I went down the next day to try to figure out what was going on. And I met a young African American man who told me he wouldn't have access to capital because of the color of his skin. How old were you then? I was 19 years old and I couldn't really understand why people could possibly be denied access to capital because of the color of their skin. But meeting this one man changed my life and I went back to Berkeley and I began to study credit, credit for hundreds of years. And what I discovered was that every one thing that people said about credit was wrong. And what did they say at the time? They thought countries were the best credit. And then they thought individuals were the next best credit, and then they thought companies, and they thought companies that weren't, quote, investment grade were too risky. But 99.99% of every company in the world is non investment grade. So what did it mean? What was the truth? The truth was there was research that was done. I might have been the only one that ever reviewed that research when it came out. And as a student at Berkeley, I had access to it or anyone else could have searched these books. And it showed that during the worldwide depression of the thirties, that the highest rate of return was the lower quality of the debt you bought. In other words, the risk premiums were too large. So adjusted for risk, you got a higher rate of return. It also showed that the worst credit in history was sovereign debt. That was considered the best …