Benjamin Stein
Benjamin Stein
A License to Steal:The Untold Story of Michael Milken and the Conspiracy to Bilk the Nation
ISBN: 0671742728
A License to Steal
Benjamin Stein discussed his book, "A License to Steal: The Untold Story of Michael Milken and the Conspiracy to Bilk the Nation," the product of Mr. Stein's investigations into the "junk-bond king" Michael Milken, and his manipulation of the stock market for profit.
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A License to Steal
Program Air Date: January 30, 1993

BRIAN LAMB, HOST: Benjamin Stein, author of "A License to Steal: The Untold Story of Michael Milken and the Conspiracy to Bilk the Nation," why did you write this book?
BENJAMIN STEIN(Author, "A License to Steal: The Untold Story of Michael Milken and the Conspiracy to Bilk the Nation"): I'd been studying the subject for five or six years. It struck me as a scandalously bad scam, and it struck me that no one had told the story. I had told the story in bits and pieces in some overview in Barron's, but there was no book explaining what Milken had done wrong. It was on everybody's mind and everybody's tongue that he was a convicted junk bond swindler, but nobody exactly knew what he had done and none of the books that have come out have really explained what he had done. I thought it was worthwhile for the American people to know about the worst financial fraud in history, as far as I can tell.
LAMB: You open the book by standing in a building not too far from here.
STEIN: On Wilshire Boulevard and Rodeo, in the heart of Beverly Hills. I went over there the day after Drexel declared bankruptcy, and I wanted to see the building. They wouldn't let me in, of course, and still had the Drexel guards there. A real estate agent that I knew took me around and showed me the property because they were trying to lease it. Milken owns the building. Never one to waste the chance to make a few dollars, he wanted to lease out the space immediately, and I was shown around. It was a dismal site. It was empty and barren, and a lot of the building had never even been finished. It was very, very valuable space, but they were making so much money off the junk bond racket that they hardly needed to worry about renting a few floors until the junk bond racket failed. One of the most amazing things that happened on that day, one of the guards at the door was complaining bitterly to another guard and also to me that Milken himself had persuaded this guard to buy stock in First Executive, a Drexel-captive insurance company, and the stock had just gone down to nothing and the man had lost much of his life's saving and, as he said to me, "Where is Mike now?"
LAMB: When did you first meet Michael?
STEIN: I only met him once, although I have the feeling I'd seen him coming in and out of Morton's, which is a restaurant here. I met him when I first moved to L.A., and I was working for Norman Lear. Drexel had an office down the hall in 1901 Avenue of the Stars, and I saw a sign on it. For a long time it didn't have any sign, and then it had a sign saying something like "Drexel, Burnham, Lambert High-Yield Securities." I had a tiny amount of savings, and I thought I'd like to get a high yield, so I went in there. I told them, which was truthful, that I wrote occasionally for the Wall Street Journal and that I was also interested in this subject. They showed me around a little bit, and then Milken came out and started to explain about them. The explanation was extremely unconvincing, but, frankly, I put it out of mind for at least 10 years. It didn't really occur to me that this explanation had been so unconvincing, and it didn't occur to me that this was connected in some way with the essential fraud of the entire scheme.
LAMB: When was the last word of the book written?
STEIN: Oh, maybe four or five months ago.
LAMB: As you read through the book I saw you keep anticipating that "by the time this book comes out in early '93 he may be free."
STEIN: Yes, he's out.
LAMB: Were you sure that he was going to be free at that point in time?
STEIN: Oh, yes, because, first of all, the judge had reduced his sentence from 10 years to two years. I think that was unfortunate on her part, but she had done so, and I knew that he wouldn't serve even the full two years. I mean, the guy is just so wired it's impossible for him to ever be the subject of justice in the way that anybody would. So, I anticipated that he would be out -- in fact, I anticipated that he would be out before now. I had anticipated he would get out at Thanksgiving.
LAMB: Why did you feel so strongly about this?
STEIN: I feel very badly when people steal huge sums of money from ordinary citizens or take them unethically. It's a society which is built on trust. I write about this a lot. It's real important to me. It seems to be what differentiates America from other countries is the sense that we are a society of laws. We believe we have laws that govern the rich, the middle class and the poor, blacks and whites, Jews and gentiles. This was a case in which a whole alternative financial empire had been created in defiance of law, in defiance of economics, in defiance of all the principles that make this country great. On top of that, this empire had co-opted some of the most important commentators and academics in the field and had them say that this man was doing great things when he was really running a gigantic fraud. This was, I thought, an extremely unfortunate event to have happened and go uncommented upon. The Milken fraud represents a titanic failure of public policy, a titanic failure of law enforcement, a titanic failure of ethics, a titanic failure of journalism, of academic probity, and as far as I could tell no one was summarizing it and putting it all together. And yet it was an enormous story. It seems to me it is by far the biggest private financial story that there's ever been in America, and it was not getting out except in Barron's.
LAMB: What is Barron's?
STEIN: Barron's is a weekly financial magazine, and a very, very wonderful one. It's edited by a great man named Alan Abelson and managing edited by another great man named Jim Meagher.
LAMB: Who owns it?
STEIN: It's owned by Dow Jones.
LAMB: Who reads it?
STEIN: It's read by several hundred thousand people who really care about finance. The joke around Barron's is it's read by the retired accountant with $5 million to invest, but it's read by actually a great many people who have money to invest. If I may make this plug for them since they've been very nice to me although I'm a freelancer and I don't work for them, Barron's as far as I know is the only magazine published for the investor as opposed to the people who sell investments. The other financial magazines, which shall be nameless, I think exist mainly as platforms for the touting of the sale of investments, whereas Barron's really cares about the investor.
LAMB: How long did Mike Milken spend in jail?
STEIN: Twenty-two months, which I figure is about one month for every billion that his firm unethically took from American savers and taxpayers.
LAMB: What jail was he in?
STEIN: He was in Pleasanton Federal Correctional Facility, which is in the San Francisco Bay Area. No one would want to be in prison -- I certainly would not want to be in prison -- but as prisons go, it's a country club.
LAMB: You have a picture in your book.
STEIN: Yes, it looks like a dorm room. I went to Columbia College in New York, and I must say it's a heck of a lot nicer room that he had there at Pleasanton than I had at Columbia.
LAMB: Did you try to interview him for this book?
STEIN: Yes. I tried to interview him repeatedly and was never allowed to do that. At first I would be turned down in a very polite way by Steve Anreder, the Drexel publicist, and then I was turned down in a less than polite way by Milken's personal publicist.
LAMB: You point out that Steve Anreder used to work for Barron's.
STEIN: Yes. Although I quarreled with him repeatedly and I don't believe he was really giving the straight scoop about what was going on at Drexel by a long way, he was a heads-up player. The people who replaced him were a nightmare.
LAMB: Who is Benjamin J. Stein?
STEIN: I am Benjamin J. Stein. I am just a person, a person who loves ...
LAMB: You used to be in Washington. Where were you born?
STEIN: I was born in Washington, D.C., your nation's capital, and grew up in the suburbs, in Silver Spring, Md., a wonderful place which I visit frequently. I went to a wonderful high school there, Montgomery Blair, which I go to all the reunions even if I have to fly there from California. I went to Columbia in New York and then to Yale Law School. I was there at roughly the same time as Bill Clinton and at exactly the same time for one year as Hillary Rodham Clinton.
LAMB: Do you know them?
STEIN: Well, I met her. I don't think I've ever met him. I've met her. She was a very shy, quiet little student when she was at Yale, but obviously she had a dynamic personality waiting to come out.
LAMB: What did you do after Yale?
STEIN: I was a poverty lawyer for the Office of Legal Services of the Office of Economic Opportunity where I actually worked with some interesting people. Terry Lenzner, who later became a lawyer for Milken, and a very capable, aggressive, hard-working fellow named Mickey Kantor who has become a big, gigantic Democratic powerhouse and is now going to be special trade representative. And then I worked as a lawyer at the Federal Trade Commission, a trial lawyer. That was a very hard job. It really gave me a taste for how dangerous over-regulation is. Then I worked as a teacher at American University in Washington, D.C. -- a fabulous, fabulous job. I worked as a teacher at U.C.-Santa Cruz, which is the most beautiful town in America. If that was the only thing I'd ever done in my life, I would consider it a gift from God. It was just magnificent. Then I was a speech-writer for President Nixon and then briefly for President Ford. That was a great job. Whatever anyone may say about the Nixon people, they were, to me, the nicest people I've ever worked with in my life. Then I worked with and for Bob Bartley as a columnist and editorial writer at the Wall Street Journal editorial page. I'm a great, great fan of Bob Bartley. I don't think he got this story about Milken quite right, but he really deserves a lot of kudos from the American people for some of his accomplishments in preserving freedom. Then I came out here. I wrote a couple of -- a great many books, actually.
LAMB: "Out here" is where?
STEIN: Southern California -- Los Angeles, the center of the universe -- the original in the Xerox machine of mass culture, as I like to say. I've been a writer of books, a teacher of law, an actor and a writer of screenplays, but mostly for the last six or seven years a reader-student of financial fraud.
LAMB: How many movies have you been in?
STEIN: Oh, seven or eight maybe.
LAMB: I can remember seeing you for fifteen seconds in a couple of those movies.
STEIN: Well, Brian, in a couple of them I was in for two or three minutes, but my usual scene is quite short. I've had a long scene, which is a classic, in Ferris Buehler's Day Off where I played a boring economics teacher. I didn't even think I was that boring, but they thought I was boring -- the people who made the picture. When I'd finished doing the scene, which I ad-libbed entirely -- I made it up, all of it, entirely -- the stars of the picture -- real people, real stars, Matthew Broderick and Lea Thompson, I guess it was, or maybe just Matthew Broderick, came up to me and said, "Wow, I love your work. Have you ever done any work on Broadway?" Well, that was the first time I'd ever done any real work except for a few seconds in another movie, and the idea of calling acting work just amazes me because it's like calling sex work or it would be like calling eating a fabulous piece of tuna filet work. I mean, acting is God's gift. Acting is bliss. Reading about junk bond default rates, reading long tomes about junk bond default rates, that's work. Acting is not work.
LAMB: Why did you move out here?
STEIN: I moved out here because I wanted to write a book about the political and social and cultural content of prime time television. I had been out here by courtesy of the Wall Street Journal several times, and I had written a number of articles about how the political content of what's on prime time was dictated not by what the public was thinking, not by what the public was wanting, but by the mindset, the political views, of a very few dozen people who control prime time -- very powerful writers, producers and network executives. These people are essentially quite anti-business, anti-military, anti-suburb and anti-rural; very pro- minority, pro-old people -- a kind of classic, liberal left viewpoint of the world. I interviewed several dozen of these people and found that their views coincided precisely with what was on TV, and I wrote a book about that. Then I wrote another book, and also I had been asked to consult with Norman Lear. He had a show which had a conservative speechwriter living with a liberal photographer -- she was played by Bernadette Peters -- and he asked me to consult about that, so I did that. I was paid $600 a week, which was the most I'd ever been paid. I really thought I was as rich as a Rockefeller. So I did that, and then I helped invent a show called "Fernwood Tonight," which was a very, very funny show.
LAMB: What do you think of this part of the world?
STEIN: I love L.A. L.A. is still, as far as I'm concerned, the center of the universe. It's gone through some very difficult changes. It's got a lot of scary people in it now that it didn't have quite as many of before. It has a lot of bad gangs. The situation in terms of gang shootings is just out of control and very scary, but it doesn't really -- knock wood -- affect people on the west side of town where I live as much as in the other parts of town. I love it. It's a place of opportunity. It's a place where everything is mobile, unfixed, flexible, achievable, doable. When I watch the Clinton people and I watch the Bush people, I'm just awfully, awfully glad that I live here where I don't have to be part of a company town. There are all kinds of different opportunities for variations on a theme. I love Hollywood. I mean, Hollywood is a very forgiving, open, wonderful place, and L.A. altogether is like that. I'm privileged to have a house in Malibu. I can't really afford it, but I have it, and as I'm doing my dishes -- I don't have a dishwasher -- but as I'm doing my dishes, looking at the ocean, I feel awfully lucky. I mean, I could be just looking at a brick wall. I could be looking at somebody's back yard. I'm awfully, awfully lucky to live where I do.
LAMB: You dedicate this book to Alex, Tommy and Trixie.
STEIN: Alex is my permanent wife. We've been divorced and separated several times, but I consider her my wife for life no matter what our legal status is.
LAMB: Are you married to her now?
STEIN: We're separated now. We at one time executed a holistic divorce which we just wrote out and we were divorced. But I intend to be in one guise or another married to her for all eternity; not just for this lifetime but for all eternity. Tommy is my son, the world's cutest human. He's five years old and he's the world's cutest human. And Trixie is my dog.
LAMB: How long have you been married to Alex?
STEIN: Off and on since 1968. It's sometimes off, sometimes on.
LAMB: You know that when you say these kinds of things that people want to know what's this all about -- off and on, up and down, but you're going to be married to her for eternity. Where did you meet her?
STEIN: I mean, I have not been legally married to her since -- we were married and divorced, remarried and separated for quite a long time.
LAMB: How many times have you been married to her and divorced?
STEIN: Twice, but I intend to be married to her at the time I die, whenever that is, God willing, and I intend to spend eternity with her.
LAMB: Where did you meet her?
STEIN: I met her at the State Department at a junior foreign service officers ball on July 4, 1966. I'd never seen anyone so beautiful in my entire life. I was with a date, a girl who was a very, very fine woman -- actually a high honcho of the Clinton regime at this point, and a very, very fine human being. But I saw this woman across the room with a fellow who is also kind of a high Clintonite type, now that I think of it, and I just had never seen anyone like her. I thought, this girl is fantastically beautiful. Nobody could be this beautiful and also smart, I remember thinking to myself, but then it turned out she was incredibly smart. She was a student at Vassar College and very, very smart.
LAMB: What does she do now?
STEIN: She is, like me, a dog fancier. She is a mother, she is also a lawyer. She was a lawyer for a long time at Paramount, then she was head of legal at United Artists. She's a saint, is her basic occupation. She's a saintly person.
LAMB: There is a picture in the back of the book of you on the flap, that we'll see on the screen in just a moment. There are a lot of dogs in there. I see a dog in your lap. That's Trixie?
STEIN: That's Trixie.
LAMB: You have a dog on your tie.
STEIN: That's also Trixie.
LAMB: How do you know?
STEIN: I remember having a tie made in Trixie's image.
LAMB: And there is a dog behind you on the wall.
STEIN: That's Mary, my first dog, who was given to me by a wonderful girl named Pat who is not a high Clinton official but is in Washington. I just love dogs. Dogs are everything. If I had to choose to spend the balance of my life in perfect serenity, I think it would be just me and some dogs lying in bed watching TV. But I have to work on junk bonds, too, because it's my social duty.
LAMB: We'll get back to this book in a moment. Who is Herbert Stein?
STEIN: He's my father. He's a genius, economist, writer and wit.
LAMB: In the back in your acknowledgements you call him your brilliant father. "He insisted that I write about Milken in terms of economic theory, especially price fixing, and this really explained everything."
STEIN: Drexel was really the money machine that it was because Milken was able to fix the price of bonds. Most sellers of bonds, underwriters of bonds, deal in a highly competitive market. They would get a tiny percentage of the bond's value for underwriting them and selling them.
LAMB: Let me interrupt. What is a bond?
STEIN: A bond is a promise to pay a certain sum of money at a certain rate of interest over time. A bond is evidence of indebtedness; that is, evidence that the bond issuer has borrowed money from someone and will repay it with a certain amount of interest over a certain period of time.
LAMB: So when you walk in that voting booth and you see up there that bonds are being floated by counties and cities, that's what you're talking about?
STEIN: Yes, well, Milken did actually work in that area as well, but he mostly worked in corporate bonds. He would raise money for corporate borrowers, but because he could fix the market price at which the bonds were sold and because he could sell bonds that no one else could sell, he could capture a fantastic commission for underwriting these bonds. For example, if Morgan Stanley, a very much more reputable, although they're not perfectly reputable, investment bank issued bonds for, say, G.E., it might get a quarter of a percent. But if Milken issued them for the Schmeckless Corporation, which nobody had ever heard of, he gets four percent, plus he would probably get equity kickers, plus he would get the promise of the people around the Schmeckless Corporation that they would use a sizable percentage of that money to buy other bonds for the Reckless Corporation or the Teckless Corporation or some other corporation. In real life they're often savings and loans and insurance companies or casino companies.
LAMB: Is this hard for the average person to understand?
STEIN: Not at all. It's the same concept as if General Motors, instead of selling Chevrolets so that they'd have to compete with Fords, Plymouths, Hondas and Toyotas, could charge anything it wanted for Chevrolets and people had to buy them. The beauty of the Milken scheme and what made it so incredibly powerful was that Milken controlled both sides of the deal. He controlled both the lenders and the borrowers. He controlled the lenders because he controlled a huge network of federally insured S&Ls and of very good-sized insurance companies and of junk bond funds so that, for example, you, Brian Lamb, said, "I am starting the Brian Lamb Corporation. We're going to market fishing tackle. Nobody's ever heard of us, but I'd really like to raise $200 million, please, Mr. Milken."

He would say, first of all, "Call me Mike. Well, of course we can do it." I'm summarizing this for you. I'm not really quoting him verbatim. "Here's what we'll do. We'll take your $100 million and we'll actually raise $120 million for you." You would say then, "But Mr. Milken, I don't think my company will be able to support more than, say, $60 million. I don't think we can pay the interest on more than $60 million."

He would say, in effect, "No problem. Here's what we're going to do. We'll raise the $120 million. You will use some of that excess $60 million to continue servicing the bonds, continue paying the interest on the bonds. In the meantime you'll take other parts of the money I've raised for you and you'll buy bonds in the Ben Stein Corporation and those will pay a very high coupon and we will use that money to pay off the coupon on your bonds."

You would say, "But Mr. Milken, or Mike, who will buy my bonds? I'm a complete unknown in this field." He would say, "Well, Columbia Savings because the head of Columbia Savings, Tom Spiegel, is my best bud, and Centrust in Florida, because David Paul, the head of Centrust, is my best bud, and Lincoln Savings because Charles Keating in Arizona is one of my best buds, and First Executive because Fred Carr, the head of First Executive Insurance Company, is my very, very best bud, and we'll get them sold. Don't you worry about selling them. You pay me four percent, I get equity kickers -- that is, I get stock in the company in large quantities -- and leave the rest to me."
LAMB: One of the reasons we do this show is to do books on public policy and the connection here, as you read through your book you see reference to the Securities and Exchange Commission, you see reference to the Justice Department, you see reference to John Dingell's committee on Capitol Hill.
STEIN: John Dingell's committee are heroes in this context. They're the only people who paid any attention to this whole phenomenon. The SEC, charged with enforcing the securities laws, completely, totally, dropped the ball on this. I think this is a national scandal, and I really think there should be a special prosecutor appointed to investigate this whole subject.
LAMB: But you made some connections there...
STEIN: Yes, very big.
LAMB: ... with John Shad.
STEIN: John Shad, who was head of the SEC during most of the Reagan years, is a former stockbroker and investment banker who was best friends, or very close friends, with Fred Joseph who was the chairman of the board of Drexel. Milken was really running Drexel, but Fred Joseph was the chairman of the board and he was endlessly, endlessly, endlessly pals and buddies with Fred Joseph even when there was a lot of evidence kicking up that Drexel was not quite an above-board player. He would never allow any kind of full-bore prosecution or even full-bore investigation of Drexel, or never facilitate it, let us say.

It is amazing that with all the laws on the books about requirements of full disclosure and requirements that there not be any schemes or devices to defraud investors, Drexel, entirely built on lack of full disclosure, entirely built on fraud, was never really gone after by the SEC and still has not been gone after by the SEC. This is something which every large player on Wall Street knows in his bones happened. I have spoken to many, many big powers on Wall Street, well-known names on Wall Street, and they said, "Of course it happened just like you said, of course it was a fraud, of course the bonds could never pay off the way they were promised to pay off." Everybody knew it; at least they knew it for the last few years. They didn't know it all the time, but for the last few years. The SEC never went after it. It is a shame. I would say it verges upon criminal dereliction of duty. I won't say by any specific person, but for the agency in general it's virtually criminal dereliction of duty.
LAMB: Six billion dollars left?
STEIN: I think that Milken would have roughly five or six billion left.
LAMB: Where?
STEIN: I don't know. A friend of mine who is a state securities commissioner for Colorado and writes funny songs about securities law -- yes, that's true -- has made up a song about this which goes to the tune of "Michael, Row the Boat Ashore," which has to do with, "The Atlantic Ocean is deep and wide, Michael's money on the other side," but that's just a guess. I don't know where it is. People come to me and tell me about stories about it being in Switzerland and Germany and the Cayman Islands and the Bahamas. I don't know where it is. By my calculations he would have taken in five or six billion, and he would have put that at interest. He wasn't just going to put it under his bed in Encino. He's had to pay out about a billion and a half. In the meantime he's earned interest on that other money, and he's had very, very large legal and public relations fees. But he would still have several billion left, I think. It's hard to imagine that he would have less than that, though.
LAMB: You mention Bob Bartley, the editor of the Wall Street Journal who runs the editorial page. You say a lot of nice things about him in here, but you say he missed it on this whole story and you name a lot of other journalists that missed it. Did anybody get it?
STEIN: There was a journalist at the San Diego Union who got it. Nobody's ever heard of him, but he got it.
LAMB: What's his name?
STEIN: I don't even remember his name. Michael Thomas, a very, very smart guy who writes for the New York Observer and who writes books, got it. He didn't get it in detail, but he certainly got that it was a scam. He's a terribly important observer of the financial scene. My father and I got it, and a number of people on Wall Street and a number of lawyers in the field got it, but as far as I'm aware, the financial journals of the community completely missed it. It's really very unfortunate. Some of the big, big names in financial journalism at the New York Times just completely missed it. It's really unfortunate. The L.A. Times, which should have been all over this because, after all, it happened in L.A., just never had a clue. I mean, they had one or two halfway decent stories about the size of the secret Milken partnerships, but they never really had a clue.
LAMB: How many people were affected? How many people lost money?
STEIN: Everyone in America lost money -- except for a few hundred or a thousand inside players -- because 55 Drexel-controlled or -influenced S&Ls failed, seized by the RTC. The loss to the taxpayers in making up the losses to the depositors was in excess of $10 billion, or at least roughly. It might have been slightly more or it might have been substantially more, but the taxpayers have to eat that loss. They have to pay, so every taxpayer has to cough up some money for that. There are the people whose pensions were invested in Milken junk. They lost a lot of money. People whose savings were in junk bonds, they lost money; people whose insurance benefits were imperiled or reduced substantially because of the loss in Milken junk. Lots and lots of people lost money.
LAMB: At one point you paint a picture of people walking into the lobby of one of the savings and loans and having a desk there and you can walk up and buy some junk bonds.
STEIN: Oh, that was Keating. Charles Keating had a gig where, in the last stages of his empire when he had lost so much money in Drexel junk and in bad real estate and he was desperately short of money, he concocted a scheme to sell junk bonds directly -- not through brokers, not even through Drexel -- to his own depositors. When his elderly depositors would come in and try to renew their certificates of deposit, he would have salesmen and saleswomen who would say to them, "Buy our American Continental Corporation debentures instead. They pay much more interest and they're just as safe as federally insured deposits." Well, they turned out to be a catastrophe. They went down to almost zero. The elderly depositors lost almost everything. Now there have been some major judgments in court against Keating and the insurers and the accountant, so I think those bond holders will get back most of what they lost. In fact, they might get back all of what they lost, but there are an awful lot of people who won't get it back, and the taxpayers will never get it back.

See, this scam was a very, very clever scam. It was not a scam of dumb people. The scam was to go to the buyers and say, "Here is our Drexel junk. It yields a very high interest rate. It yields five percentage points higher than Treasuries." The buyer, if he's not totally bribed to insensibility, says, "But aren't they called junk for a reason? Don't they default fairly often?" He said, "Yes, they default more than Treasuries," which don't default ever, at least not so far, knock wood, "but they'll default at a rate so low that the amount of interest that I pay you, that excess interest, will more than offset the losses on default." It's as if you were in a fraternity, let's say, and you loan money to all these other people in your fraternity and you say, "Some of them are going to default but I'm charging so much interest to the others that that interest will more than offset the defaults." Well, that's what Milken said. He said, "I'll have some defaults, I agree. I'll have more defaults than you would have if you had Treasury bonds or investment grade bonds. I don't deny it. But they'll be so low relative to the increased interest that you'll come out way ahead.
LAMB: You say 35 percent of the bonds defaulted?
STEIN: Oh, much more than that. Well, it depends on how you count it. If you count just defaults it would be roughly between 30 and 35 percent.
LAMB: Let me see if I understand this. Let's say I went to Drexel and I put some of my money into these bonds.
STEIN: Right. If you bought a diversified portfolio of all the Drexel bonds issued between, say '83 and '90 when they folded, roughly 35 percent of them would have defaulted by '91.
LAMB: So if I put $10,000 into bonds, went into the office right down the street here and said, "Here's $10,000. I want to buy some bonds."
STEIN: Roughly 35 percent of them would have defaulted. Now, they don't go to zero when they default. They go to maybe 40 percent or 30 percent on average so that you don't lose all that. But then an awful lot of them, maybe another 30 percent, would have been exchanged for stocks, and the stock would often turn out to be valueless, and you certainly would not get any interest on the stock. The others which were successful, and he did have some companies that were not failures, would often call in their bonds. If they were successful they would say, "Gosh, we're not going to keep paying this super-high interest. We'll call them in and we'll issue some lower-interest-paying bonds." So if you bought a huge, diversified portfolio of Milken junk, you would not come out ahead, in fact, but because of the defaults and exchanges and calls you would come out way behind where you would have come out had you bought other kinds of bonds.

So what happened was, the Milken people bought these bonds, like First Executive or Lincoln Savings, Centrust, Mutual Benefit, Ben Franklin Savings, Santa Barbara Savings, Citifed in New Jersey -- all over the country -- and they have in their portfolio, say, $100 million worth of Drexel bonds or $1 billion worth. The average interest rate is 14 percent, so they're booking these huge amounts of interest payments as income but they're not setting up any kind of reserve for defaults. Had they set up appropriate reserves for defaults they would have shown very low earnings, but they would not have defaulted.

It's the equivalent of a person who's earning money, earning money, all his life earning money, spending every penny, not putting aside any reserve for the fact that at some point he'll probably retire, not work and have to have some money. Essentially, the Milken captive buyers -- the S&Ls, the insurers, the junk bond funds -- were doing that. They were booking this huge amount of income but not taking reserves for the defaults which were rolling in, rolling in, rolling in. They would take charges, some of them, for unrealized losses, but they would not take the deductions against income. It was fantastic accounting fraud. I know that sounds boring, I'm sorry, but it's very important. Everyone thinks accounting is boring, but I think what they're really getting confused about is that accountants are often boring. But accounting, for those of a criminal turn of mind, is the absolutely most lucrative, exciting, adventurous, glamorous place to be.
LAMB: When you look at, again, the structure of government, you also talked about the Government Accounting Office.
STEIN: The General Accounting Office, the so-called watchdog agency of Congress, was so captured by Milken that it was amazing. They were like the government agency equivalent of Patricia Hearst turning into an actual fighter for the Symbionese Liberation Army. They were supposed to be supervising the federal deposit insurance fund. They came out in 1989 with a report endorsing the purchasing and holding of junk bonds by federally insured S&Ls. They used only Drexel-supplied, Drexel-endorsed, Drexel-affiliated experts for their report, did not do any independent investigations of their own of default rates, and when a year later 11 of the 12 S&Ls they'd cited as great examples of junk-bond-holding S&Ls had failed, and I spoke to the author of the report, he said he wouldn't change a thing.
LAMB: Can this all happen again?
STEIN: Yes, and will, because you may be sure that the stakes for any government bureaucrat undoing this fraud or stopping the fraud are far smaller than the stakes for the people perpetrating the fraud. Milton Friedman, a solid genius guy for his mathematical work on monetarism and other things, has a very wonderful theory of how government and influence on government works. It is that the smaller the number of people trying to influence the government policy, the greater effect they will have because the results will be so large for each individual person that he or she will exert enormously more effort than the large group of people who are more or less indifferent, and that would include government bureaucrats. The GS-14 supposed to be watching what Milken's doing ...
LAMB: What's a GS-14?
STEIN: That's a government pay grade -- gets paid whether or not the fraud is busted. The Milken player who puts this fraud over on the government does not get paid if the fraud is busted but gets millions and maybe hundreds of millions if the fraud goes ahead.
LAMB: But as a system of checks and balances, we've touched on John Dingell ...
STEIN: Dingell was good. He did not go far enough, but he was the one who first exposed the fact that Milken was controlling the price of the bonds. Milken would take, say, bonds of MGM or Golden Nugget or somebody like that, and in the same morning he'd sell them to all different people at different prices, just whatever price he felt like selling them. He was the first to expose that Milken would, for example, take a bond from the issuer and he would buy in a Milken family trust for a little bit above the offering price and then he would immediately resell it for a huge percentage profit on an annualized basis, say, to First Executive. Then if First Executive wanted to sell, he would buy it back from them at a loss and resell it to another Drexel captive at another huge profit so that he was controlling the price for the benefit of him, his top players and insiders and partners and to the detriment of his fiduciaries -- his trustors, his customers.
LAMB: We're going to go back to the system of checks and balances. You have the congressional committees, the press.
STEIN: The press was a complete failure except for Barron's.
LAMB: The General Accounting Office, another government agency.
STEIN: A complete failure.
LAMB: The Securities and Exchange Commission.
STEIN: An almost complete failure. They did eventually indict Milken on 98 felony counts. The Milken people always say, "Well, these were trivial counts," and I have to say, compared with what he really did, they were trivial.
LAMB: But in the end you give credit to a college professor.
STEIN: A business school professor, [Kenneth Paul] Asquith who was then at Harvard and is now at M.I.T. who did the first studies that showed that the Drexel junk was defaulting at a much higher rate than Drexel had claimed -- a much, much, much higher rate. Drexel had its own captive academics who would put out these studies using all kinds of very questionable methodology about the default rates. He was the first one who applied appropriate methodology, got it publicized adequately and really, I think, put the nails in the coffin.
LAMB: Go back to the acknowledgements. We started with your father who you gave a lot of credit to, and then you mention your mother, Mildred Stein.
STEIN: My mother is very, very smart and very witty as well.
LAMB: What did she do for your book?
STEIN: She read it and she was very skeptical. But I have to say, her skepticism about my view of it prompted me to do a great deal more research and thinking about the entire template than I might otherwise have done.
LAMB: In the end was she for you on this thing?
STEIN: Oh, she was very much for me.
LAMB: But she thinks this is okay.
STEIN: Well, I mean, she wishes I had been a doctor. She'd still rather I was a doctor, but she's very proud of this book.
LAMB: What does she do for a living?
STEIN: She is a housewife, a collector of newspapers and also helps my father with his books and writings. She is a very successful, on a small scale, investor in stocks. She is very good at that. She has some wonderful success stories.
LAMB: What government jobs has your father had?
STEIN: He started in 1937 at the Federal Deposit Insurance Corporation. I may have this wrong but I think he worked for the War Production Board. He was in the Navy during World War II. He was an ensign and then, I think, a second lieutenant. And then he worked for a very long time, for about 20 years, for the Committee for Economic Development. He was research director. It's a businessmen's group that in those days was absolutely at the forefront of responsible, conservative free-market approaches to economic problems, and he wrote many, many wonderful reports and studies and policy papers for them. He's an extraordinary genius. I mean, he's not just a genius as an economist, although that would be plenty, but as a political thinker and a social thinker. He's just an incredibly witty, smart guy.
LAMB: Where is he now?
STEIN: He's at the American Enterprise Institute, which is a think tank in Washington, and just an amazing guy. To talk to him is really sort of like going on a roller coaster, he's so smart.
LAMB: But he was chairman of the Council ...
STEIN: I hadn't gotten to that yet. He was chairman of the Council of Economic Advisers for a time under Nixon, and then very briefly under Ford. He was a member under Chairman Paul McCracken for a few years or a couple of years before he became chairman.
LAMB: "My sister Rachel."
STEIN: She is a writer in New York, and a great wit. Rachel is my older sister. She doesn't look it. She looks younger. She came up with an amazing piece of analysis which really was just mind-blowing -- see, I'm part of the Clinton generation. I use phrases like "mind-blowing," and I know the words to almost every Bob Dylan song, so I think I should be chairman of the SEC. I was talking to her maybe 10 years ago, and I said, "Well, why is it, do you think, there is so much more financial fraud than there used to be? Is it because of the inflation rate? Is it because of the change in the regulatory climate?" She said, "It's because there are so many more criminals working on Wall Street, that's why." That really opened my eyes that the problem was a problem of individual, unethical people doing these things. It wasn't so much a problem of giant macroeconomic trends but of an ethical collapse.
LAMB: Do you have a political philosophy that you follow today?
STEIN: I like to think of myself as a compassionate conservative. I have a lot of sympathy for people who are poor, who are homeless, who are handicapped by various things, including perceptions of racism, and I do think that the country spends much too little on the least fortunate among us, and I think too much is spent by the most fortunate among us. An awful lot of the money that goes for very fancy cars and for beautiful homes and for plastic surgery would be better off, frankly, being taken by the government and used to improve education and health care and drug rehabilitation and law enforcement for poor people. I think this country spends much too little on maintaining itself as a society.
LAMB: I'm confused a little bit when I hear you talk about -- you wrote the book about Hollywood and the politics out here and what they're giving us on television, yet you stay here, you live it, you're in the movies and you consider yourself a compassionate conservative. But does your ideology track with most of the people that live here?
STEIN: It tracks, I think, with most of the people who live here, or at least a lot of them. It doesn't track with many of the people in the entertainment business. But the people in the entertainment business are very ideologically monolithic, or tend to be anyway, but they also tend to have a certain amount of tolerance for the occasional eccentric like yours truly who comes along and pitches things. Considering the fact that I am, I think, probably the only person who likes Nixon in the entire Writers Guild, I think I've had some extraordinary successes here as a writer and provider of ideas to Hollywood. And I will say that I don't think I'm ever going to be in the Hollywood inner circle for a lot of reasons, some of which are ideological, but Hollywood is a generous, open-minded place in many ways; at least it has been to me. It could have been more so, but overall it's been very good to me.
LAMB: You mentioned before we went on the air that people don't drink much here.
STEIN: Yes. I was comparing it with Washington, where I grew up and where I often visit, and with New York. It never fails to amaze me when I go out to lunch with people in New York and they have a drink or a couple of drinks at lunch. That's unheard of in Hollywood. It's not done. It just isn't done. It's not that it occasionally happens; it never happens. People in Hollywood have many, many vices, but they tend to be extremely health conscious and extremely abstemious about alcohol -- extremely. It's an amazing thing. You go into Morton's, which is a very powerful and wonderful restaurant here, and in one part of the room are all the show biz people and they're drinking grape juice or drinking apple juice or drinking soda water, and then you go to the other part of the room where the visiting investment bankers and the visiting lawyers who are out here on business from Chicago or New York are, and they're slamming down drinks and slamming down drinks. Then there are the tourists, say, from England or from Germany and they're like just pouring it straight from the tank down their throats, and the people from Hollywood are just sitting there. You can always tell, the people from Hollywood don't drink and they don't smoke. They're abstemious; they're health conscious. They want to live forever.
LAMB: Do you ever want to come back to Washington?
STEIN: I'd really love to come back to Washington. If I could live there and live so I could see my parents every day and see my old friends from high school, I would love that a lot, but I do love my acting. I go back there quite a lot. I think I will get an apartment there, if income permits, so that I can just spend more time. I love being around my parents. They're very, very smart, funny people.
LAMB: Why do you love the acting?
STEIN: I, for most of my life, was not paid to be me. I essentially just act as me. I can't play Hamlet. I don't expect to ever play Hamlet. I don't expect to ever play a paratrooper or a cowboy, but I never got paid to be me before. I got paid to do work, but they pay me -- not very much, but enough -- to be me. That's a fantastic gig. You work with very friendly, nice people. There is never such a thing as people being in a bad mood on the set. You usually have a lot of attention paid to you. You have somebody doing your hair -- obviously not a big thing in my case -- you have somebody doing your makeup, your wardrobe. It's just friendly. It's like being at camp. It's like being at summer camp, particularly a cheerful one, or being in a very large, friendly family, only you get paid for it. I hate to leave the set. Doing this work was interesting and challenging and hard work, and it's my life -- I dream about it almost every night -- but acting is just a gift. Acting is just bliss.
LAMB: In this book you talk about being roughed up by the PR machine and Michael Milken.
STEIN: Yes, very cruelly and very foolishly on their part. They have floated a whole series of just bizarre things about me -- one, that I wanted to work for Michael Milken, which was just using snippets of a letter I sent to Milken and a whole bunch of other investment bankers asking them if I could go over some of their deals before they made them public so I could explain to them what the ethical problems were, and I said, "In return what I'd like to do is interview a whole bunch of your younger people and get an idea of their ethical standards." This letter which everybody else ignored, I have to say -- I sent it to Morgan Stanley and Goldman, Sachs, and a whole bunch of other people -- everybody else ignored it but the Drexel people tried to use it to show sour grapes that I wasn't working for them and that's why I wrote the book. And I may say, I think that was always preposterous because suppose I had applied for the job and suppose they had turned me down and suppose I had written it out of sour grapes, which I did not, but suppose I had, even so it has a tremendous amount of factual material in it that would have to be disproved to disprove my analysis of the case. They can't just say, "Ben Stein, you're a creep," to disprove my analysis, but they keep thinking that they can. Then they picked up a bizarre story of me being a potential airplane hijacker -- just an incredible story, so crazy that it's hard to even conceive of -- and they floated that around.
LAMB: Where did that come from?
STEIN: It came from an incident -- we used to have a vacation house in Santa Cruz. There had been prowlers in the neighborhood, and I was shipping a gun up to Santa Cruz to keep in my house. I had a big argument with them at the airport about the means of shipping the gun. But it was an unloaded gun and nobody ever thought it was for hijacking. It was an issue of how the gun should be shipped. But there was a preposterous, preposterous series of allegations. Then because I had written an article in the New York Times op-ed page about why I didn't think former President Bush should use halcyon, a powerful sleeping pill that he was reported to have used, and I said I had been prescribed and I had found it a very, very dangerous drug. Others, of course, like it, but I had found it very dangerous. I said I didn't think the president should be using it. They picked that up to say that I was a drug addict. One of Milken's lawyers was on a radio talk show not long ago saying that I was a drug addict just because of that. And very mean remarks about my wife, which I don't want to even repeat on the air, but just absolutely unfounded and totally made up, cruel remarks about her.
LAMB: But you did write about those things in the book, about your wife.
STEIN: A well-taken point. I will say then that they misquote a woman with whom I was once in litigation, a famous comedienne named Joan Rivers, to the effect that my wife was a lesbian, which is a totally made up, untrue comment. I have nothing whatsoever against lesbians, and they're very, very productive members of this Hollywood community, but the idea that my wife was ever one is just unbelievably wrong and it just was a device to try to upset and smear me. It's an amazing thing. I have written hundreds of thousands, by this point maybe a million, words about Drexel -- very, very detailed stuff about bond default rates, about rates of default offset by yields on bonds. I've never ever once gotten a factual rebuttal from the Milken PR machine. All I've gotten is ad hominem smears from the PR machine and from the legal machine.
LAMB: But the article you did write about Joan Rivers did turn into a lawsuit?
STEIN: Right. That was a terrible mistake on my part. I should never have written it. But I was -- as is in deposition, so I don't think I'm sharing a confidence -- I was told a story by several different people about a whole bunch of very witty, funny things Joan Rivers had said at a memorial shivah for her departed husband in the late '80s and I wrote them up under a pseudonym in GQ. I was asked to write about them. I said I thought they should have somebody else write them, and they said, "Well, you just write about it under a pseudonym."
LAMB: What's GQ?
STEIN: GQ is a very popular slick sheet magazine, in large part about men's fashions but it's about a lot of things.
LAMB: What was your pseudonym in that? Do you remember?
STEIN: You know something, I don't. I think it was Bert Hacker. Some real person actually has -- and I read it and I was terribly amused by it. But I thought, actually, the remarks were quite funny and didn't show her as doing anything but being funny and witty, which she is obviously a very witty woman. She sued over it, and she sued for libel. I think I should just finish this one thing, which is, she dropped the suit after not very long, apologized to me for even questioning my honesty and integrity, and also apologized to GQ. Somehow that part of her apologizing for questioning my honesty and integrity never gets picked up by the Milken people. The part that she sued me gets picked up, but the fact that she dropped it doesn't somehow get picked up.
LAMB: Let me just throw one other thing in there: She now today has a gossip program on the USA network where they sit around and just talk about gossip. It's hard for probably some people to understand what's going on in a town like this. You write an article and she sues you.
STEIN: It is my belief that she sued me largely as a publicity stunt. Her career was in trouble at that time. She wanted to make herself look sympathetic. She got on TV and cried. She did look sympathetic, and, frankly, I regret having written the article because it got me into a lot of hot water with people that don't understand about humor or about libel law. But one of the defenses we actually produced to the court -- and this is in public papers as well -- is that she was libel-proof in this area because we had said no more than she had a devilishly sharp wit, and that since she had earned a very lavish living for many years having a devilishly sharp wit, especially making fun of family members in her act, she could not then sue for saying, "Joan Rivers, you have a very sharp wit and you make fun of family members." Amazingly, to show you how courts work in America, the judge in the case dismissed that saying, "I don't believe that. Joan Rivers" -- and I'm not quoting verbatim -- "is a friend of mine, and we're on the same charitable boards, and I'm sure she wouldn't say anything like that." This is a judge. So, beware of being in court altogether, is my thought about all of this.
LAMB: You mentioned earlier in this talk that a lot of your old colleagues are now in the Clinton administration. Evaluate that administration.
STEIN: He's obviously a terribly smart guy. The wife is obviously terribly smart. I think he's got a fairly high-powered group of people around him. I think it's disgraceful that Ron Brown was appointed with so little thought about his connections and the kind of people he works for and the kind of man he is. But I think he's terribly smart and means well. My thought for us Republicans is, we shouldn't start sniping at him right away. Let's give him a little chance to see if he can do something. We have real problems in this country. It's a cinch that we Republicans have not solved them. It's a cinch that a lot of them have gotten worse while we Republicans were in office, so I think it is not unreasonable to give the Democrats a little bit of room to try out their solutions and see if they work. I mean, it's obviously not true that Republicans and conservatives have all the answers. Maybe the Democrats do have some answers. Let's hope it works.
LAMB: Assess the impact this town -- Hollywood movies, television programs -- is having on the country.
STEIN: I think, generally speaking, TV has a questionable effect because it distracts people from reading, studying, being with their family, learning human skills of communication and compassion. What would you think would happen to a country in which people instead of spending time with their family, instead of learning to read, instead of learning about the wider world through reading, instead of taking care of their children, are glued to a television screen? Obviously, by its very nature, television has a kind of questionable impact. I think TV promotes some very good values. I think TV is extremely pro-family -- extremely. There is no other medium that's ever endorsed the family unit, however constituted, and the idea of love and nurture of those within it anywhere near as much as TV has.

I think TV is very much pro-integrity and honesty. It really slams people who don't have good morals. It's very anti-business and teaches that business is corrupt and difficult. Unfortunately, that's often very largely true, especially in finance. I don't think it's as true in other areas as it is in finance. I think it teaches that work is the sucker's way out and schoolwork is really for losers and nerds and geeks, and that's a really bad thing. I think if you watch the shows which show students and young people, only the losers do their schoolwork. The winners do not do their schoolwork. The winners finesse it by some kind of con tricks. I think that's a bad attitude.
LAMB: Simon & Schuster have published this book of yours. This is what it looks like. How is it doing?
STEIN: It's doing pretty well. It's not a raging best seller, but it's doing pretty well. When it gets out into the bookstores people buy it and learn from it. I think it's a two- or three-hour read for a decent reader. You really get a whole new idea of how American finance and business runs and about gigantic failures in American life.
LAMB: Have you heard from the Milken organization since you published this book?
STEIN: I heard from it in the sense that one of Milken's lawyers was on a local talk show saying, "Don't believe a word you read about this guy. He's a drug addict." This based on the fact that I wrote that for a week I'd been prescribed halcyon for insomnia. So I've heard from them in that way. I haven't heard from them in any kind of direct way. You know, Michael Milken is reported to have been in Narcotics Anonymous when he was in prison, which is a twelve-step program for people who are narcotics addicts. The book that said that also said he was not a narcotics addict, and I have no reason to doubt that that's so. But if he's really in that program, he has to promise to turn his will and his life over to God and to make a new start ethically in his life. It may well be that he has. I would question that, based upon the work that his publicists and his lawyer recently did on me, but I hope and pray that that's true. He's obviously a man of great ability and obviously a very persuasive man. It's obvious the government isn't going to go after him in any serious way. The RTC did sue him, alleging a conspiracy almost identical to what I describe in the book, and he settled for $900 million. But if he can change and pull himself together, he's going to be a real local asset for us here in Southern California.
LAMB: Two quick questions: Of the six or seven movies you're in, which one did you get the most reaction from?
STEIN: Ferris Buehler's Day Off, by far; second, Honeymoon in Vegas; third, Soapdish.
LAMB: The next book for you?
STEIN: The next book is a book about financial misconduct just as a general thing. It's for the Twentieth Century Fund, and I'm very close to being done with that.
LAMB: This is what the book looks like. It's called "A License to Steal" by Benjamin J. Stein, all about Mike Milken. Thank you very much for joining us.
STEIN: Thank you very, very much.

Copyright National Cable Satellite Corporation 1993. Personal, noncommercial use of this transcript is permitted. No commercial, political or other use may be made of this transcript without the express permission of National Cable Satellite Corporation.