that would increase the longer the owner refrained from cashing in the note. Drexel's
"increasing rate notes" easily brought in the entire $5 billion required.
In November of 1986, Ivan Boesky pleaded guilty to one felony count of manipulating
securities, and his testimony led to the indictment of Milken in March, 1989, some
months after the RJR Nabisco deal had been sewn up. In order to protect more important
financial players, Milken was allowed to plead guilty in April 1990 a five counts of
insider trading, for which he agreed to pay a fine of $600 million. On February 13, 1990,
Drexel Burnham Lambert had declared itself bankrupt and gone into liquidation, much to
the distress of junk bond holders everywhere who saw the firm as a junk bond buyer of
last resort.
By this time, many of the great LBOs had begun to collapse. Robert Campeau's retail
sales empire of Allied and Federated stores blew up in the fall of 1989, bring down
almosty $10 billion of LBO debt. Revco, Freuhauf, Southland (Seven-Eleven stores),
Resorts International, and many other LBOs went into chapter eleven proceedings. As for
KKR's deals, they also began to implode: SCI-TV, a spin-off of Storer Broadcasting,
announced that it could not service its $1.3 billion of debt, and forced the holders of $500
million in junk bonds to settle for new stocks and bonds worth between 20 and 70 cents
on the dollar. Hillsborogh Holdings, a subsidiary of Jim Walker, went bankrupt, and
Seamans Furniture put through a forced restructuring of its debt.
It was clear at the time of the RJR Nabisco LBO that the totality of the company's large
cash flow would be necessary to maintain payments of $25 billion of debt. That will take
a lot of animal crackers and Winstons. If RJR Nabisco had been a foreign country, it
would have ranked among the top 15 debtor nations, coming in between Peru and the
Phillipines. Within a short time after the LBO, RJR Nabisco proved unable to maintain
payments. KKR was forced to inject several billion dollars of new equity, take out new
bank loans, and dunning its clients for an extra $1.7 billion. RJR Nabisco by the early
autumn of 1991 was a time bomb ticking away near the center of a ruined US economy.
If citizens are bright enough to follow the line that leads back from Milken to Kravis to
Bush, RJR and similar horror stories could politically demolish George Bush.
In September 1987, Senator William Proxmire submitted a bill which aimed at restricting
takeovers. Two weeks later, Rep. Rostenkowski of Illinois offered a bill to limit the tax
deductability of the interest on takeover debt. The LBO gang in Wall Street was horrified,
even though it was clear that the Reagan-Bush team would oppose such legislation using
every trick in the book. Later, LBO ideologues blamed the Congress for causing the crash
of October, 1987.
Kravis has always been adamant in opposing any restrictions on the kind of insanity we
have briefly reviewed. "I'm very much of a free-market person," says Kravis. I don't want
interference. My life...you've listened to my life story, I don't want interference! The best
thing to happen to people and this country is a free market system, and I'm very
concerned, if we don't keep the right people in office, that we're not going to have this
free-market environment. And we should have it!" [fn 7]