Michael Milken, the junk bond billionaire turned philanthropist, says developing countries could free up trillions of dollars by increasing their use of the credit markets.
Poorer nations could release as much as $20 trillion for investment through securities based on mortgages, Milken will say in a speech at a conference in London today. By building derivatives on loans, bonds and credit cards, they could raise between $50 trillion and $100 trillion, according to an outline of his speech e-mailed by conference organizer BNP Paribas SA. „Financial innovations have driven every advance of civilization since the development of banking in Mesopotamia 4,000 years ago,” Milken, will tell the high-yield, high-risk debt forum. „Financial technology produces more jobs, more economic development.” Milken's bond deals in the 1980s helped set entrepreneurs from casino billionaire Stephen Wynn to corporate raider Carl Icahn on their way to riches. Smaller US companies that exploited opportunities to raise money from debt and derivatives markets have created a net 58 million new jobs since 1970, in contrast with larger competitors which cut 4 million posts, according to Milken.
US institutions sell about $1 trillion of asset-backed bonds every month, according to the Securities Industry and Financial Markets Association's Web site. More than $20 trillion of derivatives based on debt known as credit-default swaps are outstanding worldwide, according to Basel, Switzerland-based Bank for International Settlements. The UK's lead in building a market for innovative financial products in the 1990s helped reduce unemployment to 4% from 10%, while the jobless rate in Europe stayed above 10%, according to Milken. „When the UK adopted financial technologies in the 1990s, things changed,” says Milken. Milken at Drexel Burnham Lambert Inc. helped fuel the M&A boom of the 1980s by selling bonds to newly created funds. By 1989, the junk bond market had crashed and two years later Milken was jailed for violations including securities fraud. He paid more than $1 billion in civil settlements and fines, and was banned for life from the securities industry.
Appetite among western investors for high-risk debt has returned. Companies sold $151 billion of junk bonds in the US and $48.4 billion in Europe last year, according to data compiled by Bloomberg. The securities are rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's. For developing countries, the cost to borrow has never been lower, with emerging-market bond yields at an average 4.07 percentage points over US Treasury notes, according to JPMorgan Chase & Co.'s EMBI+ index. Health care is key to development, Milken says, putting the value of „human capital” at $4,000 trillion worldwide. Increased life expectancy in the US added $2.6 trillion a year between 1970 and 1998, according to Milken. „Ultimately we make the effort not because of productivity gains but because each life is precious,” he said. (Bloomberg)