Michael Milken
Instrumental in creating the high yield bond market that gave birth to Oaktree's business
Biography
Michael Milken (born 1946) built the modern high yield bond market at Drexel Burnham Lambert through the 1970s and 1980s. His research — drawing on W. Braddock Hickman's 1958 study of corporate bond performance — demonstrated that a diversified portfolio of below-investment-grade bonds could generate risk-adjusted returns superior to investment-grade bonds, because the market systematically overestimated default risk.
Before Milken, a company without an investment grade rating could not issue bonds publicly at all. The speculative-grade debt that existed was almost entirely "fallen angels" — bonds issued by sound companies that had since been downgraded. Milken's contribution was twofold: he argued that non-investment grade companies should be able to borrow if the interest rate was high enough to compensate lenders for the risk of default, and then he built the machinery — origination, distribution, market-making — that turned the argument into a functioning market. Marks is precise about the nature of the achievement: Milken was neither the inventor nor the discoverer of low-rated bonds; he was the person who did the most with them.
Milken was convicted in 1990 of securities violations related to his junk bond operations, sentenced to 10 years (subsequently reduced to two), and banned from the securities industry. He was pardoned by President Trump in 2020. The legal controversy has never diminished the fundamental significance of his market-building contribution.
After his release he founded the Milken Institute, the economic think tank whose research Marks was still citing in memos two decades later.
He appears in 8 Oaktree memos with 16 total mentions — fewer than you might expect, reflecting both the legal complexity and the fact that his contribution is so foundational it is often implicit rather than explicit.
Key Stories
The 1978 Phone Call — In 1978, shortly after Marks had organized and begun to manage Citibank's convertible securities fund, his boss called with an assignment. A client wanted Citibank to manage a portfolio of something called high yield bonds, and someone had to find out what they were. The instruction, as Marks reconstructs it, was gloriously offhand: "There's some guy named Milken or something who works for a small brokerage firm in California." Few people had ever heard of high yield bonds. There was almost no historical performance data, and what little existed came from a few obscure mutual funds. Most institutional portfolios had an inviolate minimum credit rating of single-A or triple-B. That brief conversation, Marks writes, changed his life — it routed him into the asset class where he would spend the rest of his career.
The Morning That Produced Oaktree's Motto — The 1978 meeting with Milken gave Marks more than a product briefing. It produced the intellectual inversion at the heart of Oaktree's approach. The choice, as Marks came to frame it, was between buying the bonds of America's most admired companies at prices that assume nothing can go wrong, or buying the bonds of unloved companies at prices that overstate the risk of default — from which the surprises are likely to be on the upside. Having seen fortunes lost investing in the best, it seemed much smarter to buy the worst at too-low prices. From this came the motto Oaktree later adopted: "If we avoid the losers, the winners will take care of themselves." Marks credits the morning he spent with Milken as the biggest single source of inspiration for it.
The Hickman Foundation — Marks locates the intellectual root of the high yield idea in an obscure 1958 book, Corporate Bond Quality and Investor Experience by W. Braddock Hickman, which is said to have given Milken much of his inspiration. Studying corporate bond performance from 1900 to 1943 — a stretch that includes the Great Depression — Hickman found that the lower a bond's quality and rating, the higher the return from holding it. Marks calls this a very important conclusion, and it is easy to see why: it is the empirical seed from which both Milken's market and Marks' career grew. Default risk, properly diversified and properly priced, was not something to avoid but something to be paid for bearing.
Creating the Asset Class — Before Milken, below-investment-grade bonds were held primarily by retail investors through mutual funds. Institutional investors — pension funds, insurance companies, bank trust departments — either were prohibited from holding them by mandate or avoided them by preference. Milken's research demonstrated that the default-adjusted return on a diversified high yield portfolio exceeded investment-grade returns. He then built the infrastructure — origination, distribution, market-making — to make the asset class viable for large investors. Without this infrastructure, there would have been no high yield market for Marks to build a career in.
The Institutional Constraint as Opportunity — The regulatory barriers that excluded institutional investors from high yield bonds were not just a historical artifact — they were the source of the persistent mispricing that generated excess returns for unconstrained investors. Marks entered high yield at Citibank in the late 1970s specifically because institutional avoidance created attractive prices. This insight — that wherever institutional constraints prevent rational actors from accessing an asset class, excess returns are available for unconstrained investors — is a structural principle Marks applies across all of Oaktree's strategies.
The 1990 Collapse as Opportunity — When Drexel Burnham collapsed in 1990 and Milken's conviction triggered a wave of forced selling in the high yield market, prices collapsed to levels disconnected from fundamental value. This created one of the best high yield and distressed investing environments in history — the opportunity that launched Oaktree's predecessor practices. The irony: Milken's legal downfall created the conditions for Marks and Karsh to build what became one of the world's leading credit firms.
The Mark-to-Market Doom Loop — Marks adds a regulatory detail to the 1990 story that still rankles. As part of the government's effort to "get" the high yield bond industry — and Drexel and Milken specifically — savings and loan associations were required to mark their high yield holdings to market, dooming many of them in a time of price weakness. The forced marks turned a price decline into institutional insolvencies, which produced more forced selling, which produced lower prices. For Marks it is a standing lesson in how accounting rules and regulatory crusades can manufacture the very crises they claim to prevent — and in why the prosecution of Milken and the failure of Drexel Burnham, by precluding the remedial bond exchanges that might have kept companies alive, turned a recession's defaults into a full market collapse.
Impact on Marks' Work
The Structural Barrier Thesis: Milken's high yield market demonstrated the core principle Marks applies across all Oaktree strategies: markets where structural barriers (regulatory constraints, complexity, stigma, mandate restrictions) prevent rational institutional investors from participating offer persistent excess returns for unconstrained investors with the analytical capability.
The Asset Class Foundation: Without the high yield bond market Milken created and institutionalized, there would be no Oaktree. The high yield practice is the foundation on which everything else — distressed debt, private credit, infrastructure — was built.
The Theory Behind the Career: In "Gimme Credit" (2025), Marks reduces the entire logic of credit investing to one sentence and then attaches two names to it: lending to a risky borrower is worthwhile if the interest rate is high enough to produce a return above safe debt even after allowing for expected credit losses — the theory, he writes, that underpinned both Milken's popularization of high yield bonds in the late 1970s and his own career. Few sentences in the corpus state the Marks-Milken lineage as directly.
The Sea Change in Prudence: In "Sea Change" (2022), Marks frames Milken's contribution as one of the great conceptual shifts in investment history. Before the mid-1970s, prudent bond investing meant buying only presumedly safe investment grade bonds; non-investment grade bonds were off-limits to fiduciaries, since proper financial behavior mandated the avoidance of risk. Milken and a few others saw that it should be possible to issue — and prudently invest in — lower-rated bonds if the interest compensated for the default risk. The move from avoiding risk to bearing it intelligently for pay is, in Marks' telling, the hinge on which modern credit investing turned.
The Open Playing Field: By 1988, Marks notes in "Getting Lucky" (2014), the prominence of Drexel Burnham and Milken had attracted broad attention to high yield bonds — but distressed debt was still little known and poorly understood, leaving an open playing field for Oaktree's first distressed fund. The pattern generalized into a career-long heuristic: each new Oaktree strategy sought the next asset class where stigma, complexity or unfamiliarity still kept competitors out, and Milken's market was the original template.
Key Passages From Marks' Memos
"Other sponsors may be wary of junk bonds because of the market's well-publicized collapse in 1989 and 1990, and the securities' association with Michael Milken and the now-defunct bond house Drexel Burnham Lambert."
— How Does an Inefficient Market Get That Way (1994)
"Noteworthily, Michael Milken and Jonathan Simons wrote in The Wall Street Journal of June 20 that, 'Global corporations have raised nearly $2 trillion in public and private markets this year . . .'"
— So Much That's False and Nutty (2009)
"“There’s some guy named Milken or something who works for a small brokerage firm in California, issuing and trading high yield bonds. Can you find out what that means?”"
— Dare to Be Great (2006)
"Mike was neither the inventor (first to create) nor the discoverer (first to find) of bonds rated below investment grade. He’s just the person who did the most with them."
— Everyone Knows (2007)
"The motto we chose for Oaktree was inspired by a lot of people and events, but the morning I spent with Mike Milken in 1978 was the biggest single source of inspiration."
— Everyone Knows (2007)
"But in the mid-1970s, Michael Milken and a few others had the idea that it should be possible to issue non-investment grade bonds – and to invest in them prudently – if the bonds offered enough interest to compensate for the risk of default."
— Sea Change (2022)
"That was precisely the theory that underpinned Michael Milken’s popularization of high yield bonds in the late ’70s, as well as my career."
— Gimme Credit (2025)
"Michael Milken is generally credited with the idea, implemented in the late 1970s, that non-investment grade companies should be able to issue bonds if their interest rates are high enough to compensate for the risk of default."
— What's Going on in Private Credit? (2026)
Referenced In
Source: Howard Marks Knowledge Base — Oaktree Capital Management memos 1990–2025