Milken Says Credit Could Free $100 Trillion for Poor Countries

Milken Says Credit Could Free $100 Trillion for Poor Countries
Bloomberg, 2007-01-18
By John Glover

Michael Milken, the junk bond billionaire turned philanthropist, says developing counntries could free up trillions of dollars by developing markets based on mortgages, credit cards and loans.

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. Financial products linked to loans, bonds and credit cards could help to 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, 60, will say. ``Financial technology produces more jobs, more economic development.''

Milken is credited with popularizing the market for junk bonds that now generates more than $200 billion of financing a year for non-investment grade companies worldwide. He's advocating bonds and derivatives that he says helped smaller companies in the U.S. create 58 million new jobs since 1970.

U.S. 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.

Innovative Products

The U.K.'s lead in building a market for innovative financial products in the 1990s helped reduce unemployment to 4 percent from 10 percent, while the jobless rate in Europe stayed above 10 percent, Milken will tell people attending the conference on high-yield, high-risk debt.

``When the U.K. 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.

Junk Bond Resurgence

Milken's work these days is focused more on health and economic research than the financial markets through organizations including the Milken Institute.

Appetite among western investors for high-risk debt has returned. Companies sold a record $151 billion of junk bonds in the U.S. 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 1.79 percentage points over U.S. Treasury notes, according to JPMorgan Chase & Co.'s EMBI Global Diversified 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 U.S. 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 says.