Beverly Hills, Calif.
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It once was called the “Predator’s Ball,” the annual conference held by Michael R. Milken where Wall Street’s titans celebrated their victories. Now, more than two decades later, the hottest topic here is how one of the biggest predators — Goldman Sachs — looks to be one of the prey.
Inside the halls of the Beverly Hilton, Mr. Milken, the onetime “junk bond king” of Drexel Burnham Lambert who fell from grace and has resurrected himself as a successful philanthropist, has turned his former Predator’s Ball into a thought-provoking three-day event about the economy, politics, health care and energy.
The running narrative at Mr. Milken’s confab is quite the opposite of the national mood: Many of the attendees seem to side, or at least sympathize, with Goldman, out of a belief that Goldman had done nothing wrong in helping clients place bets that the housing bubble was going to burst.
“I don’t want to use the word childish ... but it’s childish.” That’s how Kenneth Griffin, the founder of the Citadel Investment Group, described the Securities and Exchange Commission’s decision to pursue a civil fraud case against Goldman for the firm’s role in creating a subprime mortgage-related investment that turned sour, costing some investors more than $1 billion in losses. Mr. Griffin was standing in the corner of a ballroom at Mr. Milken’s conference Monday saying that the Goldman case was politically motivated.
“I think that the disclosure around one transaction being the justification to vilify Goldman Sachs or to pass regulatory reform is just incredible,” Mr. Griffin said. “I think the Goldman Sachs case has clearly energized the Democrats with respect to passing the regulatory reform.”
Marc Lasry, the founder of Avenue Capital, said of the mood in Washington, “Everything is 20/20 hindsight — you shouldn’t have done this, you shouldn’t have done that.”
“The government is going for the jugular,” Meredith Whitney, a Wall Street research analyst who spotted the subprime bubble early, said between panels. “Sadly,” she said of Goldman’s reputation, “the damage is already done.” She added that, while Goldman is now being singled out, “everyone was in the same soup.”
A subtext emerged during the first morning of the conference with some attendees drawing parallels between the aggressive stance of the government toward Goldman and the way Drexel and Mr. Milken were prosecuted.
Many attendees are longtime friends and acolytes of Mr. Milken, including Leon Black, the founder of Apollo Management (and former Drexel man); Ted Turner, whose Turner Broadcasting was financed, in part, by Drexel, and Lewis Ranieri, the “godfather” of mortgage-backed securities.
Some have long felt that Mr. Milken, who popularized the junk bond market, was unjustly prosecuted, even though he ended up pleading guilty to six felony counts of securities fraud and conspiracy, paying $600 million in fines and spending 22 months behind bars. His firm, Drexel, went out of business.
There is no comparison between the problems of Goldman, which faces a single civil charge, and those of Drexel years ago, which faced criminal charges. But the perspective from many here is that both wrongly became the subjects of inquisitions, though even juxtaposing the two feels a bit far-fetched and unfair, given the many differences.
“I have to imagine that the people in that company are pretty sad that they are being compared to Drexel Burnham,” Christopher Ailman, chief investment officer of the $120 billion California State Teachers’ Retirement System, said about Goldman. (And yes, Calstrs is a Goldman client.)
Despite the constant chatter, most attendees quieted down around Mr. Milken himself. A group of executives discussing the Goldman and Drexel cases in the hallway Monday morning went silent as Mr. Milken, dressed in a bright orange tie and wearing a bright smile, passed by. Through his spokesman, Mr. Milken declined to comment.
The prevailing view among the attendees is that Goldman got too big, too fast — and too arrogant. Goldman’s transformation from one of the oldest, most respected names where clients came first to an aggressive trading firm whose mission wasn’t to avoid conflicts of interest, but to “manage” them, has become the poster boy for what went wrong on Wall Street.
Indeed, while some participants here were defensive about Goldman, there was also a sense that some relished what the case might do to a powerful competitor. Mr. Griffin, who is both a defender and client of the firm, still was quick to point out that, in his eyes, there is little reason Goldman (or Morgan Stanley) should be granted bank holding company status by the Federal Reserve, which helps them borrow money cheaply while still taking risks that investment banks do. “We have two investment banks parading around as banks,” he said.
Mohamed El-Erian, the chief executive of Pimco, one of the world’s largest money managers, was more circumspect about the vilification of Goldman and Wall Street.
“Because of the origins and the impact of the global financial crisis, we have now entered an historical phase in which most industrial country governments will restrain banks through the wide use of regulatory, tax and enforcement tools,” he said. “People can debate for hours whether this should happen or not. The fact is that it will happen.”
While most agree that the system needs to be reformed, the worry, at least in Beverly Hills, is whether the reform will go too far — in contrast to the rest of America, where many feel the reform won’t go far enough.
Mr. Milken, who has never been a big fan of regulation, recently offered his own answer to the problems plaguing Wall Street and the economy. His suggestion? We all need better — and longer — memories.
“Time and time again, problems emerge from a failure to heed the lessons of history,” he recently wrote, ticking off a list of similar reasons for boom-and-bust cycles to the one we just experienced.
“America’s future economic health depends on a more-careful reading of financial history.”
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