through deconglomeration and takeovers that hostilities against the junk bond market broke out.... The high yield market grew at the expense of bank debt, and high yield companies grew at the expense of the hegemony of many established firms. As Peter Passell noted in
The first line of attack on this new market of high-yield bonds was to call them 'junk.' The word itself was powerful. The financial media picked it up and many investors were frightened away.
The next step was for compliant politicians to pass a law requiring S&Ls to get rid of their 'junk,' supposedly to protect the public. That this was a hoax is evident by the fact that only 5% ever held any of these bonds, and their holdings represented only 1.2%
of the total S&Ls assets. Furthermore, the bonds were performing satisfactorily and were a source of much needed revenue. Nevertheless, The Financial Institutions Reform and Recovery Act, which was discussed previously, was passed in 1989. It forced S&Ls to liquidate
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rices to plummet, and the thrifts were even further weakened as they took a loss on the sale. Jane Ingraham comments: Overnight, profitable S&Ls were turned into government- owned basket cases in the hands of the Resolution Trust Corporation (RTC).
To add to the disaster, the RTC itself, which became the country's brgest owner of junk bonds ... flooded the market again with $1.6
billion of its holdings at the market's bottom in 1990....
So it was government itself that crashed the junk bond market, not Michael Milken, although the jailed Milken and other former officials of Drexel Burnham Lambert have just agreed to a $1.3 billion settlement of the hundreds of lawsuits brought against them by government regulators, aggrieved investors, and others demanding
'justice.'1
Incidentally, these bonds have since recovered and, had the S&Ls been allowed to keep them, they would be in better financial condition today. And so would be the RTC.
With the California upstarts out of the way, it was a simple matter to buy up the detested bonds at bargain prices and to bring control of the new market back to Wall Street. The New York firm of Salomon Brothers, for example, one of Drexel's most severe critics during the 1980s, is now a leading trader in the market Drexel created.
REAL PROBLEM IS GOVERNMENT REGULATION
So the real problem within the savings-and-loan industry is government regulation which has insulated it from the free market and encouraged it to embark upon unsound business practices. As the
If you're going to wreck a business the size of the U.S. Thrift industry, you need a lot more power than Michael Milken ever had.
You need the power of national political authority, the kind of power possessed only by regulators and Congress. Whatever 'hold' Milken or junk bonds may have had on the S&Ls, it was nothing compared with the interventions of Congress.
At the time this book went to press, the number of S&Ls that operated during the 1980s had dropped to less than half. As failures, mergers, and conversion into banks continue, the number will decline further. Those that remain fall into two groups: those
'Banking on Government,' pp. 24, 25.
Quoted in 'Banking on Government,' p. 26.
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that have been taken over by the RTC and those that have not. Most of those that remain under private control—and that is a relative term in view of the regulations they endure—are slowly returning to a healthy state as a result of improved profitability, asset quality, and capitalization. The RTC-run organizations, on the other hand, continue to hemorrhage due to failure by Congress to provide funding to close them down and pay them off. Losses from this group are adding $6 billion per year to the ultimate cost of bailout.
President Clinton was asking Congress for an additional $45 billion and hinting that this should be the last bailout—but no promises.
The game continues.
CONGRESS IS PARALYZED, WITH GOOD REASON
Congress seems disinterested and paralyzed with inaction. One would normally expect dozens of politicians to be calling for a large-scale investigation of the ongoing disaster, but there is hardly a peep. The reason becomes obvious when one realizes that savings-and-loan associations, banks, and other federally regulated institutions are heavy contributors to the election campaigns of those who write the regulatory laws. A thorough, public investigation would undoubtedly turn up some cozy relationships that the legislators would just as soon keep confidential.
