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80 THE CREATURE FROM JEKYLL ISLAND
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again in a slightly different form. Capital, especially for small
companies, was now corning from bonds which Drexel had found a
way to mass market. In fact, Drexel was even able to use those
bonds to engineer corporate takeovers, an activity that previously
had been reserved for the mega-investment houses. By 1986, Drexel
had become the most profitable investment bank in the country.
Here was $180 billion that no longer was being channeled
through Wall Street. Here was $180 billion that was coming from
people's savings instead of being created out of nothing by the
banks. In other words, here was growth built upon real investment,
not inflation. Certain people were not happy about it.
Glenn Yago, Director of the Economic Research Bureau and
Associate Professor of Management at the State University of New
York at Stony Brook, explains the problem:
It was not until high yield securities were applied to restructuring
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 New York Times, the impact was first felt on Wall Street, "where
sharp elbows and a working knowledge of computer spreadsheets
suddenly counted more than a nose for dry sherry or membership in
Skull and Bones." 1
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 at once their "junk" bond holdings. That caused their
HOME, SWEET LOAN 81
rices to plummet, and the thrifts were even further weakened as
jL>y 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).
t add to the disaster, the RTC itself, which became the country's
largest 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 Wall Street Journal stated on March 10, 1992:
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
w iU decline further. Those that remain fall into two groups: those
1. Glenn Yago, Junk Bonds: How High Yield Securities Restructured Corporate America
(New York: Oxford University Press, 1991), p. 5.
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'"Banking on Government/' pp. 24, 25.
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Quoted in "Banking on Government," p. 26.