4 ms·

I've read a few books on junk bonds, and if they were a Martingale / pyramid, how come Nelson Peltz, Carl Icahn, MCI, et al, became (and still are) billionaires

by zandorg 18y ago

I've read a few books on junk bonds, and if they were a Martingale / pyramid, how come Nelson Peltz, Carl Icahn, MCI, et al, became (and still are) billionaires? They made out like bandits.

whacked_new 18y ago
Only the winners are remembered and reported. Likewise is the world of "famous" fortune tellers.
- zandorg 18y ago
  But as far as I can tell, there were more junk bond successes than failures. But I admit, when Michael Milken was arrested, it all came tumbling down for Drexel, and I can't remember any book saying exactly who failed with Milken's attentions. So yeah, I think you're right, and even books can dodge the truth.
  - joe_bleau 18y ago
    "Den of Thieves" by James B. Stewart covers the Milken, DBL and Boesky years. It's a decent read--I just finished it about a month ago.
nostrademons 18y ago
A pyramid scheme always has a few huge winners. They're the ones who get into the pyramid when it's small. Depending on how broad the pyramid is, oftentimes everyone except the bottom rung (the retail investors) ends up as a winner.
- coliveira 18y ago
  What people forget is that capitalism is based on fear and greed. If you look at a particular way, everything is a "pyramid scheme". For example: "Why didn't people see that a company based on selling copies of music is not sustainable?" -- this may be the excuse used by everyone when most music music recording companies fail. Any capitalist activity can be seen as a suckers game, because price is subjective. Financial markets are just a faster, larger scale version of other markets.
  - stcredzero 18y ago
    So, a generalized successful capitalist formula: 1 - Use greed to motivate Other People 2 - So you can use Other People's Money 3 - Get in at the beginning, get out early with the money 4 - Leave behind suckers with worthless junk Use your profits to begin the cycle again. I prefer Warren Buffet's approach: 1 - Look for good people producing genuine value 2 - Make a bet on them
    - nostrademons 18y ago
      The difference between the two is really in how cynical the observer is, not in anything that they're doing. For example, one of Buffett's first (and most profitable) investments was in See's Candies. They make chocolate, at fairly high prices. Where's the value in that? Then he used the money to buy companies like Coca-Cola (they sell carbonated sugar water, and in developing nations often steal much needed water from indigenous people to do it) and furniture stores (which purchase furniture from cheap laborers and sell it after a 4x markup). This really makes perfect sense when you consider that "greed" is a synonym for "what people want", with the only difference being that "greed" implies that what they want is frivolous, unnecessary, or destructive. So Paul Graham's maxim of "Make something people want" could, if you're cynical, translate to "Exploit people's greed." The end result is the same - you have something they desire - but the connotations are very different.
      - stcredzero 18y ago
        See's pays careful attention to freshness of ingredients. This is not only my experience, but also the opinion of a panel of chocolatiers and food critics hired by Consumer Reports to evaluate various brands of chocolates. For me, they are a much better value than Godiva. I prefer to give See's boxes as gifts. Giving my friends and family pleasure is valuable to me. Furniture stores - There is a value add to being able to go somewhere and try out furniture. If you think 4X markup is way too much, then you have a business opportunity on your hands. Get information to the consumer and connect them to furniture makers. The consumer pays less, the manufacturer gets more, and you get rich off of your cut. Coca-Cola - I don't buy it. Others do. To them, it has some sort of value. It's a stretch to equate "Make something people want" and "Exploit people's greed." That Venn diagram is two overlapping circles, not just one.
antiismist 18y ago
Junk bonds are not a pyramid scheme. Junk bonds are really high yield bonds, and they were perfectly useful and successful in unwinding the strange corporate conglomerations made during the 60's and 70's. Even if they were a pyramid scheme, the Peltzes, Icahns, etc didn't hold the bond themselves. They would want to take over a company and sell the parts. So they would front some capital, and get other people to buy the bonds which was used to fund the takeover. So they were running the pyramid, not actually in it (if you think junk bonds were in fact a ponzi scheme).
bwd 18y ago
When the junk bond/leveraged buyout strategy started, it was a reaction to the fact that corporate managers who had lived through the great depression were too risk averse when it came to balance sheet debt, along with the fact that there is a tax asymmetry between providing returns to suppliers of capital in debt form as opposed to equity form. In the early days, these factors, along with low stock prices, permitted the financiers to buy companies and either restructure or dismember them to produce a profit at fairly low risk. Early profits on these deals attracted competition, eventually resulting in extremely high prices and debt levels. By the time of RJR/Nabisco, the debt levels were too high to be safe in an economic downturn. I expect that there was a similar life cycle for collateralized debt instruments. The people that made out well were the early adopters who understood what they were doing, and the people who got burned were the ones who simply had to be in the business because they saw that other people were making so much money.

by zandorg 18y ago

I've read a few books on junk bonds, and if they were a Martingale / pyramid, how come Nelson Peltz, Carl Icahn, MCI, et al, became (and still are) billionaires? They made out like bandits.

whacked_new 18y ago

Only the winners are remembered and reported. Likewise is the world of "famous" fortune tellers.

zandorg 18y ago
But as far as I can tell, there were more junk bond successes than failures. But I admit, when Michael Milken was arrested, it all came tumbling down for Drexel, and I can't remember any book saying exactly who failed with Milken's attentions. So yeah, I think you're right, and even books can dodge the truth.
- joe_bleau 18y ago
  "Den of Thieves" by James B. Stewart covers the Milken, DBL and Boesky years. It's a decent read--I just finished it about a month ago.

nostrademons 18y ago

A pyramid scheme always has a few huge winners. They're the ones who get into the pyramid when it's small. Depending on how broad the pyramid is, oftentimes everyone except the bottom rung (the retail investors) ends up as a winner.

coliveira 18y ago
What people forget is that capitalism is based on fear and greed. If you look at a particular way, everything is a "pyramid scheme". For example: "Why didn't people see that a company based on selling copies of music is not sustainable?" -- this may be the excuse used by everyone when most music music recording companies fail. Any capitalist activity can be seen as a suckers game, because price is subjective. Financial markets are just a faster, larger scale version of other markets.
- stcredzero 18y ago
  So, a generalized successful capitalist formula: 1 - Use greed to motivate Other People 2 - So you can use Other People's Money 3 - Get in at the beginning, get out early with the money 4 - Leave behind suckers with worthless junk Use your profits to begin the cycle again. I prefer Warren Buffet's approach: 1 - Look for good people producing genuine value 2 - Make a bet on them
  - nostrademons 18y ago
    The difference between the two is really in how cynical the observer is, not in anything that they're doing. For example, one of Buffett's first (and most profitable) investments was in See's Candies. They make chocolate, at fairly high prices. Where's the value in that? Then he used the money to buy companies like Coca-Cola (they sell carbonated sugar water, and in developing nations often steal much needed water from indigenous people to do it) and furniture stores (which purchase furniture from cheap laborers and sell it after a 4x markup). This really makes perfect sense when you consider that "greed" is a synonym for "what people want", with the only difference being that "greed" implies that what they want is frivolous, unnecessary, or destructive. So Paul Graham's maxim of "Make something people want" could, if you're cynical, translate to "Exploit people's greed." The end result is the same - you have something they desire - but the connotations are very different.
    - stcredzero 18y ago
      See's pays careful attention to freshness of ingredients. This is not only my experience, but also the opinion of a panel of chocolatiers and food critics hired by Consumer Reports to evaluate various brands of chocolates. For me, they are a much better value than Godiva. I prefer to give See's boxes as gifts. Giving my friends and family pleasure is valuable to me. Furniture stores - There is a value add to being able to go somewhere and try out furniture. If you think 4X markup is way too much, then you have a business opportunity on your hands. Get information to the consumer and connect them to furniture makers. The consumer pays less, the manufacturer gets more, and you get rich off of your cut. Coca-Cola - I don't buy it. Others do. To them, it has some sort of value. It's a stretch to equate "Make something people want" and "Exploit people's greed." That Venn diagram is two overlapping circles, not just one.

antiismist 18y ago

Junk bonds are not a pyramid scheme. Junk bonds are really high yield bonds, and they were perfectly useful and successful in unwinding the strange corporate conglomerations made during the 60's and 70's. Even if they were a pyramid scheme, the Peltzes, Icahns, etc didn't hold the bond themselves. They would want to take over a company and sell the parts. So they would front some capital, and get other people to buy the bonds which was used to fund the takeover. So they were running the pyramid, not actually in it (if you think junk bonds were in fact a ponzi scheme).

bwd 18y ago

When the junk bond/leveraged buyout strategy started, it was a reaction to the fact that corporate managers who had lived through the great depression were too risk averse when it came to balance sheet debt, along with the fact that there is a tax asymmetry between providing returns to suppliers of capital in debt form as opposed to equity form. In the early days, these factors, along with low stock prices, permitted the financiers to buy companies and either restructure or dismember them to produce a profit at fairly low risk. Early profits on these deals attracted competition, eventually resulting in extremely high prices and debt levels. By the time of RJR/Nabisco, the debt levels were too high to be safe in an economic downturn. I expect that there was a similar life cycle for collateralized debt instruments. The people that made out well were the early adopters who understood what they were doing, and the people who got burned were the ones who simply had to be in the business because they saw that other people were making so much money.