Baby, You're a Rich Man Still

By John Greenwald

Even for a billionaire, the $600 million penalty that junk-bond king Michael Milken has agreed to pay is a breathtaking sum. Milken will be forfeiting more money than any other felon in history. By another measure, the penalty is even larger than Union Carbide's $470 million settlement offer for the Bhopal disaster. Yet Milken's fortune, which has been estimated at $1.2 billion, is by no means wiped out. The frugal financier, who invested his monumental income instead of spending it, possesses an intricate web of assets that have been well sheltered from taxes and prying eyes. At the least, Milken is likely to remain a centimillionaire, a famous philanthropist and a formidable investor.

To the workaholic Milken, 43, power is more precious than money, so his prison term is the real penalty. By pleading guilty to six counts of securities fraud (reduced from 98 criminal charges in the original indictment), Milken faces as much as 28 years behind bars. But oddsmakers bet that when Milken is sentenced in October he will get five years and serve less than that.

When he gets out, Milken can go back to tending a world-class fortune that began with a $25,000 salary when he joined Drexel Burnham Lambert in 1970. While he was head of Drexel's junk-bond department, his compensation zoomed from $45.7 million in 1983 to more than $550 million in 1987, the highest annual paycheck in corporate history. All told, he earned $1.1 billion during those golden years.

Milken did not fritter money away on Gulfstreams and private islands as most tycoons do. He formed partnerships to invest in everything from furriers to California real estate. His family's holdings include the five-story building that housed Drexel's Beverly Hills offices, along with several adjacent structures. (Milken picked up extra cash by renting the buildings to Drexel for about $11.2 million from 1984 to 1988.) The complex at Wilshire Boulevard and Rodeo Drive now has an estimated value of roughly $85 million.

Another gauge of Milken's wealth is the Foundation of the Milken Families, a group of four charitable funds. With total assets of about $350 million, the foundation has dispensed $45 million in donations. Among Milken's favorite charities: the United Way of Los Angeles and the University of Pennsylvania, where Milken attended the Wharton School.

Milken has already made what amounts to a whopping down payment on his penalty. When he was indicted on racketeering charges last year, Milken promised to post $700 million to keep prosecutors from seizing his assets. So far he has handed over $300 million in cash plus an IOU for another $300 million. The remaining $100 million was in the form of Drexel stock, which became worthless when the firm went bankrupt last February. Result: Milken has in effect put up half of his $600 million fine.

Even so, he may be due for a colossal tax break. Since $400 million of his penalty will be set aside for compensation of investors who suffered from Milken's schemes, the money can be treated as a tax-deductible business expense. Milken could thus be eligible for up to $112 million in tax write- offs. "This is what happens when you have corporate criminals whose penalty is basically monetary," declares Michael Waldman, a tax specialist for Public Citizen, a Washington-based consumer group. "They hire the best lawyers and tax advisers money can buy to figure out ways to deprive society of its debt, in years and dollars."

Legal fees are probably Milken's biggest regular expense right now. For a tycoon, he lives a relatively modest life with his wife Lori and three children in a five-bedroom house in the Los Angeles suburb of Encino. When Milken was the most powerful financier in America, a bodyguard drove him to his office by 4:30 a.m. in a limousine. But those days are behind him. Under terms of the settlement, the Government has permanently barred Milken from the securities business. Yet if Milken ever does run a little low, he could always call on his brother Lowell, who earned more than $102 million at Drexel from 1984 through 1987. As part of the plea agreement, all charges against Milken's sibling were dropped.

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With reporting by Thomas McCarroll/New York and James Willwerth/Los Angeles