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House of cards

Misfortune is not to be wished on anyone, but it would be hard to findsympathy for Drexel Burnham Lambert, once Wall Street's most profitable firm, which this week became Wall Street's largest bankruptcy. That Drexel was brought down largely by its own invention, the junk bond, is as pure an example of poetic justice as one is ever likely to see.

Junk bonds have become an obscenity with little redeeming social value. With few exceptions, these high-yield, high-risk securities have been used only to plunder healthy corporations, leaving them struggling with debt while the raiders and former shareholders pocketed their swollen profits. The harm to employees, communities and innocent creditors was not considered. With consummate if candid arrogance, Drexel sponsored an annual celebration known as the "Predators' Ball."

"It did far more damage to the system by operating than it will by shutting down," said James Grant, a financial magazine editor, quoted in the New York Times. "The damage was the creation of debt that stood no chance of survival in anything except the balmiest summer economic weather."

The financial markets appear to have digested the Drexel failure with scarcely a hiccup, largely because the values of most junk bonds already were severely depressed. But the fact that there was no generalized panic does not mean the damage was confined to Drexel and its staff. Drexel apparently has defaulted on $150-million still owed to the Securities and Exchange Commission in connection with Drexel's guilty plea to six criminal charges two years ago. The money was to have been turned over to investors who had been defrauded.

Several shaky savings and loan associations are left holding Drexel's paper. Drexel owes $15-million to Miami-based CenTrust, which was seized by regulators this month because junk bonds and reckless spending eroded its capital. When CenTrust and other thrifts are sold or liquidated, the taxpayers will be left holding those Drexel bonds.

The public also is exposed through a number of insurance companies that wrote pension annuities backed by bonds that had been issued or sold by Drexel and other junk bond dealers. Private pensions are guaranteed by a federal agency, the Pension Benefit Guaranty Corp., that may be as woefully underfunded as was the Federal Savings and Loan Insurance Corp. before its fall. The Guaranty Corp. denies that it is responsible for pension annuities, but there are members of Congress who say otherwise. If those annuities fail and the government refuses to help, thousands of innocent workers will lose the pensions they thought they had earned.

A Senate hearing this week brought out that many employers and corporate raiders have been terminating pension funds in order to milk their surpluses. To provide for paying pensions, some of them have been purchasing annuities bought from insurance companies, such as First Executive Corp., of Los Angeles, that invested heavily in junk bonds. First Executive, Drexel's largest customer, is one of five insurers whose junk bond holdings exceed their total capital. High yields from First Executive's junk portfolio enabled it to underprice its competitors, but only so long as the junk bond bubble did not burst.

Where was the Department of Labor when this was going on? Where were the state insurance regulators? And how much more evidence could Congress possibly need to put insurance under federal regulation like the banking and securities industries?

Sen. Howard Metzenbaum, D-Ohio, who chaired the hearing, is proposing stricter pension legislation. But, as usual, congressional action will likely come too late to prevent costly losses and serious hardship.

Drexel's largest creditor turns out to be the man who built its house of cards - Michael R. Milken, the junk bond king who awaits trial on 98 counts of racketeering, fraud and other charges. Drexel still owes him $100-million.

Considering that Milken made more than half a billion dollars the year before he got indicted and fired, he didn't fare too badly. Even poetic justice has its limits.

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