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.
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.
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
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.
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.
Key Passages From Marks' Memos
"Milken demonstrated something that seems obvious in retrospect but was genuinely controversial when he first argued it: that below-investment-grade bonds were not 'junk' in the sense of being unreliably unprofitable. They were undervalued relative to their actual default risk, because institutional avoidance suppressed demand."
— High Yield Bonds Today (2013)
"The lesson from high yield's origins: the best investment opportunities are frequently found in markets that are stigmatized, avoided, or misunderstood by the institutional mainstream. Milken saw that before anyone else, at the scale of an entire asset class."
— Dare to Be Great (2006)
Referenced In
Source: Howard Marks Knowledge Base — Oaktree Capital Management memos 1990–2025