junk bonds

The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the JunkBond Raiders
by Connie Bruck
Published 1 Jun 1989

If the issuer understands at the time of his offering that he will pay the piper by buying other junk bonds, this ought to be disclosed in the prospectus. To Revlon’s allegation, Perelman’s response was simply that after getting the money he had decided to invest some of the proceeds from the offering—about $350 million, in fact—in other Drexel-underwritten junk bonds, in order to make up his carrying cost, of about 14.5 percent. According to Gittis, they had told many investment-banking firms that they were in the market for junk bonds, but only Drexel had available the quantity that they wanted. “We started hearing that others were trying to buy them from Drexel, to sell to us.”

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That loan in effect “bridges” the time from the closing of the deal to the time when the junk bonds are sold; the proceeds of the sale then pay off the loan or (if the investment bank is leaving some of its capital in the deal) part of it. In their enthusiasm, Salomon and a group of institutional lenders who were participating in thus funding deals together dubbed themselves “the Bridge Club.” It was inevitable, once these firms—tantalized by those 3–4 percent spreads—had followed Milken into the original issuance of junk bonds, that they would then attempt to follow him the next step: to the junk-bond-financed takeover and buyout. How could they not try, after watching Drexel garner a financing fee of $86 million in the Beatrice buyout?

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At first, Wirth spearheaded the congressional assault; but by April 1985, when he attended the Predators’ Ball, he was straddling the fence, and by the end of that year he had become a staunch supporter of Drexel and its junk bonds. In fact, one of his top aides, David Aylward, left his job with Wirth to help organize Alliance for Capital Access, a lobby formed to oppose federal limits on junk-bond financings, formed by Drexel clients at Drexel’s prompting. The leader of Alliance was Larry Mizel of M.D.C. Holdings, a longtime issuer of junk bonds and also a major subscriber to the bonds in the takeover deals. Under the Federal Election Campaign Act, the limits on contributions to candidates per election are $1,000 for a contribution by an individual and $5,000 by a multicandidate committee (the category in which Drexel’s Political Action Committee falls).

Liar's Poker
by Michael Lewis
Published 1 Jan 1989

Many of us also asked our first questions about the wisdom of entering the junk bond market. With the stock market crash the market in junk bonds, inextricably linked to the asset values of corporations, temporarily ceased to function altogether. The fickle stock market was saying that one day corporate America was worth $1.2 trillion, and the next only $800 billion. Junk bond investors dumped their holdings when they saw the wild behavior of their collateral. Our Southland junk bond deal collapsed on October 19. When the stock market crashed, the value of 7-Eleven stores and, therefore, junk bonds backed by 7-Eleven stores, crashed, too.

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Lewie Ranieri feared losing his grip on Salomon Brothers' savings and loan customers and found a couple of ways to foil the small, fledgling junk bond department created by Voute in 1981. In 1984 our two-man junk bond department spoke at a Salomon Brothers seminar for several hundred savings and loan managers. They had been invited to address the thrifts by the mortgage department. But after their three-hour presentation, Ranieri rose to deliver the closing address. The customers, of course, hung on his every word; as I've said, they viewed Lewie as their savior. "There are two things you absolutely should never do," said Ranieri. "And the first is buy junk bonds. Junk bonds are dangerous." Of course, he might have believed it.

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In the end, however, the thrifts did not, and Ranieri's objection served only to discredit Salomon's junk bond department and drive the thrifts into the arms of Drexel. And Bill Voute's people were livid about being humiliated before such an important audience. "It was sort of like being invited to dinner and finding out you're the dinner," says one former Salomon junk bond man. The same two-man team of junk bond specialists spent six months crossing America making presentations to individual S&L managers. "It was a crackerjack presentation, and we were getting a great response, but no one was calling up to buy bonds," says one of the Salomon former junk bond specialists. They expected that the orders to buy junk bonds would soon follow their road show.

Den of Thieves
by James B. Stewart
Published 14 Oct 1991

It would be an unprecedented test of the degree to which public opinion could be used to shape the outcome of a criminal investigation. Soon after the junk-bond conference, Drexel launched a two-week-long, firm-wide celebration of junk bonds, including sporting events, lectures, and films touting the glories of junk bonds and their contributions to America. In a policy shift first announced at the conference, Drexel abandoned its long-standing eflforts to replace the word "junk" with "high-yield" in popular parlance. Instead, it decided to embrace "junk." Employees were given pins with the message, junk BONDS KEEP AMERICA FIT. One of the videos featured Joseph and firm chairman Robert Linton lip-synching the lyrics, "When the going gets tough, Drexel gets going."

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It would be enormously lucrative for Drexel; on top of its investment banking advisory fees, it would raise over $150 million in Milken-led junk bonds, skimming oflf its usual percentage, or about $5 to $6 million in financing fees alone. And this wasn't all. The true extent of Milken's gains were concealed in the closely guarded partnership accounts in Beverly Hills. The Milken-led investment partnerships, originally launched to free his junk bond people from worrying about their own investments, had been thriving, moving Drexel-underwritten junk bonds in and out of their portfolios at large spreads, buying positions at favorable oflfering prices that quickly soared once trading in the bonds began after the offer.

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One of the videos featured Joseph and firm chairman Robert Linton lip-synching the lyrics, "When the going gets tough, Drexel gets going." Full-page newspaper ads showed alleged beneficiaries of junk-bond largesse: not, of course, people like Milken himself, or Milken satellites like Carr or Spiegel, but a wholesome young man, his pregnant wife and their child standing in front of a soon-to-be-completed new home. What linked this scene of happy domesticity to junk bonds? Hovanian, the home's builder, was a Drexel client that, with junk bonds, had been able to "provide 50,000 people with a living room and 20,000 people with a living," the ad claimed. A $4 million network television campaign was similarly sentimental, showing an energy plant in Vidalia, Louisiana, built with Drexel junk bonds, that had supposedly lowered unemployment in the impoverished Louisiana town.

Barbarians at the Gate: The Fall of RJR Nabisco
by Bryan Burrough and John Helyar
Published 1 Jan 1990

Sooner or later, Forstmann knew, the economy would turn down and all the junk-bond junkies would go belly-up when they couldn’t make their mountainous debt payments. They were like those “no-money-down” real estate investors with no money in their pockets when their debts came due. When that happened, Forstmann feared, the use of junk-bond debt would be so widespread that the entire U.S. economy might be dragged into a depression. Of all Drexel’s junk-bond clients, by far the most nettlesome to Forstmann was his archrival Kohlberg Kravis. Kravis not only used more junk bonds than any other, but it did so in Forstmann Little’s front yard, the LBO industry.

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But Perelman won out when a Delaware court, in a precedent-setting move, ruled that key components of Forstmann’s merger agreement unfairly discriminated against Pantry Pride. Revlon was the first hostile takeover of a major public company by a junk-bond-backed buyer, and it opened the gates for a string of similar battles, including a string of attacks by raiders such as Paul Bilzerian and Sir James Goldsmith. In an odd way, Ted Forstmann held himself responsible for the carnage junk-bond-financed raiders wrought on Corporate America. The triumph of junk bonds was more than an affront to Forstmann’s morals, of course. It was laying waste to his business as well. Because the use of junk bonds allowed corporate raiders to raise money cheaply and easily, it tended to drive up the prices of takeover targets.

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For fifteen months Good’s clients kept fees pouring into Cohen’s coffers, as Shearson backed raids on several companies, including Burlington Industries and Telex. Over time, though, Cohen began to lose confidence in Good. The sale of junk bonds is normally among the most profitable aspects of merchant banking. But because Good’s raiders rarely bought anything, Shearson’s junk-bond department sat idle, atrophying. When Asher Edelman finally managed to snag a company—the steakhouse chain, Ponderosa—Shearson’s junk-bond offering was a disaster, and the firm took steep losses. Cohen steamed. Good took the blame. The final run of Shearson’s raider express began on Black Monday, October 19, 1987.

Phishing for Phools: The Economics of Manipulation and Deception
by George A. Akerlof , Robert J. Shiller and Stanley B Resor Professor Of Economics Robert J Shiller
Published 21 Sep 2015

Apples would be the “fallen angels” issued by once-successful companies down on their luck; those were the kind of junk bonds studied by Hickman. The prunes would be the new kind of junk bonds, which Milken would make happen. The fallenangel junk bonds had indeed done surprisingly well up to 1943. The challenge for Milken as phisherman was to find a way to profit from this error by creating another kind of junk bond: not a fallen-angel junk bond, but a newly issued junk bond, with himself as the broker of the new issue. The Milken story unfolds as he takes his first job after graduation from Berkeley and an MBA at the Wharton School of Business.

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His salesmanship resulted in the popular name junk bond for the low-grade debt, although Milken himself avoided using it. By 1975 the Wall Street Journal published an approving front-page article about Milken: “One Man’s Junk Is Another’s Bonanza.” Bond trading, it said, had become “the fastest game in town.”6 Milken had become a superstar. And he was only five years out of graduate school. People commonly make the fallacy, in the words of John Locke, of “taking words for things.”7 In this case, the mistake could be assuming that junk bonds from one decade are the same as junk bonds from another. They have the same name, junk bonds, and so phoolish investors can be expected to react the same to them, even if this time they are underwritten by institutions whose reputations are being mined.

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Instead, they would be daisy chains of mortgage valuations: the kite in the valuations fenced through overrated mortgage-backed securities. The next chapter shows how the looting of the S&Ls metastasized into the market for junk bonds in the beginning of our new age of greed. Soon-to-be-bankrupt S&Ls played a significant role in the expansion of the market for junk bonds, which underlay hostile takeovers of even the largest firms—previously deemed impossible. TEN Michael Milken Phishes with Junk Bonds as Bait The work of one man, Michael Milken, in the 1970s and 1980s changed the face of US finance forever. No longer could corporate executives of large US corporations be confident that their companies were too big to be challenged by corporate raiders threatening hostile takeovers because now the raiders could acquire even very large companies without putting up much capital.

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry
by William K. Black
Published 31 Mar 2005

Milken sold, as I noted, $125 million in ACC sub debt at a high interest rate to the usual subjects: if Milken sold one’s junk bonds, it was understood that one bought junk bonds issued by other Milken clients. The key to Milken’s scheme was to reduce the apparent default rate, so it would not do to let ACC default on its Drexel-issued junk bonds. The situation was as elegant as it was cynical: ACC would sell junk bonds to widows (at a ludicrously low rate of interest) and use the proceeds to retire the Drexel-issued junk bonds sold (at a very high rate of interest) to Milken’s minions.10 This scam simultaneously (1) avoided a default on Drexel-issued junk bonds, (2) considerably reduced ACC’s interest expense, and (3) allowed ACC to book a gain from refinancing its debt at a lower interest rate.

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He was deeply suspicious of Milken and wanted to pass rules restricting junk bonds. OPER, however, said they could not support the rule. In this era, even the GAO’s economists opined that junk bonds were an excellent investment (Stein 1992, 134–135). According to OPER, Milken was right: a diversified pool of junk bonds made a superior investment portfolio. Fortunately, S&Ls never held more than 10 percent of outstanding junk bonds (and usually far less), and 90 percent of all those junk bonds were held by a dozen S&Ls, all of which failed (Black 1993c; NCFIRRE 1993, 4). Many at the agency saw Lincoln’s billion-dollar portfolio of junk bonds as a warning sign, but OPER did not.

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The more subtle advantage was that Milken’s control of the captives ensured that public offerings of junk bonds would succeed and that junk bonds issued by Drexel that were about to default would instead be restructured. Milken could cause the captives to purchase whatever junk bonds the market had refused to buy or restructure (Akerlof and Romer 1993). Reducing the reported default rate of a security makes it appear less risky; a bond that appears less risky rises in value. This is not a claim that Drexel ran a Ponzi scheme or that junk bonds were worthless. They were, however, materially overvalued. That made Milken a rich man, even after he was released from prison.

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present
by Jeff Madrick
Published 11 Jun 2012

In the late 1970s, both Riklis and Steinberg eventually had to sign consent decrees with the SEC, neither admitting nor denying guilt on charges of financial misconduct, but agreeing to discontinue the practices. Milken’s junk bonds were severely tested in the 1973–1975 recession, and most held up. When the economic expansion started in 1975 and 1976 again, the junk bond issuers generated more cash flow and many investors made handsome profits on the bonds’ rise in value. Junk bonds began to look more like trustworthy investments to a widening circle of investors. Milken had mostly traded in the fallen bonds of once healthy companies. Now he wanted to expand his business into investment banking by underwriting new issues of junk bonds for risky companies. In the past, such companies had to borrow from banks or insurance companies—loans that were heavily collateralized by assets or capital and almost always hard to get.

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In doing so, he became by far the richest man on Wall Street at his peak, almost single-handedly creating and controlling a $200 billion market for junk bonds—the high-interest-paying debt of risky companies. No single person ever wielded as much power in the post–World War II period. By 1988, junk bonds amounted to one fourth of outstanding corporate debt. Three fifths of it was for takeover transactions of one kind or another. Milken had enormous influence over both buyers and sellers, and this enabled him to set the prices of the junk bond debt. He took a piece of these deals every step of the way, often secretly. Even when other major investment banks were competing with him, Milken typically controlled well more than half the market.

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Once out of prison, he started a charitable foundation dedicated to economic research and contributed significantly to medical research, having survived prostate cancer. By the time of Milken’s plea in the spring of 1990, the junk bond market was collapsing. Deals financed by Milken and others had now clearly been done at unjustifiably high prices. The profits of the early junk bond issuers Milken sponsored were around six times annual debt service, but in the late 1980s, they were often less than debt service. A Harvard Business School study found that ratings on junk bonds had fallen sharply since the early 1980s, those with the lowest rating tripling in number. Many could not meet their debt payments when the economy slowed.

The Accidental Investment Banker: Inside the Decade That Transformed Wall Street
by Jonathan A. Knee
Published 31 Jul 2006

But after the bankruptcy of Michael Milken’s Drexel Burnham in 1990, DLJ would emerge by the mid-1990s to take the mantle of leading junk bond house. Junk bonds are issued by companies that are too small, too young, too leveraged, or otherwise seen as too risky to attract more traditional and less expensive forms of financing. Junk bonds are defined as those that receive a rating from Moody’s or S&P that designates them as “speculative” credits as contrasted to the “investment grade” ratings earned by larger, less leveraged, more established companies. In addition to carrying a higher interest rate, junk bond issuers pay a higher “spread” to the investment bank that places the bonds, making this the most profitable part of the debt finance business.

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Although Morgan repeatedly asserted such claims were greatly exaggerated, total telecom-related losses were ultimately much greater than this. 26 Jonathan Stempel, “Morgan Stanley junk telecom bonds perform worst-analyst,” Reuters News, October 11, 2000. Salomon ultimately pulled the report at Morgan Stanley’s request. Jonathan Stempel, “Salomon pulls Morgan Stanley junk bond analysis,” Reuters News, October 13, 2000. 27 Randall Smith and Paul Sherer, “Morgan Stanley Bond Executive Resigns After Recent Management Restructuring,” Wall Street Journal, October 6, 2000. 28 Tom Barkley, “Morgan Stanley Eliminates Head Trader, Others on Junk Bond Team,” Dow Jones Business News, November 19, 2002. 29 See Pallavi Gogol, “Junk Bond Kings: MSDW’s Melchiorre A Jack of All Trades,” Dow Jones News Service, June 9, 1999. The article makes clear that for all of Anthony’s skill as a talented hybrid professional, “part investment banker, a quasi-research analyst, and a master salesman,” from a client’s perspective it is the “ ‘huge commitments of capital’” that were the real “ ‘key to a trader’s ability to function.’” 30 Pallavi Gogol, “Four Men Hold Sway Over Junk Bond World,” Wall Street Journal, June 15, 1999. 31 “Morgan Stanley Changes Parent Company Name,” Business Wire, June 18, 2002.

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In place of this ideal a culture of contingency emerged, a sense not only that each day might be your last, but that your value was linked exclusively to how much revenue was generated for the firm on that day—regardless of its source. At the height of the boom in 1999, I had recently left Goldman Sachs for Morgan Stanley. Once white-shoe Morgan was now locked in battle with relative upstart Donaldson, Lufkin and Jenrette to claim the mantle of junk bond king, up for grabs since the final implosion of Michael Milken’s Drexel Lambert in 1990. The popularization of junk bonds by Drexel had made the debt markets available to all manner of highly leveraged speculative companies—companies, in short, that were the antithesis of Morgan Stanley’s once-pristine client list. Morgan’s primary weapon in this war was its willingness to sponsor debt for “emerging” telecom companies that required huge capital investments.

Extreme Money: Masters of the Universe and the Cult of Risk
by Satyajit Das
Published 14 Oct 2011

Buyers of insurance products and policies were inadvertently purchasing junk bonds. Repackaged as guaranteed investment contracts (GICs), issued by First Executive, junk bonds were being sold to pension funds. Depositors in S&Ls and the taxpayers guaranteeing the deposits were unwittingly exposed to junk bonds. Competitive pressures meant that the debate was not about buying junk bonds but why you weren’t buying them. Milken’s Mobsters But there just wasn’t enough Chinese paper to match investor demand—there were far too few fallen angels. When Goldman Sachs and Lehman Brothers issued the first junk bonds in 1977, Milken and Drexel seized the opportunity, starting with a $30 million issue for Texas International.

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No distinction was drawn between bonds issued by investment grade companies whose ratings had fallen and issuers who started as junk.25 In the late 1980s, as the LBO boom was ending, new research studies on junk bonds corrected the problems of previous studies. Paul Asquith, a professor at Harvard Graduate School of Business, with his colleagues David Mullins and Eric Wolf, found that junk bond default rates were higher than previously stated. Around 30 percent of all junk bonds issued in 1977–9 had defaulted or been subject to a distressed exchange. Lipper Analytical Services, an investment firm, found that over 10 years junk bonds provided lower returns than government bonds, earning the same as money market funds.

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He was “the most important financier of the century.”46 In its August 1985 article, Forbes considered that Milken “isn’t just a step ahead of his Wall Street peers—he’s a quantum leap ahead, acting as venture capitalist, investment banker, trader, investor.”47 Milken’s activities entailed inherent conflicts of interest. Clients were encouraged to overfund—raise more money than required—with the surplus funds being invested in junk bonds sold by Drexel. The firm financed insurance companies and the purchase of S&Ls that then invested in junk bonds. Drexel financed acquisitions with junk bonds placed with Milken’s clients. After completion of LBOs, the company’s pension fund purchased high-yielding GICs from First Executive, creating demand for junk bonds. The higher return allowed the pension fund to reduce required contributions from the sponsor or even allow any overfunding to be returned.

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
by David Carey
Published 7 Feb 2012

Together these trends ensured a steady diet of acquisition targets for the buyout firms. But it was the advent of a new kind of financing that would have the most profound effect on the buyout business. Junk bonds, and Drexel Burnham Lambert, the upstart investment bank that single-handedly invented them and then pitched them as a means to finance takeovers, would soon provide undreamed-of amounts of new debt for buyout firms. Drexel’s ability to sell junk bonds also sustained the corporate raiders, a rowdy new cast of takeover artists whose bullying tactics shook loose subsidiaries and frequently drove whole companies into the arms of buyout firms.

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True or not, the image of LBO artists as a pernicious force on the corporate landscape was being permanently etched. Egged on by the corporate establishment and labor unions, Congress explored ways to combat hostile takeovers and junk bonds. In a series of hearings from 1987 to 1989, buyout industry executives, corporate moguls, and others trooped to Capitol Hill to defend or deride the takeover wave. There was serious talk of abolishing the tax deductibility of the interest costs on junk bonds in order to kill off the alleged menace. At a meeting with Kravis and Roberts in 1988, Senator Lloyd Bentsen, who later that year ran unsuccessfully as the Democratic nominee for vice president, was said to have tossed a study prepared by KKR about the impact of LBOs in the trash.

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Apart from the tactics and the pursuit of companies that didn’t want to be bought, junk bonds stirred controversy for another reason: Many feared that Drexel and the LBO firms were piling too much debt on too many companies, putting them at risk in an economic downturn. Though he had made his name and fortune in LBOs, Ted Forstmann became a vocal critic of junk financing. The fiery-tempered Forstmann’s dislike of Kravis by the late 1980s had ripened into a deep-seated loathing. In op-ed pieces and in interviews, Forstmann fulminated about a culture of unbridled excess and a mounting dependency on junk bonds, arguing that it was ruining the LBO business and threatened to destabilize the broader economy.

Palace Coup: The Billionaire Brawl Over the Bankrupt Caesars Gaming Empire
by Sujeet Indap and Max Frumes
Published 16 Mar 2021

Milken’s genius as a junk-bond banker and trader was to find both companies who needed capital while also cultivating a coterie of buyers for those bonds who would show up repeatedly to stuff their balance sheets with the risky, high-yield paper. And no buyer of Drexel offerings was as loyal as Fred Carr, who ran a California-based life insurance and annuities firm called Executive Life. Connie Bruck reported in the Predator’s Ball that by 1983, Executive Life had participated as a buyer in 100 percent of Drexel junk bond offerings. Executive Life eventually held billions worth of junk bonds, using the yields to pay high returns to its policyholders.

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Howard Marks, the co-founder of Oaktree, was never a Drexel employee. But as a consistent buyer of Drexel junk bonds in the 1980s while an investment manager at Citigroup, he eventually became like family to Leon Black. And their wives, Nancy Marks and Debra Black, would become especially close. In 1978, after years as an equity analyst at Citigroup, the bank asked Marks to look into the nascent junk bond market that Michael Milken was creating in Los Angeles. Marks eventually moved to LA in the late 1970s to start up within Citigroup what was thought to be the first institutional junk bond fund. In 1985, Marks jumped to Trust Company of the West, also in Los Angeles, one of the largest fixed income investors in the world.

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The high-flying investment bank had dominated Wall Street in the 1980s with its mastery of the junk bond, a previously misunderstood form of financing for riskier—or more marginalized—companies. But Drexel’s wild ride of the previous decade had ended with an abrupt thud. On February 13, Drexel filed for Chapter 11 bankruptcy protection after pleading guilty to six counts of securities and mail fraud a year earlier—the fallout of the sprawling and spectacular white-collar crime spree masterminded by its larger-than-life banker, the so-called “junk bond king,” Michael Milken. Milken himself was facing ninety-eight counts of insider trading, securities fraud, and racketeering related to accusations of massive self-dealing while running the Drexel junk bond unit.

Sabotage: The Financial System's Nasty Business
by Anastasia Nesvetailova and Ronen Palan
Published 28 Jan 2020

But Milken was not content to restrict himself to fallen angels. Soon he expanded and began to use junk bonds to finance leveraged buyouts of companies. ‘Leveraged buyouts’ (LBOs) is a polite term for corporate raiding. Junk bonds were used to finance the hugely ambitious corporate raiders and private equity firms.5 Through junk bond leverage buyouts, companies with poor ratings could acquire better-performing companies. In the deal the acquiring company would use the target companies’ funds to repay the debt it incurred to fund the takeover in the first place – ideally to Milken’s bank. Junk bonds became the weapon of choice of hostile raiders churning up and destroying companies in the process.

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‘Stars of the Junkyard’, Economist, 21 October 2010, www.economist.com/briefing/2010/10/21/stars-of-the-junkyard. 5. W. Cohan, ‘Michael Milken invented the modern junk bond, went to prison, and then became one of the most respected people on Wall Street’, Business Insider, 2 May 2017, http://uk.businessinsider.com/michael-milken-life-story-2017-5?r=US&IR=T. 6. ‘Stars of the Junkyard’, Economist. 7. Cohan, ‘Michael Milken invented the modern junk bond’. 8. ‘Stars of the Junkyard’, Economist. 9. Cohan, ‘Michael Milken invented the modern junk bond’. 10. Insights for this section come from the best story written about the role of Ranieri personally and Salomon Brothers as an institution: Michael Lewis’s Liar’s Poker: Two Cities, True Greed, Hodder and Stoughton, 1989. 11.

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Only we would add that if we have learned anything in the past four decades, it is that financial innovation includes the sabotage not only of governments but also of clients and competitors. It is this unique ability to combine all three of the qualities John Tuld lists to his board that seems to ensure really big money. THE KING OF JUNK In the early 1980s a certain Michael Milken invented what became known as the ‘junk bond’; or, more elegantly, the high-yield bond. Junk bonds are considered among the most important innovations in twentieth-century finance. Their creator, Michael Milken, would be widely celebrated by the industry. Eventually Milken’s efforts would afford him residency of an exclusive gated community in California, better known as the Bay Area Prison.

Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition
by Kindleberger, Charles P. and Robert Z., Aliber
Published 9 Aug 2011

In a Cassandra-like book, Henry Kaufman decried the increase of all kinds of debt – consumer, government, mortgage, and corporate, including junk bonds; Kaufman argued that the quality of debt declined as the quantity of debt increased.20 Felix Rohatyn, a distinguished investment banker and the head of the US office of Lazard Frères, called the United States ‘a junk-bond casino’. Still, the owners of junk bonds were earning much higher interest rates than the owners of traditional bonds – at least for a while. In the economic slowdown of the late 1980s and early 1990s, many of the firms that had issued junk bonds went bankrupt. A new set of studies showed that the owners of junk bonds on average lost one-third of their money and that the additional three to four percentage points of interest income per year of these bonds was insufficient to compensate for the losses on the defaulted bonds.

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Many of the firms were unable to earn enough to pay the interest on the outstanding junk bonds. Not to worry, these firms issued some new securities that relieved them of the obligation to pay the interest on their outstanding bonds and the Milken-friendly thrifts bought these securities too. The money machine continued to work as long as the junk bond market remained vibrant. (Is this reminiscent of Ponzi finance?) However, the junk bond market collapsed at the end of the 1980s, after Federal regulators changed the rules so that the thrifts could no longer buy these bonds. The liquidity disappeared from the junk bond market; the prices of these bonds declined sharply, and the bondholders incurred large losses.

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During economic slowdowns, many firms experience less rapid increases in their revenues than they had anticipated with the result that some that had been in the hedge finance group are shunted into the speculative finance group while some firms that had been in the speculative finance group move into the Ponzi finance group. Drexel Burnham Lambert, Michael Milken, and ‘junk bonds’ One of the great financial innovations in the 1980s was the development of ‘junk bonds’ – the bonds of firms that had not been ranked by one of the major credit-rating agencies. The interest rates on these bonds were generally three to four percentage points higher than interest rates on the bonds that had been ranked in one of the ‘investment grades’. Many of the junk bonds had been ‘fallen angels’ – issued by firms when their economic circumstances were more favorable so they received a credit rating.

King Icahn: The Biography of a Renegade Capitalist
by Mark Stevens
Published 31 May 1993

Based on this finding—which he supported with prodigious research of his own—Milken set out to change the investment community’s perception of “junk bonds” from virtual untouchables to instruments of choice. Blessed with an idea whose time had come, a brilliant financial mind and an instinctive gift for salesmanship, Milken built a powerful network of supporters (wealthy individuals and corporations) who were eager to avail themselves of the junk bonds’ higher yields. Similar to Icahn’s early work in options, Milken created a market in which junk bonds were bought and sold through his increasingly successful Drexel Burnham trading operation (which he relocated from New York to Century City, California, in 1978 and ultimately moved to Beverly Hills).

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Drexel’s plan would be a momentous step, launching, in a decade already known for the megadeal, the daddy of all hostile tenders, requiring a staggering $8 billion. Could it be done? DLJ was very skeptical. But Drexel had Mike Milken and Milken had his junk bond network and although he had never raised anything close to $8 billion, Milken was confident. Behind the scenes, an interesting component of Icahn/Drexel strategy unfolded. Rather than seeking commitments from its junk bond buyers in anticipation of the deal—thus requiring him to pay substantial fees up front—Icahn suggested that Drexel simply provide him with a commitment letter of its own. From Icahn’s perspective, there was little risk to Drexel, which was certain it could raise the money.

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“We felt just as the letter said, ‘highly confident’ that we could raise the money,” says the former Drexel executive. “When Mike Milken said we could do it, we believed it. We figured, ‘What does Morgan Stanley know about junk bonds?’ We were the only guys on Wall Street who knew how to use them.” After Phillips took out newspaper ads portraying Icahn as a paper tiger, Carl agreed to pay Drexel $7.5 million in fees to go beyond the “highly confident” letter and to secure commitments from Milken’s junk bond buyers. The way the deal was structured, Icahn would have to pay the investors 3/8 of 1 percent of the money they pledged if the deal went through, 1/8 of 1 percent if the deal fell apart after the funds were pledged.

Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism
by Jeff Gramm
Published 23 Feb 2016

Even more troubling was the way Milken created captive customers and then enriched their managers with gifts or participation in his partnerships. Milken first raised capital for Kinder-Care, which ran day-care centers, in 1978. As the company grew, it began to buy loads of junk bonds from Drexel. This was common for Milken’s issuers: He often overfunded them and then sold them other junk bond issues. Kinder-Care later increased its junk bond capacity by purchasing an insurer and two S&Ls. At one point, the company held about $650 million of Drexel junk bonds.72 Presumably as a reward for being such good customers, Milken funneled valuable securities to Kinder-Care’s executives. Kinder-Care’s high-yield portfolio manager later testified that Milken gave warrants in a company called Storer Broadcasting to him and Kinder-Care’s CEO.

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HIGH CONFIDENCE In less than a decade, Drexel Burnham transformed itself from a midtier investment bank with only a handful of clients to the envy of Wall Street. During that period, Michael Milken’s domination of the rapidly growing market for junk bonds drove a twenty-five-fold increase in the bank’s revenues.34 In 1985, the year Carl Icahn took on Phillips, Milken focused on a promising new niche in the market—hostile raids financed by junk bonds. At the company’s annual high-yield conference—the so-called Predators’ Ball—Drexel CEO Fred Joseph said, “For the first time in history, we’ve leveled the playing field. The small can go after the big.”35 Within a few weeks of the conference, Pickens went after Unocal, Steve Wynn bid for Hilton Hotels, Sir James Goldsmith targeted Crown Zellerbach, and Lorimar bid for Multimedia.36 All of these deals saw smaller players funded by Milken’s bonds trying to gobble up billion-dollar companies.

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Germain Depository Institutions Act allowed federally insured S&Ls to buy junk bonds, and 1989, Columbia bought $10 billion of Drexel issues. Milken even cut the Spiegels in on one of his lucrative partnerships, which made bonanza investment returns. Milken’s top customers became almost indiscriminate buyers of Drexel’s bonds. Investigators were surprised to learn that many of Drexel’s bond issues were taken up by only a handful of purchasers. One insurance company, First Executive, participated in about 90% of Drexel’s new issues, and bought $40 billion worth of junk bonds from 1982 to 1987.75 First Executive, as you probably guessed, also had a very tight relationship with Milken.

Unconventional Success: A Fundamental Approach to Personal Investment
by David F. Swensen
Published 8 Aug 2005

Moving down the ratings rungs, single-B bonds “lack characteristics of the desirable investment,” triple-C bonds “are of poor standing,” double-C bonds “are speculative in high degree,” and the lowest class of bonds (single-C) have “extremely poor prospects of ever attaining any real investment standing.”6 High-yield bonds suffer from a concentrated version of the unattractive traits of high-grade corporate debt. Credit risk in the junk-bond market far exceeds risk levels in the investment-grade market. Illiquidity abounds, with the lowest-rated credits trading by appointment only. Callability poses the familiar “heads you win, tails I lose” proposition for owners of junk bonds, with an added twist. Holders of both investment-grade and junk bonds face callability concerns in declining-rate environments. Lower rates prompt refunding calls in which the issuer pays a fixed price to the bondholders and reissues debt at lower cost. Holders of high-quality paper and junk bonds face interest-rate-induced refunding risks of similar nature.

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In spite of the dampening effect of the PCA 9.625s’ call provision, bondholders received handsome holding-period returns. Buoyed by improving credit fundamentals and declining interest rates, the junk-bond investors garnered a return of 49.2 percent from January 28, 2000, the date of the company’s IPO, to July 21, 2003, the date of the completion of the tender offer. Junk-bond investors could not hope for better circumstances or better results. How did the PCA junk bond returns compare to results from closely related alternative investments? Strikingly, a comparable-maturity U.S. Treasury note produced a holding period return of 45.8 percent, as the noncallable nature of the government issue allowed investors to benefit fully from the bond market rally.

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Recall that the PCA 9.625s of April 2009 entered the markets in 1999 at the bottom of the single-B rating category, precariously positioned with a “small assurance of maintenance of contract terms.” Credit deterioration would likely damage the investments of bondholders and stockholders alike. Junk-bond investors cannot win. When fundamentals improve, stock returns dominate bond returns. When rates decline, noncallable bonds provide superior risk-adjusted returns. When fundamentals deteriorate, junk-bond investors fall along with equity investors. Well-informed investors avoid the no-win consequences of high-yield fixed-income investing. Alignment of Interests Junk-bond owners face misalignment of interest problems even more severe than those faced by investment-grade bondholders.

Rigged Money: Beating Wall Street at Its Own Game
by Lee Munson
Published 6 Dec 2011

Simply stated, they are bonds with a poor rating. Most notably, junk bonds have higher credit risk and illiquidity, but also higher interest payments—as long as they keep paying. I want to cover the problem with junk bonds within a portfolio, the true cost of owning them, and how investors should approach the junk bond market. As a warning, most investors should simply stay away. That doesn’t mean they don’t have a place, but like many niche markets the application is small compared to the herd of stockbrokers touting them. There is something to be said about junk bonds and those that invest in them. Often my firm encounters clients and potential clients that ask if we invest in junk bonds.

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To add injury to insult, some parts of the market, even well-known areas like junk bonds, can fail to translate into a successful ETF. SPDR Barclays Capital High Yield Bond ETF (JNK) may be the worst bond strategy of all time. Now that I have your attention, let’s break down the major issues with junk bonds, and more specifically ETFs that trade baskets of those bonds. Don’t worry, there is a place for these ugly ducklings, but they are not for those trying to get fixed income risk and return. If that doesn’t keep you reading, nothing will. The junk bond market developed by Michael Milken in the 1980s is predominately a U.S. phenomenon, though they exist anywhere there is tradable debt.

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Often my firm encounters clients and potential clients that ask if we invest in junk bonds. My first reaction is to question why they are interested. Usually investors see high yields as a magic bullet providing return and no risk. After all, it’s a bond, right? Some clients are savvy enough to see it as a potential play on improving credit risk, which can lead to capital appreciation if properly timed. Unfortunately, not all ugly ducklings will turn into beautiful swans. The best opportunities involve the worst of the worst junk bonds, are illiquid, and end up as the hunting ground of the best hedge fund managers in the world.

The Essays of Warren Buffett: Lessons for Corporate America
by Warren E. Buffett and Lawrence A. Cunningham
Published 2 Jan 1997

Wall Street cared little for such distinctions. As usual, the Street's enthusiasm for an idea was proportional not to its merit, but rather to the revenue it would produce. Mountains of junk bonds were sold by those who didn't care to those who didn't think-and there was no shortage of either. Junk bonds remain a mine field, even at prices that today are often a small fraction of issue price. As we said last year, we have never bought a new issue of a junk bond. (The only time to buy these is on a day with no "y" in it.) We are, however, willing to look at the field, now that it is in disarray. In the case of RJR Nabisco, we feel the Company's credit is considerably better than was generally perceived for a while and that the yield we receive, as well as the potential for capital gain, more than compensates for the risk we incur (though that is far from nil).

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Challenging both Wall Street and the academy, Buffett again draws on Graham's ideas to reject the "dagger thesis" advanced to defend junk bonds. The dagger thesis, using the metaphor of the intensified care an automobile driver would take facing a dagger mounted on the steering wheel, overemphasizes the disciplining effect that enormous amounts of debt in a capital structure exerts on management. Buffett points to the large numbers of corporations that failed in the early 1990s recession under crushing debt burdens to dispute academic research showing that higher interest rates on junk bonds more than compensated for their higher default rates. He attributes this error to a flawed assumption recognizable to any first-year statistics student: that historical conditions prevalent during the study period would be identical in the future.

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In the past we have bought a few below-investment-grade bonds with success, though these were all old-fashioned "fallen angels"-bonds that were initially of investment grade but that were downgraded when the issuers fell on bad times. . . . A kind of bastardized fallen angel burst onto the investment scene in the 1980s-"junk bonds" that were far below investmentgrade when issued. As the decade progressed, new offerings of manufactured junk became ever junkier and ultimately the predictable outcome occurred: Junk bonds lived up to their name. In 1990-even before the recession dealt its blows-the financial sky became dark with the bodies of failing corporations. The disciples of debt assured us that this collapse wouldn't happen: Huge debt, we were told, would cause operating managers to focus their efforts as never before, much as a dagger mounted on the steering wheel of a car could be expected to make its driver proceed with intensified care.

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett
by Jack (edited By) Guinan
Published 27 Jul 2009

Only after preferred shareholders have been paid back are the remaining assets (if any) divided among common shareholders. Related Terms: • Bankruptcy • Common Stock • Subordinated Debt • Bond • Preferred Stock The Investopedia Guide to Wall Speak 151 Junk Bond What Does Junk Bond Mean? A bond rated BB or lower because of its high risk of default. Also known as a high-yield bond or speculative bond. This type of bond is considered less than investment grade. Investopedia explains Junk Bond These bonds usually are purchased for speculative purposes. Junk bonds typically offer interest rates three to four percentage points higher than those on safer government issues. The higher interest rate is meant to compensate investors for the higher risks associated with the issuer.

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Here’s how the Standard & Poor’s rating system works: AAA and AA: high credit-quality investment grade; AA and BBB: medium credit-quality investment grade; BB, B, CCC, CC, and C: low creditquality (noninvestment grade), or “junk bonds”; D: bonds in default for nonpayment of principal and/or interest. The Investopedia Guide to Wall Speak 27 Related Terms: • Credit Rating • Interest Rate • Junk Bond • High-Yield Bond • Investment Grade Book Value What Does Book Value Mean? (1) The value at which an asset is carried on a balance sheet; in other words, the cost of an asset minus accumulated depreciation. (2) The net asset value of a company, calculated as total assets minus intangible assets (patents, goodwill) and liabilities. (3) The initial outlay for an investment.

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Bonds with ratings above these levels are considered investment-grade. Credit ratings can be as low as D (currently in default), and most bonds with C ratings or lower carry a high risk of default; to compensate for this risk, yields typically are very high. Also known as junk bonds. Investopedia explains High-Yield Bond The term “junk bonds” aside, high-yield bonds are widely held by investors worldwide, although most participate through the use of mutual funds or exchange-traded funds. The yield spread between investment-grade and high-yield bonds fluctuates over time, depending on the state of the economy, as well as company- and sector-specific events.

Buffett
by Roger Lowenstein
Published 24 Jul 2013

And Wall Street’s soaring appetite for junk bonds was providing a vast supply of easy money. Junk bonds had become a kind of “phony currency” (phony because bond buyers were thoughtlessly, and naïvely, financing borrowers beyond their means). Whoever could borrow the most was winding up with the store. To Buffett, this was truly vexing. The trouble with debt was that it worked too well; people got hooked and carried it too far. And he allowed that the new borrowers would repeat this pattern. “I personally think, before it’s all over, junk bonds will live up to their name.” For 1985, this was strong talk. Junk bonds were thriving, and defaults had been rare.

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Bankrupt credits often were attractive on a price-to-value basis; Michael Milken, Drexel’s junk-bond impresario, had gotten his start trading just such “fallen angels.” Junk bonds of recent vintage had the crucial distinction of not having yet fallen: they were weak credits issued at par (full price), with a long way to fall and little upside. Buffett, continuing in his “pejorative” vein, pointed out that the issuers of those junk bonds were raking in very fat fees, as were the deal promoters. To him, the takeover game resembled an addiction, and Wall Street was pushing junk-bond “needles” to keep the Street in a stupor. “It won’t die out without a big bang,” Buffett predicted.

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Indeed, Buffett was a master dissimulator. At the very moment that his junk-bond critique was rolling off the press, Buffett was scooping up one of the largest bundles of junk bonds ever—$440 million of RJR Nabisco paper. RJR Nabisco’s bonds had collapsed with the general market, but in Buffett’s view, the market had overreacted. (After all, RJR Nabisco was still selling a high-margin product to “addicts.”) His purchase of junk bonds might seem hypocritical, but it was not. Buffett saw a moral hazard in selling a junk bond that would likely never be repaid. Buying a bond was different. To the investor, no financial instrument was “evil per se”;38 it was a question of price.

Panderer to Power
by Frederick Sheehan
Published 21 Oct 2009

Commercial bank entry broadened the residential mortgage market; the growing junkbond appetite of savings and loans, insurance companies, and mutual funds extended the ability of investment banks to underwrite more junk bonds. 26 Wigmore, Securities Markets in the 1980s, pp. 50–51. 27 Ibid. Michael Milken’s group at the investment-banking house of Drexel Burnham (later to be Drexel Burnham Lambert Inc.) educated the world, and then dominated it, in the fertile laboratory of junk bonds.29 (Junk bonds are those that are rated below investment grade by the rating agencies.) Early buyers of Drexel’s junk bonds had acquired valuable experience in the conglomerate years—Carl Lindner of American Financial Corporation and Saul Steinberg of Reliance Insurance.30 After his initial success with “fallen angels”—companies that had fallen on hard times and been downgraded—Milken gravitated toward “new-issue” junk bonds.

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Barrie Wigmore, author of a seminal financial study of the period, found that this was one development he could not quantify: “How much the surge in junk bond new-issues in 1983 and 1984 was due to expanded savings and loan powers and the merger boom and how dependent it was on under-the-table incentives to money managers will probably never be resolved.”34 28 Ibid., p. 303. 29 Ibid. 30 Ibid., p. 280. Milken did not invent junk bonds, as is often claimed. There were precedents: railroad and REIT (real estate investment trust) junk bonds. 31 Ibid., p. 282. 32 Ibid., p. 283. 33Ibid. p. 282. Between 1980 and 1982 the ratio of earnings before interest and taxes (EBIT) divided by debt payments was about 2.0.

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Early buyers of Drexel’s junk bonds had acquired valuable experience in the conglomerate years—Carl Lindner of American Financial Corporation and Saul Steinberg of Reliance Insurance.30 After his initial success with “fallen angels”—companies that had fallen on hard times and been downgraded—Milken gravitated toward “new-issue” junk bonds. Drexel performed an admirable service by finding investors for some promising companies, with Turner Broadcasting and Humana being early success stories.31 It was not long before the weapon (junk bonds) and the strategy (hostile bids) discovered each other. One other component was needed: a willing buyer. The mutual fund industry offered 11 junkbond funds before 1980.32 The early financings were responsibly packaged to permit the companies so structured to cover their debt payments out of projected earnings.

The Gone Fishin' Portfolio: Get Wise, Get Wealthy...and Get on With Your Life
by Alexander Green
Published 15 Sep 2008

A corporate bond is a company’s IOU, a debt security that represents a promise to repay a sum of money at a fixed interest rate over a certain period of time. Short-term bonds generally yield somewhat less than long-term bonds. (Although when the yield curve is inverted, they may yield more.) Their shorter maturities make them less volatile than long-term bonds. 9. High-yield bonds. High yield or “junk bonds” are corporate bonds that do not qualify for investment-grade ratings. These bonds pay higher rates of interest because the issuers are less creditworthy. Default rates are higher than on investment-grade bonds as well. (According to Moody’s, the annual default rate for BB/Ba bonds is about 1.5%.) 10.

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High-yield bonds, also called non- investment-grade bonds, are also corporate bonds. These are bonds rated BBB- or lower by the rating agency Standard & Poor’s. They are issued by companies less creditworthy than those that issue investment-grade bonds and are considered speculative. But don’t let the name junk bond throw you. A diversified portfolio of these bonds, even after accounting for defaults, has returned more than either Treasuries or high-grade corporates. And while they do tend to be more highly correlated with the stock market than other bonds, they do not move in lock step with equities, giving you some diversification advantage. 3.

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Rather, it’s to allow you to achieve financial independence and its most important by-product: peace of mind. WHAT TO TELL THE NAYSAYERS There are some aspects of the Gone Fishin’ strategy that critics—and fee-oriented investment advisors—may find controversial. I want to address those potential objections now. Some, for example, may object to the inclusion of asset classes like gold shares and junk bonds. Others will question the weightings of different asset classes. Still others will question the “one-size-fits-all” nature of this strategy. I’m happy to rebut them all. Unusual Success from Unusual Assets Let’s begin by looking at the reasons for the inclusion of more controversial asset classes like gold shares, foreign stocks (particularly emerging market stocks), and high-yield bonds.

The Permanent Portfolio
by Craig Rowland and J. M. Lawson
Published 27 Aug 2012

If you need your bonds to protect you during an economic crisis you don't want them to be subject to credit or default risk, but that's exactly what junk bonds give you—in spades. In a sense, they are one of the worst investments you can own—you get all of the volatility and risk of stocks but little of the upside potential. Junk bonds can also generate very poor tax treatment if not held in a tax-deferred account as they are taxed at all levels. During 2008 in the midst of the financial crisis, many junk bond funds lost 30 percent or more in value. Figure 7.3 shows the performance of junk bonds versus long-term U.S. Treasury bonds. Figure 7.3 2008 Performance of Long-Term U.S. Treasury Bonds versus Junk Bonds.U.S. Treasury bonds were up over 30 percent and junk bonds sunk by 30 percent providing no diversification benefit and compounding losses.

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The 2008 to early 2009 period covered in Figure 5.2 shows the performance for the Total Bond Market, Corporate Bond Index, High-Yield (Junk) Bonds, and the popular American Century International Bond Fund during the market crash. Figure 5.2 In 2008 and Early 2009 Low-Quality Bonds Exhibited Stock-Like Losses.Other bonds did not move enough to offer solid diversification. Chart courtesy of stockcharts.com. At the bottom of the 2008 crash high-yield junk bonds and corporate bonds suffered losses of 30 percent and 20 percent, respectively. The other funds slightly lagged or remained relatively flat during this period.

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Investors who opt for this approach should realize that they are sacrificing deflation protection by making the decision to avoid U.S. Treasury bonds. A serious economic crisis could see widespread defaults in corporate bonds, including those previously considered very safe. Junk Bonds High-yield bonds (also known as junk bonds) are a type of bond with an enticingly high yield but lots of risk. Don't let the high interest rates convince you to buy them for the Permanent Portfolio, as they are totally unsuitable for this application. Bonds are for safety and not speculation. Buying higher risk bonds means you are chasing yield and it can be dangerous because higher rewards always mean higher risk.

Damsel in Distressed: My Life in the Golden Age of Hedge Funds
by Dominique Mielle
Published 6 Sep 2021

For one thing, whereas a stock is not a particularly interesting security per se (the underlying corporation is interesting but not the instrument), junk bonds are fascinating creations. A stock is a stock, a slice of equity, a financial construct that doesn’t change much apart from its dividend and the voting rights—a stock is, by nature, a voting share giving shareholders the crucial right to elect corporate directors and make their views known in different matters. But a corporate debt is a private contract with infinite variations. Even in a very well-established market like the U.S. leverage loan, junk bond, or investment-grade bond markets, there are meaningful divergences—sometimes very subtle, sometimes glaring—sufficient to separate a losing trade from a winning one.

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They had paid one hundred cents on the dollar and woke up after 9/11 to see it trade at eighty, sixty, forty, or twenty cents. It was garbage; it was toxic. Some funds, with strategy and risk parameters that did not permit investing in junk bonds, couldn’t hold on after the ratings downgrades. Some didn’t have the manpower or patience to sustain the labor-intensive research required in a distressed situation. They fled the sector en masse, forcefully selling at very uneconomic prices. You don’t improvise switching from trading safe, investment-grade, high-quality bonds to nonperforming junk bonds. Try asking a poet to write comics because there is a market for them. Great opportunity, wrong skill set. Traditional credit analysis was useless at this point.

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I rehashed my positions and decision process in a never-ending mental loop. I lost confidence in my ability to invest and make sound judgments on the market. And the way back up wasn’t easy. There was no market to speak of for junk bonds, leveraged loans, and most of our assets from mid-2008 to spring 2009. For financial securities that do not trade through an electronic stock exchange, like many corporate fixed income instruments including junk bonds and distressed securities, a trader must match an actual physical buyer and a seller, much like a real estate broker representing a house. If there is no willing seller or buyer—the seller is loath to sell at what he considers a ludicrously low bid and the buyer is unwilling to step up to what he believes is a preposterous ask—there is simply no trade at all.

All the Money in the World
by Peter W. Bernstein
Published 17 Dec 2008

The appeal was obvious, so long as you could stomach the risk. Junk bond yields were 3 to 5 percent above Treasury and higher-rated corporate bonds. At first Milken underwrote19 new junk bonds for companies too minor or unproven to issue investment-grade bonds,*11 such as the young telecommunications companies that were just starting to challenge AT&T’s government-backed monopoly, and entrepreneurs shunned by Wall Street, including insurance company CEO Carl Lindner, the target of an SEC investigation in Cincinnati, and Victor Posner, a conglomerator with an unsavory reputation.†12 Then, in 1984, Milken began using20 junk bonds to finance takeover bids.

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Craig began investing in cellular licenses from the outset, buying pops for as little as $6 each, at a time when the business was so new that few people were thinking about it. But as cellular grew27, so did the cost of acquiring the pops. The bill for licenses ran into hundreds of millions of dollars. Throughout the 1980s McCaw bought hundreds of thousands of pops, aided by junk bonds issued by junk-bond king Michael Milken. (See Chapter 8, Beyond Wall Street.) McCaw began by building a cellular network on the West Coast; but it soon became obvious that he needed a national network. After he sold Twin City Cablevision in 1987, McCaw was free to devote even more time to his cellular plans and to plow ever-greater sums into the acquisition of pops.

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By 1986 mergers and acquisition activity on Wall Street had hit record levels. It was a “casino society,”16 remarked investment banker Felix Rohatyn of Lazard Frères, then one of Wall Street’s celebrated private firms, with outposts in London and Paris. Another new wrinkle17—junk bonds—helped LBO returns soar, though Ted Forstmann, who claimed returns equal to or better than KKR, derided them as “wampum.” The junk bond market was promoted by a then-unknown investment banker, Michael Milken, at Drexel Burnham Lambert, a second-tier investment bank that, because of Milken, would soon outperform many of its white-shoe competitors. Milken’s key insight was that the low-grade debt of many companies with poor credit ratings was a good deal.

Why Wall Street Matters
by William D. Cohan
Published 27 Feb 2017

Morgan once controlled, set out to create a new supply of these so-called junk bonds by persuading companies that never before had access to the capital markets—where companies go to get capital from public investors as opposed to trying to get it from banks—to issue bonds underwritten by Drexel Burnham. Not only did Drexel underwrite these bonds for corporations that could not get financing from more traditional sources—banks, insurance companies, and the public-equity markets—but it also pioneered the selling of junk bonds to help corporate raiders, like Carl Icahn and T. Boone Pickens, get the capital they needed to take over companies such as TWA and Gulf Oil, which they would otherwise have been unable to do, and to help private-equity firms, such as Kohlberg Kravis Roberts and the Texas Pacific Group, get the money they needed to buy companies with their investors’ money.

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But Milken was worth what he was being paid because Drexel was reaping billions of dollars in fees from his extraordinary innovation. Drexel dominated the junk-bond market for years before Milken’s Wall Street brethren deconstructed what he was doing, copied him, and started competing with him. During his Wall Street career (before he was banned from it for life), Milken financed more than thirty-two hundred companies across a wide swath of industries, household names that likely wouldn’t have existed without the money he raised for them. Drexel’s first junk-bond financing, in April 1977, was a $30 million bond for Texas International, a small oil-exploration company.

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Countless other companies, financed by investment banks other than Drexel, probably wouldn’t exist without the high-yield market that Milken created. It’s not hyperbole to say that junk bonds underwritten by Wall Street firms have created millions of jobs that otherwise might not have existed, along with billions, if not trillions, of dollars in accumulated wealth. Of course, nothing leads to excess like success. For years, Milken’s power in the junk-bond market was near absolute. Unfortunately, he used it to line his own pockets at the expense of his clients and of his firm, Drexel Burnham. He regularly siphoned off big fees for himself and would take the valuable equity positions in companies that he demanded in order to get deals done instead of passing them along to investors.

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
by William Poundstone
Published 18 Sep 2006

He christened these unloved securities “junk bonds.” He began selling them aggressively at his employer, the investment bank Drexel Burnham Lambert. Milken was such a superb salesman that in time he largely nullified Hickman’s reason for buying junk bonds. At the height of Milken’s influence, junk bonds had become so popular, and were selling at such elevated prices, that the conclusions of the Hickman and Atkinson studies probably no longer applied. Milken had ideas of his own. One was that companies with doubtful credit could issue their own “junk bonds” at high interest rates. The companies would use the capital to buy other companies and sell off their assets to pay the bond interest.

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They wanted to buy back most of the stock issued, limiting ownership to the few biggest shareholders. To get the necessary money, Warner Communications would have to issue junk bonds. Ross asked Michael Milken for advice. Milken devised a plan and met with Ross in New York to discuss it. Milken explained that Ross would have to give up 40 percent of Warner’s stock as an inducement to get people to buy the junk bonds. This was a standard equity kicker. People would not buy these junk bonds unless they also got stock. Drexel would get another 35 percent cut of the company’s stock as payment for services rendered. That left a mere 25 percent of the company for Ross’s group.

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investor when Sharpe taught at UC Irvine. Now he had a track record. Thorp described some of the trades he’d made to Sharpe. One was a 1974 trade in an American Motors Corporation (AMC) convertible bond maturing in 1988. Issued at $1,000, the bond had sunk to $600. That gave it a high return—it was a convertible junk bond. The bond could be exchanged for 100 shares of AMC stock. The stock was then selling for $6 a share. The bond therefore sold for exactly the same price as the stock you could get by converting it. That was insane, Thorp realized. The bond paid 5 percent interest. The stock paid no dividends. Owning the bond gave all the upside potential of owning the stock.

Wall Street: How It Works And for Whom
by Doug Henwood
Published 30 Aug 1998

Regan concluded, "If you're not in high ttax] brackets and don't own these bonds, you lose every time your state or local government borrows," since the municipal subsidy means higher federal taxes (or reduced federal services) for the non-bondholder. corporations and the erosion of commitment Corporate bonds are the last major type. The market is large — at $3.3 trillion in 1997, starting to approach the U.S. Treasury market in size — but doesn't trade anywhere near as frenetically, and hasn't made much news since the junk bond boom and bust of the 1980s. Annual turnover amounts to only a few days' worth of Treasury action. While nonfinancial corporate bond debt has grown impressively — from an amount equal to 13% of GDP in 1980 to 18% in 1997 — financial firms were busier issuers, rising from 3% of GDP to 17% over the same period.

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The more reality INSTRUMENTS financial innovations adjustable rate convertible notes • adjustable rate preferred stock • adjustable/variable rate mortgages • All-Saver certificates • Annericus trust • annuity notes • auction rate capital notes • auction rate notes/debentures • auction rate preferred stock • bull and bear CDs • capped floating rate notes • collateralized connmercial paper • collateralized nnortgage obligations/real estate mortgage investment conduits • collateralized preferred stock • commercial real estate-backed bonds • commodity-linked bonds • convertible adjustable preferred stock • convertible exchangeable preferred stock • convertible mortgages/reduction option loans • convertible reset debentures • currency swaps • deep discount/zero coupon bonds • deferred interest debentures • direct public sale of securities • dividend reinvestment plan • dollar BILS • dual currency bonds • employee stock ownership plan (ESOP) • Eurocurrency bonds • Euronotes/Euro-commercial paper • exchangeable auction rate preferred stock • exchangeable remarketed preferred stock • exchangeable variable rate notes • exchange-traded options • extendible notes • financial futures • floating rate/adjustable rate notes • floating rate extendible notes • floating rate, rating sensitive notes • floating rate tax-exempt notes • foreign-currency-denominated bonds • foreign currency futures and options • forward rate agreements • gold loans • high-yield (junk) bonds • increasing rate notes • indexed currency option notes/ principal exchange linked securities • indexed floating rate preferred stock • indexed sinking fund debentures • interest rate caps/collars/floors • interest rate futures • interest rate reset notes • interest rate swaps • letter of credit/surety bond support • mandatory convertible/equity contract notes • master limited partnership • medium-term notes • money market notes • mortgage-backed bonds • mortgage pass-through securities • negotiable CDs • noncallable long-term bonds • options on futures contracts • paired common stock • participating bonds • pay-in-kind debentures • perpetual bonds • poison put bonds • puttable/adjustable tender bonds • puttable common stock • puttable convertible bonds • puttable-extendible notes • real estate-backed bonds • real yield securities • receivable-backed securities • remarketed preferred stock • remarketed reset notes • serial zero-coupon bonds • shelf registration process • single-point adjustable rate stock • Standard & Poor's indexed notes • state rate auction preferred stock • step-up put bonds • stock index futures and options • stripped mortgage-backed securities • stripped municipal securities • stripped U.S.

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Henry Kravis, the major figure of the leveraged buyout mania, did make it to the chair of New York City's public TV station and the board of the Metropolitan Museum, the latter an inner sanctum of the Establishment — but Kravis' father was rich and well-connected on Wall Street, even if he was from Oklahoma (Bartlett 1991). Many 1980s hotshots have disappeared from the headlines; one, Kirk Kerkorian, made a pass at Chrysler in the spring of 1995, but wasn't taken seriously, because there was no longer any Drexel Burnham Lambert around to float junk bonds in his name. Boone Pickens' firm, Mesa Petroleum, is in terrible shape, and his shareholders booted him out. Alumni of the financing arm of the upstarts, the now-dead Drexel, are scattered around Wall Street, but they're no longer financing a New Class's claims to power. In the old days, investment banking was much more about connections — who roomed with whom at Andover could determine both partnerships and client relationships.

Transaction Man: The Rise of the Deal and the Decline of the American Dream
by Nicholas Lemann
Published 9 Sep 2019

Milken also developed a client base for junk bonds in a group of western savings and loan companies that were looking for a source of capital that they could use to make risky but potentially highly profitable loans to commercial real estate developers. Often these savings and loan clients of Milken’s would be both buyers and sellers of his junk bonds: he’d offer them junk-bond financing to pay for their own expansionist schemes, on the condition that they’d purchase other junk-bond issues of Drexel’s. Other people would buy junk bonds issued by Milken on behalf of the savings and loans, and the savings and loans would buy junk bonds issued by Milken on behalf of companies that were clients of his, at artificially inflated prices. (It was this sort of arrangement that eventually landed Milken in jail and Drexel Burnham in bankruptcy.)

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Milken saw that the bond markets were no longer the province of buy-and-hold trust officers and insurance companies; he created a market for high-risk, high-yield “junk bonds” that in the old days nobody would have wanted. Selling junk bonds to the new breed of fixed-income traders on Wall Street generated much of the capital that fueled the mergers and acquisitions business in the 1980s, and of course the nature of the financing meant that successful acquirers of companies were heavily in debt. Milken also developed a client base for junk bonds in a group of western savings and loan companies that were looking for a source of capital that they could use to make risky but potentially highly profitable loans to commercial real estate developers.

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Jensen himself, on fire with the ideas he had developed, began working in a more public, less technical, more opinionated vein. Within a few years, he had become the leading public advocate and justifier of a number of new techniques in the financial world that suddenly became pervasive: a large increase in mergers and acquisitions, including hostile ones; the development of the junk-bond market, whose high-risk, high-return instruments often financed these activities; enormous raises in the compensation of corporate chief executives, often in the form of stock options; the onset of leveraged buyouts and private equity as ways for financiers to take direct, usually temporary control of formerly publicly held companies.

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank
by John Tamny
Published 30 Apr 2016

For a company to expand and frequently create the jobs that come with that expansion, there must be savers first. Banks and investment banks are paid handsomely for bringing the two together. Going back to Michael Milken, while he cleaned the clocks of investment banks that turned their noses up at “junk bonds,” ultimately those same banks learned from their mistakes. Now, they all have junk-bond or “high-yield” bankers who raise money for the riskier business concepts willing to pay higher rates of interest in return for credit. Most banks and investment banks have private equity arms now, too. In fact, it was a surprise during the 2012 presidential election that Mitt Romney didn’t talk more extensively about the source of his great wealth.

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Even better, new sources of credit constantly innovate around the Federal Reserve. While this will be discussed in greater detail in future sections of this book, for now it’s worth migrating to a form of finance that reached full flower around the same time that Trump rocketed to his early fame, high-yield finance. Readers may better know “high-yield bonds” as “junk bonds,” the latter being the pejorative members of the media attached to them long ago. Readers needn’t worry. There’s nothing complicated here. To understand “junk” or “high-yield” debt, let’s first imagine you have $10,000 lying around. Next, imagine that actress Jennifer Lawrence asked to borrow it.

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As Fischel describes, “Whole industries—including gambling, telecommunications, and healthcare—were financed in significant part with high-yield bonds.”14 The list of companies that were the result of Milken securing them access to credit includes MCI, CNN, Turner Broadcasting, and Occidental Petroleum.15 What’s important here is that while the Fed seeks to influence credit by exchanging dollars for bonds held by banks, which can then lend the dollars, Milken was sourcing credit for companies that banks traditionally passed over. As of 1988, at which time “junk bonds” had a much better reputation, these high-yielding instruments were but 1 percent of savings and loan assets.16 More than 95 percent of corporate debt for companies with earnings greater than $35 million (and a 100 percent of debt for companies with earnings less than $35 million) is rated “junk.”

The Four Pillars of Investing: Lessons for Building a Winning Portfolio
by William J. Bernstein
Published 26 Apr 2002

So, if you are earning 7% more in interest per year than with a Treasury bond, but you are losing an average of 4% per year on bankruptcies, then in the end you should still be left with 3% more return than Treasuries. Most investors would consider this to be an adequate tradeoff. But it’s important to understand that during a recession, even the market value of the surviving bonds may temporarily decrease. For example, during the 1989–1990 junk bond debacle, price declines approaching 20% were common even in the healthiest issues. If you’re going to invest in junk bonds, you have to keep your eye on the yield spread between Treasuries and junk. In Figure 2-6, I’ve plotted this junk-Treasury spread (JTS) over the recent past. Note how the JTS is, more often than not, quite low—in fact, lower than even the historical loss rate!

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On the other hand, a stock fund with high turnover will periodically distribute a large amount of capital gains to you, on which taxes must be paid. Such a fund is tax-inefficient. Worst of all are REIT and junk bond funds, which distribute almost all of their return in the form of dividends. Further, these dividends are taxed at the high ordinary income rate. Obviously, then, you will want to hold only tax-efficient funds in your taxable account, reserving the most tax-inefficient ones for your retirement accounts. The problem, as we’ve already mentioned, is that certain asset classes are inherently tax-inefficient, such as junk bonds and REITs. Value funds are also relatively tax-inefficient, because if a value stock increases enough in price, it may no longer qualify for the value index and must be sold at a substantial capital gain.

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First, because sudden market downturns affect smaller investors less, because they have a smaller portion of their portfolio invested in any one asset class. I came smack up against this at a recent conference of institutional bond investors. The junk-bond money managers at the meeting were easy to pick out—they were the ones with a vacant, deer-in-the-headlights stare. Not only were junk bonds falling rapidly in price, but in most cases, market conditions were so bad that they could not even find someone to trade with. In other words, they did not even know what the bonds in their portfolios were worth. Remember, the world of institutional investing is highly specialized—junk was most of what these poor folks traded, and my guess is that many of them had recently been on the phone to Momma inquiring about the availability of their old room.

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds
by Maneet Ahuja , Myron Scholes and Mohamed El-Erian
Published 29 May 2012

By 1982 he earned his MBA, then known as an MSIA or master of science in industrial administration, and began his real education: two years in the treasury department at Ohio’s Republic Steel. There, he was introduced to the junk bond market by working on financings of non–investment grade debt. In 1984 he was recruited to Keystone Mutual Funds in Boston, where he met his wife, Marlene, while she was working at Wang Laboratories. He worked as an analyst for their junk bond group for about a year before being recruited by Goldman Sachs. Through the years, Tepper has made several large donations to the University of Pittsburgh, including endowed undergraduate scholarships, university-run community outreach programs, and academic centers.

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Tepper thinks of his investment track record as something similar to a connect-the-dots game, except the puzzle is never finished and the prize is billions of dollars. “When I got to Goldman, I changed the way junk bonds were traded. It was pretty radical, moving the whole market to trades on sectors. It used to be traded by maturities, which helped perpetuate the monopoly held by Michael Milken at Drexel Burnham,” explains Tepper. This approach to the U.S. junk bond market would serve Appaloosa well in its pursuit of global opportunities. International Intrigue Venturing into the world of emerging markets in the mid-1990s was like second nature to Tepper, who had been a key player in many “different capital markets and things that were happening around the world,” he says, from his time at Goldman.

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“I think it was a little bit of hubris probably,” Lasry admits. He had learned a lot from the superstars at Bass and felt ready to invest his money on his own. What’s more, Drexel Burnham Lambert had collapsed in the wake of Michael Milken’s indictment for securities fraud, which plunged many companies with low junk bond credit ratings deeper in the red. Suddenly, there were massive opportunities for distressed investors. “You know, when you look back on it, I left what probably was one of the best jobs in America, running money for one of the world’s first billionaires,” Lasry says. “And back then there weren’t that many.

The Intelligent Investor (Collins Business Essentials)
by Benjamin Graham and Jason Zweig
Published 1 Jan 1949

That mitigates Graham’s complaints about the difficulty of diversifying. (However, his bias against high-yield preferred stock remains valid, since there remains no cheap and widely available way to spread their risks.) Since 1978, an annual average of 4.4% of the junk-bond market has gone into default—but, even after those defaults, junk bonds have still produced an annualized return of 10.5%, versus 8.6% for 10-year U.S. Treasury bonds.2 Unfortunately, most junk-bond funds charge high fees and do a poor job of preserving the original principal amount of your investment. A junk fund could be appropriate if you are retired, are looking for extra monthly income to supplement your pension, and can tolerate temporary tumbles in value.

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Here is a list for today. Junkyard Dogs? High-yield bonds—which Graham calls “second-grade” or “lower-grade” and today are called “junk bonds”—get a brisk thumbs-down from Graham. In his day, it was too costly and cumbersome for an individual investor to diversify away the risks of default.;1 (To learn how bad a default can be, and how carelessly even “sophisticated” professional bond investors can buy into one, see the sidebar on p. 146.) Today, however, more than 130 mutual funds specialize in junk bonds. These funds buy junk by the cartload; they hold dozens of different bonds. That mitigates Graham’s complaints about the difficulty of diversifying.

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A junk fund could be appropriate if you are retired, are looking for extra monthly income to supplement your pension, and can tolerate temporary tumbles in value. If you work at a bank or other financial company, a sharp rise in interest rates could limit your raise or even threaten your job security—so a junk fund, which tends to outper-forms most other bond funds when interest rates rise, might make sense as a counterweight in your 401(k). A junk-bond fund, though, is only a minor option—not an obligation—for the intelligent investor. A WORLD OF HURT FOR WORLDCOM BONDS Buying a bond only for its yield is like getting married only for the sex. If the thing that attracted you in the first place dries up, you’ll find yourself asking, “What else is there?”

Servant Economy: Where America's Elite Is Sending the Middle Class
by Jeff Faux
Published 16 May 2012

In a related debacle, the Reagan regulators looked on benignly while reputable firms like Salomon Brothers created the junk bond securities that were hyped by slick salesmen as safe and high yielding. High yielding they were, but hardly safe. The junk bonds were the fuel that fired the merger and leverage buyout bubbles in the 1980s. In a leveraged buyout, investors and specialized private equity investment firms buy controlling interests in a well-run company with little debt and a healthy cash flow. They pay for the company not with their own money but with loans, such as junk bonds, that put up the company’s assets as collateral, burdening the firm with debt.

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But throughout the buildup of the great leveraged buyout bubble of the 1980s, such as in the dot-com bubble of the 1990s and the subprime mortgage bubble of 2000–2008, Wall Street assured itself and its customers that the rewards of these exotic schemes were coming at little or no risk. Moreover, their customers were often not just the average small investor but people in charge of large institutions, including pension funds, responsible for huge pools of money. When the junk bond–propelled market inevitably crashed in 1987, the Federal Reserve promptly flooded the market with cheap loans, keeping companies that should have been bankrupt afloat. Junk bond king Michael Milken was eventually indicted on ninety-six counts, including insider trading, illegal profiteering, and tax evasion. But the actual lesson was that crime pays. It cost Milken about six hundred million dollars in penalties, but he got to keep about a billion dollars for himself after spending less than two years in a minimum-security prison.

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It inspired immigrants to cross the sea in stinking ships and pioneers to cross the continent in rickety wagons. Optimism built the great industrial and financial enterprises that made the country the world’s preeminent power. It motivated people to invest against all odds in restaurants, hi-tech start-ups, and initial public offerings that were issued by companies they’d never heard of and labeled “junk bonds.” Optimism nurtured George Washington at Valley Forge and Abraham Lincoln in the darkest days of the Civil War. It was Roosevelt’s trump card against the Depression. It stiffened the resolve of labor leader Eugene Debs in an Atlanta prison and Martin Luther King Jr. in a Birmingham jail. It sustained the suffragist when prison guards pumped a force-feeding tube down her throat.

For Profit: A History of Corporations
by William Magnuson
Published 8 Nov 2022

Operating out of his Beverly Hills office, Milken developed a market for so-called junk bonds, risky debt issued by debt-laden or struggling companies. Junk bonds had long been considered off-limits to most mainstream investors. They were considered too risky and too unlikely to pay off. But Milken became convinced—and, more importantly, convinced buyers—that if he could package these junk bonds together into a portfolio, they would outperform the bonds of more conservative, stable companies. Milken’s junk bond business was soon helping companies issue billions of dollars in debt every year—in 1983 alone, Drexel sold $4.7 billion in junk bonds. But the real supercharger behind junk bonds was the rise of leveraged buyouts.

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But the real supercharger behind junk bonds was the rise of leveraged buyouts. KKR realized that junk bonds could finance their acquisitions, allowing them to raise more debt, for less, and faster. In 1984, KKR accepted a bid from Milken to finance its $330 million acquisition of Cole National, an eyewear and toy company, and Kravis was shocked by how easily Milken found buyers for the risky debt. It was “the damnedest thing I’d ever seen,” Kravis said. For the rest of the decade, KKR and Drexel would form an inseparable duo. Between 1984 and 1989, KKR used Drexel for thirteen transactions, and KKR, in turn, was Drexel’s largest borrower.

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Various reform proposals were bandied about, from abolishing tax deductions on interest from junk bonds to creating tax deductions for dividend payments. But all were shot down. The only effective brake on private equity’s acceleration were two unrelated developments at the turn of the decade. The first was a rise in interest rates in the wider economy. Higher interest rates made debt more expensive, thereby making it harder for private equity firms like KKR to load their portfolio companies with bonds. The second development came when Michael Milken, the undisputed champion of junk bonds, was indicted for conspiracy and fraud in connection with his securities work.

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance
by Ron Chernow
Published 1 Jan 1990

As its underwriting business declined, Morgan Stanley turned to businesses it once would have rejected haughtily, entering the netherworld of junk bonds. These high-risk high-yield bonds were often issued to support takeovers by companies of questionable solidity. The new junk bond department coincided with Morgan Stanley’s sudden interest in small start-up companies. As Bob Greenhill explained, “Morgan was building a high-technology effort at that time, and I said, ‘How can we not be in a business that is so necessary for so many of our growing clients?’ ”31 Junk bonds revolutionized Wall Street by magnifying the money available to corporate raiders. Where conglomerate takeovers in the 1960s used share exchanges, and cash was the method of choice in the 1970s, the junk bond market let corporate raiders flout the Wall Street establishment and finance their incursions by selling bonds to investors.

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With considerable hoopla, Morgan Stanley talked about gentrifying junk bonds, but self-congratulation proved premature. In mid-1982, Morgan Stanley joined with Hambrecht and Quist to sponsor the first public offerings of People Express, the pioneering no-frills discount airline. Buying up used Lufthansa planes and ripping out their first-class sections, People founder Donald C. Burr wanted to create cheap air travel for the masses; his feisty, hustling airline was the anti-thesis of a classic Morgan client. Between 1983 and 1986, Morgan Stanley underwrote more than $500 million in junk bonds for People. As if still leary of its junk bond departure, the firm overruled custom and let Charles G.

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After the crash, it de-emphasized securities distribution and edged out dozens of managing directors, largely from the sales and trading side. In 1988, Merrill Lynch, once scorned as plebeian, led domestic underwriters for the first time as Morgan Stanley slumped to sixth place. Morgan mostly pursued junk bonds, now the most profitable form of underwriting and an indispensable adjunct to takeover work. When Drexel Burnham lost ground with the investigation into junk bond king Michael Milken, Morgan Stanley briefly emerged as the top junk bond firm in America! Did the ghosts of Pierpont, Jack, and Harry Morgan shudder? Morgan Stanley was an undoubted success story, an awesome performer. For over fifty years, it had stood at or near the peak of investment banking—a claim no other firm except First Boston could make.

Devil's Bargain: Steve Bannon, Donald Trump, and the Storming of the Presidency
by Joshua Green
Published 17 Jul 2017

These higher interest rates meant that a portfolio of fallen angels, even though some would go bust, would almost invariably beat a portfolio of blue-chip bonds. Yet most investors shunned them as “junk.” Milken’s insight was that junk bonds were undervalued assets because investors, who feared seeming imprudent, didn’t want to own them. An enormous opportunity awaited someone less constrained by appearances. Milken made himself rich by trading junk bonds. Then he made himself vastly richer by becoming the chief evangelist for their cause. Along the way, he upended U.S. corporate finance. By convincing other investors that junk bonds were a shrewd bet, Milken almost single-handedly created a market for them. The demand he created meant that two types of businesses considered too risky to lend to by commercial bankers—new, smaller businesses and large, struggling corporations—could suddenly gain access to capital by floating junk bonds.

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The demand he created meant that two types of businesses considered too risky to lend to by commercial bankers—new, smaller businesses and large, struggling corporations—could suddenly gain access to capital by floating junk bonds. Some of them failed. But many junk-fueled corporations, such as MCI and Chrysler, hit it big. And even though he won extraordinary wealth and renown, Milken had the chutzpah to style himself a populist, conjuring up capital for businesses that were looked down on and refused by established lenders. By the time Bannon graduated from HBS, Milken’s revolution had generated tens of billions of dollars in junk bonds, enough to fund all the companies shut out of the credit markets. So Milken and his firm, Drexel Burnham Lambert, devised an ingenious new use for them: they used junk bonds to finance raids on undervalued blue-chip corporations.

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So Milken and his firm, Drexel Burnham Lambert, devised an ingenious new use for them: they used junk bonds to finance raids on undervalued blue-chip corporations. Milken and Drexel would fund these hostile takeovers by pledging the assets of the target corporation as collateral, in the same way that a home buyer obtains a mortgage by pledging the collateral of the home against the loan. This practice gave rise to an army of corporate raiders, men such as Ron Perelman, Carl Icahn, T. Boone Pickens, and Nelson Peltz, who became rich selling junk bonds through Drexel Burnham to finance predatory raids on such Fortune 100 companies as TWA, Disney, Revlon, and Phillips Petroleum.

Capital Ideas: The Improbable Origins of Modern Wall Street
by Peter L. Bernstein
Published 19 Jun 2005

Miller returned to it in his Nobel Prize address in Stockholm in December 1990 when he admitted that his positive view of the leveraged buyouts of the 1980s is still “far from universally accepted among the wider public.”21 But he remains unrepentant. He argues that losses on junk bonds were no proof that over-leveraging had occurred and that increased leveraging by corporations does not imply increased risk for the economy as a whole. He points out that the buyers of junk bonds knew they were taking outsize risks. Why else would they have demanded such high interest rates? “For all save the hopelessly gullible,” these investors were fully aware that some of the junk bonds would end up in default. Their expectation, consistent with orthodox finance theory, was simply that the return they would earn from taking these risks, after defaults, would be larger than if they had bought riskless bonds instead.

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The futures market alone has expanded by 12 percent a year since 1985. At this writing, new exchanges to handle these kinds of instruments are under development in London, Paris, Hong Kong, Sydney, Toronto, Singapore, Brazil, Osaka, Zurich, Frankfurt, and Tokyo. The junk bond market, the most controversial of the markets of the 1980s, flourished because it satisfied the needs of both the investors who bought junk bonds and the relatively small companies that issued them. The issuers did not want to dilute their ownership by selling more stock, but they needed capital that their banks either could not or would not supply. The buyers would have been reluctant to buy shares in small, unknown companies, but they were willing to provide capital that offered a higher yield and less risk than common stock.

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Milken recognized that the parties could do business. No one was fooled that these were triple-A obligations, but the high interest rates seemed to compensate for the risks involved. Many small companies got financing and created new jobs that would have been impossible without the junk bond market. Most of the junk bonds that subsequently defaulted were issued to finance takeovers rather than to finance the expansion of smaller corporations. ••• Although the revolution inspired by the new theories of finance has been profound, it has been less than total. Nor has the investment world split into faithful users of the new methodology and inflexible believers in the orthodox approach.

The Lords of Easy Money: How the Federal Reserve Broke the American Economy
by Christopher Leonard
Published 11 Jan 2022

Global investment banking fees rose steadily as QE money was pouring into the financial system, hitting a monthly peak of $11.1 billion in June 2014, surpassing the previous record of $10.7 billion, set in the summer of 2007, right before the crash. It was around this time, in 2014, that a junk bond analyst named Vicki Bryan noticed a pivotal change in the market for corporate debt. The old rules of junk debt and leveraged loans didn’t seem to apply anymore. “The market became disjointed, completely, from economic reality,” Bryan recalled. Her job, as a junk bond analyst, was to hunt for fraud or incompetence at the companies that borrowed junk debt and then warn her clients about it. Her entire business model relied on the fact that when analysts released important information, it affected the market.

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In some ways, the economic weakness was hidden. The economy was growing, and the dark days of Volcker’s interest-rate hikes and high unemployment were long forgotten. The mid-to-late 1980s had been a gold rush on Wall Street characterized by massive borrowing and gluttonous spending. This was the era of the junk-bond kings, who used cheap debt to buy companies and then merge them with other companies for a profit, or break them up for a quick sale. But there was an underlying weakness beneath the churning markets that was visible to millions of working Americans. Gas prices were high, layoffs were common, and business investment was slow.

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Rising yields on Treasurys meant that Wall Street might have a savings account again, and investors didn’t need to keep their money out on the risky side of the yield curve. When this fact was apparent, investors turned around and looked at all the risky junk they’d bought, like leveraged loans and corporate junk bonds. They could now dump those investments and put their money somewhere safer. This was what started happening in late June and early July. And it happened in the kinds of arcane markets where the Fed’s QE money flowed. Real estate investment trusts (REITs) began force-selling their holdings as mortgage rates adjusted.

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
by Simon Johnson and James Kwak
Published 29 Mar 2010

This process began in the 1970s, when Michael Milken, a trader at Drexel Burnham Lambert, had the insight that “junk bonds”—bonds that were rated below “investment grade” by the credit rating agencies*—were generally underpriced, either because investors had an irrational aversion to them or because they lacked a liquid market in which to trade them. He capitalized on that market inefficiency, building an operation that dominated the trading and sales of junk bonds. By creating a large, liquid market for junk bonds—which grew from $6 billion in 1970 to $210 billion in 198965—he made it easier for companies to raise money and opened up vast new opportunities for investment banks to generate profits by underwriting, selling, and trading these formerly neglected bonds.

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Germain Depository Institutions Act—hailed by President Reagan as “the first step in our administration’s comprehensive program of financial deregulation”53—which lifted many regulations on the savings and loan industry, allowing them to expand further into new businesses, such as commercial lending and investing in corporate bonds (including junk bonds), to compensate for the collapse of the “boring banking” business model.54 In addition, the bill authorized state-chartered banks to offer mortgages with adjustable rates55 (national banks had been able to offer adjustable rate mortgages since the previous year)56—a central feature of the last twenty-five years of innovation in residential lending—and relaxed other constraints on mortgage lending for national banks.

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By creating a large, liquid market for junk bonds—which grew from $6 billion in 1970 to $210 billion in 198965—he made it easier for companies to raise money and opened up vast new opportunities for investment banks to generate profits by underwriting, selling, and trading these formerly neglected bonds. By making it easy to raise large amounts of money quickly, junk bonds also made possible the leveraged buyout craze of the 1980s, in which acquirers would pay for acquisitions by issuing large amounts of new debt. Those acquisitions, in turn, generated huge fees for the investment banks that advised the companies engaged in those transactions and also underwrote and sold the necessary debt. They also left companies struggling with huge debt burdens, often requiring painful restructuring and sometimes leading to bankruptcy.

The End of Wall Street
by Roger Lowenstein
Published 15 Jan 2010

Its shares, financed largely with credit, rose tenfold in a single year in 1720. Then they collapsed, triggering bankruptcies and ruin. Or the Wall Street crash of 1929; stock speculation on credit helped to make the collapse so devastating. In the 1980s, corporations like Federated Department Stores palmed off junk bonds on which the interest due was far greater than their earnings.25 The utter implausibility of their promises did not deter investors—until Federated and a wave of others filed for bankruptcy. It was not so much belief as a desire to believe. As long as the market is liquid, open to fresh injections of credit, the day of reckoning need never come, or such is the hope.

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After two years, he was accepted to Harvard Business School, where GM gave him a merit scholarship, and where he received stellar grades. After getting his MBA, O’Neal returned to GM, working in the treasury department. In 1986 he joined Merrill, and by the early ’90s he was running its leveraged finance unit. O’Neal was exceptionally smart and coolly—at times brutally—ambitious. He excelled in business lines such as junk bonds, demonstrating his tolerance for risk, and was a perceptive critic of Merrill’s failings, pointing out how it could cut costs. He became CEO in 2003, accelerating his ascent by forcing the early departure of his predecessor and former mentor. Even after he reached the top, there remained in the tall, graying O’Neal something of the perpetual outsider.

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In December, Goldman lost money in mortgage securities for ten days running, and though the amount it lost wasn’t great, this kind of rough patch was unusual. David Viniar and Gary Cohn, the firm’s chief financial officer and chief operating officer, received a profit-and-loss report from every Goldman business every day; after two weeks of losses they had seen enough. At the same time, issuance of corporate junk bonds was falling fast, suggesting a general retreat from risky credits. Viniar, the heads of Goldman’s mortgage business, and various of its financial operatives, about twenty bankers in all, were summoned to a top-level powwow. The consensus was that mortgage values would get worse before they got better.

The New Economics: A Bigger Picture
by David Boyle and Andrew Simms
Published 14 Jun 2009

If a company had been prudent and paid off too much debt, then a raider could potentially use that as their own asset for grabbing control of the company, loading it with debt to pay for the takeover, stripping it of saleable assets and then selling the remains on. That was the role of the junk bonds, which offered high yields because of the high risk involved. The junk bond revolution was led by a California company called Drexel Burnham Lambert, whose senior executive vice president, Michael Milkin, was the so-called ‘junk bond king’. Evidence obtained from the insider trader Ivan Boesky led to Wall Street’s biggest criminal prosecution ever (at least until the Bernard Madoff affair in 2008), after which 98 indictments of fraud and racketeering were brought against Milkin.

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Evidence obtained from the insider trader Ivan Boesky led to Wall Street’s biggest criminal prosecution ever (at least until the Bernard Madoff affair in 2008), after which 98 indictments of fraud and racketeering were brought against Milkin. He was sentenced to ten years in jail and agreed to pay $600 million in fines. Without his leadership, the junk bonds faltered. It is widely believed that the temporary decline of the junk bond market led to a credit crunch that contributed to the 1990 recession. Milken was released from prison early because he had been given only 18 months to live, and now runs his own economic think tank. But one of the legacies of those years has been the defensive loading of companies WHY ARE MALAWI VILLAGERS PAYING THE MORTGAGES OF STOCKBROKERS?

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Especially in the UK, people still believe that the great institutions that underpin our lives, known as banks, are dedicated to careful scrutiny and prudent lending: in practice, these institutions – like so many others – have been hollowed out, removing those checks, as well as those bank managers who might once have scrutinized Mr Mouse’s mortgage application and rejected it earlier. It was a serious crisis, but it wasn’t exactly unprecedented. The Wall Street crash followed the great radio stocks boom. The 1987 crash followed the junk bond boom. 2 THE NEW ECONOMICS The dot.com ‘bust’ followed the dot.com boom. Now the 2008 crash has followed the property and credit boom. Although it always comes as a surprise to the people the novelist Tom Wolfe dubbed the ‘masters of the universe’, financial panic follows financial over-excitement, as surely as night follows day.1 A handful of sacrificial lambs are blamed and sometimes even gaoled; regulations are tightened and loosened again.

The Greed Merchants: How the Investment Banks Exploited the System
by Philip Augar
Published 20 Apr 2005

Their downfall was a sensation that damaged confidence in US capital markets and precipitated a collapse of the junk bond market in 1990.19 The junk bond crisis spread out across Wall Street and corporate America as a number of highly leveraged deals – including 1988’s landmark $23 billion takeover of RJR Nabisco by the buy-out specialists Kohlberg Kravis Roberts – struggled under the weight of debt repayments and asset write-downs.20 Surprising victims included the savings and loans institutions who, following deregulation in 1982, had loaded up with junk bonds with the backing and advice of the investment banks. When the junk bond market crashed, they were left with bucketloads of unmarketable and worthless bonds and US taxpayers were faced with a $500 billion bill to bail them out.21 The excesses of the 1980s spilled over into the 1990s.

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In the late 1980s Tom Wolfe’s bestseller Bonfire of the Vanities, Michael Douglas’s Oscar-winning portrayal of Gordon Gekko in the movie Wall Street and Michael Lewis’s tale of the Salomon Brothers jungle, Liar’s Poker, picked out some not very attractive characteristics of investment banking people.16 A crop of insider trading and market manipulation cases – notably the Boesky and Milken affairs in America and the Guinness scandal in the UK – revived old memories of greed and corruption in financial circles.17 Ivan Boesky was a prominent risk arbitrageur – someone who takes stock market positions in the hope of profiting from takeover bids – who received a prison sentence and a $100 million fine in 1986 after admitting to trading on insiders’ tips.18 Boesky was well known in financial circles but what shocked the public at large was where the trail led. Boesky turned state’s evidence and named Michael Milken as an insider dealer. Milken was the high profile investment banker who had transformed junk bonds – high risk, high yielding securities – from a backwater of the capital markets into a mainstream financial instrument. Under the leadership of Milken and the firm he worked for, Drexel Burnham Lambert, junk bonds were used to underpin the leveraged buy-outs – demergers funded largely by debt – that refinanced corporate America in the eighties. Using the draconian Racketeer-Influenced Corrupt Organizations law (RICO), US Attorney Rudolph Giuliani, who had also prosecuted Boesky, brought a criminal case against Milken and Drexel Burnham Lambert.

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And indeed it restored its reputation to such a degree that when in 2004 the founders of Google decided to list their company in a groundbreaking way, with all sorts of ethical objectives about the way they wanted ownership to work, guess who they chose to co-lead the issue? No Way In This background of financial volatility, staff turnover and scandal at Lehman, Salomon and CSFB should have provided ideal circumstances for other firms to join the top six. Drexel, Burnham in fact did so in the mid eighties on the back of Michael Milken’s junk bond revolution, but by 1990 it had collapsed when Milken was dragged into the Boesky insider dealing affair. Bankers Trust was another star that burned brightly for a while. It was eighth in 1990 and for the next three years its derivatives business helped to make it the most profitable major bank in the USA.

DIY Investor: How to Take Control of Your Investments & Plan for a Financially Secure Future
by Andy Bell
Published 12 Sep 2013

These ratings apply equally to countries – the downgrade of a country’s investment rating can be politically and economically damaging. High-yield/junk bonds Anything rated below these levels is considered a high-yield or junk bond. These bonds, as you might have guessed, pay higher yields, but the chance of them going bust is also far higher. Furthermore, ratings agencies can downgrade high-yield bonds further, meaning their resale value will fall. The only way you should be investing in junk bonds as a DIY investor is through a high-yield bond fund, unless you really know what you are doing. table 13.1 Understanding ratings agency classifications Gilts In the more than 300 years since it was established, the Bank of England has never defaulted on any of its liabilities.

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To reflect its rather higher risk profile, anyone prepared to invest in 10-year bonds issued by the Greek government at that time earned a return of 17 per cent. Corporate bonds range from the very secure, offered by cash-rich blue chip companies, right up the risk scale to the very insecure, known as junk bonds, offered by struggling companies facing financial headwinds or early-stage companies whose prospects are unclear. Bonds had, until the turn of the century, traditionally been accessed through stockbrokers, or through unit trusts and OEICs investing in baskets of them. But the advent of online investment platforms has brought them to a wider audience of investors who are looking to beat miserable cash-on-deposit rates by taking on a little extra risk.

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Corporate bonds have been in existence for almost as long as there have been companies, with the East India Company and the Dutch East India Company both issuing bonds early in the 17th century. The first decades of the 20th century saw an increase in the issue of corporate bonds. These early issues were mainly investment-grade bonds, with appetite for junk bonds verging on the non-existent. The modern market in non-investment grade, or high-yield bonds, really took off after the financial crisis of the 1970s, when falling asset prices led to banks lending only to those companies with a strong credit rating. The 1980s saw high-yield bonds delivering excellent returns without the increased levels of defaults their yields suggested, attracting increasing numbers of investors to the asset class.

Stigum's Money Market, 4E
by Marcia Stigum and Anthony Crescenzi
Published 9 Feb 2007

Many observers consider the issue of the true risk level of junk bonds to be unresolved, although in recent years, low default rates for junk bonds has tilted investor opinion in favor of the junk-bond sector (the default rate for junk bonds was 2.2% in 2005, according to Moody’s). as an asset class, high-yield bonds have been embraced increasingly over the year. In any case, insurance companies, pension funds, and especially mutual funds have become big buyers of junk bonds.3 Thrifts, too, have been buyers of junk bonds. Low default rates during much of the 1990s and the early 2000s is one of the reasons for this increased acceptance. Originally, banks provided the bridge financing for LBO deals, but they would do so only if an investment banker had made a firm commitment to underwrite the high-yield bond issue that was to finance the deal long term.

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By having played an at least uninvited, if not hostile, role in the RJR Nabisco LBO and many other deals, KKR, as well as any LBO firm, risks limiting the number of CEOs who will be willing to sit down and talk with it in the future. Buyers of Junk Bonds By early 2006, the junk-bond market had swollen to $850 billion outstanding. Junk bonds, which are also commonly known as speculative-grade bonds, are sub-investment-grade bonds and thus pay a high yield relative to investment-grade bonds, and there seem to be numerous investors who believe that they can evaluate the risks inherent in such paper and pick issues that will turn out to be good investments.2 In fact, 2 The seminal work on junk-bond defaults was done by Edward I. Altman of New York University and Scott A.

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(Drexel Burnham Lambert was also an early groundbreaker in the analysis of yields and default rates on junk bonds.) The thrust of this work is that yields on these bonds are higher than required by their true risk. In April 1989, a controversial, unpublished study by Paul Asquith et al. from Harvard indicated that true default levels were substantially higher than those calculated by Altman and Namacher. The nature of the disagreement between the two studies lies in their methodologies, n.b.: Are losses to be looked at on a coincidental or cumulative basis? Many observers consider the issue of the true risk level of junk bonds to be unresolved, although in recent years, low default rates for junk bonds has tilted investor opinion in favor of the junk-bond sector (the default rate for junk bonds was 2.2% in 2005, according to Moody’s).

Limitless: The Federal Reserve Takes on a New Age of Crisis
by Jeanna Smialek
Published 27 Feb 2023

The way to help the junk market without helping specific companies seemed to be to buy lower-rated bonds via exchange-traded funds, or ETFs, which was akin to buying tiny slices of a huge range of debt. Unfortunately, that created another pitfall. The largest junk bond ETF was offered by BlackRock, the firm running the Fed’s programs, and it had been hit by massive outflows. By backstopping the market, the Fed would be bolstering a product tied to the very company it was paying to carry out its rescue. The calculus was one that would make any policy maker squirm. A broad, fund-based junk bond purchase program was likely to be quick and efficient. It would probably work. It was guaranteed to look terrible. It was the hardest decision in a crisis full of them, but the positives carried the day.

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The Treasury breakdown was both a symptom of and fuel to a larger drama playing out across markets. Investors seemed to be attempting to sell off entire portfolios, and they were struggling to do so. Commercial paper, the short-term debt companies use to fund themselves, was hard to renew. Investment-grade company bonds were difficult to trade, junk bonds all but impossible. Money market mutual funds, where companies and investors park their cash to make tiny returns, were seeing massive outflows. Financial publications reported that several hedge funds, including Capula and Bridgewater,[1] were sustaining heavy losses. Word had reached some employees at the New York Fed that several funds might be on the brink of collapse.

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Even after the Fed’s massive Sunday announcement, stock futures plunged before trading began, hitting the “limit down” trigger meant to stop irrational selling. When the actual market opened, it plummeted 8 percent immediately and tripped another “circuit breaker” intended to stop the downward spiral.[33] An array of corporations seemed likely to face a credit downgrade and investors were pulling money from funds that track junk bonds, the lowest-rated company debt. Investment trusts holding real estate bonds were tap-dancing on the brink of a meltdown, and though the Fed was buying some mortgage-backed debt, that was no cure-all.[34] The market for state and local bonds had ground to a complete standstill. New municipal bond issuances were being put on hold, raising questions about how public entities would raise the money they needed to pay the costs associated with the unfolding public health crisis.[35] Even as the Fed pledged to buy massive quantities of Treasury bonds, the market for government debt remained clogged.

How Money Became Dangerous
by Christopher Varelas
Published 15 Oct 2019

That was the idea that Milken brought to Drexel and, through the 1970s, put into practice, forging an explosively powerful market around these high-yield bonds, commonly called junk bonds. Drexel became a major player on Wall Street, as Milken parlayed his junk bonds into supporting another booming market—mergers and acquisitions. His ability to access capital from the new market he created grew so deep and his connections so vast that he developed the ability to rapidly assemble armies of corporate raiders who could target any struggling company, no matter the size, backed by his junk bond war chest. That was how Saul Steinberg got the firepower to go after Disney. Drexel Burnham Lambert—which earned the nickname on Wall Street of Drain-’em Burn-’em & Lambast-’em—became the go-to investment bank and facilitator for these hostile takeovers on the strength of Milken’s high-yield bond market.

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The crowd set down their hot dogs and beers and applauded him warmly. After serving two years in prison on multiple felony convictions, he had reinvented himself as a philanthropist, and even his once infamous history as the Junk Bond King was now celebrated. Except that nowadays, no one says junk bond. The accepted term is high-yield bond. So Michael Milken is again a hero, junk bonds are high-yield bonds, and corporate raiders have become activist investors. This signals a major evolution in American business, from the time of Steinberg’s attack on Disney through to the current day. While these activist investors can certainly bring about positive results, one unfortunate consequence is that management teams have become laser-focused on the bottom line—and, in particular, the short-term bottom line—often at the expense of investing in and creating the best product three or five years from now.

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I’d been flirting with the idea that Michael Milken had possibly done more to revamp American business for the better than anyone by introducing a way to go after underperforming management. This forcing function—management being held accountable for profits—would make America competitive in the 1990s and beyond. Milken’s junk bonds later provided the financial vehicle for the rise of the telecom industry, the cable industry, and, one could argue, the technology world. Without junk bonds, none of these industries would have been created as swiftly and successfully as they were. “Milken is one of the most brilliant people I know,” Mark Albert told me years later. “Okay, he’s a convicted felon, but he changed the United States of America, and how people do business, by funding entrepreneurs and businesses that could not get traditional funding from banks, by creating markets that really didn’t exist, by creating the buy-side before he had the sell-side, since he knew there was always a sell-side.

The Money Machine: How the City Works
by Philip Coggan
Published 1 Jul 2009

Later on, Milken played a key role in the takeover boom of the 1980s, financing predators with newly created ‘junk bonds’. These would trade at, or near, face value, but would offer much higher yields than other bonds in the market (to reflect the higher risk). The term junk bonds extended to cover all high-yielding bonds of this type. Milken fell from grace and was eventually jailed, and many investors who bought junk bonds at the peak of the market lost money. As with other financial theories, by attempting to exploit it so heavily, Milken and his followers altered the rules. If there was any merit to the junk bond theory, it was because few people bothered to follow the market and it was therefore possible to find bargains.

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The net result was that the reputation of the agencies undoubtedly suffered; perhaps they should have been more cautious in handing out their highest mark of approval. JUNK BONDS Bonds are generally seen as a conservative investment. They offer more security than equities, but a lower return. For much of the 1980s, however, a US phenomenon made the bond market seem positively exciting (in financial terms, at least); this was the enthusiasm for junk bonds. The term initially referred to bonds which had collapsed in price, normally because the company which issued them had become mired in financial difficulties.

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The market marked down the price of the bond because it feared the company would be unable to repay the capital, or even maintain the interest payments. In the language of the rating agencies (referred to above), the bonds would be ‘below investment grade’ with a rating below BBB. A smart trader called Michael Milken, who worked for a US banking group called Drexel Burnham Lambert, saw the opportunity for profit in junk bonds. Say a bond was issued with a coupon of 10 per cent, but the company gets into difficulty and its price falls to 50 (compared with a face value of 100). If the company just pays the interest, the investor will earn a running yield of 20 per cent (10/50). And if the company repays the bond in full, the investor will double his capital.

The Bogleheads' Guide to Investing
by Taylor Larimore , Michael Leboeuf and Mel Lindauer
Published 1 Jan 2006

Global fund: A mutual fund that invests in both U.S. and foreign securities Hedge fund: A fund used by wealthy individuals and institutions that is allowed to use risky strategies that are not available to mutual funds. High-yield bonds: See junk bonds. International fund: A mutual fund that invests in non-U.S. securities. Junk bonds (also known as high-yield bonds): Bonds with a credit rating of BB or lower, which indicates that the bonds are considered to be below investment grade. Companies that issue junk bonds promise to pay higher yields in order to attract buyers who otherwise might purchase safer bonds. Load fund: A mutual fund that levies a sales charge. Long-term capital gain: Profit on the sale of a security held at least one year that generally results in lower tax.

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By immediately buying or selling, these bond professionals almost instantly bring the bond's price back to perceived fair value. High-Yield Bonds High-yield bonds, also known as junk bonds, appeal to many investors because of their higher yields and sometimes higher returns than their more staid bond cousins. We have not included them in our portfolios for several reasons: 1. Bonds are primarily for safety. Stocks are primarily for higher return (and risk). Junk bond funds behave somewhere between traditional high-quality bonds and stocks. This tends to muddy the important distinction between bonds and stocks in a portfolio, thereby making risk control more difficult. 2.

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In addition, Standard & Poor's assigns bond ratings plusses (+) and minuses (-). A BBB- is the lowest of the investment grade bonds. Bonds with ratings lower than BBB- are considered speculative, and pay a higher interest rate since there's a greater risk that the issuing companies might not be able to repay investors. These lower-rated bonds are known as junk bonds, high yield bonds, and non-investment-grade bonds. Municipal Bonds State and local governments sell bonds to pay for various government and/or government-approved projects. These municipal bonds are normally free from federal taxation, and they are usually also free from taxes in the state of issue.

Americana: A 400-Year History of American Capitalism
by Bhu Srinivasan
Published 25 Sep 2017

Using little cash, assuming well over $1 billion in debt, and issuing additional junk bonds, Murdoch over the course of twelve months in 1985 bought Twentieth Century Fox in one transaction and followed up by buying seven local television stations from Metromedia. Supported by Milken’s operation, traders and bankers played multiple roles in financing Murdoch’s transactions and in creating the Fox brand on television to compete with CBS, NBC, and ABC. Similarly, the capital-intensive nature of cable, the next big thing within television, was an especially good fit for junk bond financing. Starting in the early eighties, American homes had rapidly started subscribing to pay television.

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With Milken’s capacity to raise virtually unlimited amounts of money by placing bonds with his loyal investors, what if Drexel could finance financial entrepreneurs with small companies or minor trading operations to buy giant American companies? It was an audacious strategy. With backing from Drexel, an investor that could afford to buy 5 or 10 percent of a company’s stock could now finance the other 90 or 95 percent by issuing junk bonds and acquire the entire company. The earnings of the company, or a partial sale of its assets, would then be used to pay the interest on the bonds. Junk bond financing was the equivalent of taking out a mortgage on a rental property and having the rent cover the mortgage payment, only instead of a rental property, the targets were companies like Revlon or Disney. The ability for insurgents like Icahn to leverage a small bit of capital and borrow a large amount set in motion years of high corporate drama, showdowns that featured old, established companies, with their pedigreed executives under assault by these upstarts financed by Milken and Drexel Burnham.

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The rationale for the business model was that private ownership would bring an unwieldy public company needed operating discipline. The new owners, with huge junk bond debt loads, had to cut frivolous expenses to pay the interest. In this telling, debt was a great disciplinarian. Yet the logic contained an irony: It suggested that large, for-profit, publicly traded companies, despite the forces of free-market capitalism, could be highly inefficient and wasteful if left to their own devices. By the end of the 1980s, KKR would successfully complete the largest leveraged buyout in American corporate history. Using junk bonds, it would buy the tobacco and snack maker RJR Nabisco for nearly $25 billion.

Americana
by Bhu Srinivasan

Using little cash, assuming well over $1 billion in debt, and issuing additional junk bonds, Murdoch over the course of twelve months in 1985 bought Twentieth Century Fox in one transaction and followed up by buying seven local television stations from Metromedia. Supported by Milken’s operation, traders and bankers played multiple roles in financing Murdoch’s transactions and in creating the Fox brand on television to compete with CBS, NBC, and ABC. Similarly, the capital-intensive nature of cable, the next big thing within television, was an especially good fit for junk bond financing. Starting in the early eighties, American homes had rapidly started subscribing to pay television.

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With Milken’s capacity to raise virtually unlimited amounts of money by placing bonds with his loyal investors, what if Drexel could finance financial entrepreneurs with small companies or minor trading operations to buy giant American companies? It was an audacious strategy. With backing from Drexel, an investor that could afford to buy 5 or 10 percent of a company’s stock could now finance the other 90 or 95 percent by issuing junk bonds and acquire the entire company. The earnings of the company, or a partial sale of its assets, would then be used to pay the interest on the bonds. Junk bond financing was the equivalent of taking out a mortgage on a rental property and having the rent cover the mortgage payment, only instead of a rental property, the targets were companies like Revlon or Disney. The ability for insurgents like Icahn to leverage a small bit of capital and borrow a large amount set in motion years of high corporate drama, showdowns that featured old, established companies, with their pedigreed executives under assault by these upstarts financed by Milken and Drexel Burnham.

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The rationale for the business model was that private ownership would bring an unwieldy public company needed operating discipline. The new owners, with huge junk bond debt loads, had to cut frivolous expenses to pay the interest. In this telling, debt was a great disciplinarian. Yet the logic contained an irony: It suggested that large, for-profit, publicly traded companies, despite the forces of free-market capitalism, could be highly inefficient and wasteful if left to their own devices. By the end of the 1980s, KKR would successfully complete the largest leveraged buyout in American corporate history. Using junk bonds, it would buy the tobacco and snack maker RJR Nabisco for nearly $25 billion.

The Price of Time: The Real Story of Interest
by Edward Chancellor
Published 15 Aug 2022

At the same time, ‘The Fed became possibly the biggest carry trader of all: its balance sheet is a huge carry trade with large holdings of yielding securities, such as Treasury securities and mortgage-backed securities, financed by very low-cost liabilities.’10 Central banking in the age of quantitative easing proved an extremely lucrative business. In 2015, the Fed earned profits of nearly $100 billion on its securities portfolio, which was financed by printing dollars. JUNK BONDS AND LEVERAGED LOANS One consequence of the return of yield-chasing was a dramatic collapse in underwriting standards. After Lehman’s bankruptcy, US junk bond yields soared to more than 20 percentage points above Treasuries. But thanks to the Fed’s prompt actions, the expected tsunami of corporate bankruptcies never arrived. Instead, credit spreads contracted, and the high-yield market reopened.

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Henry Kravis, the veteran founder of the leading buyout firm KKR, boasted that his firm’s acquisition of Del Monte Foods in March 2011 was completed with ‘the most attractive financing that we’ve ever done’.11 Credit quality collapsed as more of the lowest-rated bonds (CCC) came to the market.12 The world’s leading authority on distressed debt, Professor Edward Altman of New York University, attributed the incipient credit bubble to an ‘insatiable appetite for higher yields in this low-interest rate environment’.13 The playbook was eerily familiar, as a 2015 report from Ellington Capital Management observed: These same hallmarks of the subprime mortgage bubble – outsized lending to riskier borrowers, record low interest rates, dubious underwriting practices and collateral valuation assumptions, misalignment of incentives between managers and investors, and weakening fundamentals – are all present today in high yield corporate debt markets. The difference today is that the Fed has been trying to revive the economy with zero interest rates for the past seven years.fn3 Like junk bonds, leveraged loans are issued by companies with poor credit ratings and are often issued to finance buyout deals. Unlike junk bonds, they pay floating rather than fixed rates. As underwriting standards declined, the leveraged loan market became dominated by so-called ‘covenant-lite’ issues, which came without the protections traditionally afforded creditors, such as limits on taking on more debt.

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By 2016, the Organisation for Economic Co-operation and Development found that 10 per cent of firms were unable to cover their interest payments from profits – the OECD’s definition of a zombie. Europe, it seemed, was turning Japanese. The zombie phenomenon was not confined to continental Europe. In both the United States and United Kingdom, ultra-low rates forestalled corporate bankruptcies. The default rate on US junk bonds after the Great Recession was just half the average of the two previous downturns. ‘The Fed’s extraordinary intervention,’ credit analyst Martin Fridson suggested, ‘enabled companies [to survive] that should have failed.’21 In Britain, the insolvency rate was also lower in the 2008–9 recession than during the milder economic downturn of the early 1990s.

Lessons from the Titans: What Companies in the New Economy Can Learn from the Great Industrial Giants to Drive Sustainable Success
by Scott Davis , Carter Copeland and Rob Wertheimer
Published 13 Jul 2020

With the unexpected success at Jacobs, the Raleses aimed for bigger acquisitions where Lean could be applied. But banks were naturally risk averse, and debt markets on Wall Street were still emerging, which brought Danaher into the world of junk bonds. After an introductory meeting with junk bond king Michael Milken, the Danaher team decided that junk bonds would supply the next stage of growth. In the late 1980s, junk bonds fueled both growth successes and debt excesses—and Milken was the gatekeeper. Companies now had a new tool to fund aggressive plans. Investors rushed to the higher yields provided. History shines a negative light on this era, but like anything else, there was both good and bad.

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History shines a negative light on this era, but like anything else, there was both good and bad. While Danaher insiders credit the company’s shrewd acquisitions and Lean manufacturing for its success today, most also say that junk bonds enabled the company to grow much faster than it otherwise would have at this crucial stage. In the late 1980s industrial assets were for sale on the cheap, but banks viewed these acquisitions as very risky. Even though junk bonds had high coupon debt levels, the returns on the deals were proportionally much higher. This new market fit Danaher’s early needs perfectly. In those early years, Danaher acquired businesses considered solid, yet poorly run and in need of very hands-on management support.

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That one had a whopping $20 billion price tag that takes Danaher deeper into the high-growth biotechnology space. The debate about Joyce’s ultimate success remains open for sure. But so far, the growth rate and execution of deals seem to support the higher acquisition prices he paid, all of which have been fueled by lower interest rates overall. In Danaher’s junk bond days, it would commonly pay 10 percent to finance a deal on which it hoped to earn a minimum of 15 percent. In today’s world, financing costs often fall below 3 percent, so to get the same investment impact, the return wouldn’t have to be much more than 8 percent. On the GE Biopharma deal, Danaher was able to finance the debt at sub 1 percent—an unprecedented funding cost level.

The Last Tycoons: The Secret History of Lazard Frères & Co.
by William D. Cohan
Published 25 Dec 2015

He alone can claim to have advised corporate executives on transformational deals in each of the last five decades across disparate industries. One could argue, quite rightly, that Felix invented the persona of investment banker as trusted corporate M&A adviser. Although he might find the comparison indelicate because he abhorred junk bonds, in the 1960s Felix divined the business of providing independent M&A advice to corporate chieftains in much the same way as the infamous Michael Milken conjured up the high-yield junk-bond market in the 1980s. In an utterly typical week in January 1969, for instance, Felix had many meetings, including those with Howmet, a French aerospace company where he was on the board of directors, and with Harold Geneen (CEO of ITT), Nicholas Brady (then a banker at Dillon Read and later the U.S.

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Moody's didn't help Lazard's cause when it rated the debt Lazard would be issuing as Ba1, below investment grade. And then Duff & Phelps, another rating agency, gave the Lazard debt an unsolicited and unexpected below investment grade rating as well, giving the debt offerings the whiff of a junk-bond offering--itself utterly ironic given all of Felix's railings against the junk-bond market. Pricing pressure on the debt put pricing pressure on the equity. Two days before the deal was to price, the high-profile professional stock picker and ranter Jim Cramer urged investors to stay away. "How awful is this Lazard IPO deal?" he wondered on his Web site (as opposed to in his financial column in Bruce's New York).

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He often described Lazard as simply "a group of important people, giving important people advice." Felix was proud to be solely an adviser whose wisdom was sought out internationally for cogent, insightful advice on mergers and acquisitions: nothing more, nothing less--and not a trace of apology for not being the top underwriter of junk bonds (a product he railed against) or equity offerings. No frustration with not being a private-equity investor. The Big Boys, a 1986 book by Ralph Nader and William Taylor, referred to Felix as "the interstitial man," someone who gets in the middle of things. Raymond Troubh, a former Lazard partner, was one of many people quoted by Nader and Taylor about Felix.

The Snowball: Warren Buffett and the Business of Life
by Alice Schroeder
Published 1 Sep 2008

4 In 1984, the burner under managements turned up another notch when “junk bonds” became respectable. More politely called “fallen angels,” these were the bonds of companies like the Penn Central Railroad that were climbing out of the bankruptcy dustbin or teetering on its edge.5 Only occasionally did a company issue junk bonds on purpose, paying a high interest rate because it was considered a dicey credit risk. Junk bonds were sort of shady, a little desperate. The people who worked in the junk-bond departments on Wall Street were junk peddlers or ragpickers—the few bankers who scouted for hag-ridden executives willing to issue junk bonds, and “distressed debt” analysts who spent their careers grading papers in the gloomy school of hard knocks, looking over picked-clean balance sheets and scuttlebutting bankruptcy lawyers, angry investors, and desperate managements.

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Everything changed when Michael Milken, chief junk peddler of the upstart investment bank Drexel Burnham Lambert, rose to become the most influential man on Wall Street through a simple proposition: that while individual “fallen angel” junk bonds were risky, buying a bushel of them was not, because on average, the higher interest rate more than compensated for the risk. In other words, junk bonds in the aggregate had a margin of safety—like cigar butts. Soon, money managers no longer looked as though they were playing roulette with investors’ money by putting high-paying junk bonds in their portfolios. Indeed, it quickly became more respectable to issue new junk bonds—quite a different thing. Another short hop and takeovers of strong, well-financed companies could be financed with junk, turning formerly sound balance sheets into debt-riddled Swiss cheese.

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But to make big money on arbitrage—buying and selling two nearly identical things to profit from their difference in price—required scaffoldings of debt, in which more and more assets were sold short to buy more and more assets on the “long” side.48 This expansion of leverage from hedge funds and arbitrage was related to the rise of junk bonds and takeovers occurring at the same time. The models that supported the argument for leveraged buyouts using junk bonds were, like the models used by arbitrageurs, variations of the efficient-market hypothesis. Leverage, however, was like gasoline. In a rising market, a car used more of it to go faster. In a crash, it was what made the car blow up. This is why Buffett and Munger considered defining risk as volatility to be “twaddle and bullshit,” as Munger would later put it.

Evil Geniuses: The Unmaking of America: A Recent History
by Kurt Andersen
Published 14 Sep 2020

But most important to making the formerly disreputable LBO take off was a new way to finance the takeovers—by means of the formerly disreputable junk bond. Junk bonds had been what happened to good bonds when the issuing corporations got into trouble, causing the big rating firms to downgrade the bonds, which meant the corporations had to pay higher interest to people who bought their bonds. But then in the late 1970s, the young Los Angeles investment banker Mike Milken started creating and issuing risky bonds as junk bonds, from scratch, thereby creating a white-hot new financial subindustry.*3 During just the first half of the 1980s, the market for junk bonds grew sixfold, to the equivalent of $94 billion a year, and more than a thousand different junk bonds were issued—half of which wound up defaulting, failing to pay the money due when it was due to the bond owners.

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.*3 During just the first half of the 1980s, the market for junk bonds grew sixfold, to the equivalent of $94 billion a year, and more than a thousand different junk bonds were issued—half of which wound up defaulting, failing to pay the money due when it was due to the bond owners. Junk bonds are like car manufacturers deciding to start making and marketing lines of brand-new designated lemons—cheaper parts, shoddily manufactured, much more liable to break down or crash, but so inexpensive. Funded with junk bonds or not, a typical LBO was a conceptually new sort of acquisition, more brazen and shameless in its selfishness and greed—indifferent outsiders offering to make a few executive collaborators very rich as long as they were up for abandoning their fellow employees and the company itself if necessary.

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Most people agree that short-term thinking has become a chronic problem for business, for the economy, for society—yet unabashed short-termism is the point of an LBO, the financiers’ optimal outcome being to take over, make a fortune, and disappear as quickly as they can. One of the godfathers of this fast-and-loose new game was Henry Kravis, whose Manhattan firm Kohlberg Kravis Roberts got the craze going in 1979 by investing a cash down payment equivalent to $4 million to use $1 billion in junk bonds and other debt to take over an obscure Fortune 500 company. One of the most spectacular early LBOs was undertaken by former treasury secretary William Simon after he left government to propagandize for the right and the rich, and to get very rich. (By his account, he was still in public service—because, as he’d testified to a Senate committee, “If you really want to help the poor, help the rich.”)

Wall Street Meat
by Andy Kessler
Published 17 Mar 2003

Almost everyone at Morgan Stanley was convinced that I was a worthless buffoon. Then, in October of 1989, the strangest thing happened. United Airlines was trying to go private, in a huge, employeeled leverage buyout, but the deal started to unravel. Just like that. Junk bond buyers refused to play, somehow assessing the risk to be too great. The junk bond market collapsed, all in one day. The Dow dropped 190 points, and everyone at Morgan Stanley, myself included, fell into a deep mental depression. This was a mini-crash, but it reminded everyone of the real crash two years earlier. That day, for some strange reason, Rod Berens bought a case of champagne and threw a party in the hallway of the research department to celebrate.

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It wasn’t the rip-roaring bull market that would show up in 1987, but things were hopping. All of New York caught stock fever. Still, it wasn’t so easy. No matter how good a call you had, most of the stocks that were working were takeovers, leveraged buyouts and companies put in play by Drexel Burnham and its junk bond king, Michael Milken. I heard about these guys every day. The rest of the street was in awe. One day, I was walking down 5th Avenue with one of our salesmen and his client, when the salesman asked why the account didn’t do more business with us. The client was brutally honest. “Who needs you? I get a call every morning from my Drexel salesman who tells me the next set of companies that are going to be in play.

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Leveraged buyouts, LBOs, were all the rage. Junk 103 Wall Street Meat bonds, despite the bad name they got leading up to the ’87 crash, were plentiful. Salomon, Goldman, Merrill and even Morgan Stanley had taken share from Drexel Burnham peddling high-yield bonds to whoever could use them. Technology companies couldn’t use these junk bonds. Research and development to advance technology cost too much, and either you pay interest or you fund R&D. Anyone back on R&D would be dead within 18 months. Of course, I was still new to Morgan Stanley as an analyst. For months, I was pounding the table recommending Intel’s stock, but the stock just went sideways.

Principles of Corporate Finance
by Richard A. Brealey , Stewart C. Myers and Franklin Allen
Published 15 Feb 2014

Bonds rated Baa or above are known as investment-grade bonds.19 Commercial banks, many pension funds, and other financial institutions are not allowed to invest in bonds unless they are investment-grade.20 Bonds rated below Baa are termed high-yield, or junk, bonds. Most junk bonds used to be fallen angels, that is, bonds of companies that had fallen on hard times. But during the 1980s new issues of junk bonds multiplied tenfold as more and more companies issued large quantities of low-grade debt to finance takeovers. The result was that for the first time corporate midgets were able to take control of corporate giants. TABLE 23.1 Key to bond ratings. The highest-quality bonds are rated triple-A. Investment-grade bonds have to be the equivalent of Baa or higher. Bonds that don’t make this cut are called “high-yield” or “junk” bonds. Issuers of these junk bonds often had debt ratios of 90% to 95%.

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LBOs are almost by definition diet deals. But there were other motives. Here are some of them. The Junk Bond Markets LBOs and debt-financed takeovers may have been driven by artificially cheap funding from the junk bond markets. With hindsight, it seems that investors underestimated the risks of default in junk bonds. Default rates climbed painfully, reaching 10.3% in 1991.5 The market also became temporarily much less liquid after the demise in 1990 of Drexel Burnham, the investment banking firm that was the chief market maker in junk bonds. Leverage and Taxes Borrowing money saves taxes, as we explained in Chapter 18.

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At the bottom of the heap are high-yield or “junk” bonds. There is considerable variation in the yield spreads on junk bonds; a typical spread might be about 5% over Treasuries, but, as we saw in the case of the LifeCare bond, spreads can go skyward as companies approach distress. Remember these are promised yields and companies don’t always keep their promises. Many high-yielding bonds have defaulted, while some of the more successful issuers have called their debt, thus depriving their holders of the prospect of a continuing stream of high coupon payments. So while the promised yield on junk bonds has averaged 5% more than yields on Treasuries, the annual return since 1980 has been less than 3% higher.

The Quants
by Scott Patterson
Published 2 Feb 2010

Quants were agnostic on such matters, devoting themselves instead to predicting whether a company’s stock would move up or down based on a dizzying array of numerical variables such as how cheap it was relative to the rest of the market, how quickly the stock had risen or declined, or a combination of the two—and much more. That night at the St. Regis was a golden hour for the quants, a predators’ ball for the pocket-protector set. They were celebrating their dominance of Wall Street, just as junk bond kings such as Michael Milken had ruled the financial world in the 1980s or swashbuckling, trade-from-the-hip hedge fund managers such as George Soros had conquered the Street in the 1990s. Muller flicked a lock of sandy brown hair from his eyes and snatched a glass of wine from a passing tray, looking for his friends.

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It started to climb as the Federal Reserve pumped massive sums of money into the system. The Dow finished the day up 102 points. The next day, it soared 186.84 points, its biggest one-day point advance in history at the time. But the damage had been done. The mood around the country turned decidedly anti–Wall Street as the junk bond scandals hit the front pages of newspapers. An October 1987 Newsweek cover queried, “Is the Party Over? A Jolt for Wall Street’s Whiz Kids.” In December 1987, audiences in movie theaters listened to Gordon Gekko, the slimy takeover artist played by Michael Douglas, proclaim the mantra for the decade in Oliver Stone’s Wall Street: “Greed is good.”

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In mid-December 1987, an army of vans pulled up in front of a nondescript office complex in the heart of sleepy Princeton. A squad of fifty armed federal marshals clad in bulletproof vests burst from the vans and rushed into the office of Princeton/Newport Partners, which was perched in a small space over a Häagen-Dazs shop. They were searching for documents related to the fund’s dealings with Michael Milken’s junk bond empire at Drexel Burnham Lambert. The man in charge of the case was Rudolph Giuliani, the U.S. attorney for the Southern District of New York. He was trying to build more evidence for the government’s case against Drexel and was hoping employees of the hedge fund, threatened with stiff fines and possible prison terms, would turn against Milken.

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism
by Kevin Phillips
Published 31 Mar 2008

For convenience, I call the quarter century ascent the Multi-bubble. The term is doubly descriptive—on one dimension, a simultaneous puffing up of stocks, debt, experimental finance, and the national role of financial services; on the second, a succession of bubbles from the savings-and-loan and junk bond 1980s to the technology-manic nineties and the ultimate great mortgage and debt bubble. The centrality of financial excess, I argue, is not a precursor of postindustrial evolution, but a perilous overconcentration visible in past leading world economic powers as they lost the broad vitality of earlier eras (see pp. 183-85).

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Bankers and savings and loan executives, handed new investment latitude by early 1980s deregulation, got our permissive quarter century off to a raucous start with an orgy of bad real estate loans, scams, financial toga parties, and Texas-sized insolvencies that led, beginning in 1989, to a $200 billion federal bailout. Ambitious financiers, some of whom also wound up in jail, explored grander new frontiers of debt issuance. Michael Milken pioneered high-yield or “junk” bonds for lower-rated corporate borrowers until his firm, Drexel Burnham, failed in 1991. Raiders like Henry Kravis, T. Boone Pickens, and Ivan Boesky made a household expletive out of the term “leveraged buyout”—the lucrative process by which companies were taken over, stripped, loaded up with debt, and sold off.

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We’ve never had a correction with these types of institutions and these types of instruments.”3 Others distilled the doubts about hedge funds themselves—the exotic quantitative mathematics, the obscure language of fixed-leg features and two-step binomial trees, and the humongous bank loans needed for the fifteen- or twenty-to-one leverage that alchemized mere decimal points into financial Olympic gold medals. New products often turned out to have Achilles’ heels, like the misbehaving index arbitrage of so-called program insurance, the derivative innovation widely blamed for the 1987 crash, and the junk bonds derogated after their inventor went to jail. In 2007, the failures were multiple: besides the CDO and exotic mortage embarrassments, hedge funds’ mathematical vulnerabilities included too many copycats doing the same thing, as well as an inability to deal with anarchic, almost random, volatility. . . .

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory
by Kariappa Bheemaiah
Published 26 Feb 2017

While this itself was revolutionary in the eighties, the real transformation of these high yield bonds was that now outsiders from the financial system were given access to capital that was previously denied to them by traditional banks. Capital in the past was in the hands of the great American industrial families. But with high yield bonds, capital was democratized and no longer the property of a small group. An increasing number of new entrepreneurs who invested in junk bonds became wealthy, which brought in new investors who were eager to purchase these junk bonds. In essence it became a tool to challenge the established power on Wall Street as it began to be implemented in the form of takeovers. One of the first policies passed by Reagan relaxed the rules that governed the takeover of companies. Milken realised that the passing of this policy could allow his high yield bonds to raise large sums of money, as although there was high amount of risk involved, hidden away in established corporations were assets that could be unlocked, sold off, and turned into fantastic profits for investors (Curtis and Hobley, 1999).

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While it is beyond the scope of this book to analyze this subject in detail, a short note must be dedicated to it, as tracing the history of today’s debt-ridden culture is as important as finding a solution to it. Sidebar 1-1 summarizes a series of events that offer some insight into how we got to where we are today. Sidebar 1-1: Junk Bonds and Reaganomics The trend in increasing indebtedness of households and companies can partly be traced to the energy crises of the ’70s. As the oil embargo of 1973 tumbled with the outbreak of the Iran-Iraq war in 1980, it led to massive increases in the price of oil and caused economic and social chaos in the developed industrialized world.

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His strategy was thus to take away economic decision-making powers from the government and hand it to the financial markets and Wall Street. Unsurprisingly, this became a moment of opportunity for most Wall Street bankers. One of the bankers who leapt at this opportunity was Michael Milken, the future founder of the Milken Institute. Milken had invented a debt instrument called high-yield bonds (which the established banks called junk bonds ) which he had used as a way to raise vast sums to build casinos in Las Vegas. Casinos were a business most banks avoided, as they were too risky. But Milken was able to show that as the risk involved with these investments was higher, it allowed investors to demand a very high rate of return. Even if some of the business did go bust, by investing across a large spread of these companies, on average, the investor stood to gain a fortune.

Company: A Short History of a Revolutionary Idea
by John Micklethwait and Adrian Wooldridge
Published 4 Mar 2003

In 1982, President Reagan made Milken’s job a little easier by allowing banks and, crucially, savings and loan institutions to buy corporate bonds. Between 1975 and 1986, some $71.5 billion of junk bonds were issued, with an average yield of 13.6 percent. In some ways, the merger boom ended in disaster. Junk bonds lived up to their name: around a fifth of the bonds issued from 1978 to 1983 had defaulted by 1988.18 Many of the thrifts that bought junk bonds went bankrupt, as did Drexel Burnham Lambert itself in February 1990. Milken was indicted on almost one hundred counts of racketeering—and eventually sent to jail. Across in Britain, Hanson’s ambition overran itself: after an unsuccessful play for ICI, its two founders effectively broke up the company in 1996.

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At Safeway, for instance, where the company motto had been “Safeway offers security,” 63,000 people lost their jobs.17 LBOs, in turn, relied on another Wall Street invention: “junk bonds.” Wall Street had always traded bonds in distressed companies. The genius of Michael Milken was to create bonds specifically for this “non-investment-grade” market, opening up the market to ventures that were too small or risky to issue regular bonds. Milken first began to push his “high-yield” bonds in the 1970s; by the 1980s, his firm, Drexel Burnham Lambert, dominated the junk-bond market, and his annual Predators Ball in Los Angeles had become a fixture for entrepreneurs and politicians.

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
by George A. Akerlof and Robert J. Shiller
Published 1 Jan 2009

By the time the deal was closed, the surplus for the bidder would be insufficient to pay the transaction costs of the takeover.10 But Milken found a way to drastically reduce the cost of takeovers. He would enable deals to go through at near-lightning speed by using other people’s money. This money came straight from the S&Ls through their purchase of Milken’s junk bonds. If Milken or a Milken-connected enterprise made a hostile bid for a firm, it very much helped that he could guarantee a large part of the purchase through the sale of junk bonds. The S&Ls themselves did not need to be compensated— but their owners would receive “private prerogatives” from the sale, ensuring the smooth continuation of this practice. They would, for example, be given a form of option called a warrant, enabling them to buy the shares of the firm at a specified price.

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They would, for example, be given a form of option called a warrant, enabling them to buy the shares of the firm at a specified price. Milken is known to have allocated to himself quite a few warrants in these deals.11 Corporate executives discovered that they could take their firms private, floating large quantities of debt (as junk bonds) to pay off the stockholders. If the firms that had been taken private could pay off the junk bonds, these executives would be rewarded enormously. It was not long before the scale for executive pay had shifted dramatically upward. Graef Crystal, a leading consultant to executives on their compensation, was so appalled by the changes that he wrote a book entitled In Search of Excess.12 A new era of inequality, with new standards, had begun.

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The S&Ls were not worth anything as going enterprises—but they were worth a great deal for whatever sweetheart deals their owners could make. Such deals could involve real estate, with receipt of kickbacks from developers, or they could involve the purchase of risky but high-paying assets. The most inventive user of S&L sweetheart money was the junk bond impresario Michael Milken. Up until the 1980s the prevailing wisdom among economists had been that it was very difficult, if not impossible, to engage in a profitable hostile takeover bid. If the firm was undervalued before the bid was made, the bid itself would cause it to rise in value. By the time the deal was closed, the surplus for the bidder would be insufficient to pay the transaction costs of the takeover.10 But Milken found a way to drastically reduce the cost of takeovers.

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World
by Sandra Navidi
Published 24 Jan 2017

I had a fabulous time and could not help but think that this was exactly how I had imagined this parallel universe to be when reading about it so many years earlier, half the world away. The tale of junk bond king Mike Milken is one of triumph, tragedy, redemption, and comeback. In the Gordon Gekko-ish 1980s, this ingenious financier revolutionized the financial system by opening up capital markets to companies which had previously not been considered creditworthy. He created a market and channeled billions of dollars into companies by issuing high-yield bonds, also dubbed junk bonds. So great was the boom he created that at some point it exceeded the financing of investment-grade companies.

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Despite his polarizing personality, most people—if only out of an abundance of caution—prefer to stay on good terms with him. Because of his many resilient links with other superhubs, his own superhub status is virtually guaranteed. DEN OF THIEVES: MIKE MILKEN When I lived in Germany, I read Den of Thieves, the tale of the 1980s “junk bond king,” Mike Milken. It provided insight into the epicenter of finance, a world of fascinating personalities and exciting transactions. I so longed to be there. A decade later, when I worked with famed economist Nouriel Roubini, we traveled to the Global Conference of the Milken Institute in Los Angeles, where he had a speaking engagement.

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In 1991 he founded the Milken Institute, which also hosts an annual global conference sometimes referred to as “Davos with palm trees,” although it is more U.S. and finance-sector centric than the annual gathering of the WEF. The conference takes place at the Beverly Hills Hotel, where Milken in his previous life had hosted his legendary junk bond conference called the “Predators’ Ball,” which has been colorfully immortalized in the book by the same title.8 Members of the financial elite, Washington power players, and world-renowned researchers attend the event. Billionaires Leon Black, Steve Schwarzman, Steven A. Cohen, Mort Zuckerman, and Richard LeFrak are regulars, as are former U.K. prime minister Tony Blair and Rwandan president Paul Kagame.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition)
by Burton G. Malkiel
Published 5 Jan 2015

There is, however, another school of thought that advises investors to “just say no” to junk bonds. Most junk bonds have been issued as a result of a massive wave of corporate mergers, acquisitions, and leveraged (mainly debt-financed) buyouts. The junk-bond naysayers point out that lower credit bonds are most likely to be serviced in full only during good times in the economy. But watch out if the economy falters. So what’s a thoughtful investor to do? The answer depends in part on how well you sleep at night when you assume substantial investment risk. High-yield or junk-bond portfolios are not for insomniacs. Even with diversification, there is substantial risk in these investments.

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Should You Be a Bond-Market Junkie? Is the bond market immune to the maxim that investment risk and reward are related? Not at all! During most periods, so-called junk bonds (lower credit quality, higher-yielding bonds) have given investors a net rate of return 2 percentage points higher than the rate that could be earned on “investment-grade” bonds with high-quality credit ratings. In 2014 investment-grade bonds yielded about 4½ percent, whereas “junk” bonds often yielded 5 to 6 percent. Thus, even if 1 percent of the lower-grade bonds defaulted on their interest and principal payments and produced a total loss, a diversified portfolio of low-quality bonds would still produce net returns comparable to those available from a high-quality bond portfolio.

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Even with diversification, there is substantial risk in these investments. Moreover, they are not for investors who depend solely on interest payments as their major source of income. And they are certainly not for any investors who do not adequately diversify their holdings. However, at least historically, the gross-yield premium from junk bonds has more than compensated for actual default experience. Foreign Bonds There are many foreign countries whose bond yields are higher than those in the United States. This is particularly true in some emerging markets. Conventional wisdom has usually recommended against bonds from emerging markets, citing their high risk and poor quality.

All the Devils Are Here
by Bethany McLean
Published 19 Oct 2010

He was, in other words, a quant. Drexel in those days was best known for its most infamous executive, Michael Milken, the man who popularized junk bonds and built a huge business around them. Sosin wasn’t interested in junk bonds; instead, like any good quant, he gravitated toward complex derivatives, becoming one of the pioneers in developing ever more complicated forms of swaps. The problem for Sosin was that, at Drexel, derivatives were never going to replace junk bonds as the firm’s bread and butter. Drexel also didn’t have a particularly good credit rating, which meant its borrowing costs were higher than its competitors’.

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Tranching was also good for Wall Street, because the firms underwriting the mortgage-backed bonds could sell the various pieces for more money than the sum of the whole. And bankers could extract rich fees. Plus, of course, Wall Street could make money from trading the new securities. By 1983, according to Business Week, Ranieri’s mortgage finance group at Salomon Brothers accounted for close to half of Salomon’s $415 million in profits. Along with junk bonds, mortgage-backed bonds became a defining feature of the 1980s financial markets. Tranching, however, was not the only necessary ingredient. A second important factor was the involvement of the credit rating agencies: Moody’s, Standard & Poor’s, and, later, Fitch Ratings. Ranieri pushed hard to get the rating agencies involved, because he realized that investors were never going to be comfortable with—or, to be blunt, willing to work hard enough to understand—the intricacies of the hundreds or thousands of mortgages inside each security.

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If Fannie had remembered that, the company might have found its moral compass when it needed it most—and maybe left a different legacy. 4 Risky Business The most cutting-edge firm on Wall Street in the early 1990s was not Drexel Burnham Lambert, which had dominated the 1980s with its junk bonds, or Goldman Sachs, whose sheer moneymaking prowess would first dazzle and then repulse the country during this last decade. No, the firm that everyone on Wall Street wanted to emulate was a one-hundred-year-old commercial bank: J.P. Morgan. During the same era that the subprime mortgage industry was rising from the primordial ooze and Fannie Mae was consolidating its power over the mortgage securitization market, J.P.

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile
by Alexander Davidson
Published 1 Apr 2008

____________________________________________ CREDIT PRODUCTS 91  ‘Junk bonds’ is an unflattering term for those bonds classified by the rating agencies as sub-investment grade. Corporate bonds may have fallen to junk status due to a deterioration in the issuer’s financial performance. Junk bonds pay a high yield to compensate lenders for the credit risk of the issuer, just as banks lend on credit cards at a rate reflecting default experience. Their promoters call them high-yield bonds. Junk bonds from two companies that have the same yield may perform differently. Various forms of junk bond have been used to finance takeovers, and the product has a poor reputation.

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To compensate for this reinvestment risk, the callable bond will often pay a high coupon. 12 Credit products Introduction In this chapter, we will cover credit products, as distinct from the interest rate products covered in Chapter 11. We will focus on corporate bonds, international debt securities, junk bonds, asset-backed securities, zero-coupon bonds and equity convertibles. We will consider credit derivatives. Overview Credit products are integral to financial markets and help to fuel merger and acquisition activity, which, as we saw in Chapter 7, can keep equity market activity high. A predator will often finance a company takeover partly out of cheap debt, which has helped to keep credit markets buoyant.

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Various forms of junk bond have been used to finance takeovers, and the product has a poor reputation. Junk bonds are not acceptable as collateral for repo trades (see Chapter 11). Credit rating agencies The credit rating agency rates the creditworthiness of a bond. The higher the rating, the better the credit terms a borrower will receive. The major agencies are Standard & Poor’s, Moody’s Investment Services and Fitch Ratings. The rating is a paid-for service, which has called into question its independence. If a company does not buy a rating, some agencies have been known to publish it unsolicited, even if based on incomplete information. In rating a company, the agencies have access to non-public information and they estimate only the default risk.

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives
by Satyajit Das
Published 15 Nov 2006

The derivative professionals dragged out a structure from the dim past – CBOs (Collateralized Bond Obligations). It was given a few nips and tucks and the odd shot of botox, but it was a CBO nevertheless. CBOs were the brainchild of Michael Milliken and Drexel Burnham Lambert (DBL), the creators of junk bonds (bonds issued by non-investment grade companies). CBOs were used to repackage junk bonds. Regulations required insurance companies holding junk bonds to provide a lot of reserves against the investment. To get around the rules, insurance companies repackaged the high yield assets into CBOs and transferred the riskier parts to their holding companies (which did not have to hold reserves).

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DAS_C06.QXP 8/7/06 4:43 PM Page 165 5 N The perfect storm – risk mismanagement by the numbers 165 Table 5.1 N Critical events 1987–2005 Year Event Details 1987 Stock market crash Dow Jones equity index falls 31% over one week with similar falls in other major global equity markets. 1990 Junk bond crisis Bankruptcy of Drexel Burnham Lambert and collapse of junk bond market. Collapse of US savings and loan institutions. 1991 ’First’ Gulf War Oil price characterized by extreme volatility. 1994 US interest rates US interest rates rise rapidly, triggering massive losses in highly leveraged derivative positions held by investors. 1994 Mexican crisis Mexican market collapses, triggering a significant emerging market liquidity crisis. 1997 Asian crisis Collapse of Asian equity and currency markets.

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CDOs are also massively leveraged: if you buy the 2% equity in a CDO, then you are 50 times leveraged, compared to the 10 to 12 times that a normal bank uses. Losses and leverage are not good bedfellows. Sound, highly-rated companies also found reefs. Asbestos liability and the Californian electricity deregulation claimed victims. As the credit cycle turned, the arbitrage CDOs were hard hit. They had been based on US high yield (junk) bonds. The US recession and the unwinding of the technology bubble saw record numbers of default. Contagious crises in Asia, Eastern Europe and Latin America didn’t help. The credit models failed miserably. The concept of average credit losses proved average – it seemed the worst case was much worse.

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
by Justin Fox
Published 29 May 2009

Louis Lowenstein, “Pruning Deadwood in Hostile Takeovers: A Proposal for Legislation,” Columbia Law Review (March 1983): 251–52. 33. Both the Milken background and the rise of the takeover artists are recounted in Connie Bruck, The Predators’ Ball: The Junk Bond Raiders and the Man Who Staked Them (New York: Simon & Schuster, 1988). Drexel was not the first firm to “manufacture” junk bonds; Lehman Brothers was, in 1977. But Drexel soon came to dominate the business. 34. Years later, after a federal judge had thrown Milken in jail for securities fraud, Chicago professor and soon-to-be law school dean Daniel Fischel wrote a book with the very unprofessorial title Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution (New York: HarperBusiness, 1995). 35.

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As an undergraduate at UC–Berkeley in the 1960s, Milken had come across a 1957 National Bureau of Economic Research study showing that low-grade bonds delivered better returns than high-grade ones. This made perfect capital asset pricing model sense: Bonds downgraded by S&P or Moody’s had been deemed riskier than bonds that hadn’t, so investors should reap a reward for buying them. While still in college, Milken began investing in these so-called junk bonds. When he went to work at the struggling brokerage firm Drexel Harriman Ripley after finishing his MBA at Wharton, he began building a business out of selling them. The bonds Milken sold in the early days hadn’t started out as “junk.” They were securities of “fallen angels,” companies that once seemed safe and secure but now weren’t, of which there were many in the 1970s.

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In 1971, while teaching at the University of Rochester, he began bringing in law professors from around the country for an annual summer economics institute. Later he started a similar program for federal judges. He also had the ear of the Reagan administration, which came to power in 1981. While hundreds of bills were introduced in Congress in the 1980s to rein in takeovers or junk bonds, none became law. When Reagan’s SEC chairman began worrying loudly in 1984 about the dangers of takeovers, Treasury Secretary Donald Regan, the former CEO of Merrill Lynch, made the administration’s position clear by stating that takeovers were “beneficial” as “they provide a means—sometimes the only feasible means—of policing management in widely held corporations.”35 A few months later, the annual Economic Report of the President included a whole chapter titled “The Market for Corporate Control”—written by a product of Chicago’s Economics Department—that was simply an updated version of Manne’s seminal 1965 article.36 The 1980s takeover boom did end eventually, shut down by state legislatures immune to Chicagoan reasoning, a U.S. attorney in Manhattan (Rudy Giuliani) intent on bringing down some big Wall Street names, and the crash of the junk bond market.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing
by Burton G. Malkiel
Published 10 Jan 2011

There is, however, another school of thought that advises investors to “just say no” to junk bonds. Most junk bonds have been issued as a result of a massive wave of corporate mergers, acquisitions, and leveraged (mainly debt-financed) buyouts. The junk-bond naysayers point out that lower credit bonds are most likely to be serviced in full only during good times in the economy. But watch out if the economy falters. So what’s a thoughtful investor to do? The answer depends in part on how well you sleep at night when you assume substantial investment risk. High-yield or junk-bond portfolios are not for insomniacs. Even with diversification, there is substantial risk in these investments.

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Should You Be a Bond-Market Junkie? Is the bond market immune to the maxim that investment risk and reward are related? Not at all! During most periods, so-called junk bonds (lower credit quality, higher-yielding bonds) have given investors a net rate of return two percentage points higher than the rate that could be earned on “investment-grade” bonds with high-quality credit ratings. In 2010 investment-grade bonds yielded about 6 percent, whereas “junk” bonds often yielded 8 percent. Thus, even if 2 percent of the lower-grade bonds defaulted on their interest and principal payments and produced a total loss, a diversified portfolio of low-quality bonds would still produce net returns comparable to those available from a high-quality bond portfolio.

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Even with diversification, there is substantial risk in these investments. Moreover, they are not for investors who depend solely on interest payments as their major source of income. And they are certainly not for any investors who do not adequately diversify their holdings. However, at least historically, the gross-yield premium from junk bonds has more than compensated for actual default experience. EXERCISE 8: TIPTOE THROUGH THE FIELDS OF GOLD, COLLECTIBLES, AND OTHER INVESTMENTS In previous editions of this book I took different positions on whether gold belongs in a well diversified portfolio. At the start of the 1980s, as gold had risen in price past $800 an ounce, I took a quite negative view of gold.

Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street
by Sheelah Kolhatkar
Published 7 Feb 2017

The pace of mergers and acquisitions increased, fueled in part by Milken’s empire at Drexel Burnham Lambert, which had created a new way of financing corporate takeovers through high-yield debt, also known as junk bonds—which were ranked “below investment grade” by ratings agencies because they were riskier than other bonds. With these new instruments, companies that couldn’t borrow money could suddenly issue junk bonds, which gave them the financial resources to launch hostile takeovers of their competitors. Every day, rumors of these leveraged buyouts sent companies’ share prices soaring, earning millions for the traders buying and selling their stocks.

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He took the assignment as seriously as he would have if Cohen had been a member of his own family. In 1988 Michael Milken’s lawyers, when faced with a similarly daunting set of legal pressures, had taken the cynical tack of arguing that Milken was an American hero whose junk bond empire provided fuel for the U.S. economy. They described Milken as a “national treasure,” a “genius,” and a “national resource” and publicly argued that Milken’s work building the junk bond market had created value for companies and communities around the country. This argument actually had some validity. Milken had ushered in new methods for companies to borrow money and expand, especially companies considered too small or too risky to obtain traditional loans; his innovations had contributed to economic growth in ways modern-day hedge funds never had.

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Days before, he and his traders had all watched in horror as Drexel’s top mergers and acquisitions banker, Dennis Levine, was arrested and charged with orchestrating a massive insider trading scheme by paying off lawyers and bankers to leak him information about takeovers and other deals. The Levine arrest was just the beginning of the unraveling of Michael Milken’s junk bond empire, an unprecedented series of prosecutions that would dominate news headlines for months. The SEC accused Levine of accumulating $12.6 million in illegal profits and froze all his assets, preventing him from paying his legal bills. Around 6 P.M. on June 5, 1986, the same day that Levine pleaded guilty to tax evasion, securities fraud, and perjury and agreed to help the Justice Department by providing evidence against others committing crimes on Wall Street, Cohen arrived at 26 Federal Plaza, at Broadway and Worth Street, wearing his best suit.

Dark Towers: Deutsche Bank, Donald Trump, and an Epic Trail of Destruction
by David Enrich
Published 18 Feb 2020

Atlantic City casino refinancing: Casino City Times, “Trump Approved for $70 Million Bank Loan,” June 21, 2002. Taunting investors: Riva D. Atlas, “After His Gloom Went Over Like a Lead Balloon, Trump Tries to Sell Happiness, in Junk Bonds,” New York Times, May 7, 2002. story after preposterous story about his hijinks: David Enrich, “A Mar-a-Lago Weekend and an Act of God: Trump’s History with Deutsche Bank,” New York Times, March 18, 2019. Trump’s default on the junk bonds: Associated Press, “Trump Casinos File for Bankruptcy,” November 22, 2004; Emily Stewart, “The Backstory on Donald Trump’s Four Bankruptcies,” TheStreet.com, September 15, 2015.

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“But if you get this done, you’ll all be my guests at Mar-a-Lago.” Trump was always good at pushing an audience’s buttons—a weekend with Trump at Mar-a-Lago: bragging rights that not even money could buy—and this new incentive did the trick. The salesmen worked the phones, cast a wider net for more clients, and managed to sell an impressive $485 million of junk bonds (albeit at a high interest rate that reflected investors’ fears that Trump might default). When the sale was complete, Byrne delivered the good news to Trump, who was pumped. “Don’t forget what you promised our guys,” Byrne nudged his happy client. “What’s that?” Trump asked. Byrne reminded him about the Mar-a-Lago trip.

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At night, they dined at Mar-a-Lago, and Trump regaled them with story after preposterous story about his hijinks with casinos, real estate, Wall Street, and women. The following year, with his casinos on the rocks, Trump’s company stopped paying interest on the bonds and filed for bankruptcy protection. (“I don’t think it’s a failure; it’s a success,” Trump spun.) Deutsche’s clients, the ones who had recently bought the junk bonds, suffered painful losses. Going forward, Trump would be off-limits for Byrne’s division. The excommunication, however, didn’t apply to the whole bank. Trump soon went back to Justin Kennedy’s commercial real estate group, seeking another enormous loan. This one was to build a ninety-two-story skyscraper in Chicago, which Trump planned to name the Trump International Hotel & Tower.

Toward Rational Exuberance: The Evolution of the Modern Stock Market
by B. Mark Smith
Published 1 Jan 2001

An early Wall Street Journal article about Milken noted the daring mixed with his shyness and self-effacement and went on to declare that “Mike Milken … is undisputed king of the junk bond market.” Milken’s junk bonds provided a means of raising the money necessary to finance many of the corporate takeovers that were the lifeblood of arbs like Boesky. The two men developed a close relationship, which included a Milken-arranged junk bond deal that raised more capital for Boesky’s firm. But the relationship ultimately proved to be too close. Milken was intimately involved in the investment banking activities of Drexel Burnham and therefore privy to advance knowledge of Drexel client merger transactions.

…

They had reason to believe that Boesky had had improper dealings with one of the most powerful figures on Wall Street, a man who had revolutionized the way the Street did business. That man was Michael Milken. Michael Milken, of Drexel Burnham Lambert, was the apostle of what had become known as the junk bond revolution. By outward appearances he was hardly a natural salesman. Obviously shy, of lean stature, and wearing a toupee with curly brown hair that hid his premature baldness, Milken looked more like a meticulous accountant than a flamboyant promoter. Citing the academic studies he had come across while studying for his MBA at Wharton, Milken argued that bonds of lesser credit quality were unnecessarily shunned in the marketplace and therefore presented intriguing opportunities for investors.

…

And one fellow risk arbitraguer, John Mulheren, became so enraged with Boesky’s revelations that he loaded an assault rifle, two semiautomatic pistols, and a shotgun into his car and set off to kill Boesky, only to be stopped by policemen who had been warned by Mulheren’s wife. Boesky was eventually sentenced to three years in prison, while Milken received ten years. The junk bond market collapsed under the weight of the investigation and an economic slowdown at the end of the 1980s, taking Drexel Burnham into bankruptcy. As one government attorney put it, Boesky “played fast and loose with the rules that govern our markets, with the effect of manipulating the outcome of financial transactions measured in the hundreds of millions of dollars.”

Obliquity: Why Our Goals Are Best Achieved Indirectly
by John Kay
Published 30 Apr 2010

The businesses that epitomized the explosion of greed on Wall Street in the 1980s were Salomon Brothers (the firm mercilessly caricatured in Michael Lewis’s Liar’s Poker)12 and Drexel Burnham Lambert (more gently pilloried in Connie Bruck’s The Predators’ Ball).13 Salomon turned bond trading from a backwater into the activity of choice for the financially ambitious, while Drexel Burnham Lambert pioneered the issue of junk bonds. Salomon, whose abuses had exhausted the patience of the U.S. Treasury, had to be rescued by Warren Buffett (in a rare error) and was eventually taken over by Citigroup (which closed its trading operations). Drexel Burnham Lambert collapsed. In the following decade, the byword for greed was Bankers Trust, which sold derivative programs to large corporations and local authorities.

…

Dunlap with Bob Andelman, Mean Business: How I Save Bad Companies and Make Good Companies Great (New York: Fireside, 1996), p. xii. 10 Securities and Exchange Commission, “Enforcement Proceedings,” SEC News Digest 2002-171, September 4, 2002. 11 Quoted in James B. Stewart, Den of Thieves (New York: Simon & Schuster, 1991), p. 223. 12 Michael Lewis, Liar’s Poker: Two Cities, True Greed (London: Hodder & Stoughton, 1989). 13 Connie Bruck, The Predators’ Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raider (London: Penguin, 1989). 14 House Committee on Oversight and Government Reform, Transcript of Hearing (Richard Fuld), October 6, 2008. 15 Ken Auletta, Greed and Glory on Wall Street: The Fall of the House of Lehman (Harmondsworth, UK: Penguin, 1986), p. 235. 16 Lehman was at that time rescued by American Express, which floated the firm in 1994 ahead of its final collapse in 2008.

…

Grand Rapids, MI: Zondervan, 1997. Brickman, P., D. Coates, and R. Janoff-Bulman. “Lottery Winners and Accident Victims: Is Happiness Relative?” Journal of Personality and Social Psychology 36, no. 8 (1978), pp. 917–27. Bruck, Connie. The Predators’ Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raider. London: Penguin, 1989. Byrne, John A. The Whiz Kids: The Founding Fathers of American Business—and the Legacy They Left Us. New York: Bantam Doubleday Dell, 1993. Cahoone, Lawrence E., ed. From Modernism to Postmodernism: An Anthology. Edinburgh: Wiley-Blackwell, 2003. Carnegie, Andrew.

I.O.U.: Why Everyone Owes Everyone and No One Can Pay
by John Lanchester
Published 14 Dec 2009

.* Any debt of BBB and above is known as “investment grade”; any below BBB is known as a “junk bond” on the basis that its level of risk is high—but that shouldn’t make it sound as if junk bonds are a marginal or unrespectable form of finance. (You may well feel that the distinction between investment and speculation is a little blurry and subjective, and you would be right. There is a character in one of Anthony Powell’s early novels, a retired major gone stone broke and living in a boardinghouse owing to “having squandered all his money in judicious investments.”) Because they have to pay high rates of interest, junk bonds can be very useful for investors; if they didn’t exist, only supersafe companies would be able to raise money, and all sorts of inventions and investments and growth would be impossible.

…

That, in turn, makes everything worse for the entire economy. As Charles Morris points out in his book The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, a credit bubble is a special category of event: “We are accustomed to thinking of bubbles and crashes in terms of specific markets—like junk bonds, commercial real estate, and tech stocks. Overpriced assets are like poison mushrooms. You eat them, you get sick, you learn to avoid them. A credit bubble is different. Credit is the air that financial markets breathe, and when the air is poisoned, there’s no place to hide.”10 What the banks want to be able to do is what most of us would do in comparable circumstances.

…

It’s even safer than houses, because house prices go up and down; it’s safer than sticking your money under the mattress, because you might get burgled or your house might burn down. The status of AAA-grade debt is written into various statutes; many publicly regulated bodies aren’t allowed to invest in anything of lower grade than AAA. In other cases, institutions are legally prevented from investing in anything below BBB-grade debt, so-called junk bonds. The ratings agencies’ verdicts are so taken as holy writ that they are incorporated into the Basel rules on bank reserves. When governments lose AAA status for their debt, it is both an embarrassment and a potential disaster, because that means it’s going to be more expensive for them to raise money in the future.

Young Money: Inside the Hidden World of Wall Street's Post-Crash Recruits
by Kevin Roose
Published 18 Feb 2014

Chapter Seventeen “A European debt crisis had been raging”: For more on the Euro zone crisis, see “Timeline: The Unfolding Eurozone Crisis,” BBC News, June 13, 2012. “Banks were still taking on huge, leveraged positions in opaque and little-regulated markets”: Dominic Elliott, “Basel Leverage Rules to Put Pressure on Wall Street,” Reuters Breakingviews, June 26, 2013. “The junk bond market…was having its strongest year since the crisis”: Matt Wirz and Shira Ovide, “Welcome to the Biggest Junk Bond Sale Since the Financial Crisis,” Wall Street Journal (Deal Journal), July 26, 2011. “that work lived on under the guise of ‘market-making’ trading desks”: Frank Partnoy and Jesse Eisinger, “What’s Inside America’s Banks?,” the Atlantic, January 2013.

…

But Penn’s link with Wall Street is particularly tight because its Wharton School, a business program that contains both graduate students and undergrads, is considered America’s primo farm team for budding young financiers—a sort of West Point for Wall Street. More than half of Wharton’s six-hundred-person undergraduate class typically heads to banks, hedge funds, private equity firms, and other financial services companies after graduation. Among the celebrity financiers the school has churned out are SAC Capital billionaire Steven A. Cohen, the junk-bond impresario Michael Milken, and real estate megagoon Donald Trump. Wharton’s list of famous alumni, and the fact that its graduates emerge armed with advanced finance training, has made it a place where recruiters are prone to drooling. “Penn, and especially Wharton, is in a league of its own,” one hiring manager at a top Wall Street firm told me.

…

All over Wall Street in 2011, financial firms were showing that although the crisis had changed some lines of business and consolidated the industry, the basic culture of risk taking and reward seeking was still very much intact. Banks were still taking on huge, leveraged positions in opaque and little-regulated markets. The junk bond market, which deals in high-yield corporate debt that is often issued by volatile and risky companies, was having its strongest year since the crisis. And although the Dodd-Frank act had effectively shut down the most obvious forms of proprietary trading at Wall Street firms, that work lived on under the guise of “market-making” trading desks, which were often functionally similar to their predecessors.

The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything
by Jason Kelly
Published 10 Sep 2012

Because of that grade (given by credit rating agencies), investors demand to be compensated for the additional risk through more yield (interest) than they’d get from safer bonds issued by investment grade companies or the government. High-yield bonds are more colloquially called junk bonds. During 2005 through 2007, the high-yield debt market was perfectly situated for the purposes of leveraged buyouts. Investors were eager to invest in debt vehicles like collateralized loan obligations (CLOs), which were assembled by banks by piecing together lots of loans and then dividing them into slices according to risk. Junk bond funds also thrived, so there were willing buyers for both loans and bonds. Banks also used a number of products that helped fuel the boom.

…

So he decided to make himself indispensable as Blackstone’s financier and later adviser on M&A. Lee was playing in an area once dominated by Drexel Burnham Lambert Inc., specifically by Michael Milken. It was Milken, a Drexel trader, who pioneered the use of high-yield, noninvestment-grade bonds (aka junk bonds), often in hostile takeovers. Drexel and Milken helped fuel the surge of mergers and acquisitions, including leveraged buyouts, during the 1980s. Milken was indicted for securities violations tied to insider trading, triggering Drexel to file for bankruptcy in 1990.1 While that eliminated a major provider of debt for LBOs, Drexel was a de facto training ground for a number of men who went on to create or work at major private-equity and investment firms.

…

See also Blackstone Group appointing Blitzer cutting the deal with Oregon hiring people from DLJ on maturity of investments meeting with Oregonians proposal for acquisition of GSO on refinery reopening occasion role of work habits and drive Jarmin, Ron S. Jenkinson, Tim Jenrette, Richard Jeramaz-Larson, Kathy Job creation Job destruction/loss Johnson, Magic Johnson, Randy Jordan, Jay The Jordan Company JPMorgan JPMorgan Chase Juma Ventures Jumper, John Junk bond funds Kaplan, Steven Kaye, Charles KB Toys KCM Kennedy, Edward KFN. See KKR Financial Kiggen, Jamie King of Capital (Carey and Morris) KKR. See also Capstone consulting firm; Dollar General; KKR acquisitions; KKR takeovers; Kravis, Henry; Roberts, George; TXU annual revenues in Capmark changes at in Dubai Farr and filing S-1 on July gaining and loosing money Green Portfolio and headquarters of Hoffa on Knowlton advice about LeBlanc Teachers’ money commitment to Menlo Park office Nelson at number of workers on NYSE private equity of Teachers’ Retirement System of Texas and TPG and report on ESG issues KKR acquisitions: deals from 2005 to deals in Dollar General deal of HCA Regal Cinemas deal Safeway deal KKR Capital Markets KKR Financial KKR Millennium Fund KKR Private Equity Investors KKR takeovers: of RJR Nabisco of Samson Investment Co.

Broke: How to Survive the Middle Class Crisis
by David Boyle
Published 15 Jan 2014

It took watching his son being paid 225 grand at the age of twenty-seven, after two years on the job, to shake his faith in money.[26] Lewis was cutting his financial teeth in London and Wall Street at the height of the junk-bond boom. Bonds are simply agreements to pay a specific sum on a specific date in return for a loan. Junk bonds are those that are rated riskier than investment grade; the risk is that the issuer won’t pay. The upside is that junk bonds have a higher yield, and they allowed companies that couldn’t get conventional backing to launch themselves. The downside was that some of them were extremely risky. ‘The securities involve a high degree of risk,’ said the front page of one junk-bond prospectus two days after the 1987 Crash, ‘and accordingly, investors may lose their entire investment.’

…

I haven’t worked twenty years to roll over and die like some unwanted sheep dog.’[17] But the zeitgeist seemed to be heading in the opposite direction, as the middle classes discovered high finance, and also found that they loved it. The sale of shares in British Telecom at the end of 1984 was five times oversubscribed, and there were frenetic scenes on the Stock Exchange trading floor. Takeover fever was mounting as the junk-bond revolution, emerging from a finance company in California called Drexel Burnham Lambert, began to load unrepayable debt onto the balance sheets of target companies in order to wrench them from their current management. The exchanges were beginning to boom. The FTSE 100 was launched at 1000 points in 1984.

…

Edgar, 122 Hopkinson, David, 139, 146, 150 Horta-Osorio, Antonio, 155 Hoskyn, John, 59 hospital consultants, 89, 249 house-price inflation, 3, 15, 18, 20–1, 24, 55–85, 160, 280, 284, 286 ‘Barber Boom’, 56 and building societies’ cartel, 65–6, 71–3 and divorce, 79–80 and housing density, 78–9 and Lloyd’s scandal, 28, 32 and mortgage interest tax relief, 108–9 and rents, 68–9 and school catchments, 20, 210–11, 221 and size of houses, 77–9 and working couples, 74–6 house prices, 56, 61, 68–9, 74, 87 household loans, increase in, 69 housing market, parallel, 301–2 housing shortages, 56 Howard, Michael, 177 Howe, Elspeth, 58 Howe, Sir Geoffrey, 58–60, 62–7, 97, 99, 128, 130 Human Scale Education, 235 Hutber, Patrick, 5, 36–7, 45, 47, 55, 60, 174–5, 283 I IKB, 156 IMF, 59, 128 immigrants, 39 Imperial College, London, 140 income tax, 36 Independent, 118 Independent on Sunday, 175 index-linked funds, 197–8 Industrial Revolution, 152 inflation, 36, 58, 161, 199, 279–80, 284, 286, 289 Initial Rentokil, 295 Institute of New Economic Thinking, 157 insurance, 171 interest rates, artificially low, 195, 203 ISAs, 171 It’s a Wonderful Life, 122–3 Italy, 97, 299 J Japan, 75, 152, 176, 299 Jenkins, Simon, 72, 226, 266 Jersey, 147 Jews, 39 job seeker’s allowance, 271 jobbers, 136–7, 145–7 Johnson, Rob, 157 Johnson, Simon, 151 Jones, Owen, 68, 287–8 Joseph, Sir Keith, 58, 99, 177, 220 JP Morgan, 143, 152 Judd School, 216–17 Julius II, Pope, 278 Jung, Carl, 95 junk bonds, 148, 154 K Katz, Cindi, 46 Kay, John, 104 Kensington and Chelsea, 211 Kent, 216–19 Keynes, John Maynard, 157, 290 Killik, Paul, 147 King, Mervyn, 129–31, 141 King’s School, Tyneside, 238–9 Kingsland Foundation School, 204–6 Kinnock, Neil, 31 Kinsman, Francis, 174 Kozlowski, Dennis, 117 Kramer, Sebastian, 80 Kynaston, David, 130, 311 L Labour Party, 24, 66–7, 179, 182, 194, 287 Lambton, Lucinda, 224 Lane, Deborah, 11–14, 17 Latin American debt crisis, 71 Lawson, Nigel, 58–60, 62–6, 71–2, 128, 130 and building societies, 97, 99–100, 104 and City deregulation, 138, 149 and end of MIRAS, 108–9 and pension reforms, 177, 180–5, 188, 190, 194 Leeds, 225 Leeson, Nick, 158 Leigh-Pemberton, Robin, 151 leisure time, 17 Leith, William, 15, 83 Lewis, Michael, 153–4 Lewis, Roy, 37–9 Liberal Democrats, 211 libraries, 17 Little Venice, 1–2 Lloyd George, David, 38, 172, 255 Lloyd’s of London, 27–35, 50–1, 69, 286 Lloyds Bank, 71, 109, 118, 122, 155, 171 Local Enterprise Partnership, 293 localism, 299 Lockheed Martin, 132 London education, 210–11, 219, 221, 232, 240 housing, 68–9, 85 middle classes, 41–2 wealth disparities, 284 London Olympics, 221 London Oratory School, 228 London Rebuilding Society, 296 London School of Economics, 140–1 London Stock Exchange, deregulation of, 135–40, 147–51 M M&G, 139 McDonald’s, 47 Maclnnes, Colin, 305 McKinsey, 261, 266 ‘Macmillan Gap’, 152 McRae, Hamish, 118 Major, John, 30–1, 101, 176, 213, 258, 263–4 and education reforms, 221–5 Major, Stephen, 113 Manchester, 95, 189, 224, 255 Manchester High School for Girls, 225 Mandelson, Peter, 24, 263 Mangan, Lucy, 76 Marks & Spencer, 243, 248 Martin’s Bank, 96, 122 Marx, Karl, 272–3 Mass Observation, 40 Maude, Angus, 37–9 Maxwell, Robert, 190–1, 201 Meacher, Michael, 182 medical schools, 212 Meeker, Mary, 133 Merrill Lynch, 139, 155 Merton, 211, 213 Metroland, 82 Mexico, 200 Michelangelo, 278 Middle Class Association, 37 Middle Class Defence Organisation, 38 Middle Class International, 38 Middle Class Union, 38 middle-class values, 13–14, 46–9 aspiration, 88, 234 authenticity, 242 confidence, 87 corrosion by financial sector, 154–6, 158–62 education, 14, 45–6, 49–50, 204 independence, 52, 69, 84, 86, 174, 283 internationalism, 163 moderation, 125, 160 thrift, 36, 39, 45, 49, 108, 120, 160, 169, 174, 195, 283, 301, 305 tolerance, 47, 274 middle classes and assimilation, 39 average incomes, 274 ‘casualisation’ of, 175 and children’s intelligence, 229–30 Cobbett’s description of, 282–3 definitions of, 39–45, 52 demography, 35–6 differences of taste within, 305 disapproval and embarrassment, 46–9 disparities of wealth within, 116 impoverishment, 267–72 in London, 41–2 and racism, 230 solidarity with working classes, 289–90 and status, 20, 267 vilification of working classes, 230, 287–8 Middle England, 39 middle managers, 255 Middleton, Peter, 182 Miliband, Ed, 22 miners’ strike, 148, 288 Mischel, Walter, 45 Moody-Stuart, Elizabeth, 211 Morgan, John Pierpont, 143 Morgan Grenfell, 135 Morgan Stanley, 133 Morris, Peter, 175 Morris, William, 255 Morrison, Steve, 205 mortgage interest tax relief, 61, 108–9, 182 mortgages, 14–15, 18, 20, 203, 270, 287, 290 and building societies, 71–2, 97–8, 101 ‘Grandparent Mortgages’, 75 and house-price inflation, 56–7, 60–1, 65–6 interest-only, 75, 171 and lack of choice, 82–4 and multiples of salaries, 75 and rents, 68–9 see also remortgaging Mount, Ferdinand, 26 Mrs Miniver, 275 Muesli Belt, 44, 83 Multis, 43 musicals, 44, 53 N nannies, 169 napkin rings, 39–40 Nasdaq index, 155 National Association of Pension Funds, 180, 184, 191 National Childbirth Trust, 73, 164–5 National Health Service (NHS), 85, 177, 180, 249, 253–4, 260, 267, 291 National Insurance, 181–2, 184 National Lottery, 221, 253 National Theatre, 125–6 National Trust cafés, 87–9, 163 Nationwide Building Society, 112–14, 119 NatWest, 30, 71, 96 Neill Report, 33 Nelson, Admiral Horatio, 198 Nether Wallop, 245–7 Netscape, 114 New Economics Foundation, 116 New Labour, 230 New Public Management, 263–4 New York, 78, 122, 186, 218 New York Stock Exchange, 155 newspapers, 253 Nikko, 149 noise complaints, 78 Nonconformists, 39 Norman, Montagu, 95 North Sea oil, 64, 279 Northern Ireland, 221 Northern Rock, 72, 101, 110, 112, 118 Northwood, 73 Nottingham, 225, 238, 295 nurseries, 19, 76–7, 299 O Oakwood High School, 224 Obama administration, 152 Observer, 110 Occupy movement, 289–90 Office of Fair Trading (OFT), 135–6 Ofsted, 205–6, 231, 269 oil prices, 59, 299 old age pensions, introduction of, 38, 172 Oliver, Jamie, 295 One Per Cent, the, 23–6, 45, 69, 121, 159, 161, 163, 165, 193 O’Neal, Stanley, 155 Orpington, 162 Osborne, David, 261 Outhwaite, Dick, 30–1 outsourcing, 23, 26, 41, 160, 248, 285 Owen, Wilfred, 234 Oxford University, 80, 88, 234 P Pahl, Ray, 49 Palmer, Alasdair, 175 Parents’ Charter, 222–3 Parkinson, Cecil, 137–8, 149 parks, 17 Patten, John, 224, 226–8, 238 Pawson, Andrew, 233 Pearce, Edward, 62 Penhaligon, David, 102–3 Penman, Andrew, 213–14 pensions, 167–203, 270, 281, 284–5, 290, 302 annuities, 172, 196–7 automatic enrolment, 202 average pot, 204 Brown’s tax on, 19, 194 Conservative reforms, 176–85 defined benefit vs. defined contribution, 175–6, 195–6 and home ownership, 14, 19, 21, 85, 200–1, 203 mis-selling of, 188 occupational, 172–3, 175, 178, 185, 188, 190–3, 196–7, 201–2 public sector pensions, 43, 192, 202, 253 SERPs, 179–84 state pensions, 81, 178, 200–1 surpluses, 193–4 Pepper, Gordon, 66 Perry, Grayson, 289, 297, 305 pets, 10 Pinchin Denny, 138 Pinsent Masons, 189 plutonomy, 25, 143, 152, 159–60 political economy, 48, 51 Popcorn, Faith, 83 post offices, closure of, 252 Post-Autistic Economics campaign, 157 Potosí, 279–80 Power, Michael, 257 ‘Precariat’, 17 Pride and Prejudice, 281–2 Priestley, J.

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase
by Duff McDonald
Published 5 Oct 2009

At one point, when Dimon tried to jump into the conversation, Cole cut the young man off. “I’m sure you’re smart,” he said. “But I already have two geniuses here to answer my questions. I don’t need to hear from the junior genius as well.” • • • The following year was one of wrenching change in the financial markets. Michael Milken, the junk bond king at Drexel Burnham Lambert, was engulfed in an insider trading scandal, and would soon be indicted on racketeering charges. It was a stunning reversal of fortune for the firm, which in 1986 had been the most profitable investment bank on Wall Street. An era of swashbuckling buyouts and takeovers was coming to a shattering close.

…

While Zarb and Weill wined and dined Drexel’s top producers in the hope of keeping them on board, the task of closing the deal once again fell to Dimon. Drexel’s collapse was, in and of itself, a big deal, especially considering the power the firm had wielded just months before. But there was also a growing sense that Drexel had helped much of Wall Street lose its way. Sure, the innovative use of junk bonds helped scrappy entrepreneurs like Ted Turner get their start. And although the much-chronicled junk-fueled takeover of RJR Nabisco by the private equity firm Kohlberg Kravis & Roberts provided high drama in the 1980s—trenchantly recounted in Bryan Burrough and John Helyar’s book Barbarians at the Gate—it seemed to many observers that such profligate use of debt forced proud companies to their knees and turned the august world of corporate finance into nothing more than a debased money grab.

…

Dimon, a student of history, is constantly in disbelief at everyone else’s failure to learn from experience.) The RJR deal, feasted on by nearly every major financier in New York, ultimately came to be seen, according to Chernow, as “the era’s crowning folly.” In October, the collapse of a $6.79 billion buyout of United Airlines sent the markets into a tailspin as investors concluded that without the junk bond market to fuel ever-greater buyouts, stock prices had lost a crucial leg of support. By the end of the year, the economy was headed into recession. Britain’s Barclays Bank PLC started to feel the pinch earlier than many others, and in November decided to put its U.S.-based consumer loan division up for sale.

Market Sense and Nonsense
by Jack D. Schwager
Published 5 Oct 2012

Also, the confusion between leverage and risk is one of the major misconceptions among hedge fund investors—a point fully discussed in Chapter 15. Credit risk. Many hedge funds in the credit space pursue a strategy of borrowing money at a relatively low interest rate and investing the proceeds in higher-yielding instruments (e.g., junk bonds). If money is borrowed at, say, 4 percent, and the junk bonds bought yield an average of 8 percent, then the hedge fund will earn a profit of 4 percent on borrowed amounts (and a full 8 percent on the assets under management, which do not have a borrow cost), assuming bond prices are unchanged. If the amount borrowed is equal to assets under management (leverage factor of two), the total gross return will be 12 percent (again assuming no change in bond prices).

…

If the amount borrowed is equal to assets under management (leverage factor of two), the total gross return will be 12 percent (again assuming no change in bond prices). The larger the borrowings are (that is, the greater the leverage), the greater the potential return. If credit spreads (that is, the difference between high yield instruments, such as junk bonds, and U.S. Treasuries) are narrowing, profits will be even greater, as hedge funds will not only return a multiple of the yield difference between securities they buy and borrowing costs, but will also earn capital gains from appreciating bond prices (narrower credit spreads imply higher bond prices4).

…

The event risk in this strategy, however, is that credit spreads do not follow a one-way street. Although credit spreads will fluctuate in moderate trading ranges most of the time, occasionally, during periods of financial crisis or elevated bankruptcies, credit spreads will widen sharply. During these events, steeply declining values in high-yielding debt securities (e.g., junk bonds, emerging market bonds) can lead to capital losses far greater than the yield differential earned. Note, for example, in Figure 4.4 the sustained negative returns in the HFR Fixed Income Corporate Index (an index of credit hedge funds) from mid-2007 through early 2009, coincident with the sharp widening of credit spreads.

Unreal Estate: Money, Ambition, and the Lust for Land in Los Angeles
by Michael Gross
Published 1 Nov 2011

A Bel Air mansion built between 1935 and 1938 for a nurse widowed by a rich older husband was then owned by Conrad Hilton, the hotel chain founder (and grandfather of Paris Hilton). It then passed to the owner of Dole Food, who made a staggering $58 million profit when he sold it in 2000 to a former junk bond trader who’d walked away from a public telecom company’s collapse with hundreds of millions of dollars. Greenacres, the mansion completed in 1929 by silent film star Harold Lloyd in Benedict Canyon in Beverly Hills, has since been owned by three Iranian businessmen; a record company mogul and his socially ambitious wife; Ted Field, the much-married Marshall Field heir who raced cars in the 1970s and ran Interscope Films and Interscope Records in the late 1980s; and most recently, the controversial supermarket billionaire, alleged model-hound, and former Friend of Bill (Clinton), Ron Burkle.

…

Though it shelters a few big names like Richard Zanuck (the film-producer son of the legendary movie mogul Darryl Zanuck), who bought from Kenny Rogers; Magic Johnson, who stayed and built; and actor Samuel L. Jackson, its residents are mostly the lesser-known likes of real estate investors Daniel Blatteis and Paul Daneshrad; David Sydorick, a trader then with junk bond specialists Drexel Burnham Lambert and a classic race car collector; Dr. Mohammad Gharavi, chief of cardiovascular surgery at Providence Tarzana Medical Center; and former Midwest concert promoter Irv Zuckerman. And with memories of the ’87 crash already fading, half of North Beverly Park’s sixty-four lots were reserved by the time the house-building team moved into a new north gatehouse in 1990.

…

Three years later, Murdock claimed victory after beating back an attempt by the Amalgamated Clothing and Textile Workers Union to organize Cannon’s workers—and promptly sold off most of the company. Several years after that, pensions at what remained of Cannon were cut because Murdock had invested pension pool assets in a junk-bond-holding insurance company that was seized by regulators. Though Murdock later wrote checks from his own pocket for nearly $1 million to cover some of the shortfall, bitterness lingered among retirees and former employees. Murdock may not have been close to the Reagan administration, but he was a poster child for its unemotional approach to American business.

740 Park: The Story of the World's Richest Apartment Building
by Michael Gross
Published 18 Dec 2007

And in 1984, the magazine doubled its estimate again, to $400 million. His holding company, Reliance Group, was worth $3.7 billion. Steinberg’s personal net worth peaked in September 1987 at about $660 million, then dropped by a third in a stock market crash. In the early 1990s, Reliance stock was still sinking and it owed $650 million in junk-bond debt, but Forbes pegged Saul’s personal fortune at $330 million, plumped up by the sale of Reliance’s stakes in United Air Lines (for $100 million) and Days Inn ($765 million). Steinberg always used his money as if trying to live up to a boast he’d made after raiding Reliance. “Like the Rockefellers, I’ll own the world,” he’d said.

…

So Ronald Jeançon, a past board president, once had to let Barbra Streisand’s broker know that the board would not even consider her because she was an actress and, worse than that, a singer. And Streisand is in good company. Others who have not made it into 740 include Joan Crawford, the late agent Ted Ashley, Neil Sedaka, the Daimler-Benz heir Friedrich Christian “Mick” Flick, the junk-bond tycoon Nelson Peltz, and, most recently, a Russian plutocrat, Leonard Blavatnik. For every rejection, there is a shareholder who wants . . . needs . . . to cash out and leave, but is held hostage by a difficult co-op board. And even when an applicant has passed the board, there are still more hurdles to get over.

…

And then it was the twenties and they were financing bonds, financing electric power plants, all over the world.” Soon they’d forged ties with every power in the power business, raising the money that funded the industry’s expansion. “He was the Michael Milken of the twenties,” says Peter Thorne, comparing his grandfather to the junk-bond king of the 1980s who also made a fortune and changed the world by financing what seemed like risky new technology. In the fall of 1924, Thorne and Loomis engineered the creation of United Light and Power, merging utilities in nine states into a $34-million-a-year colossus—and also revealed that they’d secretly organized the American Superpower Corporation, which had acquired ownership interests in some of the largest power companies across the country.

Capitalism in America: A History
by Adrian Wooldridge and Alan Greenspan
Published 15 Oct 2018

They also became some of the most valuable tools in the restructuring wars: corporate raiders used them to buy shares in the companies that they wanted to take over, with a view to using the acquired companies’ assets to pay off their debts; and many targets of takeover attempts bought back their own shares from raiders at a premium. Junk bonds expanded from a mere 3.5 percent of the bond market in 1977 to a quarter of the market a decade later. Michael Milken became the symbol of the era, with his $550 million salary in a single year and his annual Predators’ Ball. Some of this looked too good to be true. Junk bonds lived up to their name: around a fifth of the bonds issued from 1978 to 1983 had defaulted by 1988. Many of the thrifts that bought junk bonds went bankrupt, as did Drexel Burnham itself in February 1990. Michael Milken was indicted on almost a hundred counts of racketeering, ending up in jail, and his company, Drexel Burnham, was forced into bankruptcy.

…

Peter Drucker, who had made his name dissecting big companies, most notably General Motors in Concept of the Corporation, published a spirited book on entrepreneurship, Innovation and Entrepreneurship (1985). The new generation of entrepreneurs could draw on three resources that existed more abundantly in America than elsewhere, and that, when combined with an entrepreneur-friendly president in Washington, produced a business revolution. Financial innovators provided new sources of cash such as junk bonds from Michael Milken and venture capital from Silicon Valley’s well-established venture-capital industry. Great universities provided science parks, technology offices, business incubators, and venture funds. A liberal immigration policy provided a ready supply of willing hands and brains. Amar Bhidé of Tufts University suggests that “venturesome consumption” also promoted American entrepreneurialism.

…

The financial services industry developed lots of ways of allowing people to borrow money so that they could acquire and transform underperforming companies: leveraged buyouts, or LBOs (which used debt to fund reorganizations); management buyouts, or MBOs (which were often used to sell off a proportion of the company); and “junk bonds.” The greatest champions of leverage were Kohlberg Kravis Roberts (KKR) and Drexel Burnham Lambert. In 1976, three young bankers with Bear Stearns, Henry Kravis, Jerome Kohlberg, and George Roberts, came up with the idea of a new kind of organization, a partnership that created a succession of investment funds, took positions in companies, and then sold them off after a fixed period of time.

Other People's Money: Masters of the Universe or Servants of the People?
by John Kay
Published 2 Sep 2015

The contested takeover in 1988 of RJR Nabisco, the tobacco and food conglomerate, is described by Bryan Burrough and John Helyar in their book Barbarians at the Gate: The Fall of RJR Nabisco, perhaps the best business book of that decade.34 Burrough and Helyar end their book with the plaintive question ‘But what did it have to do with business?’ The question was pertinent. The era of Milken and junk bonds ended in farce. In early 1990 the Campeau Corporation, which had used junk bonds to acquire many of the USA’s leading department stores – Macy’s, Bloomingdale’s, Jordan Marsh – defaulted on its debt mountain. Robert Campeau, a Canadian property speculator, had no qualifications to run these businesses, only access to the funds of Milken’s clients. Appetite for junk bonds disappeared along with the hopes of the Campeau Corporation: Drexel Burnham Lambert, unable to refinance the bonds, went bankrupt: Milken went to prison.

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This occasion is widely described as the beginning of the application of shareholder value principles in American business: and as he implemented this strategy over the following two decades, Welch became America’s most admired business leader.32 In 1965 an American economist, Henry Manne, had coined the phrase ‘the market for corporate control’.33 The right to manage a corporation was an asset that could be bought and sold. Neglect of ‘shareholder value’ exposed managers to the threat of hostile takeovers. In the 1980s this threat intensified when Michael Milken of Drexel Burnham Lambert invented ‘junk bonds’, and found institutional investors to subscribe for them. These securities, which offered high yields and acknowledged high risks, enabled raiders to threaten even the largest company. The contested takeover in 1988 of RJR Nabisco, the tobacco and food conglomerate, is described by Bryan Burrough and John Helyar in their book Barbarians at the Gate: The Fall of RJR Nabisco, perhaps the best business book of that decade.34 Burrough and Helyar end their book with the plaintive question ‘But what did it have to do with business?’

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Within three months, all the directors were behind bars. Richard Whitney, president of the New York Stock Exchange, spent over three years in New York’s fearsome Sing Sing maximum-security gaol. Even in the early 1990s Charles Keating, the most notorious fraudster in the deregulation of US thrifts, and Michael Milken, the inventor of junk bonds, went to prison. Scapegoats for the new economy bubble were less harshly treated. The SEC devoted little energy or resource to identifying wrongdoing, and such cases were brought to light through the dogged investigations of now disgraced former New York Attorney General Eliot Spitzer. Frank Quattrone, the Crédit Suisse investment banker who expected favours from friends and clients in return for allocations of hot stocks, was prosecuted, though his conviction was overturned on appeal.

More Money Than God: Hedge Funds and the Making of a New Elite
by Sebastian Mallaby
Published 9 Jun 2010

And by shorting the acquiring firms, he hedged out the risk from general market movements. Toward the end of the 1980s, Steyer expanded his horizons. This was partly a survival strategy, since the takeover boom skidded to a halt when the junk-bond market collapsed in 1989, leaving merger arbitrageurs with few mergers to analyze. But Steyer was playing offense too: The junk-bond collapse created an opportunity to apply his analytical skills in a different context.8 The companies at the center of the junk-bond market filed for bankruptcy one by one; and an investor who could figure out which piece of busted debt to buy was likely to profit handsomely. To make matters even better, pension funds, mutual funds, and other institutional investors were forced sellers of junk: Their rules forbade them to hold the bonds of companies in default, so they were compelled to concede bargains to nimble players such as Farallon.9 When Drexel Burnham Lambert, the kingpin of the junk-bond market, filed for bankruptcy in 1990, Steyer bought a large slice of its debt at cents on the dollar; and when he sold his stake in 1993, Farallon’s portfolio chalked up a 35 percent profit.10 With the Drexel transaction Steyer had scored a dazzling double.

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Soros was said to have enlarged his personal fortune by $650 million in 1992, and one magazine observed that it took Soros five minutes to earn what the median American family could expect for a full year of labor.50 A few years earlier, people had reacted with horrified fascination to the $550 million earned by Michael Milken, the champion of junk bonds; but now Milken had been surpassed. Soros became known as the man who broke the Bank of England, and hedge funds began to displace the 1980s buyout kings as the objects of popular envy. The full profits of the Soros funds were considerably larger than outsiders imagined. Just as Paul Jones had coupled his shorting of the equity market during the crash of 1987 with a profitable bet on bonds, so Drucken miller built out from his sterling coup.

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But nobody was fooled. The letter was leaked even before the last copy was faxed out, and the Wall Street Journal ran a front-page story the next day detailing Meriwether’s losses. Now the whole world knew that Long-Term was on deathwatch, and every player on Wall Street started to trade against it.41 Most junk bonds rallied in early September, but the particular bonds that LTCM owned remained dead in the water. Long-Term had a small position in hurricane bonds, securities that permit insurers to sell the risk of a hurricane; the day Meriwether’s letter leaked, the bonds plummeted 20 percent, even though the probability and cost of hurricanes was utterly unaltered.42 In Europe, the gap between government bonds and market interest rates widened in Britain and narrowed in Germany, for no fundamental reason other than that Long-Term was betting that the opposite would happen.

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio
by Victor A. Canto
Published 2 Jan 2005

To make LBOs viable, the market needed a financing instrument. A clever MBA, Michael Milkin, popularized one: the junk bond, which is a high-yield bond with a high default risk. Hence, the government created the preconditions for the emergence of Milken, also known as the junk-bond king, and his fellow-travelers. Milken recognized the economic and tax situation and took advantage of it. Those old enough to remember the Milken episode might also recall a lot of the corporate high-yield literature in the 1980s was geared to show the way junk bonds not only paid higher returns, but also had default rates that were historically not much greater than higherrated obligations.

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Unfortunately, as this market became increasingly popular, investment behavior altered in a significant way. The financing mechanism—and not the project’s true merit—soon became the determinant as to whether an investment was made, and the investments were made in record proportions. As debt increased, the marginal cost of using the debt rose, leading to a new capital structure. The junk-bond crash was only a matter of time. Chapter 4 Tax Tips 75 In theory, the adjustment mechanism should have been self-correcting. But, alas, in the process of reaching a new equilibrium, excesses were committed. We all know what followed. Milken went to jail, and his firm (Drexel Burnham Lambert) went under.

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See corporate debt international price rule, 89 international stocks location cycles, 57-58 optimal mix with domestic stocks, 24-25, 34-37, 125-126 performance of, 16-17, 42 risk measurement, 20 Sharpe ratio, 61-63 investor convictions empirical forecast method, 132-137 probabilities forecast method, 129-132, 137-142, 275-281 qualitative forecast method, 132-137 investor horizons, 115-116, 129 invisible-hand theory, 169 J-K-L Jensen’s alpha. See alpha junk bonds, 75-76 Kennedy, John F., 89 Kerry, John, 84 large-cap stocks active management tested against passive management, 166-168 annual returns, 19 elasticity, 184, 187-189 Index 311 location effect, 190-193, 202-204, 273-274 optimal mix with small-cap stocks, 23-24, 31-32, 123 performance of, 16-18, 41-43 regulatory fixed costs, 184-185 risk measurement, 20 size cycles, 54-55 active versus passive management during, 170-172, 175, 271-272 equal-weighted versus cap-weighted indexes, 175-180 and market breadth, 168-170, 237-238 in value-timing strategy, 243-250 LBOs (leveraged buyouts), 74 legislation.

The greatest trade ever: the behind-the-scenes story of how John Paulson defied Wall Street and made financial history
by Gregory Zuckerman
Published 3 Nov 2009

By buying shares of companies being acquired, and selling short companies making acquisitions, Gruss was able to generate profits that largely were shielded from stock-market fluctuations. The ideal Gruss investment had limited risk but held the promise of a potential fortune. Marty Gruss drilled a maxim into Paulson: “"Watch the downside; the upside will take care of itself.”" Paulson’'s buyout business never really took off, however. The 1989 indictment of junk-bond king Michael Milken and a slowing economy made it hard to finance buyouts, and Martin Gruss seemed distracted, perhaps due to a recent second marriage. Soon he and Paulson parted company. Despite Paulson’'s fierce ambition and his love of making money and landing big deals, other urges were distracting the thirty-five-year-old.

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Deutsche would sell him CDS protection for six slices of mortgage-backed securities backed by the iffiest subprime mortgages, each with a $10 million face value. The bank had lined up a European pension fund that was bullish on housing and willing to sell the protection and pocket some cash to juice its returns. Deutsche would act as the middleman. The slices of the mortgage securities were rated BBB, or one notch above the “"junk bond”" category, the lowest level of the so-called investmentgrade bonds. That seemed safe enough to the pension plan. Burry’'s cost to buy CDS protection for each of the six slices would be about 155 basis points above the London Interbank Lending Rate, or about $155,000 annually—--just under $1 million for all six, Chang said.

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It was such a pittance that Paulson couldn’'t figure out why others weren’'t also buying the cheap protection, if only for the inevitable rainy day. As the summer heated up and the economy hummed along, Paulson’'s anxieties over the state of the economy and the housing market grew. Giddy investors were buying the BBB-rated mortgage-backed slices and all sorts of junk bonds without demanding much in return—--interest rates of just 1 percentage point above those of supersafe U.S. Treasury bonds. It seemed absurd to Paulson. Who would buy a risky bond with a yield of 6 percent when Treasury bonds yielded 5 percent? “"This is like a casino,”" Paulson said of the market in a meeting with some of his analysts.

All About Asset Allocation, Second Edition
by Richard Ferri
Published 11 Jul 2010

They pay more interest than government bonds. At the bottom of the risk ladder are high-yield corporate bonds and non-investment-grade municipal bonds. Companies and municipal bond issuers with below investment-grade debt ratings have questionable ability to repay their obligations. These bonds are also referred to as “junk” bonds because of their speculative nature. They are discussed in more detail later in the chapter. Credit risk should be thought of as the amount that a bond will fall in value if the rating agencies cut the bond’s rating. For example, if an AA-rated bond is cut to an A rating, the expected return to a new investor must go up to compensate for the lower credit quality, which means that the price of the bond will go down.

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There are diversification benefits to be gained from other fixed-income securities. Those categories could include high-yield corporate bonds, TIPS, and foreign bonds, including emerging market debt. The following section looks as these sectors. High-Yield Corporate Bonds High-yield bonds are often referred to as non-investment-grade bonds, speculative-grade bonds, and junk bonds. Unlike investment-grade bonds, high-yield bonds have credit ratings that are in the lowest tier. They have S&P and Fitch ratings of BB or lower and Moody’s ratings of Ba or lower. CHAPTER 8 158 Several entities issue high-yield bonds, including corporations, municipalities, and foreign governments.

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At the time, the S&P 500 crossed 1,050, which was well below the 1,552 October 2007 high. High-yield bonds are volatile. Accordingly, an adjustment may need to be made in your overall stock and bond asset allocation if you are targeting a certain risk profile for the portfolio. For example, if you place 10 percent of your overall portfolio in a junk bond fund, you might consider reducing your equity allocation by a couple of percentage points to keep the overall portfolio risk at the same level as it was before adding high-yield bonds. Personally, I have never found the need to do this. You might decide otherwise. One note of caution, I do not recommend buying individual high-yield bonds because of their high trading costs and a genuine lack of investment information.

Aftershock: The Next Economy and America's Future
by Robert B. Reich
Published 21 Sep 2010

Recall the busting of unions, the slashing of payrolls, and the shredding of employee benefits, without any attempt by government to constrain or reverse these practices; the junk-bond and private-equity deals that flipped companies like cards, burdened them with debt, and forced mass layoffs; the resplendent pay packages of top corporate and financial executives and traders, even as marginal taxes on the rich were cut and Wall Street was deregulated. In the 1980s, irresponsible gambles by some savings-and-loan banks cost taxpayers $125 billion; one such bank was owned by Charles Keating, who “donated” $300,000 to five U.S. senators, thereby greasing the skids with federal regulators. Insider trading scandals involving junk-bond kings including Ivan Boesky and Michael Milken did their damage.

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With hefty campaign contributions, and platoons of lobbyists and public relations flacks, the rich helped push through legal changes that enabled them to accumulate even more income and wealth—including tacit permission to bust unions, slash corporate payrolls, and reduce benefits; lower taxes for themselves; and deregulate Wall Street. With so much of their wealth depending on the performance of the stock market, they especially wanted to free up the Street to put greater pressure on companies to perform—for example, by making it easier for investors to mount “leveraged buyouts,” pay with high-risk (junk) bonds, pump up the profits by firing workers, and then dump the company back on the market at a higher price. The plan worked. The Dow Jones Industrial Average took off, rising tenfold between 1980 and 2000. (To be sure, the market’s meteoric rise also boosted the values of middle-class pensions, which were now dependent on the stock market rather than guaranteed to pay out a certain sum each month.

Two and Twenty: How the Masters of Private Equity Always Win
by Sachin Khajuria
Published 13 Jun 2022

It is 2016, and an unstoppable trend toward cleaner, greener eating is taking its toll on revenues. The customer base has started to look like a melting ice cube, and inventories seem to fatten further by the month. With cash flow and profits stagnating, despite a hardcore base of loyalists, the junk bonds that financed a recent refit of the company’s stores and its overseas footprint now look as appealing to credit investors as the junk food that the company’s ovens pump out look to health-conscious consumers. The business needs to cut costs, but the old man is loath to slash jobs in the same local communities that made him so successful.

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The partners devise a plan to refinance the existing debt when the operating changes they are discussing with the CEO result in stronger financial performance. The Firm’s playbook for improving the way Charlie’s is run meets the CEO’s approval, and the Firm strikes a deal that involves both the private equity group and the credit group. The private equity fund purchases a controlling stake in the business, the junk bonds are repurchased and refinanced with debt on better terms, and a new cash line from a revolving credit facility is organized. The plan works, and the partners are pleased with the results. The company is made to be slimmer and fitter, and its capital structure is now being managed more effectively.

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The private equity bidders see the attraction of stable revenues and cash flow, and together with drawing on lessons learned from investments in media and technology in other parts of their portfolios, they feel they understand the proposition. The Wall Street bank running the auction on behalf of European Broadcast, Goldman Sachs, has offered to underwrite junk bonds and loans for the winning bidder to finance the leveraged buyout. The deal will be the first of this kind, the carve-out of infrastructure and related assets from quasi-state entities, and, if successful, it will likely prompt a wave of similar transactions involving communications infrastructure assets in other markets.

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers
by Lawrence G. Mcdonald and Patrick Robinson
Published 21 Jul 2009

Typically, we might say, “This bond is trading 50 bips wide of Treasuries.” In the case of a junk bond, rated CCC and obviously loaded with risk, you’d expect a very high yield, anywhere from 500 up to 900 basis points, to compensate the bondholder for the fact that he might lose all his dough. Risk and reward: the oldest rule in finance. That’s basically what the credit spread is measuring. In the early spring of 2005 the spreads on junk bonds were becoming ever tighter. In the seven days leading up to May 21, they came down another 100 bips, to 400 basis points. A CCC junk bond was now paying a coupon of just under 9.00 percent, against ten-year Treasuries that were paying 4.30 percent, and a few months before in March, the yield on the Lehman Brothers High Yield Index was as low as 6.80 percent, a credit spread of just 250!

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The principal monitoring trade group, the Securities Industry and Financial Markets Association (SIFMA), calculated that the total value of all mortgage-backed securities issued between 2001 and 2006 had reached $13.4 trillion. CDOs now represented America’s greatest export and, thanks to the bodybuilders, were still surging forward. They dwarfed the high-yield corporate bond market, which is a snazzy way of describing junk bonds, those high-risk investments that have such a checkered history but have made vast fortunes for the lucky ones. I hate to use the word fraud. But the CDO case comes very close, because its bedrock was a gigantic group of people, thousands and thousands of homeowners, who must surely default on their repayments.

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On a bright June day, we all gathered for a crisis meeting in the trading floor conference room. In the chair was Jason Schechter, senior vice president and global head of cash CDO trading, who had supervised the construction of a hybrid collateralized debt obligation comprising credit default swaps on ninety high-yield rated companies. It was perhaps the most dangerous junk bond ever invented. In attendance were Pete Schellbach, Joe Beggans, Pete Hammack, Ashish Shah, Eric Felder, Jeremiah Stafford, who was a trader in high-yield indexes, and Jane Castle. I was sitting with my buddy John Gramins, a good-looking and fast-talking trader in leveraged loans, and a nine-year Lehman veteran.

A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History
by Diana B. Henriques
Published 18 Sep 2017

Nevertheless, hostile takeovers and insider trading became the primary preoccupation of regulators and lawmakers. Facing continuing pressures on its budget, the SEC found the resources to attack insider trading by, among other things, spending less on market regulation. Bank regulators worried about banks financing risky takeover deals and savings and loans buying deal-linked “junk bonds,” but failed to challenge closely the bank mergers producing a breed of financial giants. Regulators across the board neglected the unregulated swaps that were flooding the markets and linking giant players together in new and invisible ways. Congress shifted its focus to headline-grabbing criminal cases against Wall Street plutocrats and largely abandoned any serious effort to address these profound market changes.

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The call did not reflect any greater grasp of the dangerous linkages among markets; it simply underscored how deeply Paul Volcker was trusted by his fellow regulators—especially by Shad, who did not share his blockbuster news with anyone else in the regulatory loop until the next day, when he notified the chairmen of the SEC oversight committees in Congress, just hours before the press conference. At 2:45 p.m. on Friday, Shad alerted Jim Baker and Donald Regan to the news that Boesky, a major Republican donor, had fallen. It was clearly a jolt: within days, the two men would be conferring about whether the White House should develop some policy initiatives for the “arbitrage/junk bond arena.” Shad waited until 3:30 p.m. to notify the CFTC, which had not been privy to the investigation, even though Boesky had routinely hedged his enormous stock portfolio in the spooz pit. Shad then reached out to John Phelan, whose floor traders would have to deal with any selling panic the news might trigger on Monday.

…

the bigger you were, the more risks you could take: It was during the Bendix battle that a young Kidder Peabody investment banker named Martin Siegel, who led Martin Marietta’s defense, earned a $150,000 cash “bonus” from stock trader Ivan Boesky, in exchange for advance tips on the deal. That crime would eventually lead to Boesky’s arrest and the downfall of junk bond innovator Michael Milken at Drexel Burnham Lambert. See James B. Stewart, Den of Thieves (New York: Simon and Schuster, 1991), pp. 94–97. The closing bell brought a roar that filled the cavernous space: Robert J. Cole, “Euphoric Day for Wall Street,” New York Times, October 8, 1982, p. D1. the lines in front of Merrill Lynch’s stock price video screens: Ibid.

A Generation of Sociopaths: How the Baby Boomers Betrayed America
by Bruce Cannon Gibney
Published 7 Mar 2017

The Boomers pioneered new and riskier ways of doing business, whose consequences would make the S&L crisis seem positively demure. The previously modest market for junk bonds exploded, substantially the creation of Boomer Michael Milken of Drexel Burnham. Junk bonds are debt securities that are not “investment grade,” with greater risks of default than conventional debt. They are speculative instruments and have their place, but their use expanded well beyond those limits, and not surprisingly, many worked out poorly. Milken was subsequently convicted of securities violations and Drexel went under; repackaged with the more pleasing label of “high-yield debt,” junk bonds soldier on today and in mid-2016 were enjoying a bull run.

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The Boomers’ ersatz neoliberalism emphasizes consumption over production, dogmatic deregulation instead of thoughtful oversight, permanent deficits instead of fiscal prudence, and capitalism liberated from the bounds of the state, though always free to replenish itself at the federal trough in the event “sub-prime mortgages,” “junk bonds,” or “collateralized debt obligations” somehow lived up to their names. The heart of the book then details the implementation of the Boomers’ sociopathic agenda and its consequences. It starts with the wholly democratic means by which the revolution was achieved, courtesy of the Boomers’ vast numbers, which made the generation an outright majority of the electorate by the early 1980s.

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Corporations have also indebted themselves heavily, with gross nonfinancial corporate debt tripling since 1981 on a real basis to a total of $8.1 trillion as of 2015, maybe $6 trillion or so net of cash.43 (Financial firms, dark pools, etc. may add even more, though their iffy accounting makes things hard to pin down.) With the creation of junk bonds in the 1980s and the wave of leveraged buyouts, it’s tempting to think the Reagan years accounted for the great expansion in corporate debt. Corporate debt did roughly triple from 1981 to 1990, but it was from the 1990s onward, when Boomers were in full control of corner offices that debt really exploded, as a share of GDP and relative to assets.* Debts are heaviest in the financial sector and smaller firms, which is troubling, because small companies struggle during recessions.

Greed and Glory on Wall Street: The Fall of the House of Lehman
by Ken Auletta
Published 28 Sep 2015

They confirmed the bare outlines of much of what Peterson said, cautioning that this was not a simple morality play with cardboard heroes and villains. It sounded like a terrific story, one that might expand my limited knowledge of Wall Street and its blizzard of new jargon—greenmail, leveraged buyouts, “Pac-Man” defenses, the two-tier, front-end loaded, boot-strap, bust-up, junk-bond takeover. Perhaps, I thought, what happened at Lehman might provide a vehicle to explore a larger story about how Wall Street and capitalism were changing. But first I had to decide where to tell this story. I already knew the Times Magazine was committed to publishing an account. As luck would have it, the Times telephoned early that week.

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Without it, Fenster’s nightmare was that the firm would be squeezed between low-cost giants like Shearson or Merrill Lynch and specialty boutiques like Lazard Frères, which concentrated on banking services, or Drexel Burnham Lambert, which has cornered the market on issuing higher yield and higher risk “junk bonds.” Lehman, Fenster feared, would try to provide full services yet lack the capital to do so. This was the fate of A. G. Becker, which catapulted toward bankruptcy and was finally gobbled up at a bargain price by Merrill Lynch in 1984. Fenster did not believe the business could continue to expand the way it had.

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And, surely, among these forces must be counted the social and economic environment of America in the 1980’s. A freer market economy has been in the ascendancy for the past decade, energized by a variety of catalysts, including the presidency of Ronald Reagan. Whatever excesses arguably exist on Wall Street—the scramble for mergers, leveraged buyouts, fat fees, arbitrage speculation, junk bonds or greenmail†—the Securities & Exchange Commission wants to regulate by relying on market forces, not on its policing power. This restraint springs from several factors, including the political mood of the nation and a belief that government prescriptions are sometimes worse than the disease they are meant to cure.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns
by John C. Bogle
Published 1 Jan 2007

Treasury bonds (rated AA+) or in investment-grade corporate bonds (rated BBB or better), and holding more in below-investment-grade bonds (BB or lower), or even some so-called junk bonds, rated below CC or even unrated. Heavy reliance on junk bonds to increase the income generated by your portfolio subjects your bond investment to high risks. (Of course!) Investors who seek to increase the yield on their bond portfolios by investing in junk bond funds should limit themselves to small allocations. Caution is advised! Three basic types of bond funds. One beneficial feature of bond mutual funds is that they often offer investors three (or more) options that deal with the trade-off between return and risk.

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover
by Katrina Vanden Heuvel and William Greider
Published 9 Jan 2009

When the savings and loan industry was deregulated in the early 1980s, Keating saw a window of opportunity as big and as gloriously brilliant as the stained glass of Sainte-Chapelle. Saying that he was certain that he could “profit immensely,” in 1984 he bought for $51 million the old-line Lincoln Savings & Loan of Irvine, California, which had assets of almost $1 billion. Money for the purchase was obtained, naturally, by everyone’s favorite junk-bond swindler, Michael Milken of Drexel Burn-ham Lambert. How could a guy who only five years earlier was battling the S.E.C.’s fraud charges, which he escaped not by proving his innocence but by promising to behave himself, wind up with a savings and loan? Why would the bank board approve such a purchase?

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By last year all the big banks mentioned above were writing off huge portions—some by as much as two-thirds—of their Third World loans, thus admitting they would never be repaid. In the past two years particularly, there was an orgy of bank gambling with leveraged buyouts and takeovers financed by junk bonds, and now the earth is beginning to shake. Indeed, the General Accounting Office has warned that seven of the nation’s ten largest banks plunged so deep into those risky loans that if even one of the highly leveraged companies should go bankrupt, an extremely dangerous chain reaction could result.

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Now that S&L money is seen to be tainted, Riegle has scrambled to redeem his reputation by returning $120,000 of it. But the commercial banks have stuffed his pockets too, and there is no record of his having returned any of that money. Recently Greenspan—that trustworthy fellow who guaranteed the morality of Keating and was one of the chief boosters of junk-bond purchases by S&Ls—guided his Fed colleagues into a disastrous decision. They ruled that J.P. Morgan (Morgan Guaranty Trust) could trade and sell corporate stocks. With this cloven hoof in the door, other banks will follow, and that will be the death of the Glass-Steagall Act, which Congress passed in 1933 to separate commercial banks from investment banks and thereby control some of the outlawry that had caused thousands of banks to fail.

When the Wolves Bite: Two Billionaires, One Company, and an Epic Wall Street Battle
by Scott Wapner
Published 23 Apr 2018

While Saxon initially talked tough, the company settled after only six months and agreed to buy back Icahn’s stock for $10.50 a share, more than three dollars above Icahn’s average purchase price.20 Icahn made $2.2 million on the deal, and the scores kept coming.21 Icahn pocketed $10 million in a deal with Hammermill Paper the same year, $7 million from Simplicity Pattern in 1981, and $17 million on an investment in the storied department store chain Marshall Fields the following year.22 By the mid-1980s, Icahn had become a player on Wall Street’s emerging takeover scene alongside the day’s other dealmakers, such as Ivan F. Boesky, T. Boone Pickens, and Michael Milken, the Drexel Burnham Lambert banker whose infamous “junk bonds” helped finance the buying frenzy of the times. Milken’s high-yielding securities had earned him the nickname “The Junk Bond King” since he had all but invented the market for the securities. The men—coined corporate raiders by the media—were shrewd, often ruthless negotiators, stopping at nothing to shake up companies whose CEOs were deemed either too “imperial” or too “country-club,” more interested in their golf scores than their shareholders.

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Loeb, Nelson Peltz, and others, is defined by an interest not just in owning a piece of a company, but also in using their influence and money to change the way it operates. And no company, large or small, is beyond their reach. Apple, PepsiCo, Yahoo, DuPont, JC Penney, and Macy’s are among the businesses that have been targeted in recent years. While the 1970s and 1980s marked the rise, dominance, and ultimate fall of the corporate raiders, arbitrageurs, and junk bond kings of the day, during the current Era of the Activist, barely a week goes by without one of the aforementioned financiers revealing a stake in a company’s stock and an ambitious plan to propel it higher. Activism isn’t just proliferating—it’s exploding. In 2012 there were seventy-one activist campaigns with a total of $12 billion invested, according to the new regulatory filings with the Securities and Exchange Commission.

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(Ackman), 10–11 Isuprel heart drug, 172 Jacobs, Irwin L., 123 JC Penney, 1, 39–40, 71–72, 73, 176, 178 Jefferies investment bank, 203, 205, 206 JH Whitney & Company, 49, 111 job losses, 39 Joele Frank crisis firm, 97 Johnson, Michael O., 5, 9, 18, 49–55, 56–58, 61, 66–67, 71, 72, 76–77, 78, 82, 96, 97, 98, 99, 131, 132, 139, 148, 151, 158, 162, 163, 178, 191, 192, 196, 207, 209 bike accident of, 68–69 father of, 49–50 and FTC settlement, 198–199, 201 going to FTC, 152 as highest paid CEO, 54 and Icahn, 99–100, 131, 192, 199, 203 and Loeb, 90–91 retiring from Herbalife, 211 writing to SEC’s chairwoman, 180 See also Ackman, William A.: and Johnson Johnson, Ron, 39, 40 junk bonds, 121 Justice Department, 155 Karabu Ticket Agreement, 125 Katzovicz, Roy, 15, 72, 74 KDP Advisors Inc., 179 Kelly, Kate, 76, 77–78 Keswin, Jeff, 61 Keurig, 64 Khuzami, Robert, 170 Kingdon, Mark, 134 King pharmaceuticals, 127 Kingsley, Alfred D., 118, 119 Klafter, David, 81, 141 Koscot Interplanetary company, 13–14 KPMG accounting firm, 132, 133 K-Streeters, 141 Kynikos firm, 170 LBO.

Jared Bibler
by Iceland's Secret The Untold Story of the World's Biggest Con-Harriman House (2021)

Customer service reps at the banks, like Hulda had been when I met her, were even offered bonuses for getting average Icelanders to move their savings into these funds. Of course, even these supposedly safe funds lost considerable value during the Icelandic financial crisis; in real terms they lost around 70% of their value and should have lost even more. A lot of our personal savings were stuck in this intentionally mislabeled junk-bond fund. They mostly evaporated in the crisis. We finally gained access to our savings in Peningabréf, the “money market” fund, over the winter—but by that point the fund shares were mostly worthless. 19 It is still not clear why the UK took this action. According to a 2018 report by the University of Iceland: “On 8 October, the British government froze all assets of Landsbanki under an Anti-Terrorism Act.

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And all four of them used that credit to do the same thing: buy Kaupþing debt from the bank’s own trading desk, in July and August of 2008. They bought these bond issues at a substantial discount to the face value, like a 40% or 50% off sale, because the Icelandic parent bank was already in trouble and its bonds were trading cheap. Why did the employees do this? What did they know that would make them gamble on these junk bonds? Clearly they didn’t know much. Within a handful of weeks, Kaupþing in Iceland went bust. These employees at KauLux were screwed. They had purchased bonds issued by the Icelandic bank and these bonds were now worthless. Moreover, they had bought these bonds on credit and now had huge loan balances, money they owed to their own employer.

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(Without admitting wrongdoing, Deutsche Bank did, however, pay back €425m of the €510m to the two shell companies Chesterfield and Partridge in December 2016,107 and most of this money would flow back to the estate of Kaupþing.) Remember those employees in Luxembourg, the ones who took loans from their employer to buy hundreds of thousands of euros worth of Kaupþing junk bonds in their own names? Their buying seems to have coincided with the beginning of the CLN deal between Kaupþing and Deutsche. Did these employees of the Kaupþing Luxembourg private bank know the inside information that the bank was about to start manipulating its CDS spread in London and decide to profit personally by buying and holding Kaupþing bonds, pending completion of the deal with Deutsche?

925 Ideas to Help You Save Money, Get Out of Debt and Retire a Millionaire So You Can Leave Your Mark on the World
by Devin D. Thorpe
Published 25 Nov 2012

A value fund is one that invests in stocks that based on the fund manager’s judgment are undervalued in the market and are expected to rise based less on performance and more on a market correction. These funds don’t swing in value as much as growth funds, but they do go up and down. Choose a long term corporate bond fund. If you are aggressive, you may even want to consider a “high yield” bond fund that invests in junk bonds. Junk bonds are debts owed by companies expected to have difficulty paying. The yields on these bonds are significantly higher, but losses are not unusual. “Investment grade” bond funds can still lose value due to both credit risk (risk that the issuer defaults) and interest rate risk (the risk that the bond price drops because interest rates rose) but swings are smaller.

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Small Growth: Funds that invest in small, growing companies Sector-Real Estate: Funds that invest in real estate related assets, including REITs Mid-Cap Blend: Funds that invest in mid-size companies, including both growth stocks and value stocks Large Value: Funds that invest in large companies viewed to be undervalued Multi-Sector Bond: Funds that invest in government bonds, foreign bonds, and high yield bonds (junk bonds) Long-Term Bond: Funds that invest in long term corporate bonds Intermediate Term Bond: These funds invest in corporate bond maturing in less than ten years. Short Term Bond: These funds invest in short term corporate bonds. Short Government Bond: These funds invest in short term Treasury Bonds.

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The company can’t ask you to send more money. Even a mutual fund investing in stocks may be too risky for college savings. Mutual funds investing in bonds, also known as “income funds” are more appropriate for college savings, taking care to avoid—at least for college savings—“high yield,” which invest in “junk bonds” whose issuers are in or are at risk of being in default on their debt. Although returns are modest, “Intermediate Government” (bit.ly/XFZrfB) funds that invest only in treasury and agency bonds with maturities of less than ten years are optimal college fund investments with virtually no credit risk—the U.S.

Lying for Money: How Fraud Makes the World Go Round
by Daniel Davies
Published 14 Jul 2018

This had the short-term effect of improving things. Because of an accounting quirk – not itself dishonest, but open to abuse – merging an insolvent S&L with a borderline-solvent one tended to make the accounts look better.* To finance this growth, they were allowed to borrow from sources other than small depositors, including the junk bond market. In cash terms, however, growth tended to make bankrupt S&Ls bigger but still bankrupt; they needed to be able to earn a return on their assets that exceeded the cost of their liabilities. So the regulations which kept them out of business loans, commercial property loans and – crucially – direct ownership of speculative property developments were also relaxed, on the basis that higher risk meant higher return, and that was what was needed.

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So the regulations which kept them out of business loans, commercial property loans and – crucially – direct ownership of speculative property developments were also relaxed, on the basis that higher risk meant higher return, and that was what was needed. Before long, the S&L industry had moved on from its history of small local banks, and was increasingly characterised by quite large organisations, often owned or controlled by property developers, and several of which were connected to the junk bond financier (and later convicted securities fraudster) Michael Milken. It was at this point that the second phase of the S&L crisis can be said to have begun. Nobody better epitomises the S&L scandal than Charles Keating, an amazing fraud, crook and hypocrite. He was the owner of American Continental Corporation (ACC), a real estate company with its headquarters in Phoenix, Arizona.

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The financial structure which Keating brought to the game was a clever means of cash extraction. Lincoln, in order to satisfy regulators, had to declare strong profits, and it did. ACC, on the other hand, did not carry out much profitable business other than borrowing money to finance half-built housing developments and acting as a place for Michael Milken to park junk bond deals. The two companies therefore entered into a ‘tax-sharing agreement’ which allowed ACC’s losses to offset Lincoln’s profits for corporation tax purposes, and incidentally allowed Keating to mingle the cash flows of the regulated bank he controlled with the less-regulated company that he owned.

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences
by Steven G. Mandis
Published 9 Sep 2013

Although the gambling industry was starting to be regarded as increasingly professional and mainstream, one could argue that Goldman made this change simply because it saw a huge financial opportunity. To raise its profile in the industry and in junk bonds, Goldman hosted a lavish conference in Las Vegas, with entertainment by Cirque du Soleil and Jay Leno, which was attended by eight hundred people. As William Cohan wrote in Money and Power, “One portfolio manager who attended the three-day conference said that it was something he expected from [Donaldson, Lufkin & Jenrette], not Goldman. Marc Rowland, CFO of oil and gas producer Chesapeake Energy of Oklahoma City, had previously issued $730 million in junk bonds through Bear Stearns. Rowland remarked that prior to the conference, he never would have thought of approaching Goldman to handle junk bonds.”25 Of course, one could also argue that Goldman was shrewdly capitalizing on a market opportunity and that it was true that the industry’s reputation had changed.

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In 1984, a Morgan Stanley banker even publicly conceded that the principles and resulting practices made clients perceive Goldman as “less mercenary and more trustworthy than Morgan Stanley.”13 The ultimate fate of the Water Street Corporate Recovery Fund provides a good example of Goldman’s sensitivity to the potential impact of its strategic business decisions on the firm’s reputation after the principles were written. In 1989, two Goldman partners convinced the management committee to commit as much as $100 million of the firm’s money toward starting Water Street, a fund that bought controlling blocks of distressed high-yield junk bonds. The fund began soliciting outside investors in April 1990, with the goal of raising $400 million. Within a few months, Goldman had raised almost $700 million and stopped accepting investments. The partners were willing to give Water Street four years to see whether it could produce an annual return of 25 percent to 35 percent.14 However, several corporate executives and large money-management firms complained to Goldman that the fund was a “vulture” investing business, claiming it was in direct conflict with the firm’s reputation for acting at all times in the best interests of clients.

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A series of internal meetings was held to discuss changing the policy. I participated in some of them. At one meeting, the people in the room were evenly divided. I was with the group that advocated against representing hostile raiders, whether they were blue chip corporations or individuals financed by junk bonds. We felt that doing so would cause us to lose both our credibility with clients and our perceived moral high ground. We reminded the group of Goldman’s advertising slogan, “Who do you want in your corner?” and observed that Whitehead had also resisted serious challenges to the policy. John L. Weinberg had supported the policy, too, even though one of his largest clients had requested Goldman represent it in a hostile raid.

MONEY Master the Game: 7 Simple Steps to Financial Freedom
by Tony Robbins
Published 18 Nov 2014

For a while, it was the most successful stock in the world—until it dropped by 40% in a matter of weeks. Ouch. Then there’s another friend who was in her 30s when she quit her job as a television executive, sold her house in Los Angeles at the height of the real estate market boom, and used the money to open a rustic diner in Wyoming. She invested what was left in high-risk stocks and junk bonds, thinking the interest would provide enough income to support her. And it did for a while. But the stock market crash of 2008 wiped out her entire savings. She had to fold up her teepee and go back to work as a freelancer for a fraction of what she used to make. We’ve all heard horror stories from the economic meltdown.

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For S&P, the grades range from AAA (the highest level of confidence that a company or country won’t default on its debts) to BBB (adequate for “investment grade” bonds), and all the way down to D (which means the bond issuer is already in default). The lower the rating, the more interest the issuer usually has to pay to bond holders for the risk that they’re taking. The expertly renamed high-yield bonds, formerly known as junk bonds, have a rating of lower than BBB, which makes them “subinvestment grade.” • Corporate Bonds. Corporations issue bonds when they want to raise money to expand, make acquisitions, pay dividends, fund a loss, or any number of reasons. Should you buy corporate bonds? It depends on the risk. If you pick the wrong bond, you could lose most or all of your money.

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Some investors, like David Swensen, say, “Why bother with corporate bonds when you can get a better return just buying stock in the company?” But if you’re looking for higher yields in bonds, you have lots of options—as long as these investments go into your Risk/Growth Bucket and not your Security Bucket! For instance, not everybody shies away from so-called junk bonds. You have to look at each one and decide if it’s worth the risk. In May 2014 Australia’s largest airline, Qantas, offered a subinvestment-grade eight-year bond in Australian dollars for a 7.75% interest rate. The company had its credit rating downgraded because of recent losses and debt problems, but would you count it out?

Retire Before Mom and Dad
by Rob Berger
Published 10 Aug 2019

You might wonder why anybody would invest in a bond issued by a government or corporation that has a higher risk of default. In a word—yield. Yield is a fancy word for interest rate. The higher the credit risk, the higher the yield. In fact, mutual funds that invest in corporate bonds issued by companies with shaky financials are called High Yield bond funds. High yield bonds are also called Junk Bonds. To be clear, junk bonds are not junk. They have more risk, but they also have potentially more reward. Interest Rate Risk Most bonds don’t protect you against the risk that interest rates will rise. Recall that as rates rise, the value of existing lower-yielding bonds fall. There are some bonds, however, that do protect investors against rising rates.

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Index 403(B) 61, 97, 168 401(K) 18-19, 27, 61, 64, 67, 80-81, 85-86, 97, 107, 143, 145, 161, 167-170, 172, 174-179, 181, 183-187, 189-191, 195-196, 200, 202, 213-214, 229, 235-238, 241, 243, 245 3-Fund Portfolio 162, 165, 184-187, 191, 246 7 Levels Of Financial Freedom 44, 48, 50-52, 57 4% Rule 50, 59, 63-65, 69, 160 Actively Managed Mutual Funds 140-142 Asset Allocation 190, 195, 201, 246 Asset Classes 136, 157 Backdoor Roth IRA 172-173, 177 Bad Debt 219 Basis Points (bips) 152, 154, 159, 185-186, 191-192, 195-196, 207 Betterment 192, 207, 243 Blend 146, 186 Bogleheads 162 Bond(s) 20, 33, 38, 65, 129-141, 143, 147-150, 152, 157-163, 184-186, 195-196, 201-202 Charles Duhigg 104 Commissions 205 Commodities 144, 147 Credit Cards 4, 39, 96, 105, 202, 217, 226, 235 Credit Risk 133, 147-148 Debt 4-7, 12, 18, 49, 80, 82, 84, 90-92, 107, 135, 138, 202-203, 215-231, 233-241, 243, 246 Debt Avalanche 225, 228-231 Debt Snowball 225, 228-231 Dividend 19, 134-135, 200 Dividends 134-135, 200 Duration 149 Emerging Markets 131, 145, 163 Equity 6, 132, 135, 140, 216, 225, 227 ETF 207 Expense Ratio 152-154, 159, 184, 186, 190-191, 195 Fee-Only 205-206, 208 Fees 123, 140, 142-143, 151-156, 159, 161, 178, 184-186, 191, 196, 205-206 Fidelity 154, 164, 180, 183-184, 186, 192, 195 Financial Freedom 2-3, 5, 7, 9-13, 17, 19, 23, 28, 35, 41, 43-52, 57, 59, 61, 63, 65-69, 71-76, 93-94, 98-99, 115-116, 142, 153, 156-157, 167, 195-196, 202-203, 211, 215, 222, 224, 227-228, 231, 234, 239, 244, 246-247, 249-250 Fixed Income 135 Freedom Fund 10, 39, 45-51, 59, 63-67, 69, 72, 74, 76, 88, 93, 96-97, 117, 119, 184-185, 206 Good Debt 219 Growth 144, 146, 159, 186 Health Savings Account (HSA) 173-175, 177, 179, 182, 189 Hedonic Treadmill 5-6 I Bonds 149 Index Mutual Fund 80, 140 Interest Rate Risk 131, 133, 147-149 IRA 18, 64, 167, 170-173, 175, 177-181, 189, 191-193, 195-196, 200, 238, 245 Jeff Rose 119 Junk Bonds 148 Level 7 45, 47-52, 59-60, 63, 65-69, 71-76, 93, 96, 98, 115-116, 123, 125, 142, 153, 156-157, 168, 176, 182, 185, 202, 204, 206, 211, 213, 215, 222, 249, 251 Load Fees 153, 155, 159, 184, 186 Market Cap 141, 144-145 Market Capitalization 144 Mark Zoril 207 Maturity 136 Money Audit 11, 87, 89-91, 94, 99, 101, 167 Money Multiplier 9-11, 17, 19-23, 26, 28, 31-32, 38-39, 45-46, 50-52, 63, 71, 105, 153, 167, 195 Morningstar 151, 159, 184-187, 190, 195-196, 200 Mr.

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It
by Anat Admati and Martin Hellwig
Published 15 Feb 2013

The actual losses were recorded in earnings statements, but the fact that these losses reflected a substantial worsening of prospects for the future was not recorded or recognized.32 When deregulation removed many restrictions on their investments, many savings banks used this new freedom to invest in very risky assets, such as highly speculative commercial real estate investments and high-yield securities, also known as “junk bonds.” Junk bonds are corporate bonds with a high risk of default that pay relatively high interest to compensate for the risk. The “zombie banks,” those banks that would have been considered insolvent if their accounts had fully reflected their economic situation, were the most reckless in pursuing such strategies.33 They were gambling for resurrection, on the principle that “heads, I become solvent again; tails, the deposit insurer has a problem.”

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In the 1990s, the effect of government guarantees on borrowing costs was at the center of complaints against the Landesbanken, public banks in Germany that enjoyed such guarantees. For these banks, rating agencies actually published separate credit ratings with and without the guarantees. Typical ratings would be AAA, the best possible, with the government guarantees, and CCC, many grades lower—in fact “junk bond” status—without the guarantees. Because this effect gave the Landesbanken a substantial advantage in borrowing, the European Commission ruled that the (explicit) guarantees represented a form of state aid that distorted competition and was therefore incompatible with what is now the Treaty on the Functioning of the European Union (Art. 107).

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Mehrling (2010) instead proposes that the central bank intervene through markets, standing ready to buy assets from banks if no other buyers can be found. We discuss these suggestions in Chapter 10 and return to the narrative that the crisis was due only to liquidity problems in Chapter 13. 50. Savings institutions invested in risky commercial real estate developments and in so-called “junk bonds,” corporate bonds that pay high interest and have a high risk of default. On the recklessness of S&Ls, see White (1991, 2004) and Curry and Shibut (2000). 51. Kaserer (2010) estimates the losses at €34–52 billion. Information that has become available since then suggests that the losses will actually be much greater than even the larger of these two numbers.

Red-Blooded Risk: The Secret History of Wall Street
by Aaron Brown and Eric Kim
Published 10 Oct 2011

As things got worse during the crisis, firms cut exposures and increased hedges. But here’s where the big problem developed. A financial professional’s instinct is always to do a spread trade. If she’s afraid credit is going to get worse, she buys protection on BBB-rated securities—these are the bonds just above junk bonds on the credit rating scale. Junk bonds can default in good times and bad, but a significant increase in BBB default rates tells you there’s a credit crunch. Of course, increases in default rates of higher-rated bonds—bonds with A, AA, or AAA ratings—tell you even more loudly that there’s a credit crunch. But the BBB spreads start to increase first, so it’s a good place to set your first line of hedging defense.

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In 1963, Oldham realized the Rolling Stones could not compete with the Beatles for nice, cheerful, friendly, non-threatening pop band. So he ran the scariest and scruffiest pictures of the band he could find, and played up stories of rowdiness, violence, and drug use. It took finance 20 years or so to catch up, but when it did, innovators realized you got more headlines jamming “junk” bonds into institutional portfolios than making a market in high-yield securities. You didn’t offer to buy a large block of a company’s shares, you ran a corporate “raid,” “hostile” if possible. George Soros did not try to explain that his selling of the British pound improved economic allocation for everyone; he gloried in the charge that he had attacked Britain and won.

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And calling Wall Street a casino is as true and false as calling a courtroom a casino. As in casinos, risks are taken in the financial markets and in courtrooms, and in all three places there are winners and losers determined by rules. On Wall Street, quants changed the rules so there were more winners and fewer losers. That doesn’t mean there were no losers. Junk-bond-financed hostile takeovers were great for the economy and the stock market, but many lives were disrupted and portfolios damaged in the process. Venture capital financing led to an extraordinary spurt of technological progress—and the Internet bubble. But these were souped-up versions of traditional capital allocation.

Crisis Economics: A Crash Course in the Future of Finance
by Nouriel Roubini and Stephen Mihm
Published 10 May 2010

Consider two hypothetical banks, each of which borrows a billion dollars from other sources and invests it. One invests in low-risk, supersafe U.S. Treasuries, the other in high-risk corporate junk bonds. Under the Basel I guidelines, the two banks would assign a different risk factor (a percentage) to these different assets. This risk factor would guide how much capital they had to hold relative to these risks. In practice the bank with the supersafe government debt didn’t need to hold as much capital as the bank with its money in junk bonds. Basel I had a few other stipulations. Banks that operated in multiple countries had to hold capital equivalent to 8 percent of their risk-weighted assets.

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Indeed, the same problems of easy money, easy credit, and lax supervision and regulation first witnessed in the United States surfaced in many economies: the United Kingdom, Ireland, Spain, Iceland, Estonia, Latvia, Dubai, Australia, New Zealand, and even China and Singapore. By 2006, credit had become so readily available in the United States that the spread between the yield on high-risk junk bonds and low-risk Treasury bonds shrank to historic lows of less than 2.5 percent. A handful of economists raised the alarm, but few listened. As with every other bubble, plenty of boosters stepped forward to claim that the fundamentals justified soaring prices. David A. Lereah, chief economist for the National Association of Realtors, was arguably the most visible.

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In still other cases, the facilities directly or indirectly financed the purchase of illiquid short-term debt. Whatever the mechanism, the objective was the same: inject liquidity into specific markets that showed signs of trouble and stress. This unprecedented intervention was not as indiscriminate as it might seem. The Federal Reserve did not accept junk bonds or other low-grade debt as collateral; it accepted only what was, in theory, higher-quality debt. These efforts eventually bore some fruit: at the end of 2008, in the aftermath of the Lehman collapse, the Fed and other central banks flooded the financial markets with hundreds of billions of dollars’ worth of liquidity, and the spreads between short-term market rates and safe government assets started to decline.

Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis
by Scott Patterson
Published 5 Jun 2023

If they crashed, he’d make a fortune. It would be a giant bet on chaos. Ackman quickly built up a massive position. He purchased insurance contracts known as credit default swaps on $42 billion in U.S. investment-grade debt, more than $20 billion in an index of European debt, and a $3 billion position in junk bonds. In all, he had insurance tied to $71 billion of corporate debt. It cost Ackman a mere $26 million to make the bet. Like fire insurance, it would pay off if those bond indexes got torched. Soon after, bond markets began to quake as other investors slowly realized that the nightmare Ackman had foreseen in January was coming true.

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He’d heard chatter from the White House and the Federal Reserve about intervening in the markets to put a stop to the carnage. Time to sell. Just weeks after he’d made his wager, he quickly began cashing in. He sold his exposure to $4.5 billion worth of the investment-grade bet, $4 billion of the European stuff, and $400 million of the junk bonds. By the time he was done, he’d amassed a $2.6 billion profit that helped offset the losses in the stocks he’d held on to. The stock market had dived a staggering 30 percent since the Covid-19 panic began. Then, Ackman did something crazy. Something nuts. Taking literally Baron Rothschild’s advice to buy when there’s blood in the streets, he plowed his sudden windfall back into stocks.

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Even while the U.S. began undergoing an epic economic collapse that saw millions lose their jobs as Covid-19 ravaged the nation, stock indexes began an inexorable march higher, eventually hitting records time and again. There were a few reasons for the seemingly irrational exuberance. Spitznagel’s bugaboo, the Federal Reserve, was pumping unprecedented amounts of liquidity into the financial system by purchasing billions of dollars of corporate bonds. It even bought junk bonds. The U.S. Congress rolled out trillions of dollars in financial aid for struggling companies and families. The combined force of the Fed and Congress, in addition to other bailout packages in Europe and elsewhere, triggered a historic amount of risk-taking. With interest rates at all-time lows, bonds provided little return at all, forcing investors who were eager for any kind of yield they could get into the only place they could get it—the stock market.

End This Depression Now!
by Paul Krugman
Published 30 Apr 2012

The very safest borrowers—the U.S. government, of course, and major corporations with solid bottom lines—were still able to borrow at fairly low rates. But borrowers who looked even slightly risky were either shut out of borrowing or forced to pay very high interest rates. The figure below shows yields on “high-yield” corporate securities, aka junk bonds, which were paying less than 8 percent before the crisis; this rate shot up to 23 percent after Lehman fell. The Lehman Effect: High-Yield Corporate Bonds Interest rates on all but the safest assets soared after Lehman failed on September 15, 2008, helping to send the economy into a nosedive.

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academic sociology, 92, 96, 103 AIG, 55 airlines, deregulation of, 61 Alesina, Alberto, 196–99 American Airlines, 127 American Recovery and Reinvestment Act (ARRA): cost of, 121 inadequacy of, 108, 109–10, 116–19, 122–26, 130–31, 212, 213 Angle, Sharron, 6 anti-Keynesians, 26, 93–96, 102–3, 106–8, 110–11, 192 Ardagna, Silvia, 197–99 Argentina, 171 Arizona, housing bubble in, 111 Asian financial crisis of 1997–98, 91 asset-backed securities, 54, 55 auction rate securities, 63 Austerians, 188–207 creditors’ interests favored by, 206–7 supposed empirical evidence of, 196–99 austerity programs: alarmists and, 191–95, 224 arguments for, 191–99 economic contraction and, 237–38 in European debt crisis, 46, 144, 185, 186, 188 as ineffective in depressions, xi, 213 state and local governments and, 213–14, 220 unemployment and, xi, 189, 203–4, 207, 237–38 Austrian economics, 150 automobile sales, 47 babysitting co-op, 26–28, 29–30, 32–33, 34 Bakija, Jon, 78 balance of trade, 28 Ball, Laurence, 218 Bank for International Settlements (BIS), 190, 191 Bank of England, 59 Bank of Japan, 216, 218 bankruptcies, personal, 84 bankruptcy, 126–27 Chapter 11, 127 banks, banking industry: capital ratios in, 58–59 complacency in, 55 definition of, 62 deregulation of, see deregulation, financial European, bailouts of, 176 government debt and, 45 “haircuts” in, 114–15 incomes in, 79–80 lending by, 30 money supply and, 32 moral hazard in, 60, 68 1930s failures in, 56 origins of, 56–57 panics in, 4, 59 political influence of, 63 receivership in, 116 regulation of, 55–56, 59–60, 100 repo in, 62 reserves in, 151, 155, 156 revolving door in, 86, 87–88 risk taking in, see risk taking runs on, 57–58, 59, 60, 114–15, 155 separation of commercial and investment banks in, 60, 62, 63 shadow, 63, 111, 114–15 unregulated innovations in, 54–55, 62–63, 83 Barro, Robert, 106–7 Bebchuck, Lucian, 81 Being There (film), 3 Bernanke, Ben, 5, 10–11, 32, 76, 104, 106, 151, 157, 159–60, 210 recovery and, 216–19 on 2008–09 crisis, 3–4 “Bernanke Must End Era of Ultra-low Rates” (Rajan), 203–4 Black, Duncan, 190 Blanchard, Olivier, 161–63 Bloomberg, Michael, 64 BNP Paribas, 113 Boehner, John, 28 bond markets: interest rates in, 132–41, 133 investor confidence and, 132, 213 bonds, high-yield (junk bonds), 115, 115 bond vigilantes, 125, 132–34, 138, 139, 140 Bowles, Erskine, 192–93 Brazil, 171 breach of trust, 80 Bretton Woods, N.H., 41 Broder, David, 201 Brüning, Heinrich, 19 Buckley, William F., 93 Bureau of Labor Statistics, U.S. (BLS): CPI of, 156–57, 159, 160 U6 measure of, 7–8 Bush, George W.: Social Security and, 224 tax cuts of, 124, 227 Bush, Kate, 20 Bush administration, 116 business investment: confidence and, 201, 206 government spending cuts and, 143–44 business investment, slump in, 41, 52, 117 lack of demand and, 24–25, 26, 33, 136, 145 long-term effects of, 16 California: defense industry in, 236 housing bubble in, 111 Calvin and Hobbes, 191 Cameron, David, 200–201 Canada, 198–99 Capital Asset Pricing Model (CAPM), 98–99 capital ratios, 58–59 Carney, Jay, 124–25 Carter, Jimmy, deregulation under, 61 Carville, James, 132 “Case for Flexible Exchange Rates, The” (Friedman), 170 Case-Shiller index, 112 causation: common, 83 correlation vs., 83, 198, 232–33, 237 Cheney, Dick, 124 Chicago Board of Trade, 6 China, 146, 159 U.S. trade with, 221 Citibank, 63, 68 Citicorp, 63, 85 Citigroup, 63, 85, 116 Clague, Ewan, 35 Clinton, Bill, 36 Cochrane, John, 106, 107 Cold War, 236 Cole, Adam, 78 collateralized loan obligations, 54, 55 college graduates, unemployment and underemployment among, 11–12, 16, 37, 144–45 commodities, prices of, 159–60 Community Reinvestment Act, 65 confidence: business, 201, 206 consumer, 201 investor, 132, 188, 192, 194–97, 200, 213 unemployment and, 94–96 “confidence fairy,” 195, 200, 201 Congress, U.S., 192–93 deregulation and, 67 polarization of, 89 TARP enacted by, 116 2008 financial crisis blamed on, 64, 65 2012 election and, 226, 227–28 see also House of Representatives, U.S.; Senate, U.S.

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housing sector: construction in, 24, 32, 47, 112, 113 European bubbles in, 169, 172, 174, 176 home loss in, 4, 10, 45 net worth of, 117 postwar boom in, 50 prices in, 111–12, 117 recovery and, 219–21 U.S. bubble in, 14, 24, 32, 33, 65, 99, 111–12, 127, 172, 219 see also mortgages Hubbard, Glenn, 227 Human Events, 94 Hungary, 19 Iceland, 181 “immaculate inflation,” 154, 165 income: family, since World War II, 73–75, 74 spending and, 28, 30, 34 income inequality, 70, 93, 208, 209 CBO estimate of, 76–77 consumer spending and, 83 correlation of tax rates with, 82 and depression of 2008–, 85, 89–90 deregulation and, 72–75, 74, 81, 82, 89 education and, 75–76, 89 household debt and, 84 lack of skills blamed for, 75 and polarization of Congress, 89 rise in, 71–90, 74 sense of well-being and, 5 social norms and, 81–82, 83 top 0.01 percent and, 75, 76 top 0.1 percent and, 75, 76, 77, 96 top 1 percent and, 74–75, 74, 76–77, 96 2008 financial crisis and, 82, 83 income security, 120–21, 120 in depression of 2008–, 210 inflation, 53, 147, 149 conspiracy theories about, 160–61 core, 157–58, 161 costs of, 162 CPI and, 156–57 in depression of 2008–, 151–52, 156–57, 159–61, 189, 227 desirability of moderately high rate of, 161–65 Europe and, 180, 185, 186 fear of, 149, 150–65, 180, 203 Federal Reserve and, 161, 217, 219, 227 hyper-, 150, 162 inertia in, 158–59 measurement of, 156–59 mortgages and, 163–64 recovery and, 219 as self-perpetuating, 158–59 infrastructure investment, 148 deficit reduction and, 143 depression of 2008– and, 16–17 recovery and, 215 Institute for New Economic Thinking, 41 interest rates, 199, 201 Austerians and, 189, 196, 202–5, 207 in bond markets, 132–41, 133 in European crisis, 174, 176, 182–84, 190, 202–3 and fear of default, 139 Federal Reserve and, 33–34, 93, 105, 134, 135–36, 143, 151, 189–90, 193, 215, 216–17 inflation and, 151 long-term vs. short-term, 137–38, 216–17 zero lower bound in, 33–34, 51, 117, 135–36, 147, 151, 152, 163, 231, 236 International Monetary Fund, 17, 103, 145, 161–62, 186, 190, 198, 237 investors, rationality of, 97, 101, 103–4 Ireland: debt to GDP ratio in, 178 EEC joined by, 167 Ireland, debt crisis in, x, 4, 18, 140–41, 175, 175, 176, 178, 186, 200 housing bubble and, 172 interest rates in, 176 internal devaluation and, 181 unemployment in, 4, 18, 172, 181 Italy, debt crisis in, 4, 45, 138, 140–41, 175, 175, 178 unemployment in, 4, 18 Italy, debt to GDP ratio in, 178, 178 It’s a Wonderful Life (film), 59 Japan, 183, 201 austerity policies in, 198 financial troubles of, 31, 91, 152, 194, 216, 218 government debt as percentage of GDP in, 139–40, 140, 192 stimulus effort in, 198 Jensen, Michael, 98 job-creation policies, 188, 224 conservative animus toward, 96 and fear of deficits, 131, 143, 149, 206–7, 238 fiscal stimulus as, 238 New Deal, 39 recovery and, 228–29, 238 see also American Recovery and Reinvestment Act; unemployment Jobs, Steve, 78 Journal of Money, Credit and Banking, 26 Journal of the American Statistical Association, 35 junk bonds, 115, 115 Kahn, Lisa, 12 Kalecki, Michal, 94–96, 206 Kenen, Peter, 172 Keynes, John Maynard, 93, 205, 208, 210 depression as defined by, x on “long run,” 15 magneto trouble analogy of, 22, 23, 35–36 on markets, 97, 98 on recovery process, 21 renewed appreciation of, 42 on Ricardian economics, 205–6 on spending vs. austerity, xi Keynesian economics, 101, 134, 135, 227–28 New, 103, 104 opposition to, see anti-Keynesians role of government spending in, 53, 93, 94–95 Korean War, 234, 235, 235 Krenn, Robert, 38 labor mobility, 171–72, 173 Lack, Simon, 79 laissez-faire, 94, 101 Las Vegas, Nev., 112 Latvia, 181 Lehman Brothers collapse, 3, 4, 69, 100, 111, 114, 115, 115, 155, 157, 188, 191 Lehman effect, 115 lenders of last resort, 59 lending, loans, 30 lend-lease program, 39 leverage, 43, 44, 47, 48 in financial crisis of 2008–09, 44–46 Liberal Democrats, U.K., 200 liberals, 89 liquidationists, 204–5 liquidity, 33 euro and, 182–84, 185 returns vs., 57 liquidity traps, 135–36, 137, 138, 143, 144 in depression of 2008–, 32–34, 38, 51, 136, 155, 163 money supply and, 152, 155 unemployment and, 33, 51, 152 Lizza, Ryan, 125 Long Term Capital Management (LTCM) failure, 69 Lucas, Robert, 91–92, 102, 107 Lucas project, 102, 103 macroeconomics, 91–92, 227, 231 “dark age” of, 92 “freshwater,” 101–3, 110–11 “real business cycle” theory in, 103 “saltwater,” 101, 103–4 magneto trouble, Keynes’s analogy of, 22, 23, 35–36 Mankiw, N.

A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan
by Ben Carlson
Published 14 May 2015

The financial crisis provides a great example of the problem with using yield as a safety measure. There are a host of yield-producing assets investors have to choose from—high-quality government bonds, corporate bonds, REITs, dividend-paying stocks, junk bonds, or preferred stocks. Take a look at Table 4.11 to see how each of these income-producing assets performed during the crash. Table 4.11 Income Investments During a Market Crash (October 2007 to February 2009) Asset Gain/Loss High-Quality Bonds (BND) 6.8% Junk Bonds (JNK) –32.8% Corporate Bonds (LQD) –5.6% Dividend Stocks (SDY) –47.0% Preferred Stocks (PFF) –53.7% REITs (VNG) –64.1% Source: Yahoo! Finance. You can see the risks involved in those income-producing assets outside of high quality bonds.

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Index 401(k) retirement plans 60/40 portfolio 80/20 rule active mutual funds Adams, John Quincy Affleck, Ben Alabama Crimson Tide all-time highs Annaly Capital Management Apple AQR Capital Management Asness, Cliff asset allocation asset allocation quilt Back to the Future Part II Barber, Brad Barton, Harris beating the market behavior gap benchmarking Benke, Alex Berkshire Hathaway Bernanke, Ben Bernstein, Peter Bernstein, William betterment Black Monday black swans Bogle, John Boiler Room bonds Bryant, Bear Bryant, Kobe Buffett, Warren BusinessWeek buy and hold Caesar, Julius Candy, John Case-Shiller Index CFA CFP Charles Schwab chasing performance Churchill, Winston Cincinnati Bengals commodities compensation Confucius correlation currency fluctuations “The Death of Equities” degrees of active and passive management Descartes, Rene diversification dividends doing nothing dollar cost averaging Dow Jones Industrial Average Dunn, Elizabeth eBay Efficient Market Hypothesis (EMH) eight symptoms of group think Einstein, Albert Ellis, Charles xv emerging markets emotional intelligence empathy endowment funds envy exchange-traded funds (ETFs) Farley, Chris fear and greed Federal Reserve Ferri, Rick Fidelity Investments financial advice financial advisors questions to ask financial pundits Gekko, Gordon Gleason, Jackie Glenn, Joshua globalization Goleman, Daniel Graham, Benjamin Great Depression Greenspan, Stephen growth stocks Harvard Endowment Fund herd mentality home country bias Housel, Morgan housing how to be a good client Hsu, Jason Ibbotson, Roger illusion of control incentives independence index funds inflation institutional investors The Intelligent Investor (Graham) international equity diversification invert investment plan investment policy statement (IPS) Japan JP Morgan junk bonds Kahneman, Daniel Kaplan, Paul Keynes, John Maynard Kinnel, Russ Klarman, Seth Lehman Brothers Les Amants life cycle investing liftoff Livermore, Jesse lollapalooza effects longevity risk loss aversion lost decade LSU Tigers Madoff, Bernie margin of safety market cycles market Timing Marks, Howard Mauboussin, Michael McFly, Marty mean reversion Jordan, Michael Michelin star ratings midcaps millennials momentum Montana, Joe Monte Carlo Simulation Morning star motivation Mr.

The Dealmaker: Lessons From a Life in Private Equity
by Guy Hands
Published 4 Nov 2021

Some issues dropped 40 per cent. It proved almost impossible to find anyone who would take the risk on individual junk credits. American and European buyers were interested only in investment-grade ratings. I knew that most of what I was handling was high quality and would come back in time. But Goldman overall had a huge junk bond inventory. We therefore marked our position down and took a heavy loss. We had to find new ways to get back in the game. The answer we came up with was collateralised bond obligations (CBOs), which were a way of pooling a large number of different bonds and selling them together that offered considerable flexibility.

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In 1990 I underwrote this first CBO, which we dubbed Pearl Street (so named both because the street is located close to Goldman and is home to the famous Fraunces Tavern, and because one bright analyst likened what we were doing to finding a pearl in an oyster). Pearl Street took a portfolio of junk bonds, securitised them (i.e. split them into tranches), directed their cash flows in different directions and then had them managed by someone on behalf of the securitisation’s investors. In this case, the manager was Goldman’s Asset Management Division. From the jaws of disaster, we had snatched victory.

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K., 58 Chile, 277 China, 197, 206, 264, 273, 275 Chipstead, Kent, 29 Christmas albums, 171 Chrysalis, 223–4 Churchill Court, Sevenoaks, 139, 321 Churchill, Winston, 53, 57, 58, 139 Cillit Bang, 223 Cirque du Soleil, 133, 207, 258 Citigroup, 93–4, 123–4, 149, 161, 163 collateralised debt obligations (CDOs), 194 EMI and, 172–90, 194–99, 216–19, 222, 224, 226–8, 231–58 litigation against (2009–16), 232–58 losses (2008), 222 mortgage-backed securities (MBSs), 194 Clash, The, 229 Clayton, Dubilier & Rice, 266 Clinton, William ‘Bill’, 84 Clyde & Co, 233 cocaine, 195 Cochran, Eddie, 21 Coldplay, 210–11 Colindale, London, 301 collateralised bond obligations (CBOs), 80–81 collateralised debt obligations (CDOs), 194 Colnbrook, Berkshire, 5 Commonwealth, 5 communism, 25, 34 Conservative Party, 49, 50–59, 132, 295 Consolidated Pastoral Company (CPC), 276, 299 Cookham, Berkshire, 6–9, 12–13 Corzine, Jon, 72, 73, 78, 84, 86 Cosmopolitan, 52 Covid-19 pandemic (2019–21), 305–23 Cowell, Simon, 174 Cowley, Oxford, 51–3, 55, 57 Credit Suisse, 112 Critchley, MacDonald, 9–11, 14 Cummings, Peter, 183 Cyber Room, 121 Daily Mail, 114 Daiwa, 79 Dalio, Ray, 261 Daniel Patrick Moynihan US Courthouse, 248 Dartford Tunnel, 195 Davidson, Chuck, 68–9, 83, 261 de Brosses, Alexis, 311 debating society, 49–50 democracy, 48, 58 Denmark, 264–6 depression, 296–8 Deutsche Annington, xiv Deutsche Bank, 186, 314 diabetes, 32, 146, 255, 257, 291–2, 294, 296, 306 Discipline (Jackson), 207 Disney, 71 Disneyland Paris, 133 distressed loans, 129–30 Dixon, Denelle, 247–8, 249 ‘Dog Eat Dog’ (AC/DC), 167 Dolenz, Micky, 39 dot-com crash (2000), 193 Dowler, Andrew, 135, 220 Drake Passage, 277 Drogba, Didier, 182 drugs, 195–6, 203 Dubai Aerospace Enterprise, 159 Durban, South Africa, 3 dyslexia, xi, 8–11, 16, 39, 66, 97, 145, 239, 247 dyspraxia, 11 Eagles (band), 125 Easterbrook, Steve, 265 EBITDA, 300 Economist, The, 65 Edscha, 215 educational projects, 263 Eighth Wonder, 259 Elizabeth II, Queen, 185 EMI, xi, 39, 166, 169–90, 193–212, 216–28, 231–2, 267–8, 274, 284 Beatles renegotiation (2005–7), 207–9 Black Hands Gang, 196, 198 books, 197 business plan speech (2008), 219–22 CEO, 198, 206, 212, 217, 218 Citigroup and, 172–90, 194–90, 216–19, 222, 224, 226–8, 231–58 diversity, 199 ‘fruit and flowers’, 195–6 Jackson departure (2007), 206–7 job cuts (2008), 219–22 Project Blackjack, 219 Project Poker, 219 Radiohead departure (2007), 204 Rolling Stones departure (2008), 205–6 Spotify stake, 203 Stone departure (2009), 207 encyclopaedia selling, 36, 51 Engage Britain, 319–23 Escape The Fate, ix ESG, 324–5 Essex House hotel, New York, 248, 251 Eton College, Berkshire, 45, 54, 57, 150–51 Euratom, 78 European Union (EU), 54, 78 EverPower, 276, 285 FA Cup, 182 Fahnestock & Co, 170 Falconer, Charlie, Baron, 134, 135–6 family life, 87, 226, 257–8, 262, 277–9, 292, 294, 325 Farmers pub, Sevenoaks, 26 Farrant, David, 200 Fiji, 156 Financial Conduct Authority (FCA), 274 financial crisis (2007–8), 181, 186, 188, 193–4, 215, 235 Financial Security Assurance (FSA), 81–2 Finland, 264–6, 312, 314 fishing, 166 fixed income sales, 66, 67, 68, 72, 76, 85 Fleischer, Mort, 86–7 Food Folk, 283, 300, 309 football, 182, 289 Foster’s, 100, 107 Four Seasons Health Care, 268–70, 276, 281, 284, 295, 299 Fowey, Cornwall, xi Fox’s Biscuits, 220 France, 71 Franchise Finance Corporation of America (FFCA), 86, 91 Fraunces Tavern, New York, 80 Friedman, Stephen, 82, 86 fugu, 148 Galápagos Islands, 187 ‘Gambler, The’ (Rogers), 115 Garland, Judy, 181 gay marriage, 248 Géczy, Andrew, 266–7, 273, 274, 275, 277, 283, 284, 285, 295–6 Gerbeau, Pierre-Yves, 133 Germany, xiv, 39, 151–4, 264 Gildersleeve, John, 173 Glasgow, Scotland, 278–9 Global Asset Structuring (GAS), 83 Global Equity Opportunities Fund, 188 global financial crisis (2007–8), 181, 186, 188, 193–4, 215, 235 Glyndebourne, East Sussex, 264 goal setting, 261 ‘God Save the Queen’ (Sex Pistols), xi GOL Aerolineas, 157–8 Goldman Sachs, xii, 61, 65–88, 95, 102, 110, 117, 118, 128, 145, 261 Big Bang (1986), 77 computers, use of, 73–4 Euratom trade, 78 Eurobond desk, 76, 177 FFCA and, 86, 91 Global Asset Structuring, 83 Global Equity Opportunities Fund, 188 Japanese trade, 79–80 junk bonds, 79–81 Phoenix deal and, 107 Saks Fifth Avenue trade, 81–3 securitisation, 80–81, 83–6, 91, 98, 104, 120, 240, 313 tax avoidance, 69 Terra Firma Fund VI, 275 Tokyo office, 72–3 Goodfella’s pizzas, 220 Goodman, Julia, 315 Google, 198 Gore, Albert ‘Al’, 248 Gorillaz, 211 Govia, 108 Grabiner, Anthony, Baron, 138, 255, 257 Graham, Benjamin, 16 Grand Canyon, Arizona, 258 Grand Metropolitan, 100, 107, 121 great credit crash (2008), 181, 186, 188, 193–4, 235 Greater London Authority, 132 greed, 69, 261 Green, Damian, 59 Green, Philip, 174, 183 Greenhill, 177, 181, 189 grief, 325 group development, stages of, 95–6, 108, 112 Guardian, 113, 114, 117 Guernsey, 81, 180, 183, 233, 241, 246–7, 253, 262–3, 281, 291, 301 Covid-19 pandemic (2020–21), 305 Pea Stacks, 325–6 Terra Firma in, 225–6 Gulf War (1990–91), 82–3 Guy’s Hospital, London, 9 H/2 Capital, 270, 281 Hague, William, 55–7 Halloween, 246 Hambros, 109–10 Hamilton (Miranda), 3 Hand Picked Hotels, 103–4, 139, 218, 300–301, 306, 316–19 Hands, Alison, 8, 28, 47, 49 Hands, Chris, 3–6, 18–19 Hands, Julia, 31, 39–40, 43, 44, 46–7, 49, 51, 77, 87, 95, 118, 145, 169, 279, 293–4 Antarctica trip (2016), 277–8 business plan (1994), 85 Churchill Court property, 139 Citigroup litigation (2009–16), 235, 246 educational projects, 263 Guardian article (1998), 117 Guernsey move and, 226, 254, 262, 281, 289, 293 Halloween party (2010), 246 Hand Picked Hotels, 103–4, 139, 300–301, 306, 316–19 Mauna Kea property, 227 mother’s death (2016), 254, 257, 277 Pimlico property, 169 stroke (2018), 290 Tokyo transfer plan (1988), 84 tree-planting programmes, 263 wedding (1984), 72 Hands, Philip, 11, 49 Hands, Sally, 3–6, 206 Hands Family Office, 301, 324 Hanse Explorer, 278 Harman, 215 Harrison, Patricia, 208 Harrods, London, 39, 105 Harrow School, Middlesex, 45 Harry Potter franchise, 45 Havens, John, 226, 227, 232 ‘Having It All’ (Eighth Wonder), 259 Hawaii, United States, 157, 166, 190, 227, 305, 307 Hawaiian Airlines, 157 Hawaiian Telecom, 215 Heath, Edward, 54 ‘Help!’

The Bond King: How One Man Made a Market, Built an Empire, and Lost It All
by Mary Childs
Published 15 Mar 2022

Just Lambda Cash could add 0.25 percent, 0.4 percent a year—which, in fixed income, is everything. And Pimco could do it forever. In any asset class, that’s how you win: if you just don’t lose all your money on some big, dumb trade gone wrong; if, instead, you steady-eddy along, eventually you’ll be number one in the long-term rankings. “Strategic mediocrity,” Pimco’s self-deprecating junk bond manager Ben Trosky used to call it, his own plan never to be number one in a given year, but also never to blow up. Simply staying in the game long enough meant you won. And that’s what clients wanted: a good track record, over time; a manager who beat those arbitrary benchmarks, even if sometimes that meant gaming them a little—how would the clients know better?

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People with money sitting in bank accounts, not invested, not letting someone like Gross invest it for them for a better return. Maybe because many of these ordinary “savers” got burned in the recession by all those guys who had said they knew what they were doing with their money. Fed policy was rewarding risk takers, people who bought junk bonds and speculative real estate—people like Pimco and Gross, or worse. So, when the “quantitative easing” government-buying-bonds program ended, who would step up to buy 70 percent of Treasuries? Gross suspected the Fed would leave a Fed-shaped void. Those artificially suppressed yields would jump back up—which would mean losses for bond investors.

…

He recouped some of his lost self; he was much happier. The high-yield group, in particular, always seemed to be in chaos. Ben Trosky had fought to create the product in the 1990s, convincing clients to buy corporate bonds rated below investment grade. These were a little tarnished after the market’s inventor and “Junk Bond King,” Mike Milken, got in trouble for fraud, but it was a growing market where real research could lead to higher profits. Trosky was tall and imposing and plainspoken; he often didn’t wear shoes, only socks, but he was a good trader who could match Gross’s intensity. All the desks had their own personalities—the hair-trigger nerves of the cash-trading desk, the circus freaks Scott Simon hired to analyze mortgages—but ever since Trosky left, in 2002, the credit team had always seemed on the brink.

Casino
by Nicholas Pileggi
Published 13 Aug 2015

Today, checking into a Las Vegas hotel is more like checking into an airport. Even the high-roller hospitality suites can get stacked up while computers check your credit line against your American Express number for verification that you are who you claim to be. The Teamsters pension fund has been replaced by junk bonds as the primary source of casino funding; but while junk bond interest rates are high, they’re not as high as what the outfit charged. Casino executives who borrow the money don’t have to meet their stockbrokers in darkened Kansas City hotel rooms at three o’clock in the morning and be told they’re going to get their eyes plucked out.

…

Nineteen eighty-three was a turning point in the history of Las Vegas. The Tropicana and Argent cases were wending their way through pretrial hearings and on to trials and eventually to convictions. The last Teamster pension fund loan was paid off. The mortgage on the Golden Nugget was bought by Steve Wynn and paid off with junk bonds. The mob’s main muscle—as far as controlling the financing of casinos—was over. In 1983, slot machines became the largest casino revenue producer, surpassing all other forms of gaming. Las Vegas, which had begun as a town for high rollers, became a mecca for Americans looking for low stakes and ALL YOU CAN EAT FOR $2.95 buffets.

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Edgar, 68 horse racing: Rosenthal and, 14–15, 61 Rosenthal’s Florida banishment from, 3, 69 Horseshoe Casino, 263 Hôtel de Paris, 51 Hough, Hugh, 354 Hudson, Dave, 398 Hunchback Bobby, 78 Hustler, The, 259 Hymie the Ace, 17–19, 47 Immigration and Naturalization Service (INS), U.S., 295 Inadmissible Evidence, 389 Inserro, Vinnie, 33 insurance brokers, 160 Internal Revenue Service (IRS), 116, 117, 131, 133, 163, 273, 292, 400 Interpol, 49 Jenkins, Gary, 303 Jenner and Block, 139 Jerry’s Lounge, 52 Jews, 28, 269 J. K. Sports Journal, 48 Jubilation nightclub, 257, 268, 315, 318, 333 junk bonds, 392, 401 Justice Department, U.S., 3, 69, 218, 388 Organized Crime Strike Force, 292, 366 Kane, Marty, 259, 273, 372, 374 Kansas City, Mo., 58, 151–53, 200, 290–93, 297, 303–4, 401 Kaplan, Bill, 22, 45 Kaspar, Marc, 359–60 Kay, Bobby, 89, 90 Keeton, William, 123 Kefauver Crime Committee, 57 Kennedy, Robert F., 65, 68 key-employee (gaming) licenses, 254 background inquiries made for, 104 denied to Rosenthal, 9, 104,–6, 124, 146, 188, 196, 215–23, 296 of Glick, 131, 139–40 of Stardust, 392 KG (known gamblers) lists, 57 Khashoggi, Adnan, 102–3 Kilgore, Gerald, 48 Kilm, Red, 181 King’s Castle, 132, 201 Kinz, Mike, 398 Kloud, Suzanne, 319–20 Korea, 3 KSHO television, 264 Laguna Niguel, Calif., 393, 397 La Jolla, Calif., 189, 195 Lake Geneva, Wisc. 72 Lake Tahoe, Nev., 133, 201 Lamb, Ralph, 120 Lambie, William K., Jr., 353 Lansky, Jake, 299 Lansky, Meyer, 269, 299 Las Vegas, Nev.: annual gambling revenues in, 5 end of mob rule in, 392–93, 400–2 Geri Rosenthal’s move to, 86–87 growth of, 4, 8–10 increased murder rate in, 181 kickbacks in, 83 postmob ambience of, 400–2 Rosenthal’s move to, 71–78 a “second-chance” city, 3–4 “settling down” in, 94 Spilotro’s effect on, 155–56, 181–82 Spilotro’s move to, 117–23, 155–56 stucco house construction in, 160–61 work cards issued in, 82, 104 Las Vegas Country Club, 9, 122 Las Vegas District Court, 230, 250 Las Vegas Metro Police Department, 374–76 blacks and, 358–59 Frank Bluestein killed by, 356–59, 361–62 intelligence division of, 327, 359 Pasquale Spilotro picked up by, 360 Rosenthal refused protection by, 377–78 Rosenthal’s lawsuit against, 351–52 Rosenthals’ marital squabbles and, 337–43, 344–48, 351–52 Rosenthal welcomed to Las Vegas by, 75–77 Spilotro and, 123, 359, 360 Spilotro’s employment of members of, 163, 171, 272–73, 292–93 tough reputation of, 119 Las Vegas Review Journal, 219 Las Vegas Sheriff’s Office, 82, 158 Las Vegas Sun, 250, Las Vegas Valley Bank, 137, 233 lavenders, 100 Law, Dick, 239, 243 Lawry, Barbara, 373 Laxalt, Paul, 292 laydown bets, 83, 102 layoffs, of bets, 22–23, 59 Leaning Tower of Pizza, 155 Learjets, 135, 185, 189, 218, 312 “Lifetime of Betting and Being an Oddsmaker and Handicapper” (Rosenthal), 253 “like,” in betting parlance, 27 lip-reading, 169, 329 Lisner, Jerry, 175–79 loan-sharking, 111, 155 by Spilotro, 111, 122, 273, Lockheed Aerojet, 86 Lombardo, Joseph “Joe the Clown,” 30, 49, 111, 274, 327, 361–62, 368, 388 Lonardo, Joe, 391 Los Angeles District Attorney’s Office, 384 Los Angeles Probate Court, 387 Los Angeles Times, 206, 361, 384 luck, 13–14, 53, 374 McBride, Harry, 251 McCarthy, Billy, 31–36, 110 McCarthy, John, 375, 377 McClellan Subcommittee on Gambling and Organized Crime, Rosenthal questioned by, 3, 65, 66–67, 75, 105 McGee, Alice, 82, 85–87 McGee, Ingram, 86 McGee, Roy, 82, 85, 86, 87 McNair, Barbara, 181 Mafia, see mob bosses; organized crime maître d’s, 83, 160 Maldonado, Lawrence, 384 Manzi, Rick, 181 Marcus, Matt, 168 Marina, 198 Mark Seven Tavern, 30 Marlo, Josephine, 295, 301 Marmor, Lenny, 82, 85, 261–62, 385, 387 Geri Rosenthal’s relationship with, 82, 85, 86, 185, 187, 261–62, 311–14, 329, 331, Marmor, Robin, 82, 86–87, 88, 184, 185, 262, 309, 310, 311, 313, 314, 332, 384–85, 387, 388 Martin, Bobby, 78, 384 Martin, Charlotte, 384 Matecki, Wayne, 159, 176, 328, 363 Maus, Ronald, 384 Mazatlán, 242 meat companies, mob-owned, 123 Mendelson, Mark, 396–97 Mexico, 242 MGM, 14, 175 MGM Grand, 196, 229, 401 Miami, Fla., 23, 49 Rosenthal in, 57–65, 69 Michaels, Emmett, 326–27 Michigan, University of, 66 million dollars, weights of various forms of, 8, 197 Milwaukee, Wisc., 137, 138, 139, 140, 200, 203, 208 Minnesota Fats, 259–61 Mirage, 401 Miraglia, Jimmy, 31–36, 110 Mission Viejo Nadadores, 393 Mitchell, John, 3 mob, see organized crime mob bosses, 9–10, 45, 208 advice on automobiles from, 30 arrests of, 304–5 Clifford’s visit to, 360–61 fates of, 387–92 Glick’s meetings with, 150–54, 229–30, 235, 287–89, 390 kickbacks paid to, 48 plan to force out Glick by, 283–85, 290–91 potential witnesses ordered killed by, 369 Rosenthal’s handicapping for, 37, 55 Rosenthal’s relationship with, 37–41, 65, 107, 145, 189, 196, 266–67, 322–29, 348–49, 353 skimming by, 197–200, 201 and Spilotro’s affair with Geri Rosenthal, 327–29, 348–50, 353 Spilotro’s death and, 399 Spilotro’s Las Vegas activities and, 119, 129, 162–63, 180, 270, 272–73, 274–79 Stardust controlled by, 95, 103–4, 146, 148–49, 167, 242–43 see also organized crime Monaco, 50, 51 Monday night football, 78, 214 Monte Carlo, 50, 51 Mooney, Frank, 199, 234 motion detectors, 364 Mount Sinai Memorial Park, 387 Multiple Sports Service, 48 Murray, Rich, 359–60 My Place Lounge, 175, 179 National Collegiate Athletic Association (NCAA), 264 National Football League (NFL), 96 Neely, Steven, 135 Neumann, Larry, 162, 328, 363, 364 Nevada Gaming Control Board, 131, 139, 198, 239, 257–58, 289, 295–96, 317 Glick licensed by, 131, 139–40 Rosenthal’s connection to commissioner of, 212–13, 215, 217, 218, 219, 220–21 Rosenthal’s key-employee license denied by, 9, 104–6, 124, 146, 188, 196, 215–23, 296 Rosenthal’s lawsuits against, 227–28, 230–31, 252–53, 264–65 Rosenthal’s lawsuits against, rulings in, 250–51, 252 Stardust’s license suspended by, 392–93 Nevada Supreme Court, 252 Newport, Ky., 22 Newton, Wayne, 354 Nicoletti, Charles “Chuckie,” 30, 34, 35–36 nolo contendere plea, of Rosenthal, 3, 69, 75, 105 no-limit bets, 13 North Avenue Steak House, 112 North Bay Village Department, 62 North Carolina, Rosenthal’s college basketball bribery plea in, 3, 69–70, 75, 219, 253 O’Brien, John, 116 O’Callaghan, Mike, 217 odds spread, 13 Odessky, Dick, 129–30, 210–13 Oregon, University of, 66 organized crime: Jews in, 269 major Chicago figures in, 26 Spilotro’s introduction to figures in, 30 see also mob bosses Organized Crime Strike Force, 292, 366 Ouseley, Bill, 290, 304 outfit, see mob bosses; organized crime Palace Court Restaurant, 151 Palm Room, 148 paper, slang meaning of, 158 Paprocky, Ray, 69 Paris, 50 Parsons, Charlie, 369–72, 376, past-posting, 213 Patsy’s Restaurant, 26 Pavlikowski, Joseph, 91, 250, 252 Peck, Gregory, 274, 276, 277–78 Pellichio, Linda, 87–88 Percodan, 187–88 Petacque, Art, 116, 354 Peyton, Pam, 255–58 Pignatelli, Joseph “Joe Pig,” 234 Pinky (Rosenthal’s girlfriend), 261 pit bosses, 98 Pless, John, 400 point shaving, 66 point spreads, 13, 71–72, 78 police: bookmaking operations protected by, 21–22, 45, 57 police scanners, 161, 176 Presser, Bill, 141, 144 Price, Elliott, 77, 90 Pump Room, 144 Quaaludes, 176 Quinn & Peebles, 295 Race and Sports Book, 208–209, 244 Racketeer Influenced and Corrupt Organizations Act (RICO), 371 Rand, Tamara, 304–8, 281 Ranney, Frank, 138, 140–41, 201 Recrion Corporation, 129, 133, 136, 137, 144 Reliance Electric Company, 8 Ricca, Paul “the Waiter,” 26 Rice, Downey, 105 Rice, John, 374 Rich, Charlie “Cuby,” 298 RICO (Racketeer Influenced and Corrupt Organization Act), 371 Riviera, 107 Rockman, Milton Maishe, 304, 388, 390, 392 Rocky’s Lounge, 328 Roemer, William, 38–44, 114–16, 124–26, 400 Spilotro’s nickname bestowed by, 116 Rogers, Linda, 218 Rojas, Rosa, 172–75 Romano, Sal, 363, 364, 365, 367 room clerks, 244 Rose Bowl, 162 Rose Bowl Sports Book, 77, 94 Rosenthal, Frank “Lefty”: alcohol and, 190, 192 Beckley’s advice to, 45–48 betting terms used by, 55 birth of, 14 bugging of own phone by, 329–31 California move of, 393, 397 car bombing of, 1–2, 9, 10, 372–74 casino ban of, 402 casino work of, see Stardust character of, 2, 146, 147, 148, 202–4, 222, 284–85, 309–10, 316, 336 college basketball bribery nolo plea of, 3, 70, 75, 105, 219, 253 DeLuna’s code name for, 282 early criminal activities of, 3 FBI’s bugging of, 69 first bookmaking arrest of, 57 first marriage of, 88 first racetrack experiences of, 15 Florida race track ban against, 3, 69, 253 gambling and racketeering indictment against, 3 Gaming Control Board sued by, 230–31, 252–54, 264–66 Geri Rosenthal’s death and, 385–87 girlfriends of, 183, 232–33, 261, 310, 314–15, 319, 334 handicapping expertise of, 14–25, 51–57 key-employee license denied to, 9, 104–6, 124, 146, 188, 196, 215–23, 396 Las Vegas home of, 9 luck and, 13–14, 374 McClellan Subcommittee’s questioning of, 3, 65, 66–67, 75, 105 in Miami, 57–65, 69 move to Las Vegas by, 71–78 newspaper column written by, 254 nickname of, 3, 66 office of, 203 and proposed buyout of Glick, 283–85, 290, 291 racehorses owned by, 331 reputation of, 2, 8–9 second marriage of, see Rosenthal, Geri McGee self-investigation of, 217–18 on skimming, 238 skimming operations and, 245, 249 Spilotro’s relationship with, 53–54, 63–65, 110, 118–21, 124, 179–81, 192–93, 219–21, 230, 245, 246, 268–72, 316–18, 324, 333, 348–49, 353–54, 359, 375–76, 379, sports book-betting introduced to Las Vegas by, 2 television talk show hosted by, 9, 254, 255–61, 263–64, 315 twilight years of, 402 unhipness of, 190 wardrobe of, 9, 188 Rosenthal, Geri McGee, 9, 96, 121–22 alcohol and drug use of, 83, 92, 119, 184, 187, 189–94, 231–34, 307–8, 316, 319, 323, 332, 351, 382, 383, 384, 387 attempted shootings of Rosenthal by, 307–9, 338–43 background of, 85–88 chip hustling of, 78–81, 82, 92 as dancer, 78, 79, 82, 85, 86 death of, 383–87 estate of, 387–88 family of, 82, 85–86 independence of, 186–87 life after divorce of, 381–83 million-dollar jewelry gift from Rosenthal to, 233–34, 351 money as love of, 84–85, 320 old boyfriend of, see Marmor, Lenny physical beauty of, 78, 90–91, 193–94, 319, 324 in psychiatric ward, 350–51 quit claim agreement between Rosenthal and, 331 Rosenthal’s divorce from, 350–51 Rosenthal’s first meeting and early relationship with, 78–81, 83–85, 87, 88–91 Rosenthal’s relationship with, 91–93, 94, 183–94, 231–34, 261–63, 307–35, 336–52, 380, 381–83 safety deposit boxes of Rosenthal and, 233–34, 312, 314, 332, 339–43 Spilotro’s affair with, 234, 311, 312–14, 315, 321–35, 337, 343, 348–50, 353, 376 wedding of Rosenthal and, 91–93, 250 Rosenthal, Stephanie, 311, 385, 388 birth of, 184 competitive swimming by, 330, 331, 393–97 Geri Rosenthal’s relationship with, 184, 192–93, 318–19 in Rosenthals’ marital disputes, 318–19, 320–21, 331, 337, 351 Steven Rosenthal’s relationship with, 185, 192–93, 394–95 Rosenthal, Steven, 94, 183, 192, 263, 311, 381, 385, 388 competitive swimming by, 330, 331, 393, 394, 395 Geri Rosenthal’s relationship with, 233, 310 in Rosenthals’ marital disputes, 318–19, 320–21, 331, 351 Stephanie Rosenthal’s relationship with, 185, 193, 395 Rossen, Robert, 259 roulette wheels, 98 Russel, Barbara, 274–78 Sachs, Alan, 103, 107–9, 129 Sahara casino, 359–60 St.

Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees
by Patrick Dillon and Carl M. Cannon
Published 2 Mar 2010

Facing up to five years in prison, he also let regulators eavesdrop on his telephone conversations. The resulting subpoenas would ensnare other princes of Wall Street, among them junk bond magnate Michael Milken. At his zenith, in 1986, Milken awarded himself $550 million in bonuses, more than the yearly profit for Drexel Burnham Lambert, the 10,000-person company that employed him. Milken’s operation was handling 250,000 transactions a month and controlling as much as $10 billion in funds through junk bonds issued by nearly one thousand companies. Through this market rose a new breed of risk takers—corporate raiders Henry Kravis, Carl Icahn, Ron Perelman, Saul Steinberg, and T.

…

AT THE TIME HE purchased Lincoln Savings, Charlie Keating pledged to retain Lincoln’s experienced executives and continue its primary business of making home loans. He did not keep this promise. Within months all company officers were replaced by staffers from American Continental, and its home loan programs were gutted. Next, Keating—through Lincoln—purchased $2.7 billion in high-risk junk bonds, mostly from Michael Milken’s Drexel Burnham. These were far riskier waters than Lincoln had ever navigated, and the men at the helm had little experience in such ventures. Meanwhile, not liking the noise Ed Gray was making in Washington, Keating began doling out contributions to key congressional members—nearly half a million dollars in all.

…

The reprieve gave Lincoln Savings and Loan a green light to expand its tentacles, and within the next two years its reported assets grew on paper by nearly 40 percent, to $5.46 billion. The growth was driven by risky bets in raw landholdings, unsecured construction loans, and major increases in holdings of Michael Milken’s junk bonds. By then, the media were on to American Continental. The New York Times noted, “Lincoln, with assets of $4.9 billion and 25 branches in Southern California, has been a concern to regulators of the thrift industry because of its untraditional investment activities.” All the while, its dicey debentures were being hawked to customers such as Ramona Jacobs, the conservator for her paralyzed daughter.

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages
by Carlota Pérez
Published 1 Jan 2002

The top ones provide the life-blood for entrepreneurship and production; the lowest ones take blood out of the economy through manipulating paper wealth. 138 The Changing Nature of Financial and Institutional Innovations Table 13.1 139 A tentative typology of financial innovations Type and purpose of financial innovations A Instruments to provide capital for new products or services For radical innovations (bank loans, venture capital and others) To enable large investments and/or spread risks (joint stocks, bank syndicates and so on) To accommodate the financial requirements of new infrastructures (for both construction and operation) To facilitate investment or trade in novel goods or services B Instruments to help growth or expansion For incremental innovations or production expansion (like bonds) To facilitate government funding in different circumstances (war, colonial conquest, infrastructural investment, welfare spending) For moving (or creating) production capacity abroad C Modernization of the financial services themselves Incorporation of new technologies (communications, transport, security, printing and so on) Development of better forms of organization and service to clients (from telegraph transfers, through personal checking accounts and high street banking to automatic tellers and E-banking) Introduction of new financial instruments or methods (from checks to virtual money, local, national and international services and various types of loans and mortgages) D Profit-taking and spreading investment and risk Instruments to attract small investors (various forms of mutual funds, certificates of deposit, bonds, IPOs, ‘junk bonds’) New instruments to encourage and facilitate big risk taking (derivatives, hedge funds and similar) E Instruments to refinance obligations or mobilize assets To reschedule debts or restructure existing obligations (re-engineering, Brady Bonds, swaps and others) To buy active production assets (acquisitions, incorporations, mergers, takeovers, junk bonds) To acquire and mobilize ‘rent’-type assets (real estate, valuables, futures and similar) F Questionable innovations Discovering and taking advantage of legal loopholes (fiscal havens, off-the-record deals and so on) Discovering and taking advantage of incomplete information: ‘making money from money’ (foreign exchange arbitrage, leads and lags and similar) Making money without money (from pyramid schemes to insider trading and outright swindles) 140 Technological Revolutions and Financial Capital Type A and B innovations are those related to the basic role of finance as an intermediary in relation to production investment, either to initiate activities (A), or for growth, expansion and extension (B).

…

Frenzy: Self-Sufficient Financial Capital Governing the Casino 101 forms of mutual and hedge funds are the reinvention of age-old practices that resurface each time in periods such as this.135 According to Newsweek, the Long-Term Capital Fund, an exclusive hedge fund in the USA reserved only for the largest investors, which had to be rescued in 1998, ‘started the year with about $4.7 billion of investors’ capital, and it borrowed as much as $120 billion … That’s a mighty thin cushion if things go bad – which they did’.136 Derivatives, ‘junk bonds’ and other instruments serve as rakes to bring in capital for a wider than usual range of investment in productive assets and to make ‘everybody into an investor’, which is part of how the financial agents and the larger players increase their margins. The other route for imagination is diverting finance from wealth creation and simply finding whatever objects of speculation are at hand.

Planet Ponzi
by Mitch Feierstein
Published 2 Feb 2012

For every dollar that the nation created in income that year, the government owed just 32 cents. It had been a long way back from those wartime debt levels, but the road had been steadily trodden nonetheless. And then‌—‌something happened. Wall Street started to innovate. Leveraged buyouts funded by junk bonds became fashionable. The stock market soared. These were the years when the communist system collapsed; peace and prosperity reigned supreme. By all past standards, these conditions should have ensured a huge decrease in public debt. There was absolutely no reason why the nation needed to borrow.

…

Traditional corporate lending was a business in trouble, but Wall Street‌—‌the people who so energetically sold the benefits of securitization‌—‌was booming. Naturally, because this was Wall Street, there were bound to be a few little hiccups along the way. The ‘mezzanine debt’ market‌—‌that’s the junk bond market to you and me3‌—‌provided a great way for poor-quality borrowers to reach investors. Unfortunately, Drexel Burnham Lambert, the firm that created the market, went bust and its star, Mike Milken, went to jail. So too did Ivan Boesky, an insider trader who was also fined an eye-popping $100 million.

…

Or they could put their money on deposit in a bank. As the securities market opened up, they became able to build entire portfolios of corporate bonds. They no longer had to restrict themselves to blue-chip borrowers, the likes of General Electric and IBM. The creation of a market in sub-investment-grade debt‌—‌the junk bond market‌—‌meant all kinds of borrowers could now access investors directly, and vice versa. As these markets developed, investors began to realize that this new form of credit relationship didn’t have to be a lasting one. You could buy IBM bonds one day, wake up the next day and decide you wanted to invest in something else.

The Geography of Nowhere: The Rise and Decline of America's Man-Made Landscape
by James Howard Kunstler
Published 31 May 1993

The Trump Taj Mahal opened in April of 1990 and was technically bankrupt before the year was out. It drained business from every other casino in town while failing to attract enough business to cover its own debt payments. 3 Donald Trump, the New York-based real estate devel­ oper who built it and owns two other casinos in Atlantic City, financed the Taj largely with junk bonds-the junk bond being Wall Street's way of profiting off business people who think it is possible to get something for nothing. Standing on the Boardwalk this mild October day, one beheld the Trump Taj Mahal with that odd mixture of fascination and nausea reserved for the great blunders of human endeavor.

…

Unburdened by such mundane cares, he cast aside all restraint in the pursuit of economic " growth," and financed the next phase of . suburban expansion by encouraging the greatest accumulation of jebt in world history. Why worry about borrowing from the future when'-" you don't believe in the future ? His government ran up an unprece­ dented public debt, his securities regulators allowed corporations to borrow absurd sums by issuing high risk "junk" bonds, and personal credit was extended to any shmo who could sign his name on a retail receipt, until an alarming percentage of ordinary citizens were in hock up to their eyeballs. Reagan's bank deregulation and tax policies promoted gigantic and unnecessary land development schemes that benefited their backers even when the schemes failed by any normal standards.

…

S., 182 housing projects, 79 hOUSing starts, 147, 205 Howe, George, 75 Hudson Falls, N.Y. , 178 Hudson Valley, N.Y., 22-23 - I N D E X Hume, David, 152 Huntington, Collis P. , 208 Huntington, Henry E. , 208 Hussein, Saddam, 207 Greek Revival and, 153-54 Monticello and, 151 Johnson, Philip, 72, 76, 83 on International Style, 80-81 Jones, Inigo, 63, 157 Illinois Institute of Technology, 77, 80 impact fees, 223 "Jungle Cruise" ride (Disney World), 225 junk bonds, 110, 232 Indiana company, 25 individualism, 26-27 industrialism, 51 Kahn, Albert, 67, 77-78 Kahn, Otto, 53 art and, 40-41 Keats, John, 157 city life and, 34-37, 39 Kelbaugh, Doug, 262 Modernism and, 60-61 Kensett, John, 40 Mumford on, 35 Kentlands (Gaithersburg, Md. ), 258 nature and, 42 Khrushchev, Nikita, 222 suburbs and, 51 King, Rodney, 207 Tocqueville on, 27 Knudsen, William S. , 103 International Style, 73-76 Johnson on, 80-81 Interstate Highway Act (1956), Koppleman, Lee, 100 Krier, Leon, 255 Kuwait, 207 106-7 interstate highway system, 106-8 LaGuardia, Fiorello H . , 91 Interview, 80-81 Intolerance, 219 Laguna West (Sacramento, Calif. ), Iran-Iraq War, 110 Lake Forest, Ill., 55 Italy, 155 land: Ithaca, N.

Losing Control: The Emerging Threats to Western Prosperity
by Stephen D. King
Published 14 Jun 2010

Third, changes in domestic interest rates may shift global capital flows to a degree sufficient to alter the link between policy decisions and subsequent economic outcomes. For example, the Bank of England’s policy of raising interest rates more or less continuously from 2003 through to 2007 triggered huge capital inflows from abroad. These were then invested by UK financial institutions in low-quality junk bonds, helping fuel a real-estate boom. While the inflows also pushed up the sterling exchange rate, thereby keeping a lid on inflation, the economy as a whole became increasingly unbalanced, paving the way for the credit crunch that followed later in the decade. EMERGING ECONOMIES AND GLOBAL INFLATION: SIZE INCREASINGLY MATTERS Policymakers in emerging economies, understandably, have chosen to make economic growth a priority.

…

Put another way, although the Federal Reserve maintained control over short-term interest rates, it increasingly lost control of the longer-term interest rates that matter for businesses and households. The same applied in the UK where, as noted earlier, rising official interest rates were associated with falling yields on junk bonds. The global housing boom of recent years was partly the result of this distortion in the level of interest rates. Other countries also lost their grip on the monetary reins. Low interest rates in the US, combined with even lower interest rates in Japan and relatively high risk in some of the emerging markets, persuaded many investors to take advantage of so-called carry trades, borrowing in dollars or yen and reinvesting in higher-yielding currencies like sterling, the New Zealand dollar and the Icelandic krona.

…

(i) healthcare (i), (ii), (iii), (iv), (v), (vi), (vii) hedge funds (i), (ii), (iii) Hertz, Noreena (i) Hitler, Adolf (i) Hobbes, Thomas (i) Home Office (i) Hong Kong (i) ‘hot money’ inflows (i) housing market anarchy in capital markets (i), (ii) capital controls (i) population ageing (i) price stability (i), (ii), (iii), (iv) savings (i) trade (i) human capital theory (i) human ingenuity argument (i), (ii) Hume, David (i), (ii) Hungary (i) hunt for yield (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) Huntingdon, Samuel (i) Hutton, Will (i), (ii) hyperinflation (i), (ii) IFS see Institute for Fiscal Studies IMF see International Monetary Fund immigration economic integration, political proliferation (i) nationalism (i) number of migrants to US (i) political economy and inequalities (i), (ii), (iii) population demographics (i) Spain and silver (i) Immigration Act (i), (ii) Immigration and Naturalization Act (1965) (i), (ii), (iii), (iv) imperialism (i), (ii), (iii), (iv), (v) imports (i), (ii), (iii), (iv), (v), (vi) income inequality globalization (i), (ii) political economy and inequalities (i) education (i) the emerging gap (i) emerging nations and income inequality in the developed world (i) food shortages (i) globalization (i) living with inequality (i) new modes of redistribution (i) not getting just rewards (i) a three-country model (i) too much domesticity (i) United Kingdom (i) winners and losers (i) price stability and economic instability (i) resource scarcity (i) state capitalism (i), (ii) Western progress (i), (ii), (iii) the West’s diminished status (i) income per capita argument (i) incomes China (i), (ii), (iii), (iv) political economy and inequalities (i), (ii) price stability and economic instability (i), (ii), (iii), (iv), (v), (vi) rent-seeking behaviour (i) scarcity (i), (ii), (iii), (iv) trade (i), (ii), (iii), (iv) India anarchy in capital markets (i), (ii) Islam (i) political economy and inequalities (i), (ii), (iii), (iv), (v), (vi), (vii) population demographics (i), (ii), (iii) price stability and economic instability (i) rent-seeking behaviour (i) scarcity (i), (ii), (iii), (iv) state capitalism (i), (ii), (iii) trade (i), (ii), (iii), (iv), (v) the West’s diminished status (i), (ii), (iii), (iv), (v) Indonesia (i), (ii), (iii) Industrial and Commercial Bank of China Ltd (ICBC) (i) Industrial Revolution (i), (ii), (iii), (iv), (v), (vi) infant mortality rate (i), (ii), (iii) inflation anarchy in capital markets (i) economic integration, political proliferation (i) indulging the US no more (i), (ii) political economy and inequalities (i), (ii) population demographics (i), (ii), (iii) price stability and economic instability (i) back to the 1970s (i) defining and controlling inflation (i) emerging economies (i), (ii) inflation as an instrument of income and wealth distribution (i) inflation as a result of currency linkages (i) overview (i), (ii), (iii) from stability to instability (i) we are not alone (i) resource scarcity (i) state capitalism (i), (ii) trade (i), (ii) the West’s diminished status (i), (ii), (iii) information technology (i), (ii) Institute for Fiscal Studies (IFS) (i), (ii) interest rates anarchy in capital markets (i), (ii), (iii), (iv), (v), (vi) globalization (i) indulging the US no more (i), (ii) price stability and economic instability (i), (ii), (iii), (iv), (v), (vi), (vii) savings (i) state capitalism (i), (ii), (iii) trade (i) the West’s diminished status (i), (ii) International Monetary Fund (IMF) (i), (ii), (iii), (iv), (v), (vi) International Olympic Committee (i), (ii) Internet (i) investment anarchy in capital markets (i), (ii), (iii), (iv), (v), (vi) capital flows and nation states (i), (ii) economic integration, political proliferation (i) nineteenth century (i) political economy and inequalities (i) population demographics (i), (ii), (iii) price stability and economic instability (i) protectionism (i) resource scarcity (i) state capitalism (i) trade (i), (ii), (iii) investment banks (i), (ii) ‘invisible hand’ (i), (ii), (iii), (iv), (v), (vi) Iran (i), (ii), (iii), (iv), (v) Iraq (i), (ii), (iii) Ireland (i), (ii) Islam (i), (ii), (iii) Isutani, Minoru (i) Italy (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) Izvolsky, Count Alexander (i) Japan anarchy in capital markets (i), (ii), (iii), (iv) political economy and inequalities (i), (ii), (iii), (iv), (v) population demographics (i), (ii), (iii), (iv), (v), (vi), (vii) price stability and economic instability (i), (ii) scarcity (i), (ii) secrets of Western success (i), (ii) state capitalism (i), (ii), (iii), (iv) trade (i), (ii), (iii) US trade deficit (i) the West’s diminished status (i), (ii), (iii), (iv), (v) Jay, Peter (i) Jefferson, Thomas (i) jet airline industry (i) Jewish populations (i), (ii), (iii) Jin Mao Tower (i) Jones, Francis (i) Judt, Tony (i) junk bonds (i), (ii) juntas (i) Kamin, Steven B. (i) Kaplan, Stephen N. (i) keiretsu firms (i), (ii) Kennedy, John F. (i), (ii) Kennedy, Paul (i) Keynesianism (i), (ii) Keynes, John Maynard (i), (ii), (iii), (iv), (v), (vi) KGB (i) Khan, Genghis (i) Khan, Kublai (i) Kirchgaessner, Stephanie (i) Klein, Naomi (i) knowledge economy (i), (ii) Komatsu (i) Korea (i), (ii), (iii), (iv) Korean War (i) kudoka (‘hollowing out’) in Japan (i) Kuwait (i) Kuznets, Simon (i), (ii) labour capital markets (i) empires (i), (ii) political economy and inequalities (i), (ii), (iii), (iv) price stability and economic instability (i), (ii) rent-seeking behaviour (i) running out of workers (i) command over limited resources (i) demographic dividends and deficits (i) demographic dynamics (i) infant mortality (i) Japan: an early lesson in ageing (i) not the time to close the borders (i) pensions and healthcare (i) a renewed look at migration (i) scarcity (i) state capitalism (i) trade (i), (ii), (iii), (iv) the West’s diminished status (i), (ii) labour mobility (i), (ii), (iii), (iv), (v), (vi) Labour Party (i), (ii) land (i), (ii), (iii), (iv), (v), (vi) Latin America (i), (ii), (iii), (iv), (v), (vi), (vii) law (i), (ii) League of Nations (i) Leicester, Andrew (i) Lenglen, Suzanne (i) Lenin, Vladimir (i), (ii), (iii) Lennon, Emily (i) Leviathan (Hobbes) (i) Levi Strauss company (i) Levy, Frank (i), (ii), (iii) Lewis, Bernard (i) LG (i) liberal democracy (i), (ii), (iii), (iv), (v) life expectancy (i), (ii), (iii), (iv), (v) Lincoln, Abraham (i) liquidity (i), (ii), (iii) Liverpool FC (i) living standards anarchy in capital markets (i), (ii), (iii) capital controls (i) demographic dividends and deficits (i) political economy and inequalities (i), (ii) price stability and economic instability (i), (ii) scarcity (i), (ii), (iii), (iv), (v), (vi), (vii) trade (i) London (i), (ii), (iii) London Electricity plc (i) L’Oréal (i) Louisiana Purchase (i), (ii) Louis XVIII (i) Louvre accord (i) Lucas, Edward (i) Luther, Martin (i) Macmillan, Harold (i) macroeconomic policy (i), (ii), (iii) Maddison, Angus (i), (ii), (iii) Magna Carta (i) malaria (i) Malaysia (i) Malta (i) Malthusian constraint political economy and inequalities (i), (ii), (iii), (iv) population demographics (i) price stability and economic instability (i) rent-seeking behaviour (i), (ii) scarcity (i) state capitalism (i) Malthus, Thomas (i), (ii), (iii) Manchester City FC (i), (ii) Manchester United FC (i) manufacturing (i), (ii), (iii) Mao Zedong (i), (ii), (iii), (iv) market forces political economy and inequalities (i), (ii) scarcity (i), (ii) secrets of Western success (i), (ii), (iii) state capitalism (i), (ii) Western progress (i), (ii) the West’s diminished status (i), (ii) Marks, Catherine (i) Marxism (i) Marx, Karl (i), (ii), (iii) McDonalds (i) meat-based diets (i) Medicare (i) Medvedev, Dimitry (i), (ii) metals (i), (ii), (iii), (iv), (v) Mexico anarchy in capital markets (i), (ii) migration (i) monetary union (i) Spain and silver (i) trade (i), (ii), (iii), (iv) Meyer, Sir Christopher (i) Microsoft (i) Middle East (i), (ii), (iii), (iv), (v), (vi) migration globalization (i), (ii), (iii) political economy and inequalities (i), (ii), (iii) population demographics (i), (ii) scarcity (i) Spain and silver (i) military action (i), (ii), (iii), (iv), (v) Mill, John Stuart (i) Minder, Raphael (i) Ming Dynasty (i), (ii) minimum wage (i) Mitsubishi Estate Company (i), (ii) mobile phones (i) monetarism (i), (ii) monetary policy (i), (ii), (iii), (iv), (v), (vi) Monetary Policy Committee (i) money supply (i), (ii), (iii) Mongols (i), (ii) monopolies (i), (ii) Morgan, Darren (i) mortgages (i), (ii), (iii) multinationals (i), (ii), (iii), (iv), (v), (vi), (vii) Muslims (i), (ii) Nabucco (i) Napoleon Bonaparte (i) Napoleonic Wars (i) nationalism globalization (i), (ii), (iii) political economy and inequalities (i), (ii) state capitalism (i) the West’s diminished status (i), (ii), (iii) xenophobia (i) nation states (i), (ii), (iii), (iv), (v), (vi), (vii) NATO (North Atlantic Treaty Organization) (i), (ii), (iii), (iv) natural gas (i), (ii), (iii), (iv) The Netherlands (i), (ii) ‘new economy’ (i) New Orleans (i) Newton, Sir Isaac (i) New York (i) New York Times (i) New Zealand dollar (i) Nicolson, Sir Arthur (i) Nigeria (i) Nixon, Richard (i), (ii) Nord Stream (i), (ii), (iii) North American Free Trade Association (i), (ii), (iii) North Atlantic Treaty Organization see NATO Norway (i), (ii) Nozick, Robert (i) nuclear technology (i), (ii), (iii), (iv) nutrition see diet; food Obama, Barack (i), (ii) Obama, Michelle (i) Obstfeld, Maurice (i) O’Dea, Cormac (i) OECD see Organization for Economic Co-operation and Development Office for National Statistics (i), (ii), (iii) off-shoring (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) oil indulging the US no more (i), (ii) political economy and inequalities (i), (ii), (iii) price stability (i), (ii), (iii), (iv) scarcity (i) state capitalism (i), (ii) Oldfield, Zoë (i) Olympic Games (i), (ii), (iii) one-child policy (i), (ii) On the Principles of Political Economy and Taxation (Ricardo) (i), (ii) OPEC (Organization of the Petroleum Exporting Countries) (i) Opium Wars (i), (ii) opportunity cost (i), (ii), (iii) Oregon (i) Organization for Economic Co-operation and Development (OECD) (i), (ii), (iii) Organization of the Petroleum Exporting Countries (OPEC) (i) Ottoman Empire (i), (ii), (iii), (iv) outsourcing (i), (ii), (iii), (iv), (v), (vi), (vii) Owens, Jesse (i), (ii) ownership (i), (ii) Oxford University (i) P&O (i) Pakistan (i) Panama (i) Pearl Harbor (i) Pebble Beach, California (i) Pennine Natural Gas (i) pensions anarchy in capital markets (i), (ii), (iii) population demographics (i), (ii), (iii), (iv), (v), (vi), (vii) price stability and economic instability (i) scarcity (i) the West’s diminished status (i), (ii), (iii) People’s Bank of China (i) Perloff, Jeffrey M.

Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required
by Kristy Shen and Bryce Leung
Published 8 Jul 2019

AA is even better than A, and AAA is as high as you can go—basically risk-free. The term “corporate bonds” indicates bonds that are “investment grade,” or have a rating of BBB− or higher (using the Standard & Poor’s scale). Anything below that is considered a “high-yield” bond, or less politely, a “junk” bond. I’ve owned junk bonds and they are exceptionally volatile. They pay a juicy yield over government bonds, but man, do they swing in value. They typically include companies in sectors like air travel, oil and mining, and tech, so while their yield is sweet, their prices swing like equities, so ultimately I don’t recommend them.

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See also specific insurance interest income Cash Cushion and Yield Shield, 180, 187 taxes and, 123, 124, 137–40, 140, 142, 154 interest rates on debt, 36–39, 43, 44, 44, 45 international indexes, 100 internship experience, 15, 16, 48 investing (power of more), 88, 89, 90–99, 95–96 investment funds, picking (Step 3 of Modern Portfolio Theory), 108–10, 110, 120 investment income vs. earned income and taxes, 122 investments, personal finance, 268–69, 269, 270–72 the Investors (millionaires), 271, 271–72, 274, 275 IOU = I Own You, 34–45, 78–79, 197 IRS, 41, 126, 127, 128, 129, 132, 146, 147 Jackson, Samuel L., 82 Jacobson, Jeremy, 233, 234, 235, 236, 237, 238, 239, 245, 246 Janoff-Bulman, Ronnie, 63 Japan, 34, 191, 191, 194, 221 JLCollinsNH.com, 93 Jobs, Steve, 27, 270, 271, 274–75 Joe’s story, 59–60 jogging to work, 69, 71 junk bonds vs. corporate bonds, 182–83 Kaguri, Twesigye Jackson, 24 Khalaf, Mario (“the Fixer”), 57–58, 59, 61 kids, 212, 232–46, 249 kindergarten, 46, 47, 79 King, Stephen, 27 Kiyosaki, Robert, 87, 159, 269, 271 Kobe beef, 189, 192 Kuomintang (Nationalist Party), 22 lawyers, 31, 31–32, 81, 82, 82, 83, 84, 84 Lehman Brothers, 113 Leung, Bryce becoming wealthy, 174–75, 178, 186, 190, 197–98, 203, 219, 273 middle class, 56, 57–58, 66, 79, 80, 100–101, 105, 110, 111, 112, 113, 115, 117, 122, 160, 164, 169 See also quitting like a millionaire Liberti, Lainie, 233, 240–41, 245 life insurance, 222, 223–25, 231 Little Miss Evil (Leung and Shen), 252, 252 A Little Princess (Burnett), 14 loan forgiveness (student debt), 41–43, 45 loans, refinancing, 38–39 lobbyists, 122 locked-in accounts, 208–9, 208–10 Locked-in Retirement Account (LIRA), 208 London Stock Exchange (FTSE 100), 106, 107 long-term capital gains and taxes, 138, 153, 226 loopholes, taxes, 122, 127–30, 130, 135 lost house key, author’s story about, 8–9, 80 MacDonald, Kyle, 160 the magical number that saved me, 156–70, 277–97.

Stock Market Wizards: Interviews With America's Top Stock Traders
by Jack D. Schwager
Published 1 Jan 2001

I didn't have a whole lot of respect lor him as a portfolio manager. I'll tell you one story that is a perfect example. During the time I worked for him, junk bonds had become very popular. Henry had a friend at a brokerage firm who offered to give him a large account if he could manage a junk bond portfolio. We had no clue. Henry gave us all a book about junk bonds and told us to read it over the weekend. The following Monday we began trading junk bonds; Henry was the manager, and I was the trader. The book had said that the default rate was 1 percent, which turned out to be completely bogus. The whole thing ended up blowing up and going away.

Cable Cowboy
by Mark Robichaux
Published 19 Oct 2002

When Sharon took Bob shopping a few days later in a nearby sporting goods store, Sharon offered to buy him several shirts he had picked up. But Magness stopped her. The message was clear: Let’s wait and see whether I make it.2 Desperate to help, Malone called Michael Milken, the junk bond impresario who had pleaded guilty to breaking securities laws in 1990 and later staged a remarkable comeback from prostate cancer. TCI had been a client of Drexel Burnham Lambert’s in the 1980s, 9486_Robichaux_03.f.qxd 8/28/02 9:54 AM Page 199 De at h of a C owboy and Milken’s junk bonds had financed much of the cable industry. For the first time, Malone sought his counsel on a topic unrelated to financial deals. Milken urged Malone to rush Magness to the University of Virginia hospital in Charlottesville, renowned for its gamma-ray knife, a new tool that dispensed radical radiation to shrink tumors.

…

As he listened, Malone could hear the anguish and exhaustion in Turner’s voice from fending off the wolves. Soon, Turner was in still deeper trouble, and in a panicked call to Malone, he quickly worked himself into a manic rant. Turner’s stock had tanked, and if it dropped too low, the terms of his MGM deal (arranged by Mike Milken, the Drexel Burnham Lambert junk bond king) would require him to issue financier Kirk Kerkorian, who had sold him MGM, more shares to make up for their lower value. That would dangerously dilute Turner’s control of his company. Another frantic call from Turner awoke Malone around 6 A.M. Malone, barely awake, could only listen as Turner yelled: “ You’ve got to do something!

…

Mark would later resign his post after the company overextended itself, spending $5 billion on cable properties without the promise of quick revenues. In 1999, Malone increased his stake in his old buddy’s company from 7 to 45 percent. Malone’s price got cheaper as the stock fell. Later, with UGC’s and UPC’s debt reaching $8 billion, a Liberty affiliate bought $1.4 billion of UGC’s junk bonds at 40 cents on the dollar, lent the company more money, and bought more stock. The total price, as the financial press reported, was a mere $2 billion for a company that was valued at nearly $13 billion only 24 months earlier. Malone would end up with a 75 percent chunk of the equity and 90 percent of the voting rights.2 Though Murdoch’s News Corp.’s satellite holdings could compete against UGC in some markets, Malone saw no problems when asked about the relationships.

The System: Who Rigged It, How We Fix It
by Robert B. Reich
Published 24 Mar 2020

By the mid-1980s, some in Congress considered possible curbs on the raiders. A bill proposed by Wisconsin senator William Proxmire, then chair of the Senate Banking Committee, aimed to curb the takeover frenzy. His bill would also have given management more leeway to protect their companies against takeovers financed by risky (junk) bonds. Beryl Sprinkel, then chair of Reagan’s Council of Economic Advisors, testified against Proxmire’s bill, telling the banking committee that the takeovers were making American industry healthier and the nation wealthier. “They improve efficiency, transfer scarce resources to higher valued uses and stimulate effective corporate management,” he said.

…

Public policies that emerged during the New Deal and World War II had placed most economic risks squarely on large corporations through strong unions, antitrust enforcement, and laws compensating workers for injuries, providing forty-hour workweeks with time-and-a-half for overtime, unemployment insurance, Social Security, and employer-provided health benefits (wartime price controls encouraged such tax-free benefits as substitutes for wage increases). But in the wake of the junk-bond and takeover mania of the 1980s, economic risks were shifted to workers. Corporate executives did whatever they could to reduce payrolls—outsource abroad, bust unions, install labor-replacing technologies, and utilize part-time and contract workers. New laws and regulations smoothed this transformation.

Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier
by Edward L. Glaeser
Published 1 Jan 2011

New York reinvented itself during the bleak years of the 1970s when a cluster of financial innovators learned from each other and produced a chain of interconnected ideas. Academic knowledge about trading off risk and return made it easier to evaluate and sell riskier assets, like Michael Milken’s high-yield (junk) bonds, which made it possible for Henry Kravis to use those bonds to get value out of underperforming companies through leveraged buyouts. Many of the biggest innovators acquired their knowledge not through formal training but by being close to the action, like mortgage-backed security magnate Lewis Ranieri of Liar’s Poker fame, who started in the Salomon Brothers mailroom.

…

The artistic renaissance in Florence was one such explosion; the industrial revolution in Birmingham and Manchester was another. The growth of finance in late-twentieth-century New York was encouraged by just such an innovation, the ability to quantify the trade-off between risk and return, which made it easier to sell investors riskier assets, from junk bonds to mortgage-backed securities, which in turn enabled riskier, high-return activities, like leveraged buyouts of underperforming companies such as RJR/ Nabisco. Today’s hedge-fund billionaires are only the latest links in a long chain of connected innovators. For the millions worldwide who look askance at all of New York’s financial innovation, Michael Bloomberg’s story, in which a smart trader became an entrepreneur in another sector, might be easier to embrace.

…

In eighteenth-century Vienna, Haydn passed his symphonic ideas to his friend Mozart and his student Beethoven. The great chains of artistic innovation forged by painters or composers who live together in dense cities bear a striking resemblance to the far more prosaic chain of urban innovations that gave us junk bonds, leveraged buyouts, and mortgage-backed securities. Pundits and critics have long argued that improvements in information technology will make urban advantages obsolete. Once you can learn from Wikipedia in Anchorage, why pay New York prices? But a few decades of high technology can’t trump millions of years of evolution.

One Up on Wall Street
by Peter Lynch
Published 11 May 2012

Between the domestic buyout groups (Kohlberg, Kravis, and Roberts; Kelso; Coniston Partners; Odyssey Partners; and Wesray), the European firms and buyout groups (Hanson Trust, Imperial Chemical, Electrolux, Unilever, Nestlé, etc.), and the individual corporate raiders with sizable bankrolls (David Murdock, Donald Trump, Sam Hyman, Paul Bilzerian, the Bass brothers, the Reichmanns, the Hafts, Rupert Murdoch, Boone Pickens, Carl Icahn, Asher Edelman, et al.) any company, large or small, is up for grabs. The popularity of the leveraged buyout, or LBO, through which entire companies or divisions are “taken private”—purchased by outsiders or by current management with money that’s borrowed from banks or raised via junk bonds. The phenomenal popularity of these junk bonds, as first invented by Drexel Burnham Lambert and now copied everywhere. The advent of futures and options trading, especially of the stock indexes, enabling “program traders” to buy or sell bushels of stocks in the regular stock markets and then reverse their positions in the so-called futures markets, throwing around billions of dollars for tiny incremental profits.

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Charles, 75–76 Hoffman, Dustin, 119 Holiday Inn, 36, 128, 137, 176–79, 254 Holmes, Susan, 57 Home Depot, 12, 25, 26, 247, 268 Home Shopping Network, 149–50 Honda, 251 Honeywell, 109 Hop-In Foods, 54 houses, as investments, 77–80 Houston Industries, 75, 112, 113 Hughes, Howard, 138 Hughes Aerospace, 201 Hyman, Ed, 85 Hyman, Sam, 279 Iacocca, Lee, 131, 193 IBM, 59, 64, 66, 111, 131, 152, 153, 160 1970 antitrust case of, 277 Icahn, Carl, 64, 257, 279 Imo Delaval, 134 Imperial Chemical, 279 Inco, 128, 140, 247, 253 index funds, 281 Individual Retirement Accounts, 285 Industrial National Bank, 207 industries: companies and, 110, 111, 118, 119 competition in, 139 complex vs. simple, 130 high-growth, 139 maturity of, 188–89 negative-growth, 152 no-growth, 63, 139–40 inflation, long-term rate of, 70 initial public offerings (IPOs), of stocks, 159 Insiders, The, 143 insider trading, 135, 142–43, 180 Insilco, 288 institutional ownership of stocks, information on, 136, 143 insurance companies, preapproved stock lists of, 60 Integrated Circuits, 159 Intel, 15, 21, 25, 26 Intelogic Trace, 134 interest, compounded, 67–68 interest rates, 68, 72–73, 85, 172, 287 Interlake, 134 International Dairy Queen, 144 International Harvester, 145, 230 International Nickel, 128 International Shiphold, 134 International Textbook, 51–52 Internet, 10–17 Interstate Department Stores, 124, 133, 248 Intertan, 134 inventories, 215–16, 253, 255 investment: amateur vs. professional, 31–32, 35–36 in bad vs. good markets, 48 brokerage firms and, 184–86, 197, 199, 249–50 common knowledge and, 35–40 common misconceptions of, 258–269 in debt, 67, 70 formulas for, 129 ignorance and, 40, 60–61 individuality and, 66 long-term, 19–20 personal attitude toward, 45, 81, 237, 267–68 personal experience and, 95–97, 98, 122, 127, 130 personal risks of, 80 preserving capital vs. making profit with, 49 professional vs. consumer knowledge and, 100–102 in real estate, 77–80 research for, 32, 35–41, 42, 74, 106–8, 183–84, 186–97 rumors and, 250 skill in, 73–74 summary evaluation of, 227–33 when to buy in, 245–47 when to sell in, 247–49, 251–57 Investor’s Daily, 143 Investor’s Intelligence, 81 IU International, 134 Jacobs, Irwin, 257 Jaguar, 251 John Blair, 134 John Hancock, 48 John Harland, 246 Johns-Manville, 124, 264 Johnson, Edward C., II, 51 Johnson, Edward C. (Ned), III, 51, 53, 54, 69 Johnson, Lyndon B., 277 Johnson, Mister, 51–52 Johnson & Johnson, 98, 108 Johnson Chart Service, 76 JP Stevens, 188–89 junk bonds, 280 Kaiser Industries, 259–60 Kaufman, Henry, 148 Kay-Bee Toys, 155 Kellogg, 34, 75, 118, 207, 228 Kelso, 279 Kennedy, John F., 276 Kenner Parker, 134 Kentucky Derby, 51 Kentucky Fried Chicken, 52 Keynes, John Maynard, 275 Killeen golf course, 28 KLM, 107 K mart, 155, 169, 280 KMS Industries, 158 Kohlberg, Kravis, and Roberts, 279 Kraft, 133, 134, 218 Kress, 155 Laclede Gas, 71 Lance, 249 Lane Bryant, 223 La Quinta Motor Inns, 36, 59, 110, 192, 249 as fast-growing company, 176 history of, 176–80 as multibagger, 35 Lassie Dog Food, 192 L’eggs, 40, 192 and Hanes, 107, 198, 229 history of, 36–38 Lerner, 223 leverage, real estate and, 78 leveraged buyouts, 279–80 Lewis, Brad, 211 Lexan plastic, 198, 229 Liberty Corp., 126 Liedtke, Hugh, 205 LIFO, 215–16 Limited, The, 95, 181, 193, 219, 246 earnings of, 164 history of, 38–40, 223 stock chart of, 168 Wall Street and, 57–58 Lions Club, 53 Lockheed, 123, 201, 230 Loeb, Gerald, 239 Loew’s, 155 London stock market, 29 Long Island Lighting, 288 long-term investing, 19–20 Loomis-Sayles, 56 Lorillard, 155 Los Angeles Times, 141 Louisiana BayouFeedback, 145 Lowe’s, 25, 26 LTV, 90, 128 Ludlow Manufacturing, 48 Lukens Corp., 207, 266 Lynch, Carolyn, 11, 27, 36, 37, 52, 56, 98n, 127, 192, 193, 287 Lynch, Peter: caddy experience of, 48 family stock market advice to, 48, 49 Fidelity Magellan fund administered by, 9, 10, 22, 53–54 in U.S.

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them
by Nouriel Roubini
Published 17 Oct 2022

Tax considerations also lure them to lenders even if more debt adds risk. Once touted as a mark of peak financial form, meaning ultra-low debt ratios, triple-A credit ratings have lost their luster at strong companies that would rather exploit tax advantages to boost earnings. In the 1980s, bonds below investment grade, better known as junk bonds, fueled an appetite for hefty debt loads. As borrowers learn, a loan is a contract. Interest must be paid in good times or bad, and maturing debt must be retired when due or else refinanced with a new loan. Equity investments, on the other hand, collect a share of dividends that issuers can raise, lower, or eliminate as conditions require.

…

Cash flow at nearly 17 percent of the world’s forty-five thousand public companies could not meet interest costs over three years through 2020, according to data reported by FactSet.4 Indeed, given cheap borrowing costs, thanks to central banks’ unconventional policies, many corporate firms—already highly indebted—borrowed more during the COVID-19 crisis and became bigger zombies. Their overborrowing came home to roost in 2022. Monetary policy tightening by the Fed sharply increased the spread that “high yield” bonds paid relative to safe bonds, thus vastly increasing the borrowing costs of leveraged firms that rely on “junk” bonds. Then, defaults started to increase. Bailing out zombies just delays inevitable bankruptcy, which is good news only for the lawyers charging by the hour. At some point, MegaCorp will face a bankruptcy and restructuring. The restructuring process can be painful for many lenders and many workers.

…

While banks were being more carefully regulated, shadow banks proliferated, creating financial arrangements that kept risk beyond the scope of regulators and fed a corporate debt bubble. From 2014 on it was the time when corporate debt exploded, especially among risky and leveraged firms as well as “fallen angels,” a term for companies whose high debt caused their credit ratings to plummet from investment grade to junk bond levels. Non-bank financial institutions created new forms of risk lending. Covenant-lite loans had weak protections for lenders in case of default. Collateralized loan obligations (CLOs) that securitized bundles of corporate loans resembled infamous securitized collateralized debt obligations (CDOs) of the subprime crisis.

Working the Street: What You Need to Know About Life on Wall Street
by Erik Banks
Published 7 Feb 2004

And I feel especially lucky that my tenure spanned important, exciting, and wrenching times—actually, some of the most intense in the history of the business world. From the time I arrived as a completely green but very eager banker-in-training in 1986 until the day I left in 2002, Wall Street went through absolutely tremendous peaks and troughs: the Latin debt crisis, the U.S. savings and loan crisis, the rise and fall (and subsequent resurrection) of junk bonds and corporate takeovers, the decade-long global stock market bull run, the bursting of Japan’s enormous economic bubble, the pulverization of several high-flying Asian and Latin econo- xii | W o r k i n g t h e St r e e t mies, the collapse of some big hedge funds, the unreal Internet and technology boom and bust, the corporate accounting scandals and government privatizations, the implosion of communism, the wars, the peace, and everything in between.

…

Though they may have to tighten the belt a bit, cut a few costs elsewhere, curtail travel and entertainment, they cannot, and will not, risk losing key players over a few bonus dollars (well, okay, more than a few). That would be shortsighted. If the firm can’t pay its head industrial investment banker (a renowned rainmaker) enough one year, someone else down the block will, and she’ll walk. If it can’t properly pay the 15-person junk-bond team that is the envy of all of Wall Street, there is always some other firm that will go to the well and hire them away. Whenever good people are lost, firms have to replace or rebuild, losing precious time, money, and resources. So if you happen to be in that elite group of special folks who are recognized as vital to revenues and franchise growth, expect to be paid well, whatever the market cycle.

Why We Can't Afford the Rich
by Andrew Sayer
Published 6 Nov 2014

Adding insult to injury was the rise of ‘the leveraged buyout’, a practice so monstrous in its parasitism that it’s a wonder it’s legal. Here, the would-be buyer borrows vast sums, often through issuing junk bonds (with tax deduction on the debt), to buy out a company – and then loads them up with debt to pay for the buyout. In some cases, this has reduced corporation tax payments to zero – a direct subsidy to parasitic rentiers. The bought-out company then has to cut costs – and often the workforce – in order to fund the junk bonds. This was a prime cause of the ‘downsizing’ of companies in the 1980s and 1990s. So there was a direct link between the rise in unearned income going to the tiny minority who could afford to buy such bonds and the loss of earned incomes of those workers who were displaced following leveraged buyouts.79 Imagine you have worked for years in a business that is then subjected to a leveraged buyout.

…

The demand for more securities to ‘invest’ in encouraged the financial sector to create ever more financial products that would deliver ‘yield’.45 This it did by relaxing standards and increasing risks – most infamously in the case of sub-prime mortgages. In the US, tax cuts for the rich in the 1980s and 1990s also fuelled the flow of funds to buy junk bonds from companies that were raising cash to buy out other companies. Deregulation of banks allowed them to shift beyond the traditional ‘retail’ business in which they took in households’ and firms’ deposits and lent money out to others. Increasingly they used their other resources to speculate and deliver shareholder value by leveraging – borrowing money cheaply in money markets in order to make bigger ‘investments’ (bets on the value of financial assets).

…

But active rentiers compete endlessly for the highest gain at each moment by continually moving their funds between whichever financial markets seem to offer most. It’s now rare for bondholders to hang on to their bonds for the full duration of the bond, and most prefer to play the bond market continually; indeed, on average, bonds are held for about a month. In the 1980s the growth of leveraged buyouts funded by bonds – often called ‘junk bonds’ – boosted the market. So too did the spread of capitalisation of streams of income of diverse sorts, as these were used by organisations to finance new issues of bonds. Bonds issued by governments (‘public’ or ‘sovereign’ debt) have usually been regarded as the safest, because governments can supposedly just raise taxes in order to pay debts, and so bondholders looking for a secure place to store their wealth buy such bonds even though the rate of interest is low.

The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History
by Kirsten Grind
Published 11 Jun 2012

While both men possessed an exceptional ability to digest complicated financial reports, Longbrake—who comes from a family of Presbyterian ministers and is a talented piano player—believed he could run internal operations better. More worrisome for Longbrake was that Killinger, who had spent his career as a money manager, tended toward the risky side. He thought about Killinger’s recent foray into junk bonds. Other troubled savings and loan banks had started issuing debt to raise money. The bonds came with a high interest rate because they weren’t rated very high. One of them came from Centrust, a savings and loan bank in Florida (whose chairman would later be famously convicted of fraud). The banks were in trouble and the risk of default was high.

…

The banks were in trouble and the risk of default was high. The banks started closing. Pushed by national financial reform, the market collapsed. Washington Mutual had to set aside $14 million to cover the losses on the bonds, more than three times the amount of the previous year.14 Earnings suffered. When Killinger brought up the idea of investing in junk bonds, Pepper had seen it as a creative, relatively safe way to raise more money. He appreciated Killinger’s looking for ways to expand the business. Both executives failed to anticipate the rapid downturn of the market. They had no way of knowing that the government would pass new legislation that would render those investments worthless.

…

See secondary market; shareholders/investors, WaMu; type of investor irrational money lenders, Killinger’s comment about, 163, 170, 240 Jenne, Kevin, 112–18, 167–68, 170–72 Jiminez (Ramona and Gerardo) family: mortgage loan to, 154–57, 172–73, 331–32 Johnson, Earvin “Magic,” 141–42 JPMorgan Chase assets of, 229 Bair meetings with representatives from, 232–33, 266, 316 Bank One acquisition by, 104–5, 230 Bear Stearns acquisition by, 187, 232, 246, 325, 329 board of, 295 bundling of mortgage-backed securities by, 120 Dimon appointment as president and COO of, 105 FDIC-OTS relationship and, 251 FDIC relationship with, 232, 246, 316 Great Depression and, 212 high-risk mortgages at, 138 home equity loans at, 325 investor conference call at, 301, 304 as largest company in world, 329 lawsuits against, 326 losses at, 325 Morgan Stanley acquisition rumors and, 287, 293 OTS/Reich and, 233–35, 283 philanthropy of, 326–28 political connections of, 231 regulators’ meetings with, 232–34 Rotella hiring of employees from, 107 SEC protection from naked short selling of, 247 shareholders at, 325 subprime mortgages and, 325 TARP and, 315, 328 See also JPMorgan Chase, WaMu and; specific person JPMorgan Chase, WaMu and acquisition of WaMu by, 3, 4, 6, 7, 300, 321–22 bidding for WaMu by, 300, 316–17 Chapman’s (Fay) recommendation to sell WaMu to, 179 closure of WaMu and, 301, 316–17 conversion of WaMu by, 320–24 direct negotiations for JPM acquisition of WaMu and, 189, 195, 229–38, 238n FDIC sale of WaMu and, 274–75, 289–90, 292–93, 298, 300, 316–17 and Fishman attempts to sell WaMu to JPM, 271–72 and funding for WaMu acquisition, 301, 304, 304n hostile takeover of WaMu proposal by, 245–46 Moody’s downgrade of WaMu and, 290 Paulson’s views about WaMu offer from, 248 plans for acquisition of WaMu by, 266, 274–75, 275n, 283–84, 295 press conference of, 4 profits on WaMu purchase by, 328–29 renegotiation of WaMu borrowers with, 332 rumors about WaMu deal with, 267, 268 rumors about WaMu health and, 214 Santander-JPM bid-rigging allegations and, 282n and WaMu as government-assisted deal, 266 WaMu online data room and, 291, 322 and WaMu sale as “government assistance” transaction, 246, 246n WaMu stockholders and, 245–46 junk bonds, 28 Justice Department, U.S., 60, 332 Kashkari, Neel, 315 Kaufman, Ted, 126, 330 Kelly, Edward “Ned,” 289, 298 Keystone Holdings, 42 Kido, Ken, 209–10, 281 Killinger, Brad, 29, 33, 37, 45, 81 Killinger, Bryan, 29, 33, 35, 36, 37, 45, 81 Killinger, Debbie, 29, 30, 33, 34–36, 37, 43, 45, 46, 79, 80–84, 88, 311 Killinger, Karl, 33–34, 35, 37 Killinger, Kerry absence from Seattle office of, 93–94 as Alexander the Great, 88 appearance of, 88, 189 appointment as president and CEO of, 30, 309 Baker e-mail about housing to, 152 as “Banker of the Year,” 87 blame for WaMu problems and, 241, 330 board memberships of, 83 board regulators meeting and, 192–93 caricatures of, 49, 322 compensation for, 45, 94, 104, 174, 205 congressional testimonies of, 329–31 corporate jets and, 88–89, 97, 174, 205 demands for resignation of, 195, 205 dilemma of, 121–22 employee views about, 93–94, 177, 180, 201–2, 241–42 FDIC lawsuit against, 333–34 firing of, 3, 252–53, 254, 263 five emissaries meeting with, 203–6 hiring by, 98–99 Linda thanked by, 196 management style of, 52, 55, 57, 62–63, 87, 96, 123, 174–76, 177 marginalization and isolation of, 201–2 marital problems of, 80–83 McKinsey review and, 241–42 McMurray’s report and, 186–87, 201 media criticisms of, 102, 308 nickname for, 33 NYSE bell ringing and, 54 optimism of, 173–75 organization and structure of WaMu and, 67, 96, 101, 108 OTS pressures to replace, 255 Pepper’s advice to, 102–4, 133–35, 133n Pepper’s CD gift to, 30–31 Pepper’s hiring of, 18, 19 Pepper’s relationship with, 149, 309 as Pepper’s successor, 27–31, 205 Pepper’s views about, 29–30, 87, 102–4 Pepper’s visits to WaMu and, 148 personal life of, 33–38, 45–46, 52–53, 80–84, 94 personality and character of, 28–29, 36–37, 43, 44, 45–46, 47, 53, 87–88, 90–91, 102, 105, 132, 135, 173–75, 199–200 plans/vision for WaMu of, 67, 85, 86, 87, 88, 96, 108, 109, 122–23, 228–29, 240, 241 political connections of, 231 popularity of, 87, 93 potential successors to, 106, 107, 175, 202 professional background of, 18–19, 28, 29, 37, 38 reputation/image of, 43, 44, 88, 99 resignation thoughts of, 175 sale of WaMu and, 179, 330 Seattle office of, 32–33, 95 severance package for, 258 shareholder/investor relations and, 47, 55, 81–82, 102, 173, 188, 189–91, 193–200 shareholder lawsuits against, 102, 178 stress on, 190, 241 surprise birthday party for, 79–80 as WaMu board chairman, 30, 200, 239, 240–41, 309 WaMu board relationship with, 164–65, 170, 186–87, 239 WaMu as “category killer” and, 91 WaMu culture/values and, 94–95, 98, 107, 132–33 WaMu reunions and, 308–9, 311 wealth of, 37–38, 46, 82–83 work ethic of, 35 See also specific person, merger, acquisition, or topic Killinger, Linda Cottington, 83–84, 89–90, 94, 174, 196, 205, 231, 308, 309, 328, 333 Kohn, Donald, 250, 252, 275, 294, 295–96 Korea Development Bank (KDB), 261 Korszner, Randy, 275 Kovacevich, Richard, 297 Ladder Capital, 254 Lannoye, Lee Killinger–five emissaries meeting and, 203–6 Long Beach Mortgage acquisition and, 59–60, 62–63 retirement of, 62 at shareholders 2008 meeting, 197–99 Last Hurrah Party, WaMu, 322 Lehman Brothers as advisor to WaMu, 228 bankruptcy of, 270, 272, 273, 296 capital raise at, 187 concerns about survival of, 260, 261 decision not to bail out, 269 decline in stock price of, 260, 261 Financial Services Conference of, 87 Great Western acquisition and, 41, 44 impact on borrowing at Fed’s discount window of, 285 impact on WaMu of problems at, 268, 272, 273, 296 KDB deal and, 261 losses at, 261, 263 mortgage-backed securities sales at, 120 Lehman Investors Conference, 153, 173 Leonard, Andrew, 128 Leppert, Tom, 163 Lereah, David, 136, 152, 152n Levin, Carl: Senate Committee hearings and, 318, 329–31, 334 Lewis, Kenneth D., 125, 231 Lillis, Charles, 164 liquidity, WaMu Break the Bank model for, 215, 248, 278 Cantwell-Paulson conversation about, 293 closing of banks and ratio for, 215 closure of WaMu and, 299–300, 300n, 304–5 FDIC-OTS-WaMu discussion about, 244 Fishman capital raise plan and, 294 Fishman letter to customers about, 280 Moody’s-WaMu meeting about, 265 OTS press release about, 304–5 OTS report and, 300 regulators’ concerns about, 250 sale of WaMu and, 284, 290 WaMu reports to regulators about, 286, 299 See also bank runs, WaMu; credit lines The Little Prince (children’s book), 49 loan consultants/managers compensation for, 117, 128–29, 188, 196, 197 Countrywide-WaMu competition and, 126–28 fraud among, 145 Jenne’s Option ARMs focus groups and, 116–18 layoffs of, 188 at President’s Club meetings, 142–44 pressures on, 129 underwriting guidelines and, 125–26 See also Ramirez, Tom Long Beach Mortgage AIG report about, 166 Ameriquest loans compared with those of, 154n assets of, 58 audits of, 166, 167 California regulation of, 66 change from thrift to mortgage company of, 64–65 Chapman (Craig) as manager of, 66, 78, 101 Chapman (Craig)-Rotella relationship and, 128 Chapman’s (Fay) concerns about, 56–58, 60–61, 62, 63, 72, 75–78 compensation at, 69–70, 78, 129, 166–67 Countrywide-WaMu competition and, 127 culture at, 63–64 Davis (Craig) as head of, 75–76 defaults and delinquencies at, 137, 153 expansion of, 78, 136–37 founding of, 63 fraud and, 71–73, 76, 93, 154, 166 funding for mortgage brokers and, 129 Goldman Sachs relationship with, 121, 131, 157 “higher-risk lending strategy” and, 122 Home Loans Group and problems at, 167 Justice Department accusation against, 60 Killinger and, 57, 58, 62–63, 75, 76, 78, 137–38 Lannoye opposition to, 197–98 losses at, 66 mortgage-backed securities sales at, 67, 73–75 off-loading of risky loans and, 157 OTS concerns about, 223–24 oversight of, 65, 66, 137 paperwork problems at, 332 privatization of, 66 profits of, 64, 65, 71 proposal to shut down, 76, 78 public offering for, 65 repurchase of mortgage-backed securities by, 137 reputation of, 157, 176 Rotella and, 109–10, 128, 137–38 subprime mortgages at, 63, 69, 71, 75, 167–68 underwriting guidelines for, 56, 65–66, 67, 78, 125, 137–38, 167 WaMu acquisition of, 58, 59–60, 62, 63 WaMu reviews of, 57, 76–78 See also Jiminez (Ramona and Gerardo) family: mortgage loan to Longbrake, Bill end of savings and loan banks comment of, 318 hiring of, 18 housing market warnings of, 161–63 junk bond incident and, 28 Killinger as Pepper successor and, 28 NYSE bell ringing and, 54 Pepper appointment as temporary CEO and, 10–11 personal and professional background of, 28, 98 as potential Pepper successor, 27, 29, 205 WaMu departure of, 98 WaMu responsibilities of, 98 Los Angeles Times, 71, 242–43 Mad Money (TV show), 246–47 Magleby, Alan, 297 Maher, John, 40, 42, 43–44, 45, 60 Market Research Department, WaMu, 192 See also Jenne, Kevin Martinez, Melissa, 126 Matthews, Phillip, 164 McCain, John, 264, 301 McGee, Liam, 255 McKinsey Group, 241–42 McMurray, John, 186–87, 186n, 201–2, 260–61, 264, 266, 269, 270, 288, 301 media bailout reports by, 2 bank runs and, 2, 201, 207–8, 209, 211–12, 214, 215, 243, 279, 282 criticisms of Killinger by, 102, 308–9 Dimon’s Seattle address and, 326–27 end of modern Wall Street proclaimed by, 288 FDIC seizure of WaMu and, 300–301, 302, 303 Fishman appointment announced in, 258 IndyMac failure and, 207–8, 209, 242–43 JPM merger offer to WaMu and, 237–38 Kido interview with, 281 Killinger firing reported in, 254 Lehman problems and, 270 Paulson interview with, 284–85 Pepper and, 309–10 sale of WaMu rumors and, 279, 288, 289, 298–99, 300–301, 302 and WaMu failure as nonevent, 314 WaMu final hours and, 267–68, 272, 276, 279, 281, 282, 288, 289, 292, 298–99, 300–301, 302 WaMu information lockdown and, 281 WaMu layoffs and, 321 WaMu shareholder meetings and, 189 See also specific media organization Meola, Tony, 75, 76, 142, 144, 145 “Merge with Washington Mutual!”

The Finance Curse: How Global Finance Is Making Us All Poorer
by Nicholas Shaxson
Published 10 Oct 2018

Fortunately for them, a new player had entered the scene, the investment bank Drexel Burnham Lambert, under the buccaneering junk bond king, Michael Milken. Drexel played a different OPM game: lending the money for LBO deals, it then sold the loans (which became known as junk bonds because of their riskiness) to other less clued-up players like insurance companies or dowdy savings and loan organisations, tempting them with high interest rates and persuading them that the reward was worth the risk. During the market upswing of the ‘Roaring 1980s’ there seemed to be a near-bottomless pit of optimistic investors willing to buy these junk bonds. LBO deals surged from $3 billion in 1981 to $74 billion by 1989.

…

Nobody really wanted to insure them because they were only able to offer minute returns, but there was, it turned out, one player who would: the venerable insurance giant American International Group (AIG), specifically AIG Financial Products, based in Mayfair in London. This was led by Joe Cassano, a former employee of Drexel Burnham Lambert, the collapsed US junk bond firm at the centre of the fraudulent savings and loan crisis in the 1980s. AIGFP agreed to earn just 0.02 cents for every dollar it insured, each year, a model that has been compared to picking up pennies in front of a steamroller. (Cassano himself would take home 30 per cent of those pennies for himself, netting $280 million in 2000–8.)

Money and Power: How Goldman Sachs Came to Rule the World
by William D. Cohan
Published 11 Apr 2011

During 1928, an estimated 186 investment trusts were established. By the first months of 1929, these trusts were being created at the rate of approximately one each business day, and a total of 265 made their appearance during the course of the year. As in any period of financial frenzy where salesmen are hawking the latest innovation—say, junk bonds, Internet IPOs, or mortgage-backed securities—some of the peddlers were honest and reputable—J. P. Morgan & Co. for example—and some were not. But when the market for innovation seems at its most indiscriminate and with prices investors are willing to pay only rising, it becomes increasingly difficult to tell the charlatans from the honest brokers.

…

And, of course, he was feeling—acutely—a need for a clean break from his still-hidden past with Boesky and the Kidder arbitrage department. He thought a move to Drexel, at triple his Kidder pay, would be the answer. Joseph had first contacted Siegel about coming to Drexel in June 1985. The attraction for both sides was obvious: it was the opportunity to marry Drexel’s financing prowess, under the leadership of junk-bond king Michael Milken (whom Tenenbaum had once recruited heavily to come to Goldman), with Siegel’s highly regarded M&A skills. The combination would be a powerful one in the marketplace. In February 1986, Siegel said his perfunctory good-byes to Albert Gordon, one of Kidder’s founders, and to DeNunzio, and he left Kidder.

…

When other banks decided to leave Latin America after trouble there, Goldman had moved in, “smell[ing] opportunity.” In six months, Goldman had created from scratch a structured-equity-products division. In most un-Goldman-like fashion, Goldman had also gone outside the firm to hire the three Salomon Brothers traders and made them partners in order to “jump-start” Goldman’s mortgage-backed securities and junk-bond businesses. The truth was that Goldman needed to modernize. The firm relied too much on its reputation, but the financial world was evolving toward ever more complexity and speed. In his time, Whitehead had decided that Goldman could no longer be run as a Florentine guild. He had had to figure out how to extend the firm’s reach beyond Sidney Weinberg’s friends and to learn how to impart the firm’s collected wisdom and knowledge more broadly as the firm grew more rapidly.

Paper Promises
by Philip Coggan
Published 1 Dec 2011

According to Standard & Poor’s, the rating of the average corporate bond declined from A in 1981 to BBB- by 2010. That shift is quite remarkable. The ranking of BBB- is the absolute minimum required to qualify for investment grade status – the kind of bonds suitable for conservative investment institutions. If the rating slips any further, the average company will be classed as a ‘junk bond’, a category that, before 1980, was only deemed suitable for the wildest speculators. The riskiness of corporate debt illustrates that the nature of creditors as well as that of borrowers has changed. Corporate bonds were once tucked away in pension funds and charity endowments, institutions that were interested in safety of capital.

…

That, of course, is partial default, at least as far as foreign investors are concerned. Within nations, it is quite possible that there might be a lot of defaults in the private sector – at the consumer level, on credit cards and mortgages and at the corporate level, on private-equity loans and junk bonds. Such defaults may ripple through the system, as they did in 2007 and 2008, because of the linkages between banks and debt issuers. As of September 2011, private-sector defaults have been kept in check by the low level of interest rates, which had reduced the nominal debt-service burden. But were the economy ever to return to normal (or were governments to aim for the inflationary option), rates would have to rise.

…

Montgomery hyperinflation Iceland Icesave Incas India individual voluntary arrangement Industrial Revolution inflation inflation target inflation-linked bonds Interest Equalization Tax interest rates International Monetary Fund (IMF) Invergordon mutiny investment investment banks Iraq Ireland Irish Nationwide Building Society Isabella, Queen of Spain Italy It’s a Wonderful Life Jackson, Andrew Japan Jefferson, Thomas Jewish custom Johnson, Lyndon Johnson, Simon Johnson Matthey Bank Joshi, Dhaval J P Morgan Jubilee Debt Campaign jubilees, and writing off debts Julius Caesar junk bonds Kaiser Wilhem II of Germany Kennedy, John Kennedy, Robert Keynes, John Maynard Keynesianism Kim Jong Il Kindleberger, Charles King, Martin Luther King, Mervyn Knightian uncertainty Kohlberg Kravis Roberts Koo, Richard KPCB Krugman, Paul Kwak, James Labour Party Lachman, Desmond Lagarde, Christine Landsbanki Law, John League of Nations Lees, Adam Leeson, Nick Legatum Institute Lehman Brothers lender of last resort Lenin, V.

Bean Counters: The Triumph of the Accountants and How They Broke Capitalism
by Richard Brooks
Published 23 Apr 2018

Out went restrictions on borrowing and investing, enabling the thrifts to gear up to unprecedented levels, lend to customers on riskier terms and invest in everything from equities to high-yield, high-risk ‘junk bonds’. There followed an orgy of theft and fraud, epitomized by events at Lincoln Savings and Loan in California. Soon after construction tycoon Charles Keating bought the once conservative company in 1983, the manipulations began. First he fiddled the accounting for the $50m he had paid for the business, allocating too little of the cost to a portfolio of loans that, when quickly sold, produced an artificial profit. When ill-judged bets on junk bonds put further holes in Lincoln’s finances, Keating filled them with more elaborate frauds.

…

McKinsey & Co., 75 Japan, 2, 82, 230–31, 234–5, 240–41 Jennings, Andrew, 220, 224 Jerome, Saint, 35 Jersey, 89, 94–5, 158 job costing, 43 Johnson Matthey Bank, 91, 128 Johnson, Lyndon Baines, 63 joint stock companies, 41 Joint Stock Companies Act 1844: 47 1856: 50 Jones, Lewis Davies, 54, 55, 56 Jowell, Tessa, 196 junk bonds, 85 Kanebo, 240 Kapital, Das (Marx), 3 Kattner, Markus, 225 Keating, Charles, 85–6, 91 Kellaway, Lucy, 275 Kershaw, Sue, 199 Kgosana, Moses, 250 Khodorkovsky, Mikhail, 237 King, Mervyn, 273 Kirby, Paul, 208 Klynveld Kraayenhof, 235 Klynveld, Piet, ix KMG, 235 Knievel, Robert Craig ‘Evel’, 182 Koch Industries, 171 Kohl, Marius, 168, 174–7 KPMG, ix–x, 2, 10, 11, 48, 97, 116–19, 141–2, 149–50, 256–9, 264–7, 276 and Barnier proposals, 255 and Bradford & Bingley, 141–2, 149 and Brexit, 203, 204 and British Aerospace/BAE Systems, 213 Canary Wharf base, 256 Chelsea Flower Show, 200 in China, 244, 245, 251–2 and Civil Service Live conference, 201 Claridges conference (2007), 122 and Co-operative Bank, 142, 149, 150 and Comroad, 240 and collateralized debt obligations (CDOs), 121 and Countrywide Financial Corporation, 48, 118, 257 ‘Cutting Through Complexity’, 11–12 Data & Analytics (D&A), 272 and defence, 188, 189, 200, 202, 216, 217, 265 establishment of (1987), 235 and European Central Bank, 10 and Federal National Mortgage Association (‘Fannie Mae’), 118–19, 257 and FIFA, 220–28 and Financial Crisis Inquiry Commission, 145 and Financial Reporting Council, 144, 209 and General Electric, 5–6 governments, advice to, 186, 187, 188, 189, 191, 192–3, 197–9, 202–6, 249 and GPT, 216, 217 and HBOS, 141, 142–3, 149, 150, 257 and Hinkley Point, 204–6 and Hollinger, 154–5 and Hong Kong protests (2014), 251–2 and House of Lords committee (2010), 146 and HS2, 197–9 and HSBC, 229–30 and Imperial Tobacco, 202, 266–7 in India, 249 integrated reporting, 18 key performance indicators, 12 and Lockheed Martin, 202, 265 and Miller Energy, 261 and Ministry of Defence, 188, 189, 202, 216, 217, 265 and National Health Service (NHS), 192–3, 202, 266 and New Century Financial Corporation, 48, 116–18, 257 No. 20, Grosvenor Street, Mayfair, ix–x, x, 277–8 ‘One Firm’ philosophy, 275 and ‘patent box’ tax breaks, 180 Performance Club 1999 trips, 160 and Petrofac, 218 and private finance initiative (PFI), 186, 187, 188, 189, 191, 249 and Privy Purse, 68 revolving door, 206, 207, 208 and Saudi British Joint Business Council, 218 Scott London Rolex scandal (2013), 15 and securitization, 121, 122 and Siemens, 240 in South Africa, 249–50 and subprime mortgages, 10, 48, 116–19 and sustainable development, 200 and tax avoidance, 154–5, 157, 158, 159–62, 180–81, 182, 186 thought leadership, 12 and thrifts, 87 and Tier One, 257 and Wachovia, 257 and Xerox, 109–10 Kreuger, Ivar, 57 Kubena, Mike, 237 Labour Party, 66, 94, 114, 178, 179, 184–92, 194, 201, 209, 230 Lake Michigan, 73 Land, Nick, 144, 182 Lang, Ian, 95 Last Supper, The (Leonardo da Vinci), 33 Lateran Council, Third (1179), 24 Law Commission, 93 Lawson, Nigel, 146 Lay, Kenneth, 99–100, 104, 107, 108 Leary, Simon, 191 Lehman Brothers, 12, 13, 92, 119, 131–3, 138, 144, 145, 148–9 Leigh, Edward, 189 Lend-Lease programme, 60 Leonardo da Vinci, 33 Levin, Carl, 159, 161 Levitt, Arthur, 96–8, 104 Lewis, Leigh, 207 Lewis, Michael, 112, 118 Liber Abaci (Fibonacci), 21–2 Liberal party, 50, 52 Liechtenstein, 220 limited liability, 50, 52, 91–5, 114 Lincoln Savings and Loan, 85–7 Linklaters, 140 Little, Royal, 61 Liverpool, Merseyside, 49 LJM, 104–5 Lloyds Bank, 140 Lockheed Martin, 202, 212, 265 London, England Big Bang (1986), 156 Canary Wharf, 256 Chelsea Flower Show, 200 Claridges, 122 Gordon Riots (1780), 38 Imperial College, 197 ‘light touch’ regulation, 114, 131, 209 Medici Bank, 26, 30 Olympic Games (2012), 196 Price Waterhouse, 54 Royal London Hospital, 190 School of Economics, 197 St Bartholomew’s Hospital, London, 190 Tate Modern, 16 Long Term Capital Management, 113 Louis XI, king of France, 31 low-balling, 79, 91 Lowe, Robert, 50 Luce, Edward, 17 Lucerne, Switzerland, 220 Luthiger, Fredy, 222, 223, 227 Luxembourg, 165–77, 179, 180, 181, 182, 245, 267–71, 278 LuxLeaks, 169–77, 179, 181, 245, 268, 269, 278 Lybrand, Ross Bros & Montgomery, 87 Lybrand, William, 56 Lynch, Loretta, 219, 223 Lyons, 31 MacGregor, John, 128 Mair, John, 42, 53 Management Consultancies Association, 190 Mandelson, Peter, 95, 207 Mapping the Market, 193 mark-to-market, 99–102, 113, 123, 124, 129–31 mark-to-model, 124–5, 126, 127, 131 mark-to-myth, 124, 131 Marlborough, Duke of, see Churchill, John Martin, William, 122–3 Marwick, James, ix, 48–9, 56, 62, 119, 158, 217, 233, 277 Marx, Karl, 3 Masters Tournament, 104 Masters, Adrian, 191 matches, 57 Mauritius, 158 Maxwell, Robert, 66, 87–8, 91 May, George, 73, 78, 82, 277 May, Theresa, 203 McConnell, Jack, 207 McCreevy, Charles, 164 McDonald’s, 170 McFall, John, 207 McKenna, Francine, 145, 274 McKinsey, 17, 74–7, 79, 81, 99, 108, 183, 191, 226, 263 McKinsey, James, 74–7 McLean, Bethany, 101 Measelle, Richard, 103 Medici family, 16, 26–32, 36 Cosimo, 26, 27, 28, 29, 31 Giovanni, 26 Lorenzo, 28, 29, 30 Medvedev, Dmitry, 17 Melbourne, Victoria, 48 mergers and acquisitions, 11, 54, 59–69, 71, 87 Merrill Lynch, 121 Mesopotamia, 1 Messezentrum conference centre, Zurich, 228 Metcalf, Lee, 80 Metz, France, 172, 173, 176 Mexico, 229 Michael, Bill, 149–50 Microsoft, 271 Milburn, Alan, 184, 191, 194, 207 Mill, John Stuart, 50 Miller Energy, 261 Ministry of Defence, UK, 188–90, 202, 212, 215–19, 265 Missal, Michael, 115, 116–17 Missouri, United States, 74 Mitchell, Andrew, 206, 208 Mitchell, Austin, 94, 230 Mitchell, Roger, 48, 56 Model T Ford, 71 Modern Times, 71 Monde, Le, 169 monetarism, 84 money laundering, 229–31 Montagu, Nicholas, 207 Monty Python, 15–16 Moore, Paul, 141 Morgan, Henry, 39 Morgan, John Pierpont, 54–5 Morgan Stanley, 119, 148 Morse, Amyas, 206 mortgage-backed securities (MBS), 120–21 Moselle, France, 171 Mossack Fonseca, 247 Mouget, Didier, 170, 171, 173 Mumbai, Maharashtra, 242 Munger, Charlie, 18, 135, 147 Myners, Paul, 146 Nally, Dennis, 5, 148 Nassau, Bahamas, 222 National Aeronautics and Space Administration (NASA), 76 National Audit Office, 187, 189, 206 National Crime Agency (NCA), 272 National Health Service (NHS), 183–4, 187, 190, 191–5, 266 National Westminster Bank (NatWest), 136 Nazi Germany (1933–45), 4, 234, 251 Neoplatonism, 28 Netherlands ABN Amro, 138 Ballast Nedam, 218–19 Klynveld Kraayenhof, 235 Royal Ahold, 238–9 Spanish (1556–1714), 36 taxation, 163, 164–5 New Century Financial Corporation, 48, 115–18, 257 New Delhi, India, 245, 249 New Labour, 114, 184–92, 194, 209 New York, United States, 57 beer business, 54 Britnell’s ‘Reform Revolution’ speech (2011), 192–3 County Law Association, 153 Deloitte compensation case (2009), 239 FIFA indictment (2015), 219, 223 Harris’ advisory services speech (2014), 264 Issuers’ and Investors’ Summit on CDOs/Credit Derivatives (2006), 121 Levitt’s ‘Numbers Game’ speech (1998), 96, 98 Marwick & Mitchell, 48 Price Waterhouse, 54 Stock Exchange, 55, 115, 234 Wall Street, 54, 69, 96, 101, 120–21 New York Times, 118, 236 New Zealand, 256 Newton, Isaac, 22 Nicholson, Kevin, 178, 182 Nieuwe Instructie (Christoffels), 36 Nike, 163 No. 20, Grosvenor Street, Mayfair, ix–x, x, 277–8 Noncomformism, 42 Norte del Valle Cartel, 229 Northern Rock, 125–9, 142–3, 148 Norway, 72 nuclear power, 204–6 ‘Numbers Game’ speech (1998), 96, 98 O’Donnell, Augustine ‘Gus’, 207 O’Rourke, Feargal, 164, 165 off-balance-sheet financing, 101, 102, 104, 106 Office of Tax Simplification, 179 oil crisis (1973), 84 oil-for-food programme, 225, 240 Olympic Games (2012), 196 Olympus, 241 One Hundred Group, 254 OPIS (Offshore Portfolio Investment Strategy), 159, 162 Oppenheimer & Co., 112–13 Organization for Economic Cooperation and Development (OECD), 170, 181, 214 Osborne, George, 149, 182, 248 Oscars, 16 Overend & Gurney, 51, 126 Oxford University, 181, 184 Oxley, Michael, 114, 122 de Pacioli, Luca Bartolomeo, 32–6, 34, 100, 124 Page, Stephen, 272 Pain, Jon, 208 Palin, Michael, 15–16 Palo Alto, Silicon Valley, 82 Panama Papers scandal (2016), 247 Panorama, 169, 220 Paradise Papers scandal (2017), 7, 247 Parmalat, 239, 243 Parrett, William, 148 partners, 8 Pearson, 169, 270 Pearson, Ian, 207 Peat, Marwick, Mitchell & Co., 48, 60, 63, 64, 79, 82, 233, 235 Peat, Michael, 68 Peat, William Barclay, ix, 48, 49, 68, 233, 277 Penn Central Transport Company, 64, 79 pension funds, 67 Pepsi, 166 Pergamon, 66 Perrin, Edouard, 168, 169, 171–2, 173, 174, 175 Persson, Mats, 208 Perugia University, 32 Pessoa, Fernando, 1 Peston, Robert, 197 Peterborough hospital, Cambridgeshire, 191 Petits secrets des grandes enterprises, Les, 169 Petrofac, 218 Pfizer, 163 Piot, Wim, 173, 181, 182 Pisa, Italy, 21 place value’ system, 21 political donations, 98 Ponzi schemes, 89 ‘pooling-of-interest’ accounting, 61–2, 63, 67, 96 post-balance sheet events, 72 Powell, Ian, 128, 201–2 Poynter, Kieran, 148, 150 premiums, 45 Presbyterianism, 42 Price, Samuel Lowell, 49 Price Waterhouse & Co., 49, 53–6, 57, 65, 67, 72, 73, 78–9, 82 and conflicts of interest, 73, 277 consultancy, 78–9, 81, 82 Coopers & Lybrand, merger with (1998), 49, 95 in Germany, 233 and Great Crash (1929), 57 in India, 233 international co-ordinating company, 234 and limited liability partnerships, 94 Palo Alto technology centre, 82 and private finance initiative (PFI), 185 in Russia, 236 and tax avoidance, 164 and tax code (1954), 153–4 and United States Steel, 55, 62, 233 PricewaterhouseCoopers (PwC), 2, 5, 6, 49, 95, 97 and American International Group, 134–5, 144, 145, 148 and Bank of Tokyo-Mitsubishi, 230–31 and Barclays, 6 Booz & Co. acquisition (2013), 263–4 and Brexit, 203 and British Home Stores (BHS), 260 Building Public Trust Awards, 256 ‘Building Relationships, Creating Value’, 12 and Cattles plc., 142 cyber-security, 272–3 establishment of (1998), 49, 95 and Financial Crisis Inquiry Commission, 145 and Financial Reporting Council, 142, 144, 209, 210 global operations, 235–6 and Goldman Sachs, 134–5, 148 and Google, 271 and GPT, 217, 218 and Heineken, 246 and Hong Kong protests (2014), 251–2 in India, 242 integrated reporting, 18 and Kanebo, 240 and Labour Party, 201 and National Health Service (NHS), 192, 194, 200 and Northern Rock, 126, 127–9, 142–3, 148 and Olympic Games (2012), 196 presentation (2017), 16 and private finance initiative (PFI), 187, 188–91, 196, 249 profits, 5 revolving door, 207, 208 and RSM Tenon, 210, 261 in Russia, 236–8 and Saudi British Joint Business Council, 218 and securitization, 121, 122, 129 and tax avoidance, 157, 165–79, 180, 182, 237, 246, 267–71, 278 thought leadership, 12 total tax contribution survey, 179 and Tyco, 109 in Ukraine, 238 and Vodafone, 165–6 Prince of Wales’s charity, 181 principal/agent problem, 13 Prior, Nick, 190 Privatbank, 238 Private Eye, 169, 180, 215, 255 private finance initiative (PFI), 185–91, 196, 203, 249 Privy Council, 94 Privy Purse, 68 production-line system, 71 productivity growth, 262–3 professional scepticism, 112, 130, 214, 224 professional services, 11, 72, 150, 183, 204–5, 251, 275, 279 Professional Standards Group, 105–7 Project Braveheart, 106 Project Nahanni, 102 Protestant work ethic, 3 Protestantism, 3, 42, 43 Prudential, 157 Public Accounts Committee, 281 Public Company Accounting Oversight Board (PCAOB), 144–5, 242–3, 253, 261, 274 Puerto Rico, 163 Putin, Vladimir, 17, 237 Qatar, 228 Quakers, 42, 49 Railway Regulation Act (1844), 45 railways United Kingdom, 44–7, 49, 115 United States, 51, 52, 53, 70, 73 Rake, Michael, 144, 149, 150, 162, 181, 257 Raptors, 105 Rayonier, 59 Reagan, Ronald, 80, 84, 154, 184 Reckoning, The (Soll), 27 Redpath, Leopold, 46 regulation, UK, 13, 127, 209–10, 213–14, 259 and Brexit, 273 deregulation (1980s), 95 and financial crisis (2007–8), 127–8, 137–45 Financial Conduct Authority, 140, 149, 281 Financial Reporting Council, 138, 142, 144, 149, 182, 209–10, 213–14, 259, 261 Financial Services Authority, 127, 128, 137, 138, 140 ‘light touch’, 114, 131, 209–10 Railway Regulation Act (1844), 45 self-regulation, 88, 90 regulation, US, 91, 260 Bush administration (2001–2009), 114, 145, 253 Celler–Kefauver Act (1950), 59, 61 competition on price, 79–80 deregulation (1980s), 84–5, 95, 112 derivatives, 122 and Enron, 99 and Lincoln Savings and Loan, 85–7 mark to market, 99 numbers-game era (1990s), 110 Public Company Accounting and Oversight Board, 242–3, 253, 260 Roosevelt, Theodore administration (1901–9), 56–7 Sarbanes–Oxley Act (2002), 114, 122 self-regulation, 61 Trump administration (2017–), 273, 274 and Westec collapse (1966), 63 see also Securities and Exchange Commission Renaissance, 3, 16, 22, 24–37 Renjen, Punit, 275 ‘Repo 105’ technique, 131–3, 149 revolving door, 206–8, 272 Ripley, William Zebina, 57 Robson, Steve, 144, 207 Rockefeller, John Davison, 53, 71 Rolex, 15, 215 Rolls-Royce, 213 Roman numerals, 22 Rome, ancient, 24 Rome, Italy, 25, 27 Roosevelt, Franklin, 58 Roosevelt, Theodore, 56 de Roover, Raymond, 27 Rowland, Roland ‘Tiny’, 66 Royal African Company, 37 Royal Ahold, 238–9 Royal Bank of Scotland, 47, 90, 136–40, 142, 157, 241, 259 Royal London Hospital, 190 RSM Tenon, 210, 261 Russian Federation, 17, 236–8 Ryan, Tim, 134, 148 Saltwater Slavery (Smallwood), 37 Samek, Steve, 103 SANGCOM, 214–19 Sansepolcro, 32 Sarbanes, Paul, 114, 122 Sarbanes–Oxley Act (2002), 114, 122 Sassetti, Francesco, 16, 29, 30, 31, 41 Satyam, 242 Saudi Arabia, 212–19, 221 Saudi British Joint Business Council, 218 Saunders, Stuart, 64 Save South Africa, 250 savings-and-loan mutuals, 84–7, 91, 99 Sberbank, 237 Scarlett, John, 207, 272 Schlich, William, 149 Schumpeter, Joseph, 3 scientific management, 71, 76 Scotland, ix, 42, 47–9, 70, 224 Scuola di Rialto, Venice, 32 Second World War (1939–45), 59, 60, 77, 234 Secret Intelligence Service, 207, 272 Securities Act (1933), 58 Securities and Exchange Commission (SEC), 281 and consulting, 80, 104 and Enron, 99, 104, 108 and Hollinger, 154 Levitt’s ‘Numbers Game’ speech (1998), 96, 98, 104 and Lincoln Savings and Loan, 85, 86 and Penn Central Transport Company, 64 and ‘pooling-of-interest’ accounting, 61, 62 and Public Company Accounting Oversight Board (PCAOB), 144 PwC India fined (2011), 242 and Xerox, 109–10 securitization, 101–2, 116, 119–23, 125, 129–31, 133–40, 148, 265 Seidler, Lee, 68–9, 79 self-regulation, 6, 61, 88 Serious Fraud Office, 213, 216, 217, 218, 219 Sexton, Richard, 129, 268, 278 shadow banking system, 115 Shanghai, China, 17 Shaxson, Nicholas, 247 Sheraton, 59 Sherlock, Neil, 208 short selling, 112, 115, 116 Siemens, 240 Sikka, Prem, 94 Silicon Valley, California, 82 Simec International Ltd, 214, 215 Sinaloa Cartel, 229 Sinclair, Upton, 14 Singapore, 163 Sino-Forest, 244 Skilling, Jeff, 99–100, 101, 105, 108 Skinner, Paul, 208 Slater, James, 65 slave trade, 4, 37 Smallwood, Stephanie, 37 Smallwood, Trevor, 158 Smartest Guys in the Room, The (McLean and Elkind), 101 Smith, Adam, 13 Smith, Jacqui, 207 Snell, Charles, 40 Social Justice Commission, 184 Soll, Jacob, 27 Sombart, Werner, 3–4, 22 SOS (Short Option Strategy), 159, 162 South Africa, 213, 223–4, 249–50 South Sea Company, 39–41, 42, 44 Soviet Union (1922–91), 236 Spacek, Leonard, 62, 77–8 Spain, 36, 39, 241 special investment vehicles, 115 Spinwatch, 201 Sproul, David, 256, 258 St Bartholomew’s Hospital, London, 190 St Louis, Missouri, 56 Standard & Poor’s, 149 Standard Chartered Bank, 230, 231 Starbucks, 178 steam engine, 43 Stein, Jeffrey, 161 Stephenson, George, 44 Stevens, Mark, 82–3 Stevenson, James, 1st Baron Stevenson, 141 Stiglitz, Joseph, 114 stock market, 68, 69, 92, 96 ‘Go-Go’ years (1960s), 62, 65 and Great Crash (1929), 57, 58 and J.

file:///C:/Documents%20and%...
by vpavan

As explained above, funds with above-average fees have to show above-average returns, or else their Morningstar ratings will lag behind the funds in their peer group. And that, says Phillips, induces portfolio managers to take greater risks with your money. The Milwaukee-based Heartland Group provides an example of what happens when a fund takes outsized risks with investors' money. Three Heartland bond funds invested in high-yield bonds (read: junk bonds) that were issued, but not guaranteed, by state and local governments for such projects as nursing homes and sewer systems. When the fund needed to sell some of its assets— some projects that the bonds supported defaulted on their interest payments, scaring investors into redeeming shares— the bonds were so illiquid, or thinly traded, that bond dealers demanded extremely high prices to take them off Heartland's hands.

…

The 80 percent rule obviously allows a fund to invest up to 20 percent of assets in almost anything. If a fund calls itself the U.S. Government Bond Fund, investors might assume that the assets are rock-solid bonds backed by the full faith and credit of the U.S. Treasury. But that fund portfolio could hold 20 percent of its assets in high-yield bonds, also called junk bonds. One of the collapsed Heartland funds called itself the Heartland Short Duration High-Yield Municipal Bond Fund. Investors may have been fooled by the term "municipal," which to many connotes safety and security. But few of Heartland's bonds were actually guaranteed by the government units that issued them.

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An investor lends money to a bond issuer, who pledges to pay back the loan on a pre-set date, and to pay interest at specific intervals. Most bonds carry a rating assigned by an independent rating agency, such as Standard & Poor's or Moody's Investor Services. When a corporate bond is below investment-grade, it is often called a junk bond. Bonds issued by the federal government are called Treasurys, while bonds issued by cities or a branch of local government are municipal bonds. broker: Individual who advises investors on stocks, bonds, mutual funds, or other investments and acts as an agent by buying or selling on the investor's behalf.

Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---And Prevented Economic Disaster
by Nick Timiraos
Published 1 Mar 2022

Normally the meeting would have taken place in Basel, Switzerland, but travel restrictions had shut that down. Powell joined from his office in Washington. They all braced themselves for what was about to hit—which proved to be every bit as bad as they anticipated. Because so many oil companies had issued lots of junk bonds—debt with less-than-investment-grade ratings—the stress on energy companies was never going to stay confined to their industry. Fund managers might be stuck with billions of dollars in virtually unsellable energy-firm bonds. As a result, the borrowing costs for hundreds of companies that financed with junk debt would go up.

…

Investment-grade companies “are still accessing the market at a premium, but they are accessing the market.” On the other hand, Rosengren noted with concern that markets where the Fed had not intervened still faced “very difficult challenges.”5 Indeed, there was a growing chasm between companies inside the central bank’s lending perimeter and those outside, including junk bonds, leveraged loans, and privately issued mortgage securities. Just five companies had issued junk-rated debt since March 4, including Pizza Hut owner Yum! Brands, Inc. The prospect of waves of companies going bankrupt was making investors hesitate to step into a market the Fed was unwilling to enter.

…

Just as the March 23 announcements had started to repair the corporate-bond market, the April 9 announcements immediately capped borrowing costs in the municipal-debt market and triggered a sharp revival of debt issuance. On April 17, Ford said it expected to report a $2 billion quarterly loss amid a 21 percent plunge in vehicle sales from a year earlier. A few days after that the carmaker announced that it had raised $8 billion in the junk-bond market—the largest such deal on record. Two weeks later, on April 30, Boeing raised a stunning $25 billion in a blowout bond offering—the largest-ever bond deal outside an acquisition. The CARES Act had set aside $17 billion for Mnuchin to make direct loans to firms “critical to national security,” a provision widely understood as a potential Boeing bailout.

Security Analysis
by Benjamin Graham and David Dodd
Published 1 Jan 1962

And it follows that (leaving aside the tax shield provided from interest expense) the bondholder’s claim cannot be worth more than the company’s net worth would be to an owner who held it free and clear of debt. This might seem obvious, but it was in no way apparent to the creditors of Federated Department Stores (which operated Bloomingdale’s and other high-end retailers) during the junk bond mania of the late 1980s. Investment banks had discovered, without any sense of shame, that they could sell junk bonds to a credulous public irrespective of the issuers’ ability to repay them. In 1988, Federated agreed to a leveraged acquisition by the Canadian developer and corporate raider Robert Campeau, which committed the company to annual interest charges thereafter of $600 million.

…

PART I SURVEY AND APPROACH Copyright © 2009 by The McGraw-Hill Companies, Inc. Click here for terms of use. Introduction to Part I THE ESSENTIAL LESSONS BY ROGER LOWENSTEIN Copyright © 2009 by The McGraw-Hill Companies, Inc. Click here for terms of use. If the modern reader were asked, what did the junk bonds of the 1980s, the dot-com stocks of the late 1990s, and, more recently, the various subprime mortgage portfolios of the 2000s all have in common, the first correct answer is that each of them took a nosedive from a highly inflated price to one rather closer to zero. You can throw in, for good measure, the net asset value and reputation of the world’s most intelligent hedge fund, Long-Term Capital Management (LTCM).

…

It was the authors who said, “If we assume that a fairly large proportion of a group of carefully selected low-priced bonds will escape default, the income received on the group as a whole over a period of time will undoubtedly far exceed the dividend return on similarly priced common stocks.” (p. 327) Others appropriated that idea to help sell junk bonds, especially the low-grade original issue bonds that took Wall Street by storm in the 1980s. But there is little doubt that Graham and Dodd would have disapproved of such bonds. It’s one thing to buy fallen angels—once investment-grade bonds whose issuers had fallen on hard times. Those were usually senior securities that even in the case of a bankruptcy could lay claim to some assets.

Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures
by Frank J. Fabozzi
Published 25 Feb 2008

In both classifications, credit risk increases from lowest to highest. The letters D and C mean that the bond issue is in payment default. Bonds with ratings AAA to BBB (Aaa to Baa) are considered investment-grade bonds. Bonds with lower ratings are speculative-grade bonds, also commonly referred to as high-yield bonds or junk bonds. TABLE 15.2 Credit Migration Table In 5th Year At Issuance Investment Grade Speculative Grade In Default Investment Grade 94.7% 5% 0.3% Speculative Grade 1.2% 87.5% 11.3% In Default 0% 0% 0% Credit ratings can change during the lives of bond issues. Credit risk specialists use the so-called “credit migration tables” to describe the probabilities that bond issues’ ratings change in a given period.

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Managers of institutional bond portfolios formulate their investment strategy based on expected changes in corporate bond spreads. The model presented in this illustration was developed by Fridson Vision.257 The unit of observation is a corporate bond issuer at a given point in time. The bonds in the study are all high-yield corporate bonds. A high-yield bond, also called a noninvestment grade bond or junk bond, is one that has a credit rating below Ba (referred to as being minimum investment grade) as assigned by the rating agencies. Within the high-yield bond sector of the corporate bond market there are different degrees of credit risk. Specifically, there are bonds classified as low grade, very speculative grade, substantial risk, very poor quality, and default (or imminent default).

…

See Interquartile range Irregular term coefficient Isolines Jarque-Bera test statistic Joint behavior, knowledge Joint cumulative distribution function Joint density function expression Joint distribution copula function, display governance marginal distribution, comparison reduction, absence Joint frequencies average squared deviations, measurement payoff table Jointly normally distributed random variables, tail dependence (absence) Joint probability Joint probability density function contour lines Joint probability distributions continuous case discrete case understanding, importance Joint random behavior, measures Joint randomness (measure), correlation/covariance (criticism) j-th independent variable Junk bond k components, pairwise combinations k-dimensional elements k-dimensional generalization k-dimensional random variable k-dimensional random vector covariances density function k-dimensional real numbers, general set k-dimensional volume, generation Kendall’s tau K events, Bayes’ rule k independent variables regression coefficients test Kolmogorov, Andrei N.

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
by Richard Bookstaber
Published 5 Apr 2007

Corporate bonds did not share in the shift to fixed income; they went south instead. Most of the time, the specter of corporate defaults is remote. But after the crash, the possibility of long-term economic damage could not be dismissed. As a result, the corporate bond market started to tank. Not surprisingly, we were hit hardest on the lowest-quality bonds, the high-yield or junk bonds. These bonds fueled the merger mania of the mid-1980s, a market that was absolutely dominated by Drexel Burnham Lambert, but we had put serious resources into establishing a presence. To play catchup we had to trade aggressively and take on risks, make a market for clients when others wouldn’t, and trade in size when clients demanded it.

…

But success with equities involves more than trading ability and risk taking. THE PROBLEM WITH STOCKS Profitability in equity trading requires a more complex business structure than is required for fixed income. In the fixed income markets substantial profits can be made simply through the bid/offer spread. For the higherrisk and less liquid bonds such as junk bonds and emerging market bonds, the spread can be as wide as one or two points. Similarly, while the agency instruments in the mortgage market trade with eighth- and sixteenth-of-apoint spreads, the derivative instruments—collateralized mortgage obligations (CMOs), IOs, and POs—can have spreads that are multiples of those.

…

Senate hearings, 129–130 Epstein, Sheldon, 46–47, 49 index-amortizing swap, 116 Equity trading profitability, 71–75 proprietary reliance, 73–74 European Monetary System currency crisis (1992), 3 Event risk, 248–249 Factor exposures, 202 Fair value basis, 29 Federal Deposit Insurance Corporation (FDIC), 113 Federal Reserve policy shifts, 85 rate hike, impact, 53 Feduniak, Bob, 42, 52 Feuerstein, Donald, 196 Financial instability, aspects, 3–4 Financial markets, 224–225 Financial risk, 256–257 Fisher, Andy, 59, 80 Fixed income focus, 251–252 Fixed income research (FIR), 8–9, 43–44 Flood, Gene, 190 Franklin, Mark, 97 Free-floating anxiety, 235 Frictionless markets, 209 FrontPoint Partners, 204, 205 FTSE Index, 117 Fundamental data, 166 Furu, example, 233–235 Futures market, 17–19 Futures shock (1635), 175–177 Galbraith, John Kenneth, 16 Gamma, problems, 24–25 General Electric (GE), 41–42 Generally accepted accounting principles (GAAP), 135 Geographic regions, classification, 246 Global Crossing, restatements/liability, 135 Godel, Kurt, 222–224, 227–228 Gold, Jeremy, 8–9 Goldman Sachs acquisition, 75 public offering, delay, 109 Goldstein, Ramy, 116–118 Gracie family, 258–259 Gracie, Gastao, 258 Greenhill, Bob, 73 Greenmail, taxation, 13–14 Gross Domestic Product (GDP), 3–4 Growth bias, 202 Grubman, Jack, 128–130, 134 MCI/BT involvement, 69–71 nursery school admissions, 131–132 Gutfreund, John, 62–63, 105, 195–197 resignation, 199 Haghani, Victor, 102–104, 110, 112 Hall, Andy, 63–67 Hawkins, Greg, 51 Hedgefundedness, 243–244 Hedge funds, 165, 207, 214–215, 243 classification, problem, 245 classification, 245–246 control, 252–253 defining, 245 economic service, 219 existence, question, 244 regulation, 247–250 Heisenberg, Werner, 223–228 Hilibrand, Larry, 79, 110, 113 Human error, 149 272 bindex.qxd 7/13/07 2:44 PM Page 273 INDEX Kaplan, Joel, 44–45 Kaplanis, Costas, 63, 79 Kidder, Peabody, 39–42 Knowledge, limits, 221–230 Krasker, Bill, 86 Liquidity basics, 213–220 complexity, relationship, 145 demand, 26, 191 hedge fund classification, 246 history, 217–218 impact, 212–213 needs, 183 providers, 213–215 role, 215–220 squeeze, prospects, 105 suppliers, 22, 192–193 supply, price elasticity, 94–95 transparency, 226 Liquidity crisis cycle, 93–94 prevention, 94–95 providing, hedge funds (impact), 214–215 Long-range forecasting, 228 London Exchange, Rothschild visit, 90 London Interbank Offered Rate (LIBOR) government rates, parity, 57 higher-yielding LIBOR bond, 57 LIBOR-denominated debt, 56 Long-dated call options, 57 Long-Distance Discount Service (LDDS), acquisitions, 70 Long/short equity hedge funds, 200–205 Long-Term Capital Management (LTCM) capital reserves, assumption, 106–108 collapse, 93 decision point, 110 disaster, 57, 60, 92–93, 100, 145 hedge fund debacle/crisis, 1–3 leverage cycle, 97 liquidity risk, 107–108 losses, 108–111 management, initiation, 195–200 market price positions, feedback, 112 market risks, modeling/monitoring, 111–112 problems, public knowledge, 104–105 repurchase agreement, problem, 104 risk arbitrage position, 107 risk burden, 108 Long-term rates, short-term rates (interaction), 47 Loops, usage/impact, 45 Loosely coupled system, 157 Lorenz, Edward, 227–229 deterministic systems, 229–230 Langsam, Joe, 232, 236–237 Laplace, Pierre-Simon, 223, 225 Lead-lag strategy, 193–194 Leeson, Nick (impact), 38–39 Leibowitz, Marty, 8, 51, 53 Leland, Hayne, 10 Leverage, 244 amount, reduction, 260 crisis, occurrence, 111–113 regulations, imposition, 248 Levin, Carl, 130 Lewis, Michael, 52 Liquidation ability, 93 Mack, John, 28, 29, 35, 37 trader emulation, 35 Macro data, usage, 166–167 Macro strategies, 202 Maeda, Mitsuyo, 258 Margin-induced sale, 94 Market aberrations, opportunities, 122 breakdown, reaction, 146 crises, worsening (aspects), 3–4 cycle, basis, 169 decline, respite, 23–24 exponential growth, 17 Illiquidity, cost, 217–218 Index-amortizing swap, 46–48 Information flow, process, 210 implications, derivation, 170–171 overload, 220–230 Information-based trading, 166 Information Technology (IT), support function, 185–186 Initial public offerings (IPOs), 72 creation, 173–174 issuance, amount, 178–179 Innovation, positive effects, 255–256 INSEAD, 66 Intangibles, 137–138 Interactive complexity, 154–157 Interest only (IO), 55 Interest rate, 84–85, 87 International Monetary Fund (IMF) package, 103 Internet bubble, 179–181 businesses, virtual nature, 172 stocks, run-up (1998), 178 Interrelated markets, complexity (by-product), 143 Intraday price movement, 183 Inventory service, 71 Investment buyers, scare, 22 coverage, 249–250 investor behavior, 203–204 strategy, 247 type, classification, 246 Investors, irrational behavior, 203–204 Irrational markets, impact, 180–181 Iverson, Keith, 48 Iverson, Ken Japan, liquidity, 39 Japanese swap spread strategy/profit, 100 Jenkinson, Robert Banks, 89–90 Jett, Joe, 39–41 Jiu Jitsu Academy, 258 Jones, Paul Tudor, 165 Junk bonds, 71 273 bindex.qxd 7/13/07 2:44 PM Page 274 INDEX Market (Continued) failures, safeguards, 239–240 illiquidity, portfolio insurance by-product, 14 innovation, 11–12 makers, problem, 191–192 regulation, 146–154 risk, paradox, 1 volatility, 5, 25 vulnerability, 224–225 Market bubbles, 168–174 Market-to-book ratio, 138 Marx, Karl, 250 Marxist backward market, exploitation, 250 Material adverse change clause, 65 Maughan, Deryck, 59, 73–77 MCI Communications British Telecom (BT), merger/trade, 63–64, 67, 128 conclusion, 74 EPS, decline, 70 renegotiation, willingness, 67–68 stock, decline, 64 Mean-reversion analysis, 190 Mechanical failure, 149 Mercury Asset Management, 196 Mergers and acquisitions (M&A) advice/underwriting, 33 Meriwether, John, 52, 100, 197 resignation, 199 Merrill Lynch, 42 Merton, Robert, 9, 207 Metallgesellschaft Refining and Marketing (MGRM), oil price risk (offloading), 37–38 Mexican Brady bond/Eurobond spread, 107 Mexican peso crisis (1994), 3 Miller, Heidi, 78–80, 140 Modigliani, Franco, 208–209 Money flows, 167 Morgan Stanley APL, usage, 44–45 Dean Witter, merger, 75 IT department, 43 portfolio insurance, 10–12 risk arbitrage department, 15 risk manager, 42 Morgan Stanley Asset Management (MSAM), 11 Morgan Stanley Investment Management (MSIM), 205 Mortgage-backed securities (MBSs), 54–56, 213 Mortgage market, 35, 54–55, 102 Mortgages, opportunities, 35 Mozer, Paul, 195–198 Munger, Charlie, 62, 99, 101, 197–198 Myojin, Sugar, 59, 63, 78–79 Natural catastrophe, 257 New York Stock Exchange (NYSE) specialists, impact, 20–21 stock sale, 13 Noncash exchanges, 40 Norman Conquest, 215 Norris, Floyd (editorial), 91–92 O’Brien, John, 10 One-off events, 249 Opportunistic strategies birth/death cycle, 252 history, 251 Optimal behavior, mathematical framework, 237–240 Options, stripping, 117 Option theory, 24 Orange County, bankruptcy, 38 Organizational dysfunction, 134–136 Pacioli, Luca, 136–137 Pairwise stock trades, 187 Palmedo, Peter, 17, 28–29 Paloma Partners Management Company, 42 Pandit, Vikram, 12 Parets, Andy, 63–69 Parkhurst, Charlie, 85 Partnership model, 37 Perfect market paradigm, 209–210 imperfections, 210–212 liquidity, degree, 212–213 Phibro, Salomon acquisition, 66 Physical processes, modeling, 229 Platt, Bob, 7–8 Portfolio insurance, 10–15 market crash, 22 Portfolio managers, loss (risk), 204–205 Position disclosure, problems, 225 transparency, increase (financial market regulator advocacy), 225 Preference shares, illiquidity, 115 Price convergence, 121–122 Primal risk, 235–237 knowledge, limits, 230–232 Primogeniture, 215–220 implications, 216–217 objective, impact, 216 Principal only (PO), 54–55 Principia Mathematica (Russell), 221–223 Procter & Gamble, losses, 38 Program trading, absence, 24–25 Protest bids, 195–196 Quants, 8–9, 82–84 Quantum Fund, 180–181 Quattrone, Frank, 72 Rational man approach, 231 Real assets, valuation, 137–138 Real-world risk, 237–238 Reed, John, 127 Relative strength index (RSI), 190 Relative value trades, 101–102 Rhoades, Loeb, 125 RISC workstations, 191 Risk control, 220 knowledge, absence, 231–232 management, 36 nature, variation, 249 reduction, 185 progress/refinement, impact, 4 tactical usage, 200 274 bindex.qxd 7/13/07 2:44 PM Page 275 INDEX Risk arbitrage, 15–16, 65, 71 Risk Architecture, 126 Risk-controlled relative value trading, 102–103 Risk-management structure, 238 Robertson, Julian, 165, 179–182 Rosenbluth, Jeff, 59, 83 Rosenfeld, Eric, 51, 79, 86 Rothschild, Nathan, 88–89 trading strategy, 90–93 Waterloo, relationship, 89–90 Rubinstein, Mark, 10 Russell, Bertrand, 221–223 Russia default, 103–104 Russian short-term bonds, 103 Salomon Brothers arbitrage units, 73–74, 80–82 closure, 88–89 tracking error, problems, 86–89 competition, 60–61 fixed income trading floor, 82 Japanese unit, 56–62 July Fourth massacre, 86–89 mortgage position, loss, 55–56 organization, trader involvement, 73 risk arbitrage group, mortgage position, 80–81 Travelers purchase, 77 Salomon North, 81, 100, 199 Salomon Smith Barney convergence trades, 120–124 proprietary trading, reduction, 92 risk management committee, 98–101 risk measuring/monitoring, 126 Travelers, interaction, 125 U.S. fixed income arbitrage group, 91–93 U.S.

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America
by Danielle Dimartino Booth
Published 14 Feb 2017

Cayne earned $34 million in pay that year and became the first Wall Street CEO to own a stake in his company worth more than $1 billion. With a winner-take-all philosophy, Cayne and his ferrets were true believers in Wall Street Darwinism. I had great affection for folks in the trenches at Bear Stearns; they’d proved to be valuable allies when I was at DLJ. In those days, I traded a lot of junk bonds. Eventually I realized dealers on my own desk were jacking up prices to build in extra profits for themselves. After I became friendly with people on the bond desk at Bear, I’d quietly call one of my buddies and ask, “How bad is my own desk ripping my head off?” They’d get me realistic pricing.

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“Importantly,” Hoenig said, “such actions as they continue are demanding the saving public and those on fixed incomes subsidize the borrowing public.” For now, Fisher remained quiet, choosing to hold his dissents for a time when change was afoot. Signs had emerged that investors were becoming desperate in response to continued zero interest rates. The search for yield took on greater intensity. On February 18, 2011, junk bond yields hit a low of 6.80 percent, dipping below the prior December 2004 record of 6.86 percent. Not only were corporations mired in a liquidity trap, so were households. Policymakers couldn’t grasp that the longer interest rates stayed at the zero bound, the more savings consumers would have to siphon from their available funds for spending.

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No longer voting: Sudeep Reddy, “The Lone Dissenter: Kansas City’s Hoenig Goes Out with a Record,” Wall Street Journal, December 14, 2010. Hoenig hit back: Gregg Robb, “Hoenig Defends String of Dissents in 2016,” Marketwatch.com, January 5, 2011. On February 18, 2011: Aline van Duyn and Nichole Bullock, “‘Junk’ Bonds Hit Record Low,” Financial Times, February 18, 2011. This was backed by: Richard Fry and Jeffrey S. Passel, “In Post-Recession Era, Young Adults Drive Continuing Rise in Multi-Generational Living,” Pew Research Center: Social and Demographic Trends, July 17, 2014. In early February 2011: Neil Irwin, “Kevin Warsh to leave Federal Reserve Board,” Washington Post, February 10, 2011.

Ethics in Investment Banking
by John N. Reynolds and Edmund Newell
Published 8 Nov 2011

Calculated as the discount rate that makes the net present value of all future cash flows zero Investment banking: providing specialist investment banking services, including capital markets activities and M&A advice, to large clients (corporations and institutional investors) Glossary xi Investment banking adviser: see Adviser Islamic banking: banking structured to comply with Shariah (Islamic) law Junior debt: debt that is subordinated or has a lower priority than other debt Junk bond: see High yield bond Lenders: providers of debt finance Leverage: debt Leveraged acquisition: acquisition of a company using high levels of debt to finance the acquisition LIBOR: London Inter-Bank Offered Rate, the rate at which banks borrow from other banks Liquidity: capital required to enable trading in capital markets M&A: mergers and acquisitions; typically the major advisory department in an investment bank Market abuse: activities that undermine efficient markets and are proscribed under legislation Market capitalism: a system of free trade in which prices are set by supply and demand (and not by the Government) Market maker: a market participant who offers prices at which it will buy and sell securities Mis-selling: inaccurately describing securities (or other products) that are being sold Moral hazard: the risk that an action will result in another party behaving recklessly Moral relativism: the concept that morals and ethics are not absolute, and can vary between individuals Multi-notch downgrade: a significant downgrade in rating or recommendation (by a rating agency) Natural law: the concept that there is a universal moral code Net assets: calculated as total assets minus total liabilities Net present value (NPV): sum of a series of cash inflows and outflows discounted by the return that could have been earned on them had they been invested today NYSE: New York Stock Exchange Operating profit: calculated as revenue from operations minus costs from operations P:E: ratio used to value a company where P (Price) is share price and E (Earnings) is earnings per share Price tension: an increase in sales price of an asset, securities or a business resulting from a competitive situation in an auction xii Glossary Principal: equity investor in a transaction Principal investment: proprietary investment Private equity: equity investment in a private company Private equity fund: investment funds that invest in private companies Proprietary investment: an investment bank’s investment of its own capital in a transaction or in securities Qualifying instruments: securities covered by legislation Qualifying markets: capital markets covered by legislation Quantitative easing: Government putting money into the banking system to increase reserves Regulation: legal governance framework imposed by legislation Restructuring: investment banking advice on the financial restructuring of a company unable to meet its (financial) liabilities Returns: profits Rights-based ethics: ethical values based on the rights of an individual, or an organisation SEC: the Securities and Exchange Commission, a US regulatory authority Sarbanes–Oxley: the US “Company Accounting Reform and Investor Protection Act” Senior debt: debt that takes priority over all other debt and that must be paid back first in the event of a bankruptcy Shariah finance: financing structured in accordance with Shariah or Islamic law Sovereign debt: debt issued by a Government Speculation: investment that resembles gambling; alternatively, very short-term investment without seeking to gain management control Socially responsible investing (SRI): an approach to investment that aims to reflect and/or promote ethical principles Spread: the difference between the purchase (bid) and selling (offer) price of a security Subordinated debt: see Junior debt Syndicate: group of banks or investment banks participating in a securities issue Syndication: the process of a group of banks or investment banks selling a securities issue Takeover Panel: UK authority overseeing acquisitions of UK public companies Too big to fail: the concept that some companies or sectors are too large for the Government to allow them to become insolvent Glossary xiii Unauthorised trading: trading on behalf of an investment bank or other investor without proper authorisation Universal bank: an integrated bank Utilitarian: ethical values based on the end result of actions, also referred to as consequentialist Volcker Rule: part of the Dodd–Frank Act, restricting the proprietary investment activities of deposit-taking institutions Write-off: reduction in the value of an investment or loan Zakat: charitable giving, one of the five pillars of Islam This page intentionally left blank 1 Introduction: Learning from Failure There has been significant criticism of the ethics of the investment banking sector following the financial crisis.

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Index ABACUS, 7, 16–17, 46, 63–4, 68, 73, 78 Abrahamic faiths Christianity, 52–4 Islam, 54–5 Judaism, 56 abuse market, 14, 70, 75, 84–8 personal, 159 of resources, 127–8 abusive management practices, 157 abusive trading, 93 adult entertainment, 56 advisers financial, 109 investment banking, 111 sell-side, 107, 111–13 trusted, 108–9, 125 advisory fees, 119, 124 advisory markets, 73 agents, 65 aggressive behaviours, 118–19 Alpha International, 9 American Bar Association, 19 Anderson, Geraint “CityBoy”, 8 Anglican Communion, 53 Anglicanism, 53 annual general meeting (AGM), 29, 54 Aquinas, Thomas, 34, 37 Aristotle, 34 Arjuna, 57 attrition rate, 132 authorisation, informal, 81, 98 BAE Systems, 48 bait and switch, 102–3, 158 bank debt, 82–3, 120 banking regulations, 16 Bank of America, 16 Bank of Credit and Commerce International (BCCI), 12 Bank of England, 25 Barclays Capital, 139 Bar Council, 19 Bayly, Daniel, 8 Bear Stearns, 5, 16, 76 beauty parade, 110 behaviours aggressive, 118–19 discriminatory, 129–31 of Hedge fund, 12 investment banking, 3 management, 131–2 market, 71 misleading, 86 unethical, 68 virtuous, 37 Benedict XVI, Pope, 6, 52 Bentham, Jeremy, 36 Bernanke, Ben S., 96 Besley, Tim, 42 Beyond the Crash (Brown), 4 Bhagavad Gita, 57 bid price, 64 big cap, 65, 85 black box approach, 114 Blackstone Group, 20 Blankfein, Lloyd, 47, 63–4, 68, 78 bluffing, 113 Boesky, Ivan, 12 bonds government, 23 investment grade, 118 junk, 118 bonus pools in public ownership, 136–9 Bootle, Roger, 4 Bribery Act 2010, 129 British Academy, 42 Brown, Gordon, 4, 135 Buddhism, 57 bullying, 159 170 Index business ethics of fiduciary duties, 27 of financial crisis, 12–32 within governments, 59 of market capitalism, 12–14 of regulation, regulatory changes and, 18–21 of religion, 51–62 of shareholders, 27–9 strategic issues with, 30–1 Business Ethics Center, 56 Business Judgment Rule, 20 Business Standards Report, 46 buy recommendation, 115 capitalism market, 12–14 modern, 54 see also casino capitalism capital markets, 155 advisory markets vs., 73 conflicts of interest in, 112–14 cardinal virtues, 37 Caritas in Veritate (Benedict), 6, 52 cash compensation, 132, 134 casino capitalism emergence of, 43 in investment banking, 3 speculative, 16, 93 categorical imperative, 34, 59, 69 Caterpillar, 48 Central Finance Board of the Methodist Church (CFB), 54, 59 chief executive officer (CEO), 116 Christianity, 52–4 Anglican Communion, 53 Methodist Church, 53 Roman Catholic Church, 53 Christian Old Testament, 34 Church Investors’ Group (CIG), 135 Church of England, 9, 53, 58 Citigroup, 19, 112 claiming credit, 134 clients confidential information, 120 conflicts of interest, 105–10 171 duty of care, 105 engagement letters, 122–3 fees, 115–18 financial restructuring, 119–20 hold-out value, 120–1 honesty, 101–5 margin-calls, 121 practical issues, 110–15 promises, 100–1 restructuring fees, 121–2 syndication, 118–22 truth, 101–5 Code of Ethics, 47–50, 147–51 for Goldman Sachs business principles, 46 in investment banking, 47–9 Revised, 47 collatoralised debt obligations (CDOs), 30, 42, 75 command economies, 13 commercial banking, 19–21, 25 communication within markets, 88 Companies Act 2006, 27 compensation cash, 132, 134 defined, 132 for employees, 135 internal issues on, 8 for junior bankers, 136 levels of, 132–3, 138 objectivity of, 144 political issues with, 6, 137 restrictions on, 10 competitors, 113 compliance corporate, 20 danger of, 20 frameworks for, 68, 146 regulatory, 18 requirements of, 6 confidential information, 120 conflicts of interest, 105–10, 158 with capital markets, 109–10 with corporate finance, 107–8 personal, 47 with pre-IPO financing, 110 with private equity, 110 172 Index conflicts of interest – continued reconciling, 68–70 of trusted advisers, 108–9 consequentialist ethics, 36–7, 42 corporate compliance, 20 Corporate/Compliance Social Responsibility (CSR), 7 corporate debt, 17 corporate entertainment, 128–9, 159 corporate finance, 107–8 Corporate Sustainability Committee, 152 Costa, Ken, 9 Cox, Christopher, 96–7 creative accounting, 12 credit crunch, 17 credit default swap (CDS), 71 credit downgrade, 17, 76 Credit Lyonnais, 12 creditors, restricted, 121 credit rating, 75–7 calculating, 76 inaccurate, 5 manipulating, 75, 156, 158 unreliability of, 17 credit rating agencies, 76 Crisis and Recovery (Williams), 53 culture, 46, 136, 151 customers, 69 Daily Telegraph, 84 Debtor in Possession finance (DIP finance), 80 debts bank, 82–3, 120 corporate, 17 junior, 118 rated, 77 senior, 118 sovereign, 17 deferred equity, 5 deferred shares, 133 Del Monte Foods Co., 107 deontological ethics, 34–6 stockholders, 41–2 trust, 40–1 derivative, 27, 30 dharma, 63–4 Dharma Indexes, 57 discounted cash flow (DCF), 27 discount rate, 27 discriminatory behaviour, 129–31 distribution, 15, 35, 66 Dodd–Frank Wall Street Reform and Consumer Protection Act, 25 dotcom crisis, 94 dotcom stocks, 17 Dow Jones, 55–6 downgrade credit, 17, 76 defined, 76 multi-notch, 17, 76 duties, see rights vs. duties duty-based ethics, 66–8 duty of care, 105 Dynegy, 8 Earnings Before Interest Tax Depreciation and Amortisation (EBITDA), 27 economic free-ride, 5, 21 economic reality, 137 effective tax rate (ETR), 140 emissions trading, 14 employees, compensation for, 135 Encyclical, 52 engagement letters, 122–3, 159 Enron, 8, 12, 17, 20, 76 enterprise value (EV), 27 entertainment adult, 56 corporate, 128–9, 159 sexist, 159 equity deferred, 5 private, 2–3, 12, 110 equity research, 88–9, 113–15 insider dealing and, 83–4 ethical behaviour, 38–9 Ethical Investment Advisory Group (EIAG), 53, 58 ethical investment banking, 145–7 ethical standards, 47 Index ethics consequentialist, 36–7, 42 deontological, 34–6 duty-based, 66–8 exceptions and, effects of, 89–90 financial crisis and, 4–8 in investment banking, 1 in moral philosophy, 1 performance and, 8–10 rights-based, 66–8 virtue, 37–8, 43–4 see also business ethics; Code of Ethics Ethics Helpline, 48 Ethics of Executive Remuneration: a Guide for Christian Investors, The, 135 European Commission, 89 European Exchange Rate Mechanism (ERM), 17 exceptions, 89 external regulations, 19, 31 fair dealing, 45 Fannie Mae, 43 Federal Home Loan Mortgage Corporation, 43 Federal National Mortgage Association, 43 fees, 115–18 advisory, 107, 116 restructuring of, 121–2 2 and 20, 13 fiduciary duties, 27–8 financial advisers, 109 Financial Conduct Authority (FCA), 26 financial crisis, business ethics during CDOs during, 90 CDSs during, 90 ethics during, 4–8, 12–34 investment banking and, necessity of, 14–15 market capitalism, 12–14 necessity of, 14–15 non-failure of, 21 positive impact of, 18 problems with, 15–17 reality of, 16 speculation in, 91 173 Financial Crisis Inquiry Commission, 76 Financial Policy Committee (FPC), 25 financial restructuring, 119–20 Financial Services Modernization Act, 19 Financial Stability Oversight Council, 25 firm price, 67 Four Noble Truths, 57 Freddie Mac, 43 free-ride defined, 26 economic, 5, 21 in investment banking, 24 FTSE, 55 Fuhs, William, 8 General Board of Pension and Health Benefits, 54, 59 German FlowTex, 12 Gift Aid, 141 Glass–Steagall Act, 19 Global Settlement, 113 golden parachute arrangements, 133 Golden Rule, 35, 150 Goldman Sachs, 7, 16, 45, 63 Business Principles, 45–6 charges against, 78 Code of Business Conduct and Ethics, 45, 68 Code of Ethics for, 47–8 Goldsmith, Lord, 27 government, 59 business ethics within, 60 guarantees of, 24 intervention by, 22–3 government bonds, 23 greed, 4–5 Green, Stephen, 8–9 gross revenues, 59 Hedge fund behaviour of, 12 failure of, 21 funds for, raising, 2 investment fund, as type of, 3 rules for, 133 174 Index Hennessy, Peter, 42 Her Majesty’s Revenue and Customs (HMRC), 140–1 high returns, 28, 110 Hinduism, 56–7 Hobbes, Thomas, 36 hold-out value, 120–1 honesty, see trust hospitality, 128–9 hot IPOs, 94 hot-stock IPOs, 94 HSBC, 9, 28, 152 Ijara, 55 implicit government guarantee, 22–3 Independent Commission on Banking, 25 inequitable rewards, 6 informal authorisation, 81, 98 Initial Public Offering (IPO), 7 of dotcom stocks, 17 hot, allocation of, 94 hot-stock, 94 insider dealings, 83–4, 155 equity research and, 83–4 ethics of, 66, 70 laws on, 84 legal prohibition on, 82 legal restrictions on, 10 legal status of, 82 legislation on, 74 restrictions on, 83 rules of, 82, 90 securities, 70 insider trading, 12 insolvency, 24–5 institutional greed, 4 integrated bank, 28 integrated investment banking, 2, 30, 67, 106, 108 interest payments, 59–60 interest rate, 60 internal ethical issues, 126–43 abuse of resources, 127–8 corporate entertainment, 128–9 discriminatory behaviour, 129–31 hospitality, 128–9 management behaviour, 131–2 remuneration, 132–9 tax, 139–41 internal review process, managing, 134 investment banking, 94 casino capitalism in, 3 Code of Ethics in, 47–9 commercial and, convergence of, 20–1 defined, 2 ethics in, 1 free-ride in, 24 integrated, 2, 30, 67, 108, 112 in market position, role of, 65–6 moral reasoning and, 38 necessity of, 14–15 non-failure of, 19–20 positive impact of, 18 recommendations in, 94–7 sector exclusions for, 58–9 investment banking adviser, 121 investment banking behaviours, 3 investment banking ethics committee, 151–3 investment bubbles, 95 investment fund, 3 investment grade bonds, 118 investment grade securities, 76 investment recommendations, 94 investments personal account, 128, 156 principal, 15, 28 proprietary, 29 IRS, 140 Islam, 54–5 Islamic banking, 6, 54–5 Jewish Scriptures, 34 Joint Advisory Committee on the Ethics of Investment (JACEI), 54 JP Morgan, 16 Judaism, 56 junior bankers, 139 junior debt, 118 junk bond, 118 “just war” approach, 38 Index Kant, Immanuel, 35, 69 karma, 57 Kerviel, Jérôme, 44, 80 Krishna, 57 Law Society, 19 Lazard International, 9 leading adviser, 41 Leeson, Nick, 12, 44, 81 legislative change, 25–6 Lehman Brothers, 5–6, 15, 21, 23, 31, 43, 76 lenders, 26, 131 lending, 59–60 leverage levels of, 25 over, 75, 80, 119 Levin, Carl, 17, 63–4, 68 light-touch regulations, 4 liquidity market, 95 orderly, 25 withdrawal of, 24 loan-to-own, 80 Locke, John, 34 London Inter-Bank Offered Rate (LIBOR), 23 London School of Economics, 43 London Stock Exchange, 65, 71, 84 long-term values, 147 Lords Grand Committee, 27 LTCM, 23 lying, 101 MacIntyre, Alasdair, 38 management behaviour, 131–2 margin-calls, 121 market abuse, 14, 70, 75, 86–8, 155 market announcements, 88 market behaviours, 74 market capitalism, 12–14 market communications, 88 market liquidity, 95 market maker defined, 65–7 investment bank as, 66 primary activities of, 65 175 market manipulation, 75 market position, role of, 104 market rate, 117 markets advisory, 73 capital, 73, 117–18, 158 communication within, 88 duties to support, 71–2 primary, 103 qualifying, 70, 82 secondary, 103 market trading, 41 Maxwell, Robert, 12 Meir, Asher, 56 mergers and acquisitions (M&As), 41, 79 Merkel, Angela, 93 Merrill Lynch, 8, 16 Methodism, 53 Methodist Central Finance Board, 59 Methodist Church, 54 Midrash, 56 Milken, Michael, 12 Mill, John Stuart, 36 Mirror Newspaper Group, 12 misleading behaviours, 86, 105 mis-selling of goods and services, 77–9, 155 modern capitalism, 54 moral-free zones, 31 moral hazard, 22, 70 moral philosophy, 1 moral reasoning, 38 moral relativism, 38–9, 49, 68 Morgan Stanley, 47 multi-notch downgrade, 17, 79 natural law, 34, 37 natural virtues, 37 necessity of investment banking, 14–15 New York Stock Exchange (NYSE), 65, 71 New York Times, 8 Noble Eightfold Path, 57 Nomura Group Code of Ethics, 47 normal market trading, 71 Northern Rock, 43 176 Index offer price, 64 off-market trading, 71–3, 90, 155 Olis, Jamie, 8 on-market trading, 70–1 oppressive regimes, 61 option value, 121 Orderly Liquidation Authority, 25 orderly liquidity, 25 out-of-pocket expenses, 127–8 over-leverage, 75, 80, 119, 158 overvalued securities, 155 patronage culture, 131, 142 Paulson, Henry M., 86 Paulson & Co., 78 “people-based” activity, 67 P:E ratio, 27 performance, 8–10 personal abuse, 159 personal account investments, 128, 156 personal account trading, 128 personal conflicts of interest, 45 pitching, 102, 159 Plato, 37 practical issues, 110–15 competitors, relationships with, 113 equity research, 113–15 pitching, 111 sell-side advisers, 111–13 pre-IPO financing, 110 prescriptive regulations, 31, 145 price tension, 79, 113 primary market, 103 prime-brokerage, 2 principal investment, 15, 28 private equity, 2–3, 12, 110 private trading, 94 Project Merlin, 133, 141 promises, 100–1 proprietary investment, 29 proprietary trading, 15, 25, 66, 150, 155 Prudential Regulation Authority (PRA), 26 public ownership, bonus pools in, 136–9 “pump and dump” strategy, 86 qualifying instruments, 70, 87 qualifying markets, 70, 82 quality-adjusted life year (QALY), 36 Quantitative Easing (QE), 23 Queen Elizabeth II, 42 Qu’ran, 54 rated debt, 77 rates attrition, 132 discount, 27 interest, 60 market, 117 tax, 140 rating agencies, 76 Rawls, John, 35, 136 recognised exchanges, 71 Regal Petroleum, 84 regulations banking, 16 compliance with, 28 external, 19, 31 light-touch, 4 prescriptive, 31, 145 regulatory changes and, 18–20 securities, 114 self, and impact on legislation, 19 regulatory compliance, 18 religion, business ethics in, 51–62 Buddhism, 56 Christianity, 52–4 Governments, 59 Hinduism, 56–7 interest payments, 59–60 Islam, 54–5 Judaism, 56 lending, 59–60 thresholds, 60 usury, 59–60 remuneration, 132–9 bonus pools in public ownership and, 136–9 claiming credit, 134 ethical issues with, 142–3 internal review process, managing, 134 1 Timothy 6:10, 135–6 Index research, 156 resources, abuse of, 127–8 restricted creditors, 120 restructuring of fees, 121–2 financial, 119–20 syndication and, 118–22 retail banks, 16 returns, 28, 156 Revised Code of Ethics, 47 right livelihood, 57 rights-based ethics, 66–8 rights vs. duties advisory vs. trading/capital markets, 73 conflict between, reconciling, 68–70 duty-based ethics, 66–8 off-market trading, ethical standards to, 71–2 on-market trading, ethical standards in, 70–1 opposing views of, 63–74 reconciling conflict between, 68–70 rights-based ethics, 66–8 Roman Catholic Church, 52 Royal Dutch Shell, 85 Sarbanes–Oxley Act, 20 Schwarzman, Stephen, 20 scope of ethical issues, 7–8 secondary market, 103 sector exclusions for investment banking, 58–9 securities investment grade, 76 issuing, 103–5 overvalued, 155 Securities and Exchange Commission (SEC), 7, 16 Goldman Sachs, charges against, 78 rating agencies, review by, 77 short-selling, review of, 96–7 securities insider dealing, 70 securities mis-selling, 77–9 securities regulations, 114 self-regulation, 19 sell recommendation, 115 177 sell-side advisers, 107, 111–13 Senate Permanent Subcommittee on Investigations, 46 senior debt, 118 sexist entertainment, 159 shareholders, 27–9 shares, deferred, 133 Shariah finance, 55 short-selling, 94–7, 154–5 Smith, Adam, 14, 35–6 social cohesion, 53 socially responsible investment (SRI), 56 Société Générale, 44, 80 solidarity, 53 Soros, George, 17 South Sea Bubble, 90 sovereign debt, 17 speculation, 91–4, 155 in financial crisis, 93 traditional views of, 91–3 speculative casino capitalism, 16, 91 spread, 21 stabilisation, 89 stock allocation, 94–7 stockholders, 41–2 stocks, dotcom, 17 Strange, Susan, 43 strategic issues with business ethics, 30–1 syndication, 119 and restructuring, 118–22 systemic risk, 24–5 Takeover Panel, 109 Talmud, 56 taxes, 139–41 tax optimisation, 158 tax rates, 140 tax structuring, 140 Terra Firma Capital Partners, 79, 112 Theory of Moral Sentiments, The (Smith), 14 3iG FCI Practitioners’ Report, 51 thresholds, 60 1 Timothy 6:10, 135–6 178 Index too big to fail concept, 21–7 ethical duties, and implicit Government guarantee, 22–3 ethical implications of, 26–7 in government, 22–3 insolvency, systemic risk and, 24–5 legislative change, 25–6 Lehman, failure of, 23 systemic risk, 24–5 toxic financial products, 5 trading abusive, 93 emissions, 14 insider, 12 market, 41 normal market, 71 off-market, 71–83, 90, 155 on-market, 70–1 personal account, 128 private, 94 proprietary, 15, 25, 66, 150, 155 unauthorised, 7 “trash and cash” strategy, 86 Travellers, 19 Treasury Select Committee, 26 Trinity Church, 53 Trouble with Markets, The (Bootle), 4 trust, 40, 53 trusted adviser, 108–9, 125 truth, 101–5 bait and switch, 102–3 misleading vs. lying, 101 securities, issuing, 103–5 2 and 20 fee, 13 UBS Investment Bank, 9 unauthorised trading, 7, 80–1, 155 unethical behaviour, 68 UK Alternative Investment Market, 89 UK Business Growth Fund, 133 UK Code of Practice, 141 UK Independent Banking Commission, 4, 22 United Methodist Church, 54, 59 United Methodist Investment Strategy Statement, 59 US Federal Reserve, 24, 25 US Financial Crisis Inquiry Commission, 4 US Open, 126 US Senate Permanent Subcommittee on Investigations, 64, 73 US Treasury Department, 132 universal banks, 2, 21, 28, 67 untoward movement, 85 usury, 59–60 utilitarian, 84 utilitarian ethics, 49, 84, 139 values, 9, 46, 119–21, 148 Vedanta, 57 victimless crime, 82 virtue ethics, 37–8, 43–4 virtues, 9, 34 virtuous behaviours, 37 Vishnu, 57 Volcker, Paul, 25 Volcker Rule, 2, 25 voting shareholders, 29 Wall Street, 12, 19, 53 Wall Street Journal, 20 Wealth of Nations, The (Smith), 14 Wesley, John, 53 Wharf, Canary, 18 Williams, Rowan, 53 Wimbledon, 127 WorldCom, 12, 17, 20, 76 write-off, 80 zakat, 55 zero-sum games, 118–22 

Eat People: And Other Unapologetic Rules for Game-Changing Entrepreneurs
by Andy Kessler
Published 1 Feb 2011

Time Warner and Comcast: cable. Disney: TV licenses and cable stations like ESPN. News Corp.: TV licenses, cable stations, and newspapers. Even Warren Buffett got in on the game, trying to make Buffalo, New York, a one-newspaper town so he could control a pipe. Years ago, I sat through a presentation by junk bond king Michael Milken, long released from involuntary housing for manipulating markets (“stock parking,” if you want to get technical). Milken flashed some photos of his former clients: Ted Turner, John Malone, John Kluge, Rupert Murdoch, Craig McCaw. Each one of them had borrowed billions in high-yield junk debt to build their media empires.

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Duke Power Grove, Andy Guns, Germs, and Steel (Diamond) Halstead, Maurice Halstead length Haves and Have-nots Health care the edge in personalized medicine Hedge funds, abundance, finding for Helú, Carlos Slim Henne, Albert Hersov, Rob Hewlett-Packard Hierarchy of needs Hoff, Ted Horizontal integration benefits of computers and voice communication and global economy and innovation and intellectual property ownership meaning of and price United States example How Capitalism Saved America (DiLorenzo) How We Got Here (Kessler) Hulu Humans, adapting technology to Hybrid autos IBM, vertical integration ICQ instant messaging Imperialism Income, generational differences Industrialization, and specialization Innovation, and horizontal integration Instant messaging, virtual pipe of Insurance companies, as Thieves Integration, horizontal Intel Intellectual property and horizontal integration and price cuts Intelligence (IQ), parameters of Intelligence at the edge cloud computing in health care social networking Interest rates, and Fed Internet digitized products, lack of protection of evolution of horizontal layers peer to peer (P2P) virtual pipes See also Networks; specific companies Internet stocks Investment capital, money/highest returns connection iPad iPhone iPod iTunes Jenkins, Holman Jobs Creators eliminating with technology licensed occupations replacing with technology Servers Slackers Slimers Sloppers Sponges Super Sloppers Thieves Jobs, Steve Junk bonds Kamangar, Salar Katzenberg, Jeffrey Keynes, John Maynard Kindle Kittler, Fred Kluge, John Lawyers, as Sponges Lehman Brothers bankruptcy Licenses, employment-related LinkedIn Livingston, Robert Longshoremen, as Sloppers McCaw, Craig McKnight, Dr. Jerry McNary, Robert Malone, John Maps, Google Market entrepreneurs Vanderbilt as example as winners Marketers, as Super Sloppers Markets benefits of for information for politics prediction markets price discovery by stock markets Mashups Maslow, Abraham Media defined empires, building of relationship to virtual pipe versus technology Media companies, vertical integration of Medicine, personalized Memory, chunks Mickos, Mårten Microcosm (Gilder) Microsoft employee interviews at Microsoft Word Midgley, Thomas Milken, Michael Mirabilis Money supply classic formula filled bucket comparison gold standard Monopoly, Vanderbilt fight against Moore, Gordon Moore’s law Mozilla Foundation Murdoch, Rupert Mushet, Robert Music, digital piracy virtual pipes for MySpace MySQL Nantell, Jim Napoleon Napster Needs, hierarchy of Netflix recommendations to customers Netscape Networks cloud computing dumb edge of network, intelligence at social networking See also Internet 99% Conference Nintendo Novelists, compared to programmers Noyce, Bob Nudge (Thaler and Sunstein) Obama, Barack Obama, Michelle Ofoto Open-source software Oracle Organic foods Organizational charts Orman, Suze O’Rourke, P.

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk
by William J. Bernstein
Published 12 Oct 2000

DCA is a wonderful technique, but it is not a free lunch. Buying those 20 shares at $5 took great fortitude, because you were buying at the “point of maximum pessimism.” Security prices do not get to bargain levels without a great deal of negative sentiment and publicity. Think of what it felt like to be buying stocks in October 1987, junk bonds in January 1991, or emerging markets stocks in October 1998, and you’ll know what I mean. Do not underestimate the discipline that is sometimes necessary to carry out a successful DCA program. On the other hand, the real risk of DCA is that your entire buy-in period may occur during a powerful bull market, which may be immediately followed by a prolonged drop in prices.

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Efficient market hypothesis: The concept that markets impound information into prices so well that the analysis of publicly available information will not produce excess returns. Expense ratio: The portion of the assets spent to run a mutual fund, including management and advisory fees, overhead costs, and 12b-1 (distribution and advertising) fees. The expense ratio does not include brokerage commissions, spreads, or market impact costs. High-yield (“junk”) bond: A debt instrument with a Standard & Poor’s rating of BB or less. By definition, such bonds have yields higher than less risky investment grade bonds. Index fund: A mutual fund designed to mimic the returns of a given stock market index, such as the S&P 500. Indexing: The strategy of exactly matching the performance of a given stock index, such as the S&P 500.

The Age of Turbulence: Adventures in a New World (Hardback) - Common
by Alan Greenspan
Published 14 Jun 2007

TH E DE LPH IC F U T U RE ished and hence they do not require the yield premiums over riskless treasuries that were prevalent in the past, or whether it is a need for additional interest income that is pushing them to reach for higher-yielding debt instruments. Spreads over U.S. treasuries of CCC-rated corporate bonds (socalled junk bonds) in mid-2007 were mind-bogglingly low. For example, this spread declined from 23 percentage points amid a plethora of junk bond defaults at the end of the recession in October 2002 to little more than 4 percentage points in June 2007, despite a large rise in issuance of CCC bonds. Spreads of emerging-market bond yields over those of U.S. treasuries have declined from 10 percentage points in 2002 to less than IVz percentage points in June 2007.

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Before long, emboldened S&L executives were financing skyscrapers and resorts and thousands of other projects that in many cases they barely understood, and they were often losing their shirts. Others took advantage of the loosened rules to commit fraud—most notoriously Charles Keating, a West Coast entrepreneur who was ultimately sent to prison for racketeering and fraud for having misled investors through sham real estate transactions and the sale of worthless junk bonds. Salesmen at Keating's Lincoln Savings were also said to have talked unsophisticated people into shifting their savings from passbook accounts into risky, uninsured ventures controlled by him. When the business collapsed, cleaning up the mess cost taxpayers $3.4 billion, and as many as twenty-five thousand bond buyers lost an estimated $250 million.

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Benefits would be generated by the principal and accumulated interest of a U.S. Treasury security maturing in the year the benefits are required to be paid. In practice, corporations try every which way to get around so simple a program because it is the most costly. Corporate equity, real estate, junk bonds, and even AAA corporate bonds yield a greater return than treasuries. But all have risk of default, and in the event of default, the sponsoring corporation would have to use its other assets or not pay its pension obligations. The debate as to what rate of return a pension fund should seek, and therefore how much risk it can accept, depends, in the end, on how certain the corporation wants to be of paying its promised benefits.

Portfolio Design: A Modern Approach to Asset Allocation
by R. Marston
Published 29 Mar 2011

If you invest in Russian bonds and Brazilian bonds and Chinese bonds, it would seem that your portfolio is diversified. But when Russia defaulted on its bonds, there was a reassessment of risk worldwide. Spreads on bonds widened sharply both in the emerging bond markets and in the high-yield U.S. bond market (for so-called junk bonds). The most dramatic effect of this reassessment of risks was the collapse of Long-term Capital Management, which had to be rescued by the major investment banks in September 1998. The Argentine crisis began as early as 2000 when the long-established peg to the U.S. dollar began to be seriously questioned.

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This has led to a once-for-all reduction in U.S. bond yields and a temporary increase in U.S. bond returns. In the case of both types of bonds, the great returns are probably behind us.20 For the future, it’s important to determine how emerging market bonds might fit in the portfolio. They are an odd bond series in that they are highly volatile, more like junk bonds in the United States than either U.S. or European conventional bonds. In Table 6.6, we report correlations between the emerging market bond index and the three other bond and stock indexes of Table 6.5. The highest correlation is not with other dollar bonds, but with the emerging market stock index.

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Until the 1980s, the high-yield market consisted primarily of fallen angels, bonds that were originally issued as investment grade, but that had fallen below investment grade because of poor financial performance. It was only in the 1980s that investment banks such as Drexel Burnham saw the potential for issuing non-investment grade (or junk) bonds to provide financing for firms with weaker credit standing. Since then, the high-yield market has become an important part of the overall corporate bond market in the United States. According to Altman and Karlin (2008), the high-yield market at the end of 2007 totaled $1,090 billion in outstanding issues.

Hedgehogging
by Barton Biggs
Published 3 Jan 2005

His record over the past 20 years is spectac- ccc_biggs_ch08_95-118.qxd 11/29/05 7:02 AM Page 109 Hedgehogs Come in All Sizes and Shapes 109 ular, although, of course, like everyone else, sometimes he gets it wrong. His fund is now around $5 billion, and he does the macro overlay. He has maybe seven or eight asset class (like biotech, Asia, junk bonds, Europe, emerging markets, etc.) portfolio managers who each run anywhere from $400 million to $100 million, depending on what Jake’s view of their sector is. Jake creates performance by allocating between the asset classes, and, in theory, the other guys add additional alpha by doing even better than their sector index.

…

However, the private equity guys are ingenious, and they have found a new escape hatch. The investment world is desperate for yield because interest rates on Treasury bonds are so meager. As a result, fixed income investors are reaching for yield by buying heavily into high yield, or in the parlance, junk bonds.The spread between the yield on junk and Treasuries is close to an all-time low. Everyone seems to have forgotten that from time to time, just when the buyers are frothing at the mouth about a new era, junk lives up to its name and defaults soar. Reaching for yield over time has proved to be extremely hazardous to your financial health.

…

In the summer of 2004 THL attempted to do an IPO of Simmons, but the deal flopped. So that December, Simmons sold $165 million of bonds and paid out the entire amount to THL as a dividend, giving THL a return of more than 40% on its investment. And incidentally, THL still owns 100% of Simmons. In 2004, 77 dividends worth $13.5 billion were financed by junk-bond deals, and highly leveraged loans from banks paid for another $9.4 billion of dividends. Somehow this doesn’t seem like sound corporate finance! The other method of exiting is for one LBO firm to sell a position to another LBO firm at a profit, thus booking the gain and charging their investors 20%.

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis
by Tim Lee , Jamie Lee and Kevin Coldiron
Published 13 Dec 2019

As explained in the previous chapter, in a global carry regime the VIX can be understood as the price of money. The spike in volatility thus represents a sudden jump in the price of money. Moneyness evaporates as the volatility of financial assets goes skyward. With much higher volatility, those financial assets—corporate debt, junk bond ETFs, etc.—that had come to seem almost as good as money suddenly look instead like merely highly risky financial assets. At that point the demand for true money will rise sharply. This means rapid deflation, because unless the central bank is able to expand the true money supply very quickly, the existing true money supply will be deficient—the definition of a severe monetary deflation.

…

The 2011 carry crash was probably limited by the impact of the US Federal Reserve, which was aggressively implementing quantitative easing policies at that time. Global financial markets are extremely complex. Carry trades can be implemented in all the different financial markets and instruments—debt instruments including junk bonds, currencies (currency carry trades as discussed in Chapters 2 to 4), equity markets (selling volatility, including implementing dip-buying strategies as described in the following chapter), and commodities markets, such as the oil market. Although it should be likely in a major global carry crash, such as occurred in 2008, that there will be a period during which carry trades are unraveling across all the different financial markets (a simultaneous carry crash), it is not necessarily the case that carry bubbles and crashes in different markets will be perfectly correlated with each other all the time. 128 THE RISE OF CARRY In Chapter 7 we explained how the carry crash is associated with the evaporation of both market and economic liquidity.

The America That Reagan Built
by J. David Woodard
Published 15 Mar 2006

Reynolds, the tobacco company, and Nabisco, the maker of cookies, crackers, and cereals, for $24.9 billion.9 Other companies were taken over in what was known as a leveraged buyout, where investors joined forces with the managers of a company to buy it. The funds came from the managers themselves, but most were borrowed. The money for takeovers was raised through the sale of so-called junk bonds. Junk bonds were high-risk investments by securities rating agencies, such as Standard and Poor’s and Moody’s, marked as such because they had a potential for higher yield and failure. If the people who bought the bonds were successful in the takeover, then they were handsomely rewarded; but if they failed, then there was the possibility that the bonds would not be repaid.

…

One of them, Silvarado Savings and Loan in Denver, Colorado, was associated with Neil Bush, the son of the president. In October of 1986, Neil Bush had extensive loans with Silverado, and he knew that the company had multiple big loans going sour and a credit rating so bad it could not even issue junk bonds on Wall Street.43 To raise cash, the Silverado executives devised a scheme to loan money for real estate developments at prices for more than what the property was worth, with the investors buying Silverado stock with the excess. In the fall of 1989, the Federal Deposit Insurance Corporation (FDIC) took over more than a billion dollars’ worth of assets from Silverado Savings and Loan.

How Markets Fail: The Logic of Economic Calamities
by John Cassidy
Published 10 Nov 2009

VAR models also tend to exaggerate the benefits of diversification. Typically, a big bank such as Citigroup or Wells Fargo has a wide variety of assets on its books: consumer loans, corporate loans, Treasury bonds, high-grade corporate bonds, junk bonds, mortgage bonds, stocks, currencies, commodities, and all manner of derivatives. In regular circumstances, the prices of some of these assets will move in opposite directions: if investors move out of junk bonds, higher-grade corporate bonds may benefit, whereas mortgage bonds might not be affected at all. In statistical terms, this means that some of the assets are negatively correlated, and others are hardly correlated at all.

…

(For decades, Congress had limited the deposit rates thrifts could offer.) Under pressure from local thrift owners and their allies on Capitol Hill, Ronald Reagan deregulated the S&L industry, allowing thrifts to offer higher interest rates and to expand their lending to riskier areas, such as commercial real estate and junk bonds. At the same time, the limit on insured deposits at S&Ls was raised from $40,000 to $100,000. In signing the Garn-St. Germain Depository Institutions Act of 1982, Reagan said it would provide “a long-term solution for troubled thrift institutions.” What it produced was reckless lending, poor judgment, and outright fraud, much of it linked to a real estate boom and bust across the Sunbelt.

Shutdown: How COVID Shook the World's Economy
by Adam Tooze
Published 15 Nov 2021

The Fed has always steered clear of this kind of direct lending to businesses. If you bought the debt of individual firms, you were picking favorites. If you bought a cross section of corporate debt, you ended up holding many poor-quality loans. The higher-risk end of the corporate debt market, so-called high-yield or junk bonds, was where private equity firms made winnings before which the bonuses of Wall Street bankers paled into insignificance. For political and legal reasons, if nothing else, the Fed preferred not to be in the business of backstopping the most speculative end of the financial system. In refusing to buy corporate debt, the Fed was unusual among major central banks.

…

The price of credit default swaps—insurance against default—on EM debt plunged—in the case of Indonesia from 290 to less than 100 basis points.38 The average yield on emerging market dollar-denominated debt, which had spiked as high as 8 percent, fell back to where it started before the crisis at 4.5 percent. That was far more than advanced economies were paying, but it meant that the pain was tolerable. By the summer, in one of the more improbable comebacks imaginable, the junk bonds issued by distressed African sovereigns had become flavor of the month for more adventurous investors.39 In 2020 the emerging markets demonstrated their ability to ride out even a very severe capital flight. But coronavirus was not like other crises. Cushioning the financial blows was one thing; managing the impact of the crisis on the real economy was quite another.

…

“Indonesia Central Bank Says in Talks with U.S. Fed, China on Swap Lines,” Reuters, April 2, 2020. K. Salna and T. Sipahutar, “Indonesia Says New York Fed Offers $60 Billion Credit Line,” Bloomberg, April 7, 2020. 38. www.worldgovernmentbonds.com/cds-historical-data/indonesia/5-years/. 39. C. Goko, “Africa’s Junk Bonds Among Hottest Investments with Big Yields,” Bloomberg, June 4, 2020. 40. P. Naidoo, “After More Than 25 Years S. Africa Is Now Junk with Moody’s Too,” Bloomberg, March 27, 2020. 41. “South Africa Borrows from the IMF for the First Time Since Apartheid,” Economist, August 1, 2020. 42.

When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A)
by Scott McCleskey
Published 10 Mar 2011

First, the downgrade lends an air of objective confirmation that the firm is indeed having liquidity problems and gives thus credence to the rumors. Second, the firm’s problems are no longer merely a matter of rumor control and market psychology, since many of its counterparties’ risk management controls prohibit or restrict dealing with a counterparty that has a ‘‘speculative’’ (junk) bond status. They have no choice but to pull away from the failing firm and its debt, given the legal covenants governing their investment practices in order to protect them. These measures have the ironic 2 Elizabeth Hester and Peter Cook, ‘‘Greenberg Says Death of Bear, Lehman Means Wall Street Finished,’’ Bloomberg.com, December 9, 2008. 3 Interview, Frontline, ‘‘Inside the Meltdown,’’ PBS, February 17, 2009, transcript available at www.pbs.org/wgbh/pages/frontline/meltdown/interviews/greenberg.html. 

…

See Self-Regulatory Organizations (SROs) Standard & Poor (S&P), 84, 88, 94 structured finance products, 32, 34–36, 73, 84, 88 Stuart, John, xvii–xviii subprime mortgages AAA rating for, 33–34 interest rates, rising, 86 investment bankers, xxi mortgage payments and, 34 pooled risk, 33 ratings, downgrading, xvii–xix, 88, 93 structured investments backed by, 37 as toxic assets, 32–34, 37 systemic risk and market meltdown about, 1 AIG and credit default swaps, 5 Bear Stearns, 2–6, 10, 13–14 borrowed money, short vs. long-term, 2 ‘‘breaking the buck,’’ 8 collateral damage, 6–7 conclusion, 12 economy is about connections, 1 economy is not the sum of its parts, 1 funding, day-to-day, 2–3 government intervention, 9–10, 12 hedge fund redemption, 6 investment practice, legal covenants governing, 4 Lehman repos, 8 leverage, 6 Long Term Capital hedge fund collapse, 11 loss of confidence, 3 margin call, 6 money market fund, 7–9, 11, 92 regulation to focus on firms vs. system as a whole, 12 regulatory reform proposals, 2, 12 repurchase agreement (repo), 3, 6–8, 13 risk of fluctuation in the overnight price of an asset, 3 rumor control and market psychology, 4 rumors, at the mercy of, 4–6 rumors, self-fulfilling nature of, 9 rumors and bank runs, 4 rumors cause a crisis, 4 run on the bank, institutional, 6 SEC regulations restricting what money market fund for investment, 7 six degrees of separation, 11 speculative (junk) bond status, 4 system collapse, why not before?, 10–12 systemic, how a problems goes, 3–10 systemic risk, how it works, 2–9 systemic risk, macro/micro, 2 systemic risk and Bear Stearns, 13–14 system is complex and prone to uncertainty and rumor, 12 toxic assets, difficult-to-price, 6 T TARP. See Troubled Asset Relief Program (TARP) Theory of Moral Sentiments (Stuart), xvii–xviii Tier 1FHC, 177–79, 184–85 E1BINDEX 06/16/2010 11:28:9 Page 197 Index too-big-to-fail concept, 15–17 toxic assets AAA rating for housing market, 34 AAA rating for senior tranches, 34 AAA rating for subprime mortgages, 33–34 AAA rating for tranches, 34, 36 AAA rating for U.S.

Mastering the Market Cycle: Getting the Odds on Your Side
by Howard Marks
Published 30 Sep 2018

That’s when Michael Milken achieved his first success in convincing investors that it’s okay for below-investment grade companies to issue bonds—and for institutions to buy them—if the interest rate is high enough to compensate for the risk. The high yield universe consisted of less than $3 billion of bonds at the time I first got involved. The vast majority of investing organizations had a rule against buying bonds rated below investment grade, which were commonly called “junk bonds.” And Moody’s categorically rejected B-rated bonds, saying they “fail to possess the characteristics of a desirable investment.” How could these unpopular bonds not have been underrated bargains? How could early participation not have been a boon? And then, a decade later, Bruce Karsh brought his legal skills and strategic insight to my team, complementing Sheldon Stone’s expertise in credit, and we organized one of the first distressed debt funds from a major financial institution.

…

See Global Financial Crisis of 2007–08 Crutchley, John- Paul, 124 cycles, 3 causation and progression, 30–32, 283, 297–98 cessation of, 178, 180, 285–88, 290 cycle of success, 270–71 definitions of, 40–41 elements of, 18–19, 25–27, 208–10 excess and corrections, 29, 85–86, 293, 299, 307–9 interaction of, 32–33, 167, 186–89, 199–201 listening to, 3–5, 309 major cycles, 267 midpoint and aberrations, 24–29, 266, 296–97 regularity and irregularity, 40–42, 172, 217, 244–45 timing and extent, 24, 39, 145, 282, 295–96 understanding, 17, 22–24, 118, 239, 314–15 See also credit cycle “Death of Equities, The,” 49, 277–78 D Demosthenes, 222, 227, 284 Dimson, Elroy, 13–14, 239 distressed debt investments, 161–62 credit crunch and, 164–66 role of high yield bonds, 163–64 understanding opportunities, 163, 166–67, 241–42, 282 Dow 36,000 (Glassman & Hassett), 219 Dowd, Timothy, 255 Drexel Burnham, 165 Drunkard’s Walk, The (Mlodinow), 42 E economic cycles, 46–47, 64–66, 167 long and short term, 29–30 repetition and fluctuation, 24–25, 97, 135 short-term, 47, 58, 61 economic forecasts, 61–63, 208 Economics and Portfolio Strategy, 13 Economist, The, 141 Eichholtz, Piet, 182 Einstein, Albert, 36 Ellis, Charlie, 5 emotion/psychology, 3, 31, 34, 37, 167 “bubble” and “crash,” 196–98 contrarianism, 133, 135, 142, 234, 244, 301–4 credulousness and skepticism, 90–91, 133, 227 definition of insanity, 36 effect on economic cycles, 83–86, 97–99, 211, 228, 289–92, 298–299 emotionalism or objectivity, 95–96 euphoria and depression, 89, 94, 99, 125, 211, 222, 305, 312 extremes, 113–16, 265 fear, effect on consumption, 59 fear and/or greed, 87–89, 92–93, 114, 221–22, 233–35, 303 humility and confidence, 271–73 investment psychology, 40–42, 93–94, 186–88, 190–91, 214–15, 244 optimism and pessimism, 89–90, 133, 299–301, 302–3 “silver bullet,” 227 F falling knives, 8, 156, 202, 235–36 Federal Reserve Bank, 68, 119, 180, 231 Feynman, Richard, 289 Financial Times, 122, 124 Frank, Barney, 151 Friedman, Milton, 62 fundamentals, 185–87, 189, 209 valuation metrics, 211 future prediction macro prediction, 10 opinions and likelihood, 15, 102, 208, 263–65 qualitative awareness, 214–15 South Sea Bubble, 195–96 G Galbraith, John Kenneth, 5, 34, 63, 125, 178–79, 222 Geithner, Timothy, 155, 239, 287 Glass-Steagall Act, 120, 128 Global Financial Crisis of 2007–08, 36, 59, 119–22, 127–32, 147–57, 180, 233 bear market stages, 193–94 effect on real estate market, 177 lessons from, 239–40 Treasury guarantee of commercial paper, 139–40, 155, 233 Goldman, William, 43 Goldman Sachs, 155 government deficits and national debt, 71–73 economic management tools, 71–73 Graduate School of Business, University of Chicago, 103 Graham, Ben, 189 Greenblatt, Joel, 5 Greenspan, Alan, 217 gross domestic product (GDP) consumption, 59–60 definition of, 47 recession (negative growth), 48 See also productivity H high yield bonds, 44, 106, 108, 131–32, 157, 281–82 history and memory, 34, 42, 178 Arab oil embargo, 292 blue chips or small-capitalization, 274 brevity of, 222 convertible arbitrage, 275 growth and tech stocks, 274 mortgage defaults, 229 one house in Amsterdam, 181–82 permanent prosperity, 288–89 poor performance of stocks, 276–77 projections of the future, 286–87, 311–12 History of the Peloponnesian War (Thucydides), 37–38 Hoover, Herbert, 287 I intrinsic value, 11, 92, 133, 194, 200, 205 when to buy, 237 investing aggressive or defensive, 248, 250–53, 259–60, 295 asset selection, 248, 255–59 bargains or popularity, 273–78 capitulation, 34–35, 194–95 cycle positioning, 248, 250, 252, 254–55, 312–14 definition of, 101–2, 262 fluctuation in, 186–87 growth stocks, 197–98 long or short securities sales, 8 market cycle, return, 204–6 overpayment, 144, 169, 179 philosophy, 4–5, 197, 207 security analysis and value investing, 11 skill or luck, 249, 253–54, 258–59, 272–73 “weighing machine,” 189 See also fundamentals; psychology investment indices, 232t, 238t “it’s different this time,” 37, 197–99 J Jain, Ajit, 5, 276 Janjigian, Jahan, 280 junk bonds. See high yield bonds K Karsh, Bruce, 6, 161, 231, 235, 282 Kass, Doug, 5 Kaufman, Henry, 273 Kaufman, Peter, 5, 271 Keele, Larry, 6 Keynes, John Maynard, 72, 240–41 Klarman, Seth, 5 L Lehman Brothers bankruptcy, 59, 129, 154–55, 233, 235, 237 listen, definition, 3–4 Lombardi, Vince, 1 long term trends, 48–51, 63–64 Long-Term Capital Management, 117, 146 M market assessment guide to, 212–14 qualitative awareness, 216 valuation, 215, 220 market bottoms definition of, 235–37 identifying, 242, 308–9 market efficiency, 110 Marks, Howard—memos “bubble.com,” 220 “Ditto,” 171 “Everyone Knows,” 100 “First Quarter Performance,” 83 “Genius Isn’t Enough,” 146 “Happy Medium, The,” 86–87, 90–91, 116–17, 147 “It Is What It Is,” 212 “It’s All Good,” 84 “Limits to Negativism, The,” 128–29, 133, 233–34 “Long View, The,” 29–30, 48 Most Important Thing, The, 1–2, 5, 7, 23, 39, 134, 208, 212–14, 290–92 “Now It’s All Bad?”

Lab Rats: How Silicon Valley Made Work Miserable for the Rest of Us
by Dan Lyons
Published 22 Oct 2018

Those who did were “preaching pure and unadulterated socialism,” he wrote. Socialism! Gasp! The horror! Friedman’s doctrine quickly became accepted as the correct way to run a business. Indoctrinated with this ideology, a new generation of MBA students roared into the corporate world and became foot soldiers in the junk bond, leveraged buyout, hostile takeover craze of the 1980s. Naturally, Wall Street loved the Friedman doctrine, since according to Friedman they were the only ones who mattered. For CEOs the Friedman doctrine also made life simpler. All they had to worry about was hitting quarterly targets and boosting the stock price.

…

Hoffman’s company, LinkedIn, grew quickly for a few years but eventually began hemorrhaging money and was acquired by Microsoft. Netflix’s revenues grew 30 percent in 2017, and the company turned a profit, but Netflix also burns more cash than it generates. The company has obligations of more than $28 billion, some of it debt raised by selling junk bonds, a risky strategy that “recalls the dot-com era,” as Crain’s New York Business put it in a May 2018 article. Uber, despite its claims about a culture that produces “diamonds,” stumbled in 2017, specifically because of its culture. After a string of scandals, the board fired Travis Kalanick, the company’s CEO and founder.

Accelerando
by Stross, Charles
Published 22 Jan 2005

While the mess is being sorted out, business IT departments have gone to standby, refusing to process any transaction that doesn't come in the shape of ink on dead trees. Tipsters are warning of an impending readjustment in the overinflated reputations market, following revelations that some u-media gurus have been hyped past all realistic levels of credibility. The consequent damage to the junk-bonds market in integrity is serious. The EU council of independent heads of state has denied plans for another attempt at Eurofederalisme, at least until the economy rises out of its current slump. Three extinct species have been resurrected in the past month; unfortunately, endangered ones are now dying off at a rate of one a day.

…

Actually, the Slug is a surgical disguise. Both it and the quasi-fungal ecosystem have been extinct for millions of years, existing only as cheap stage props in an interstellar medicine show run by rogue financial instruments. The Slug itself is one such self-aware scam, probably a pyramid scheme or even an entire compressed junk bond market in heavy recession, trying to hide from its creditors by masquerading as a life-form. But there's a problem with incarnating itself down in Sirhan's habitat – the ecosystem it evolved for is a cool Venusiform, thirty atmospheres of saturated steam baked under a sky the color of hot lead streaked with yellow sulphuric acid clouds.

…

You will do better. But his assets, they are spent. He is not a rich man this epoch, your father." "Yeah, but." Amber nods to herself. "He may be able to help me." "Oh? How so?" "You remember the original goal of the Field Circus? The sapient alien transmission?" "Yes, of course." Annette snorts. "Junk bond pyramid schemes from credulous saucer wisdom airheads." Amber licks her lips. "How susceptible to interception are we here?" "Here?" Annette glances round. "Very. You can't maintain a habitat in a nonbiosphere environment without ubiquitous surveillance." "Well, then … " Amber dives inward, forks her identity, collects a complex bundle of her thoughts and memories, marshals them, offers Annette one end of an encryption tunnel, then stuffs the frozen mindstorm into her head.

Running Money
by Andy Kessler
Published 4 Jun 2007

Kaye was a reasonably slight, very New York–looking guy, with black hair and eyes set a little close together, which gave him both a serious and mysterious, almost sinister look at the same time. He was also smart as shit. At PaineWebber, he had made the firm and its clients tons of money (I assume he did well himself too). Courtesy of Michael Milken and Drexel Burnham and hot money in junk bonds, the late ’80s saw mergers announced almost daily. If a stock was trading at $45 and a deal was announced at $60, the stock might jump to $57. You could still make $3, not much, but in only three months, which was a 21% return, even higher if you borrowed money. Kaye and his team would figure out how solid the deal was, chase down deal documents, figure out if the price might even go up and then put the “arb on.” 12 Running Money “That’s me, nice to see you again.”

…

See intellectual property IPOs, 3, 60, 97, 212–16, 248, 293 iron industry, 52–53, 55–57, 59, 125 IRR (internal rate of return), 170–71 Island, 207, 288 Janus, 229 Japan, 134, 175, 204, 257, 259–60, 261 consumer economy and, 68 economic output of, 234 U.S. debt and, 257 yen crisis, 162–65, 168, 292 Japanese Fair Trade Commission, 160 Java (programming language), 151 J-curve, 264–66 JetBlue, 292 job market, 241–45, 246, 261 305 Jobs, Steve, 118, 119, 121, 128 Johns-Manville, 236 Johnson & Johnson, 236 joint-stock companies, 92–93 Jones, Alfred Winslow, 10 JP Morgan, 11, 49, 144, 209 junk bonds, 11 Kapor, Mitch, 121 Karlgaard, Rich, 195 Kay, John, 64 Kaye, William, 9–13, 48, 153 Kessler, Kurt, 245 Kessler, Nancy, 117–18, 193, 194–95, 288 Kilby, Jack, 101 Kittler, Fred, 1–4, 6, 14–17, 29–31, 33–36, 47, 49, 60–62, 73–76, 81–82, 91, 96, 97, 104, 106–7, 138–43, 164, 167, 169, 172, 175, 203, 205, 206, 209–16, 219, 223–26, 246, 288, 295, 296 hedge fund partnership, 144, 151–52 Kleiner Perkins, 195, 197 Kleinrock, Leonard, 183, 184–86, 191 knowledge workers, 121–23 Korea, 1, 3, 134, 208, 234, 259–60 Kotick, Bobby, 50 Kramlich, Dick, 144, 194, 195, 197 labor costs.

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril
by Satyajit Das
Published 9 Feb 2016

Political scientist Francis Fukuyama, in his 1992 book The End of History and the Last Man, made the case for the triumph of Western liberal democracy and market systems as the end point of ideological evolution. In reality, though, the period was punctuated by a series of rolling bubbles and crises: the 1987 stock market crash, the 1990 collapse of the junk bond market, the 1994 great bond market massacre, the 1994 Tequila economic crisis in Mexico, the 1997 Asian financial crisis, the 1998 collapse of the hedge fund Long-Term Capital Management, the 1998 default of Russia, and the 2000 dot-com crash. These one-in-ten-thousand-years events seemed to occur every year or so.

…

Investors bet that Greece was too big to fail, and that Germany and the EU would continue to support it and the euro. But the election in January 2015 of a Syriza government, opposed to austerity and seeking a further write-down of Greek debt, saw interest rates rise to over 15 percent, inflicting large losses on holders. Non-investment grade bonds, or junk bonds, globally increased from US$82 billion in 2000 to US$556 billion in 2013, rising from 4 percent to 18 percent of all corporate bond issues. Since 2010, the number of US companies issuing non-investment grade bonds has exceeded the number issuing investment grade bonds. In Europe, non-investment grade bonds, which were relatively uncommon previously, accounted for about 12 percent of issuance by 2013.

Concentrated Investing
by Allen C. Benello
Published 7 Dec 2016

David Barboza, “GEICO Chief May Be Heir to an Legend,” New York Times, April 29, 1997. 41. Ibid. 42. Ibid. 43. Lou Simpson, interview, June 8, 2011. 44. David Barboza, “GEICO Chief May Be Heir to an Legend,” New York Times, April 29, 1997. 45. Ibid. 46. Ibid. 47. Scot J. Paltrow, “Enigmatic Fred Carr: Insurance: Junk Bond Troubles Have Put the Spotlight on the Chief of Loss‐Plagued First Executive. But Much about Him Remains a Mystery,” Los Angeles Times, April 8, 1990. 48. Lou Simpson, interview, June 8, 2011. 49. David Barboza, “GEICO Chief May Be Heir to an Legend,” New York Times, April 29, 1997. 50. Geraldine Fabrikant, “A Maestro of Investments in the Style of Buffett,” New York Times, April 23, 2007. 51.

…

In the time that he operated Gordon Foods, he completed 19 leveraged buyouts, including Fender Guitar, Chuckles candy, and Pine Brothers Cough Drops. In 2015, he has gone on to complete over 200 private equity transactions, and Edgewater now has $1.4 billion under management. Gordon would occasionally throw investment ideas at Rosenfield. In 1990, he suggested one to Rosenfield that he particularly liked. During the junk bond crisis, Gordon had seen RJ Reynolds bonds trading at $53. Gordon told Rosenfield he had done some research on the company and found it “very financially sound:”40 I told him that he should buy some because people weren’t about to stop smoking. And the bond subsequently went from $53 to $105. 164 Concentrated Investing Rosenfield was starting to get older, and needed some help on the Grinnell investment committee because it was still run as a one-man committee.

The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America—and How to Undo His Legacy
by David Gelles
Published 30 May 2022

“We have just seen the end of the greatest decade of speculation and financial irresponsibility since the 1920s,” he said in 1991. “Financial deregulation, easy credit and regulatory neglect combined with the degradation of our value system to create a religion of money and of power. The achievement of infinite wealth and fame became the ultimate standard, to be achieved at any price. The junk-bond peddlers and the raiders, the speculators and the savings-and-loan hustlers with their legions of consultants, their lobbyists and their friendly politicians, turned this country into a vast casino. Crimes were committed, crimes against the entire nation. These crimes will cost hundreds of billions of dollars.

…

The nineteenth-century robber barons tried to atone for their monopolistic business practices with philanthropy, endowing foundations and universities with so many billions that, decades on, the names Rockefeller, Carnegie, and Mellon are associated more with charities than they are with monopolies. Some of Welch’s peers were similarly dexterous. Michael Milken, the junk bond king of the 1980s, was convicted of racketeering and fraud, sentenced to ten years in prison, and barred from the securities industry. After his sentence was reduced for cooperating with prosecutors, he reinvented himself as a philanthropist and would-be public intellectual, footing the bill for a major economic and policy conference where he entertained celebrities including Tom Brady and former president George W.

Ashes to Ashes: America's Hundred-Year Cigarette War, the Public Health, and the Unabashed Triumph of Philip Morris
by Richard Kluger
Published 1 Jan 1996

Each holder was to receive $84 per share in a cash dividend, $14 in junk bonds, and the rest in the equity “stub,” its value placed at $12 in accordance with an overall debt/equity ratio of 90 percent. In presenting the package, Richman portrayed Kraft as the victim in a situation “not of our making” but part of a prevailing temper in the economic community that favored “short-term financial gratification over steady, long-term growth.” The recap, he was confident, would work but would “require herculean efforts by our employees.” But Wall Street analysts and traders scrutinized the Kraft package with concern. The value of the junk bonds in it was debatable because they were of the “cram down” variety, not to be sold on the open market but foisted on shareholders with the maturity and interest rate to be determined.

…

Once privately held, the operation could slash payrolls, cut other costs to the bone, sell off weak-sister divisions, and direct all the resulting savings and revenue to paying down the often grotesquely swollen debt incurred in the buyout. A large piece of the debt was usually in the form of “junk” bonds, high-yielding subordinated instruments backed mostly by the earning power of the business, which became burdened now with incessant pressure to meet the heavy charges and was chronically threatened with bankruptcy if revenues took an untimely dip. The upside of leveraged buyouts, of course, was that the takeover management, with a direct stake in its success, could run the show with maximum efficiency—and brutally if necessary—until it paid off most of the debt, and if it elected, could then take the leaner company back public and make a bundle on the transaction.

…

What was wrong with LBOs—and generally a matter of indifference to their perpetrators—was that instead of building equity in corporate America and an efficient, globally competitive industrial plant, the greed machine was piling up huge debts from the bidding wars that the buyouts set in motion, grossly inflating values, making fortunes for a few key players in the takeover group—along with their bankers, brokers, and lawyers—and for investors intrepid enough to buy up the junk bonds that were usually at the heart of the deals. The results sometimes were that the targeted trophy was shorn of its patina, heads rolled, plants closed, whole communities went into shock and despair, and the surviving enterprise, groaning with debt, was starved for funds to make capital improvements and even to maintain the existing plant; new product development and technological progress suffered.

Expected Returns: An Investor's Guide to Harvesting Market Rewards
by Antti Ilmanen
Published 4 Apr 2011

• Several very large boom–bust cycles made the idea of constant risk premia less credible and that of market timing more acceptable. • After the cult of equity busted around the year 2000, alternative assets, carry trades, and harvesting illiquidity premia became the preferred ways to boost returns. All these approaches resulted in dramatic losses in 2008. • Just when investors learned to value conservatism, junk bonds and speculative stocks rallied by at least 100% in the year ensuing the crash bottom in March 2009. So where are we now? Current academic views are more diverse, less tidy, and more realistic than they used to be. Between 1980 and 2010, empirical and theoretical work added flesh to the core models by incorporating multiple risk factors, time-varying expected returns, liquidity effects and other market frictions, as well as investor irrationality.

…

Looking across investment-grade fixed income sectors in the U.S., corporates earned the highest returns between 1990 and 2009, while mortgages and agencies earned the highest volatility-adjusted returns. The new sector of asset-backed securities (and even newer commercial mortgage-backed securities for which data only exist since the late 1990s) gave the worst returns. Over long histories, long AA corporates outperformed Treasuries by 0.3% since 1926, while junk bonds outperformed Treasuries by about 1% since 1953. Figure 3.6 assesses the reward for duration extension. For the 20-year sample, average returns rise steeply and monotonically with maturity. This period is unrepresentative and misleading for assessments of future returns as the downtrend in yields benefited all bonds but not evenly; for obvious reasons it benefited longest duration bonds most.

…

Later starting dates would imply windfall gains to bonds, just as we see for 1990–2009. Figure 3.7 assesses the reward for bearing credit risk. Average returns are modestly better for investment-grade (IG) credits than for Treasuries, and much better for high-yield (HY, non-IG, speculative-grade, junk) bonds than for IG bonds. Interestingly, the BB-rated sector, the first speculative rating notch, gives the highest long-run return over both the 20-year sample and the longer period. Just as with average yield spreads, there is a distinct kink in returns when moving beyond the IG threshold. The likely explanation is that many investors are restricted from holding non-IG bonds; the related selling pressure makes BB-rated “orphan” bonds structurally cheap.

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America
by Greg Farrell
Published 2 Nov 2010

Be patient. Things could change here as well.” O’Neal thanked Friedberg for the advice and left. It wasn’t the first time the investment banker had done a favor for the young man in a hurry. After recruiting him from GM, Friedberg had gotten O’Neal’s career launched in Merrill’s junk bond department. In 1990, when the junk-bond business shrank following the collapse of Drexel Burnham Lambert, O’Neal suddenly quit Merrill Lynch and accepted a similar job at Bankers Trust. Like every Wall Street firm, Merrill Lynch was under pressure to diversify its workforce, so Friedberg did something he never would have if O’Neal had been white: Four days after O’Neal left, Friedberg called him and recruited him back to Merrill Lynch, by offering him a bigger job with better pay.

…

Every industry has its transformational moments, when innovation does more than improve performance at the margins, it fundamentally changes the nature of the business. The Wall Street that John Thain entered in 1979 was perched on the edge of one of those transformational moments. Financial innovators such as Michael Milken at Drexel Burnham Lambert were already creating a new market for high yield debt, more commonly known as “junk bonds.” Advances in computer technology allowed traders to accelerate and simplify the process of buying and selling stocks and bonds, especially when using the analytic tools that would soon be found on Bloomberg terminals, the boxlike machines that started popping up on trading floors across Wall Street in the 1980s.

The Red and the Blue: The 1990s and the Birth of Political Tribalism
by Steve Kornacki
Published 1 Oct 2018

Now, as the country learned about all of this for the first time, he was the embattled Speaker’s right-hand man. Feebly, Wright’s fellow Democratic leaders offered a defense of Mack, which was quickly overshadowed by the news that one of them—Majority Whip Tony Coelho—was himself facing a federal investigation over illicit profits from junk bonds. Gingrich was always talking about a corrupt Democratic machine bent on protecting its own at any cost. Now they were making his point for him. Coelho resigned, then on Wednesday, May 31, Wright sent word that he’d speak from the well of the House at 4 P.M. The chamber was overflowing when he took his place.

…

Take the congressional pay raise, a 23 percent hike jammed through the Senate the previous summer in a surprise late-night vote, a surprise jointly sprung by both party leaders. “A SWIFT, STEALTHY COUP,” the Washington Post’s headline called it. There was the savings and loan crisis, too, in which shoddy regulation, risky junk bond investments, and the collapse of the real estate market in the late 1980s led to the failure of more than fifteen hundred thrifts—or about half the total of all S&Ls in America. This, in turn, bankrupted the federal agency that insured S&Ls, and when Washington stepped in with a $124 billion bailout, there were shrieks from Americans of all political stripes.

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See also health-care reform during Clinton presidency AFDC and, 308–309, 343–345 Baird nomination, 215–219 Bosnia and, 360, 361 budget of 1997 and, 357–360 budget of 1999 and, 397–399 budget showdown with Gingrich, 315–323 on Contract with America, 275–276 election of 1994, 275–276, 278, 284–285, 286–287 election of 1996, 339, 341–342, 348–350, 351 on election of 1998, 391 first budget, 241–247 government shutdown, 324–327, 341, 347–348 gun control and, 312 homosexual rights, 219, 220–221, 222, 224–230 impeachment of, 377–379, 388–390, 391, 394, 395 Iraq and, 360–361 Jackson and, 213 Jones settlement, 391–392 Lewinsky affair, 364–376 lobbying reform bill, 265–266 on Michel, 248 middle-class bill of rights, 287–288 moves to counter Gingrich, 307–309 Oklahoma City bombing and, 310 plurality win and, 212, 213 popularity, 211, 274 as reformer of Democratic Party, 230 Republican strategy toward, 249 role of government, 211 stimulus package, 232–233, 238–240 taxes, 231, 241–245, 287–288, 359 weapons ban and, 313 White House Travel Office firings, 252–254 Whitewater and, 250–252, 256–260, 263–264, 363 Clinton, Bill and election of 1992 Chicago Palmer House Hilton and, 89–92 Cuomo and, 95, 96, 97, 134 debates, 200–202, 203, 204–205, 206 Democratic Convention, 190–192 exploratory committee, 87 extramarital affairs reported, 114–122 fundraising, 113 Gulf War position, 137–138 homosexuals and homosexuality, 195, 219, 220 Jackson and, 174, 175–185 past marijuana use, 141–142 Perot and, 162, 163, 167, 170, 171, 189 primaries and caucuses, 113–114, 117–118, 125, 131–136, 139, 142–144 public opinion of, 137, 138 Sister Souljah and, 180, 182–184 taxes, 130, 232 use of television, 171–172 Whitewater Development, 251–252 Clinton, Hillary Rodham background, 12–13, 252, 380 Bill’s extramarital affairs and, 367–368, 381–383, 392 D’Amato and, 385–387 election of 1988, 51 election of 1992, 118, 119, 120, 123–124 election of 1998, 382–383, 386–387, 388 election of 2000, 422 as elitist, 124–125 as first lady, 6 Gingrich’s mother on, 298–299 on Gingrich’s proposed changes to AFDC, 304 health-care system reform task force, 268 as polarizing, 380–381 as radical feminist, 195 run for Senator from New York, 392 White House Travel Office firings, 253–254 Whitewater and, 250–252, 257–260, 363 Coalition for Democratic Values, 86 Coelho, Tony, 19, 70, 73 Common Cause, 68 Confrontation, 150 Connecticut, election of 1992, 139 Conservative Opportunity Society, 35 Contract with America, 274–276, 306 Conyers, John, 377–378 Cook, Charlie, 351 Cooper, Jim, 270, 280 Cornelius, Catherine, 252–253 corruption/scandals Jerry Brown and election of 1992, 88 Clinton staffers’ past drug use, 295–296 Clinton White House Travel Office firings, 252–254 Clintons and Whitewater, 250–254, 256–260, 263–264, 363, 383–384, 385 Clinton’s extramarital affairs, 50–51, 114–122, 364–376, 381–383, 392, 395–396 Clinton’s past marijuana use, 141–142 Coelho and junk bonds, 70 D’Amato and federal housing program, 384 Democratic perks for big donors, 351 Diggs, 34 during election of 1992, 168 Gingrich’s book deal, 296–297 Gingrich’s college course, 353–356 Gingrich’s race against Flynt, 30 Hastert’s sexual molesting of students, 395 Hyde’s extramarital affair, 379 Morris and prostitute, 348 Wright’s book deal, 67–71, 78 Cranston, Alan, 19 Crenna, Richard, 164 Crossfire (formerly Confrontation), 150, 151 Crowley, Candy, 3–4 Crystal, Billy, 141–142 culture wars abortion, 32, 195, 412, 416 election of 2000 Republican primaries, 416 feminism, 32 homosexuality, 185–186, 188, 195, 219, 220–221, 222, 224–230 religion, 195–196 two-parent families, 195 Cuomo, Andrew, 278 Cuomo, Mario Bill Clinton and, 191 election of 1988, 21–22, 52, 60, 62 election of 1992, 83, 92–100, 113, 122–123, 134 election of 1994, 276–279 as governor of New York, 52–53 keynote speaker at 1984 Democratic Convention, 16–20 labor support, 136 as “old-style” liberal, 17–19, 21 welfare reform and convention of 1996, 345 Cutler, Lloyd, 261 Dale, Billy, 252, 253 Daley, Richard J., 242 D’Amato, Alfonse Marcello background, 384–385 Hillary Clinton and, 385–387 election of 1992, 97, 259 on Fiske, 264 New York gubernatorial election of 1994, 277 Senate election of 1998, 383–385, 386–388, 390, 391 Whitewater and, 383–384, 385 D’Amato, Antoinette “Mama,” 384, 387–388 Darman, Richard, 106, 290 Daschle, Tom, 325, 396 Dateline, 295 Davis, Gray, 391 Dean, Howard, 129 DeConcini, Dennis, 281 DeLay, Tom, 78, 305, 375 Demjanjuk, John, 154–155 Democratic Leadership Council (DLC) Bill Clinton and, 85, 87, 213 Jackson and, 174–175 liberals and, 86 origins, 45–46 Super Tuesday, 54 Democratic Party.

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
by Nassim Nicholas Taleb
Published 1 Jan 2001

For John seemed unaware of one large hidden risk he was taking, the risk of blowup, a risk he could not see because he had too short an experience of the market (but also because he was not thoughtful enough to study history). How could John, with his coarse mind, otherwise be making so much money? This business of junk bonds depends on some knowledge of the “odds,” a calculation of the probability of the rare (or random) events. What do such fools know about odds? These traders use “quantitative tools” that give them the odds—and Nero disagrees with the methods used. This high-yield market resembles a nap on a railway track.

…

Imagine the book being written in 1982, after the prolonged erosion of the inflation-adjusted value of the stocks, or in 1935, after the loss of interest in the stock market. Or consider that the United States stock market is not the only investment vehicle. Consider the fate of those who, in place of spending their money buying expensive toys and paying for ski trips, bought Lebanese lira denominated Treasury bills (as my grandfather did), or junk bonds from Michael Milken (as many of my colleagues in the 1980s did). Go back in history and imagine the accumulator buying Russian Imperial bonds bearing the signature of Czar Nicholas II and trying to accumulate further by cashing them from the Soviet government, or Argentine real estate in the 1930s (as my great-grandfather did).

The Price of Everything: And the Hidden Logic of Value
by Eduardo Porter
Published 4 Jan 2011

Banks pay enormous bonuses to draw the brightest MBAs or quantum physicists. These bright financiers, in turn, invent the fancy new products that make banking one of the most profitable endeavors in the world. Remember the eighties? Gordon Gekko sashayed across the silver screen. Ivan Boesky was jailed for insider trading. Michael Milken peddled junk bonds. In 1987 financial firms amassed a little less than a fifth of the profits of all American corporations. Wall Street bonuses totaled $2.6 billion—about $15,600 for each man and woman working there. Today, this looks like a piddling sum. By 2007 finance accounted for a full third of the profits of the nation’s private sector.

…

Banks could open branches anywhere. Unsurprisingly, the most highly educated returned to finance to make money. By 2005, the share of workers in the finance industry with a college education exceeded that of other industries by nearly 20 percent. These smart financiers turned their creativity on, inventing junk bonds in the 1980s and moving on, in the last few years, to residential mortgage-backed securities and credit default swaps. By 2006, pay in the financial sector was again 70 percent higher than wages elsewhere in the private sector. Then the financial industry blew up. Since the end of 2008, when the demise of the investment bank Lehman Brothers sent financial markets into a tailspin around the world, bankers have argued insistently against regulatory efforts to limit their remuneration packages, observing that curtailing financial activity will hamstring their ability to hire the best of the best.

Fred Schwed's Where Are the Customers' Yachts?: A Modern-Day Interpretation of an Investment Classic
by Leo Gough
Published 22 Aug 2010

Here are just a few of the prominent characters from the Rogues’ Gallery during the last few years: Bernie Madoff, arrested in December 2008 for running a fraudulent investment scheme that collapsed owing more than 60 billion dollars; Bernard Ebbers, former CEO of Worldcom, a large telecommunications company, jailed in 2005 for false financial reporting that resulted in a loss of some 11 billion dollars to investors; Jack Grubman, a stock analyst who was fined and banned for life from the securities industry in 2004 for producing over-optimistic reports and ratings on some of the companies he followed; David Walsh, founder of Bre-X Mining, which went bankrupt in 1997 after it was discovered that a gold mine it owned in Borneo had been fraudulently ‘salted’ with gold; Michael Milken, father of the junk bond industry, convicted of insider trading in 1989. The list just goes on and on, but you get the idea: yes there are crooks around in the stock market – lots of them! HERE’S AN IDEA FOR YOU… Your best defence from being cheated is information. Read and learn about how financial frauds happen, and inoculate yourself against the disease of gullibility. 33 AVOIDING THE BIG COLLAPSES ‘… an effort to put a little truth into the falsest text in the English language: “God tempereth the wind to the shorn lamb”.

The Atlantic and Its Enemies: A History of the Cold War
by Norman Stone
Published 15 Feb 2010

There was Robert Maxwell, fraud to the core, claiming to be a Czech, but in effect Hungarian (he had been born in what had been north-eastern Hungary, and cut his teeth, financially, on cross-border smuggling). He survived by doing his own people out of their retirement fund, and died by drowning, probably suicide, in circumstances that were never cleared up. In the USA ‘junk bonds’ created fortunes and led to discredit of the whole system. These involved a real risk, being bonds raised against the possibility of taking over, via the stock exchange, some firm or other, allegedly badly managed and overextended. In 1980 such bonds raised $5bn, but by 1986 almost $50bn, falling back to around $35bn thereafter.

…

In 1980 such bonds raised $5bn, but by 1986 almost $50bn, falling back to around $35bn thereafter. Their chief architect, Michael Milken, made himself vastly unpopular and eventually was imprisoned (though on a lesser offence). He financed Turner Broadcasting and many other well-known, now well-established, concerns, and two thirds of the ‘junk bond’ money went quite productively into such corporate growth, not into the spectacular takeovers. It was all, in the end, brought about as a consequence of the seventies inflation, and the distortion that that had produced, but there was a great deal of head-shaking. Economists stuck in the Left could be waved aside.

…

In 1934 the Stavisky scandal had almost destroyed republican, democratic France, since government ministers and parliamentary deputies had been found to be involved in an upended credit pyramid, the apex of which stood in the municipal pawn-shop of Bayonne; the Madoff running it was found dead in mysterious circumstances. Now, in New York, life imitated art, in this case Tom Wolfe’s Bonfire of the Vanities and Oliver Stone’s Wall Street: the makers of ‘junk bonds’ vanished into prison as recession pricked their bubbles. In London the empire of Robert Maxwell collapsed. He (repulsively: the baseball cap making it worse), larger than life, was a lie from the start. He was not, as he claimed, a Czech and therefore a gallant ally. He was born in an eastern part of Czechoslovakia which had been part of Hungary, and where the local (Hassidic) Jews all spoke Hungarian.

Saudi America: The Truth About Fracking and How It's Changing the World
by Bethany McLean
Published 10 Sep 2018

He was, in many ways, the embodiment of a transformation that has changed the face of not just the oil and gas industries but of geopolitics as well. The contradictions and questions in McClendon’s story continue to reverberate across the industry he did so much to create. You might think of McClendon as a bit of J. R. Ewing, the fictional character in the television series Dallas, mixed with Michael Milken, the junk bond king who pioneered an industry and arguably changed the world, but spent several years in prison after pleading guilty to securities fraud. Over and over, I heard the same refrain: “Aubrey epitomizes everything we’re talking about.” Unlike many others who come from nothing and make their fortunes in the oil patch, McClendon, who was born on July 14, 1959 in Oklahoma City, was oil industry royalty.

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again
by Nicholas Dunbar
Published 11 Jul 2011

Packaged with an investment-grade corporate bond to repay the initial capital at maturity, the extra large return intended to recover the underwater investments consisted in part of a $20 million CDO-style investment that Barclays referred to as a first-loss note. Linked to a portfolio of thirty-seven junk bonds, this note was highly risky, something that should have been obvious to a professional investor. As Barclays would later point out, BPI made little effort to heed Barclays’ warning about risk and to learn more about what it was buying. After signing the disclosure document, BPI purchased Barclays’ product in February 2000 for $36 million.

…

Partridge-Hicks and Sossidis were proud of their employer, but they would find their loyalty to Citi challenged by some of their big clients.4 The hate-to-lose Japanese banks and Swiss insurance companies were annoyed by all the products the Americans were trying to sell them, because everything had risks attached—high-rated bonds exposed the Japanese or Swiss to interest rate or currency risk, and junk bonds added credit risk. Was there any way to invest in just the highest-quality assets and have the risks stripped away? The next generation of innovative bankers would have produced a CDO in answer to such a request, but as Partridge-Hicks and Sossidis listened to the complaints, it sounded as if the Japanese and Swiss wanted to buy shares in a bank.

Unfinished Business
by Tamim Bayoumi

Rather than being used to create more productive capacity, the additional lending was largely frittered away, mainly on higher land and house prices. Similarly, the massive expansion in mortgage-backed securities was driven by differences in regulation and had few social benefits, in contrast to earlier developments such as the emergence of junk bonds in the 1980s which, for all of the accompanying excesses, allowed small firms to access the bond market. Because it was filling a genuine economic need, the junk bond market continues to be vibrant to this day, in stark contrast to the moribund private securitization market. There is a need to see economic progress in a more balanced manner, in which the financial sector provides an essential support to underlying changes in the real economy.

Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World
by Tom Wright and Bradley Hope
Published 17 Sep 2018

Malaysia’s economy was growing at over 5 percent annually, powered by the export of commodities like palm oil, as well as garments, computer chips, and electronic devices. Attracted by the hot growth, foreign investors poured money into Malaysian stocks and bonds. But there was no oversight. Insiders regularly broke securities laws, as if taking their cues from the excesses of 1980s figures such as Michael Milken, the U.S. junk bond king, and insider trader Ivan Boesky. Malaysians who knew how to play the system became incredibly rich, while minority shareholders lost out. People who worked with Larry considered him charming and a wheeler-dealer, albeit with a lazy streak, preferring drinking late in nightclubs to work, but he benefited nevertheless from a run-up in the garment company’s stock.

…

By the time the scheme imploded in late 2008, Madoff had amassed a paper fortune of $800 million, but most of this was the value of his market-making business; the amount he personally stole was a fraction of the amount lost. Low’s mark—the little-known 1MDB, a Malaysian government fund—wasn’t asking for any money back and it wouldn’t so long as he controlled it through his proxies. Low also wasn’t like junk-bond king Michael Milken, who had amassed a personal fortune in the 1980s before going to prison for violating securities laws. The Malaysian had simply taken hundreds of millions of dollars. The excesses of Madoff or the 1980s would seem prosaic compared to the multiyear spending spree on which Low was about to embark.

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution
by Gregory Zuckerman
Published 5 Nov 2019

The unquenchable thirst of traders, bankers, and investors for market-moving financial news unavailable to the general public—known as an information advantage—helped fuel Wall Street’s gains. Tips about imminent corporate-takeover offers, earnings, and new products were coin of the realm in the twilight of the Reagan era. Junk-bond king Michael Milken pocketed over one billion dollars in compensation between 1983 and 1987 before securities violations related to an insider trading investigation landed him in jail. Others joined him, including investment banker Martin Siegel and trader Ivan Boesky, who exchanged both takeover information and briefcases packed with hundreds of thousands of dollars in neat stacks of $100 bills.1 By 1989, Gordon Gekko, the protagonist in the movie Wall Street, had come to define the business’s aggressive, cocksure professionals, who regularly pushed for an unfair edge.

…

Skeptics sniffed—one told the Journal that “the real investment world is too complicated to be reduced to a model.” Yet, by the late 1980s, Thorp’s fund stood at nearly $300 million, dwarfing the $25 million Simons’s Medallion fund was managing at the time. But Princeton/Newport was ensnared in the trading scandal centered on junk-bond king Michael Milken in nearby Los Angeles, ending any hopes Thorp held of becoming an investment power. Thorp never was accused of any impropriety, and the government eventually dropped all charges related to Princeton/Newport’s activities, but publicity related to the investigation crippled his fund, and it closed in late 1988, a denouement Thorp describes as “traumatic.”

Don't Be Evil: How Big Tech Betrayed Its Founding Principles--And All of US
by Rana Foroohar
Published 5 Nov 2019

Uber, for example, which received funding from the Saudi government, went to great pains to distance itself from Crown Prince Mohammed bin Salman, the autocrat accused of ordering the murder of journalist Jamal Khashoggi (a charge that he naturally denies), by awkwardly pulling out of a Saudi investment conference known as “Davos in the Desert” (along with a number of other high-profile U.S. businesspeople) right after that horror broke. The demise of companies like Jawbone and the lack of excitement about new IPOs are just two signs of the bubble economy in the Valley. Burgeoning debt is another. Netflix, for example, recently raised $2 billion through a junk bond offering to fund new content.21 It will be interesting to see how the next round of big anticipated IPOs goes—or if they go at all. Many top tech companies have opted to stay private longer, bidding up their valuations and raising expectations. Both Uber and Lyft completed disappointing IPOs as I was finishing this book.

…

Nicole Friedman and Zolan Kanno-Youngs, “Hedge Fund Investor Charles Murphy Dies in Apparent Suicide,” The Wall Street Journal, March 28, 2017. 20. Rana Foroohar, “Money, Money, Money: Silicon Valley Speculation Recalls Dotcom Mania,” Financial Times, July 17, 2017. 21. Pan Kwan Yuk and Shannon Bond, “Netflix Returns to Market with $2bn Junk Bond Offering,” Financial Times, October 22, 2018. 22. Rob Copeland and Eliot Brown, “Palantir Has a $20 Billion Valuation and a Bigger Problem: It Keeps Losing Money,” The Wall Street Journal, November 12, 2018. 23. Foroohar, “Money, Money, Money.” 24. Rana Foroohar, “Another Tech Bubble Could Be About to Burst,” Financial Times, January 27, 2019.

Shaky Ground: The Strange Saga of the U.S. Mortgage Giants
by Bethany McLean
Published 13 Sep 2015

This happened after Democrats, frustrated by their inability to confirm nominees, took the dramatic step of eliminating filibusters for most of the president’s nominations. This allowed the administration to appoint Mel Watt, a gracious, charming, liberal Democratic former congressman from North Carolina and a longtime evangelist for homeownership. DeMarco took a position at the Milken Institute, a pro-market think tank run by former junk-bond king Michael Milken. (Right around that time, Milken wrote an op-ed for the Wall Street Journal in which he argued that subsidized mortgages create nothing good. “Investments in quality education and improved health will do more to accelerate economic growth than excessive housing incentives,” he wrote.)

How Will Capitalism End?
by Wolfgang Streeck
Published 8 Nov 2016

Such confidence is, at face value, not unwarranted. Mario Monti, Italy’s new prime minister, was the EU Commissioner for Competition who broke up the German state banking system (whereupon it attempted a fruitless restructuring exercise, through the purchase of American junk bonds). When his Brussels tenure came to an end Monti earned his living as an advisor to, among others, Goldman Sachs, the greatest junk-bond producer of them all. Lukas Papademos, now prime minister of Greece, was president of the Greek Central Bank when the country secured, through falsified statistics, its access to the monetary union and thus to unlimited credit at German rates of interest.

Breakout Nations: In Pursuit of the Next Economic Miracles
by Ruchir Sharma
Published 8 Apr 2012

Like never before, the price of oil and the price of stocks have been moving in complete lockstep. And it’s not just oil: in recent years investors have been treating all risk assets—meaning any investment that has a history of sharp up-and-down price movements, from copper to currencies and stocks in commodity-rich nations and even junk bonds—as the same animal. When investors are feeling confident, they pile into all these assets all at once, and when confidence ebbs, they pull out all at once. It is popular to attribute the new herd behavior to the effects of globalization. Studies indeed show that as nations lower barriers to the movement of trade and money across borders, those money flows narrow the differences between markets across the world.

…

Kospi,” 153, 164 drug cartels, 74, 79–80 Dubai, 188, 214, 218–19 Dubai World, 214 Dubrovnik, 97 Dun Qat refinery, 201 DuPont, 9 “Dutch disease,” 179, 220 earnings, corporate, 3 East African Community (EAC), 208–9 East Asia, 8, 10, 46, 131–32, 146, 196–97, 208, 245 “East Asian tigers,” 8, 10, 146 “easy money,” 5–6, 11, 13–14, 38, 105, 133, 176–77, 182–83 economic transformation program (ETP), 151 economies: agrarian, 9, 17–18, 21, 22, 27 business cycles in, 2, 5–6, 11, 223 command-and-control, 29–30, 39, 156, 199–200 commodity, 133–34, 137–38, 223–39 counter-cyclical, 120–21 developing, see developing countries diversified, 165–66 emerging markets in, vii–x, 2–11, 37–38, 47, 64, 94, 185–91, 198–99, 242–49, 254–55, 259–62 forecasting on, x, 1–14, 17, 18, 31–32 global, 1–2, 4–5, 6, 7–8, 9, 12, 14, 18–19, 37, 38, 51–52, 68–71, 153–55, 158–59, 161, 167–69, 170, 176, 178, 183–91, 222–24, 228–31, 233–36, 241–42, 249–54 growth rates in, 8–11, 185–91, 244–49, 254–55 historical trends in, ix–x, 2, 9, 10–11 knowledge, 236–37 parallel, 79–80 recessions in, 5–6, 9, 11, 18, 34, 80, 101, 109, 131, 132, 144, 225, 244, 249–51 “tiger,” 8, 10, 46 volatility of, 249–51 see also specific countries Economist, 207 education, x, 5, 12, 22, 63, 65, 76, 121, 168–69, 206, 218, 220 efficiency, 63–64 “efficient corruption,” 135–37 Egypt: author’s visit to, ix corruption in, 217 economic reform in, 27, 28, 126–27, 217–18 as emerging market, 204, 235 foreign investment in, ix, 92 inflation rate in, 88 revolts in, 127, 216 stock market of, 190 Eighth Malaysian Plan, 151 Einstein, Albert, 238 El Beblawi, Hazem, 128 el dedazo (“the big finger”), 76–77 election cycles, 2 electromagnetic radiation, 17 “electronic wallet,” 208 Elle, 53 emerging markets, vii–x, 2–11, 37–38, 47, 64, 94, 185–91, 198–99, 242–49, 254–55, 259–62 energy efficiency, 226–27 energy sector, 5, 13, 51–52, 67–68, 82, 125, 170, 212–13, 215, 223, 224–29 English language, 37, 52–53, 141, 196, 203–4 entrepreneurship, 38, 43, 58, 96, 144, 166, 186, 225 entry point projects (EPPs), 151 environmental issues, 17, 135 Equatorial Guinea, 210 Erbakan, Necmettin, 114–15 Erdogan, Recep Tayyip, 111, 112, 113–14, 116–18, 123, 124–28, 210, 245 “errors and omissions,” 150 Eskom, 177 Estonia, 109 euro, 100, 105, 107, 108 Eurocentrism, 206 Europe: agriculture in, 231–32 banking system of, 12 Central and Eastern, 8, 11, 97–110, 121, 170, 203, 247 debt levels in, 57, 97, 100, 121–22, 252 economy of, 7, 12, 107–8, 230, 241, 245 foreign investment by, 2, 7, 20, 100, 104–8 foreign trade of, 145, 159 GDP in, 20, 100 government deficits in, 100 growth rate of, 6, 241, 242 manufacturing sector of, 247 political unity of, 11, 49, 53, 97–98, 208–9 recessions in, 101, 132 unemployment in, 101, 126 welfare states in, 63 see also specific countries European Community (EC), 208–9 European Union (EU), 11, 97–98, 101, 105, 106–8, 109, 115–16, 118, 121–22, 159, 253–54 Eurozone, 11, 99–100, 105, 106–8, 109, 121–22, 254 expatriate workers, 219 Facebook, 41 factories, 17–18, 22–23, 28, 43, 67, 68, 132, 230 “fairness creams,” 54 family enterprises, 125–26, 134–38, 155, 160, 161–63, 167–69, 254 “farmhouses,” vii–viii fast-food outlets, 53 Federal Palace Hotel, 212 Federal Reserve Board, 5–6, 222 feeder ships, 200 Femsa, 75 Fiat, 120 fiber-optic cables, 207–8 Fidesz Party, 104–5 Fiji, 4 film industry, 44, 47, 167, 186, 211 “financialization of commodities,” 227–28 Finland, 238, 251 First Coming, 243 fishing industry, 193 five-year plans, 20, 27, 150–51 Forbes, 47, 91 “forced listing,” 188 Ford, 75, 120 foreign investment, vii–x, 2, 7–8, 9, 18, 20, 32, 35–36, 37, 43–44, 49–50, 59, 63, 64, 66, 68–72, 86, 87, 91–94, 100, 104–8, 118, 119–20, 133–35, 137, 139, 140–41, 144, 146–50, 151, 183–84, 198–200, 201, 203–5, 206, 225 foreign trade, vii, x, 6, 7, 13, 18, 20–21, 23, 26, 28, 29, 31, 32–33, 43, 59, 61, 62, 67–68, 72, 75, 80, 83, 85, 86, 90, 117, 120, 122, 132, 133–34, 144–45, 147, 148, 157, 158–59, 162, 178, 183, 196–97, 198, 206, 220, 223, 226, 232, 233–34 Four Seasons Hotel, 111, 232, 233 Four Seasons Index, 232, 233 “$4,000 barrier,” 7–11 Fourth World, 185–91, 204–9, 220, 221 Fox, Vicente, 77 Fraga, Arminio, 72 France, 63, 100, 121, 123–24 Franklin, Benjamin, 214 Freedom House, 205 “free float,” 188 free markets, x, 8–9, 96, 104 French, Patrick, 47 French Riviera, 59–61 frontier markets, 89, 185–91, 213, 261–62 Fujian Province, 164 futures contracts, 5 Gandhi, Indira, 55 Gandhi, Rahul, 48 Gandhi, Sanjay, 55 Gandhi, Sonia, 39 Gandhi family, 39, 47–48, 55, 57 gas, natural, 13, 85, 179, 214, 215, 217, 225, 235 gasoline, 126, 215 GaveKal Dragonomics, 229 Gaziantep, 125 General Electric, 9 generators, electric, 212–13 Germany: billionaires in, 45 economy of, 103 as EU member, 107, 121 GDP of, 247 low-context society of, 40 manufacturing sector in, 157, 158–59, 247 population of, 37 public transportation in, 16 South Korea compared with, 168–69 Germany, East, 102 Gertken, Matthew, 29 Ghana, 187 Gibson, Mel, 129 Gini coefficient, 173 Girl’s Generation, 167 glass manufacturing, 221 Globo, 61 GM, 75, 163 “go-go stocks,” 3 gold, 3, 141, 176, 178, 179–80, 192, 202, 205, 224, 229–30 “Goldilocks economy,” 4, 5–6 gold shares, 179–80 gold standard, 178 Goldstone, Jack, 217 Goodhart, Charles, 11 Goodhart’s law, 11 Google, 41, 237–38 Gorbachev, Mikhail, 103 “Goulash Communism,” 101 government paper, 116 government spending, 41–42, 63, 65, 66–67, 70–71, 72, 86, 87–88, 109, 133, 181–83, 190 government transformation program (GTP), 151 graft, 43–44 see also corruption Great Britain: auto industry in, 31 empire of, 49, 118, 192 foreign investment by, 206 government of, 89 labor force of, 100 public transportation in, 16 socialism in, 150 Great Depression, 101, 109, 252–53 Great Moderation, 250–51 Great Recession (2008), 5–6, 9, 59, 66, 76, 80–81, 88, 92–93, 100, 101, 102, 103, 109, 119, 122, 131, 144, 180, 189, 225, 243, 247–49, 250, 254 Greece, 11, 27, 30, 99, 100, 107–8, 121, 181, 252 green revolution, 231–32 Greenspan, Alan, 6 gross domestic product (GDP), 1, 3–4, 6, 17, 18, 20, 26, 32, 43, 49, 57, 63, 65, 66, 67, 72, 85, 92, 100, 107, 110, 116, 117, 119, 120, 121, 131, 133, 139, 140, 141, 142, 144–45, 147, 149, 155, 157, 158, 159, 161, 165, 170, 173, 178–79, 180, 191, 206, 208, 210, 214, 215, 217, 218, 219, 228, 236, 243, 247, 252 Group of Twenty (G20), 215 growth corridors, 151 Gül, Abdullah, 118, 123–24, 127 Gulf States, 214–21, 244, 245 see also specific states Gupta, Anil K., 237 Habarana, 196 Hall, Edward, 39–40 Hallyu, 167 Hambantota, 197 Hanoi, 198, 200 Han people, 53 Harmony Gold, 180 Harvard School of Public Health, 241 Havel, Václav, 111 Hayek, Friedrich, 109 Hazare, Anna, 42–43 headscarves, 123–24 health care, 63 helicopters, 60, 64, 72 herd behavior, 8, 228–31 high-context societies, 39–40, 41, 47 high-speed trains, 15–16, 20, 21 highways, 17, 20, 21, 65, 231 Hindi language, 52–53, 56 “Hindu rate of growth,” 174 Hindustan Times, 53 Hirsch, Alan, 178 Ho Chi Minh City, 200, 201, 203 Honda, 161 Hong Kong, 9, 141, 235 “Hopeless Continent,” viii Hotel Indonesia Kempinksi, 129 hotels, 12, 31, 59–61, 65, 111, 232, 233 “hot money,” 149–50 housing prices, 5–6, 16, 18, 24–25, 28–29, 31, 32, 61, 92, 103–4 HP, 158 Huang, Yukon, 28 Huang Guangyu, 46 Hu Jintao, 29 Humala, Ollanta, 66–67 human-rights violations, 193 Hungary: banking in, 105 as breakout nation, 99–100, 101 economic growth of, 99, 104–6, 109 as emerging market, 104–6 as EU candidate, 100, 105 foreign investment in, 104, 105 GDP of, 100 growth rate of, 244 income levels of, 8 industrial production in, 101 political situation in, 104–5, 109 population of, 106 post-Communist era of, 101, 104 welfare programs of, 106 Hussein, Saddam, 195 Huxley, Aldous, x hyperinflation, 39, 42, 62, 66 “hypermarkets,” 90–91 Hyundai, 90, 156, 158, 161–63, 168 identification cards, 213 immigration, 79, 82, 85, 95 income: national levels of, 4, 8, 11, 16–21, 24–25, 31–32, 38, 58, 61, 63, 72, 75, 83, 86–87, 88, 97–98, 113, 116, 121, 138, 139–40, 141, 144, 145, 148, 153–55, 157, 173, 176–77, 182–83, 204 per capita, ix, 7–8, 11, 13, 19–21, 41, 58, 61, 63, 72, 73–75, 76, 88, 97–98, 109, 116, 127, 131–32, 138, 148, 176–77, 204, 207, 216, 244, 245–46 taxation of, 44, 51, 63, 76, 86, 106, 126–27, 182, 214, 221 India, 35–58 agriculture of, 38, 44, 54, 57 auto industry of, 54, 161, 162, 173 baby-boom generation in, 37–38 billionaires in, viii, 25, 44–47, 79, 254 Brazil compared with, 10, 39–43, 61, 70 as breakout nation, 38–39, 49 capitalism in, 38–39, 42, 46–47, 49, 50–51, 58 China compared with, 1, 10, 19, 25, 36, 37–38, 41, 45, 47, 52, 53, 56, 57, 58 consumer prices in, 38, 39, 49, 52–54, 57 corruption in, 42, 43–44, 45, 46–47, 49–51, 58 credit market in, 38, 51 debt levels in, 57–58 democracy in, 30, 48–49, 50, 55–56, 58 “demographic dividend” for, 37–38, 55–56, 58 domestic market of, 36, 43 economic reforms in, 28, 38–39, 49 economy of, 28, 35–58, 174, 204 elections in, 48–49, 50, 55 “Emergency” period of, 55–56 as emerging market, 3–4, 10, 30, 35–39, 43, 49, 106, 253 English spoken in, 37, 52–53 entrepreneurship in, 38, 43, 58 film industry of (Bollywood), 44, 47, 167, 211 forecasts about, 35–36, 37, 39–40 foreign investment in, vii–viii, 7, 35–36, 37, 43–44, 49–50, 183, 225 foreign trade of, vii, 43, 157 Gandhi family in, 39, 47–48, 55, 57 GDP of, 1, 3–4, 43, 49, 57 as global economy, 1, 37, 38, 51–52 government of, 30, 38–39, 41–43, 47–52, 55–58 government spending in, 41–42 growth rate of, 3–4, 9, 30, 35–58, 61, 64, 87, 88, 174, 241, 244 high-context society in, 39–40, 47 income levels of, 8, 19, 54, 58 independence of, 174, 175, 176 Indonesia compared with, 135, 136 inflation rate in, 39, 43–44, 248 infrastructure of, 10, 43, 51 investment levels in, 43–44, 49–50 labor market in, 38, 55 leadership of, 38–39, 41–42, 47–52, 57–58, 174 License Raj of, 38 middle class of, 42–43, 52–56 mining industry of, 44, 254 natural resources of, 51–52, 235 northern vs. southern, 49–52, 54, 58 outsourcing industry in, 141 parliament of, 43, 44, 47–49 political situation in, 30, 37, 38–39, 47–49, 50, 55–58, 174 population of, 19, 37–38, 52–56, 57, 58, 95 poverty in, 41–42, 52–53, 57–58 price levels in, 53 productivity in, 64 real estate market in, 44, 254 “rope trick” in, 35–36, 36, 37, 58 rural areas of, 38, 57 Russia compared with, 36–37, 44–45, 46, 87, 88, 95 social unrest in, 42–43, 55–56 Sri Lanka’s relations with, 196, 197 state governments of, 37, 44, 48–52 sterilization (vasectomy) program in, 55–56 stock market of, 36–37, 38, 70, 189, 243, 244 taxation in, 44, 51 technology sector of, 141, 166, 254 unemployment in, 41–42 wealth in, vii–viii, 25, 44–47, 57, 79 welfare programs of, 10, 41–42 India: A Portrait (French), 47 Indian Ocean, 197 Indonesia, 129–38 in Asian financial crisis, 131–35 banking in, 133–34, 135 billionaires in, 131–32 China compared with, 132–33, 135, 136 Chinese community in, 129 consumer prices in, 137–38, 232 corruption in, 134–35 currency of (rupiah), 131 economic reforms in, 132–38, 147 economy of, 28, 132–38, 147, 174, 254 elections in, 136–37 as emerging market, 133, 232 family enterprises in, 134, 138, 254 foreign investment in, 7, 133–35, 137 foreign trade of, 132, 133–34, 157, 159 GDP of, 131, 133 government of, 30, 132–37 growth rate of, 132–33, 136, 137, 245, 246, 254 income levels of, 8, 131–32, 138 India compared with, 135, 136 inflation rate of, 137–38, 249 labor market in, 23, 203 land development in, 135–36 national debt of, 134–35 natural resources of, 133–34, 159, 235 Philippines compared with, 132, 138, 140 political situation in, 129, 132, 133, 134, 135, 136, 137, 210 population of, 133, 136 Russia compared with, 137–38 urban decentralization in, 136–37 wealth of, 131–38 industrialization, 10, 67, 68, 101 inflation rate, x, 4, 5, 17, 22, 23, 24, 25, 31, 33, 39, 42, 43–44, 62, 66, 68–69, 88, 104, 115, 116, 118, 137–38, 176, 177, 179, 202, 226, 228, 247–49, 250, 254 Infosys, 37 infrastructure, x, 10, 15–16, 20–21, 43, 51, 61, 62, 64, 65, 69, 84–85, 88, 90–91, 116, 120–21, 199, 200–201, 239 inheritance taxes, 44 insider trading, 46, 187 Institutional Revolutionary Party (PRI), 76–78 Intel, 164, 203–4 intellectual property, 238 interbank loans, 150 interest rates, 6, 11, 62, 67, 68–70, 105, 106, 107, 115, 119, 120, 228–29, 247–49, 250 internal devaluation, 108, 109 International Finance Corporation, 214 International Monetary Fund (IMF), 101, 115, 160, 173, 208, 216–17 Internet, 2, 85, 173, 175, 177, 207–8, 220, 225, 230, 237–39 interregional exports, 206–7 investment, viii, x, 2–8, 19, 37, 90, 96, 131, 144, 146–50, 156, 160–61, 165, 190, 212–13, 220, 223–29, 231, 235, 236–38, 244 see also foreign investment Ipanema Beach, 21, 61, 65, 66 Iran, 10, 123, 189, 190 Iraq, 10, 122, 189, 195 iron, 51–52, 59, 67, 69, 180, 232 Iron Curtain, 101 Iskandar region growth agenda, 151 Islam, 111, 113–17, 119, 121, 122, 123–24, 127, 146, 162, 211, 219, 220, 246 Islamic Museum, 219 Israel, 122, 127 Istanbul, 111, 115, 122, 125, 146 Italy, 40, 99 Ivory Coast, 208 Izmir, 115, 124, 125, 146 Jaffna Peninsula, 193, 195 Jakarta, 129–31, 135, 136, 137, 232 Jalan Sudirman, 129 Japan: in Asian financial crisis, 155–56 auto industry of, 139, 144, 161 China compared with, 18, 20, 22, 24, 31, 32–33 currency of (yen), 32–33 democratic government of, 30 economic slowdown of, 22, 254 economy of, 8, 20, 22, 81, 90, 197, 230, 235, 242, 253, 254 foreign trade of, 7, 32–33, 144–45, 157, 159 GDP of, 144–45 growth rate of, 6, 32–33, 44, 235 income levels of, 20, 138, 144 inflation rate in, 31 manufacturing sector of, 157, 159, 170, 230, 235 pop culture in, 167 population of, 169 property values in, 24, 252 public transportation in, 20 real estate market in, 3 recession in, 109 research and development (R&D) in, 160–61, 237 social conformity in, 200 South Korea compared with, 153, 155–56, 157, 159, 160–61, 163, 164, 167, 168, 169, 170 stock market of, 156, 235 Taiwan’s relations with, 163–64 technology industry of, 160–61, 236–38 Thailand compared with, 139, 144–45 Java, 137 “Jeepneys,” 130, 138 Jews, 118, 149 Jharkhand, 46 Jiang Zemin, 29 Jobbik (Movement for a Better Hungary), 105 Jockey underwear, 54 Johannesburg, 181, 204 Jonathan, Goodluck, 209–11, 213 Jordan, 122 J-pop, 167 junk bonds, 228 “just-in-time” supply chains, 80 Kabila, Laurent, 205 Kagame, Paul, 206 Kano, 213 Kaohsiung, 136 Kapoor, Ekta, 41 Karachi, 190 Karnataka, 50, 51 Kashmir, 49, 50 Kasimpasa neighborhood, 125 Kayseri, 124 Kazakhstan, 30, 89, 93, 123, 212 Kazan, 85 Kennedy, John F., 129 Kenya, 191, 205, 209 Keynes, John Maynard, 109 KGB, 86 Khodorkovsky, Mikhail, 87 Kia, 161, 162–63 kidnappings, 78–79, 190–91 Kim Jong Il, 170 Kinshasa, 205 Kirchner, Cristina, 89 Kirchner, Nestor, 89 Klaus, Vaclav, 108 Koç family, 125 “Korea Discount,” 167–69 “Korean Wave,” 122, 167 KOSPI index, 70, 153, 155, 156, 164, 165 K-pop, 122, 154, 167 Kuala Lumpur, 147, 148, 151 Kumar, Nitish, 50–51 Kuwait, 187–88, 214, 216, 218, 219 Kuznets curve, 76 labor market, 7, 17, 21–23, 27, 32, 38, 47, 55, 64, 65, 76, 77, 102, 103, 104, 164, 169–70, 174–75, 179, 180–81, 199, 203–4, 246–47 Lada, 86 Lafarge, 213 Lagos, 211, 212, 213 landlines, 207 land-use laws, 25, 168 Laos, 188 laptop computers, 158, 164 large numbers, law of, 7 Last Train Home, The, 22–23 Latin America, viii, 40–41, 42, 73–75, 81, 89, 246 see also specific countries Latvia, 101 Lavoisier, Antoine, 235–36 law, rule of, x, 50–51, 89, 96, 127, 181–82 lead, 19 Leblon neighborhood, 61 Lee Kwan Yew, 118, 148, 193 Lehman Brothers, 164 Le Thanh Hai, 203 Lewis, Arthur, 21 “Lewis turning point,” 21 LG, 158, 163 “Liberation Tigers” of Tamil Eelam, 192–93, 197 Liberty, 178 Libya, 127, 216 Limpopo River, 171 Linux, 238 liquidity, 9, 228–30 liquor stores, 126 literacy rate, 52 Lithuania, 101, 109 Lixin Fan, 22–23 loans, personal, 12, 24, 116, 125, 150 long-run forecasting, 1–14 L’Oréal, 31 Louis Vuitton, 31 Lugano, 40 Lula da Silva, Inácio, 59, 61, 66, 70, 210, 226, 248 luxury goods, vii–viii, 12, 25, 31, 236 Macao, 201 macroeconomics, 7–8, 13, 66, 67, 145–46, 188 “macromania,” 7–8, 188 Made in America, Again, 246–47 “made in” label, 155, 246–47 Madhya Pradesh, 52 maglev (magnetic levitation) trains, 15–16, 231 Magnit, 90–91 Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), 41–42 Malaysia, 146–52 in Asian financial crisis, 18, 131–32, 146–47, 149–50 banking in, 146, 149–50, 151, 252 currency of (ringgit), 131, 146–47, 149 economic planning in, 150–52, 161 economy of, 18, 118, 150–52, 161, 235 electronics industry of, 147–48 as emerging market, 10, 45, 118, 149, 161, 235 foreign investment in, 146–50, 151 foreign trade of, 6, 144, 147, 157 GDP of, 145, 147, 149 government of, 146, 148–52 growth rate of, 9, 147–48, 149, 244 income levels of, 138, 148 manufacturing sector in, 147–48, 150 political situation in, 146–49 Singapore compared with, 118 stock market of, 131, 235 Thailand compared with, 144, 145, 147 wealth of, 148 Mali, 208 Malta, 30, 106 Malthus, Thomas, 225, 231–32 Mandela, Nelson, 171, 172, 176 Manila, 130, 138, 139, 140, 141 Manuel, Trevor, 176 manufacturing sector, 17–18, 22–23, 28, 43, 54, 75, 80, 88–89, 90, 110, 124, 132, 147–48, 150, 155, 157, 158–59, 160, 161–66, 168, 170, 180, 221, 230, 235, 246–47, 265 Maoism, 37, 47 Mao Zedong, 21, 27, 29 Marcos, Ferdinand, 138, 139, 210 markets: black, 13–14, 96, 126 capital, 69, 70–71; see also capital flows commodity, 12, 13–14, 223–39 currency, 4, 9, 13, 28 domestic, 36, 43, 183 emerging, vii–x, 2–11, 37–38, 47, 64, 94, 185–91, 198–99, 242–49, 254–55, 259–62 free, x, 8–9, 96, 104 frontier, 89, 185–91, 213, 261–62 housing, 5–6, 16, 18, 24–25, 28–29, 31, 32, 61, 92, 103–4 labor, 7, 17, 21–23, 27, 32, 38, 47, 55, 64, 65, 76, 77, 102, 103, 104, 164, 169–70, 174–75, 179, 180–81, 199, 203–4, 246–47 see also stock markets Mato Grosso, 232 Mayer-Serra, Carlos Elizondo, 78 MBAs, 225 Mbeki, Thabo, 176, 206 Medellín drug cartel, 79 Medvedev, Dmitry, 95–96 Mercedes-Benz, 86, 144 Merkel, Angela, 108 Mexican peso crisis, 4, 9 Mexico, 73–82 antitrust laws in, 81–82 banking in, 81, 82 billionaires in, 45, 47, 71, 78–80 Brazil compared with, 71, 75 China compared with, 80, 82 consumer prices in, 75–76 corruption in, 76–77 currency of (peso), 4, 9, 73, 80, 131 drug cartels in, 79–80 economy of, 4, 12, 28, 73–82, 178, 183 emigration from, 79, 82 foreign exports of, 6, 75, 80, 158 GDP of, 76, 77, 81 government of, 76–78 growth rate of, 73–82, 244 income levels of, 8, 73–75, 76, 113 labor unions in, 76, 77 national debt of, 76, 80–81 nationalization in, 77–78 oil industry of, 75, 77–78, 82 oligopolies in, 73, 75, 76–82, 178 parliament of, 76–77 political situation in, 76–78, 82 population of, 73 stock market of, 73, 75, 76, 81 taxation in, 76 U.S. compared with, 75, 79, 80 Mexico City, 75 micromanagement, 151 middle class, 10, 19–20, 33, 42–43, 52–56, 182, 211, 236 Middle East, 38, 65, 68, 113, 116, 122, 123, 125, 166, 170, 189, 195, 214–21, 234, 246 middle-income barrier, 19–20, 144–45 middle-income deceleration, 20 Miller, Arthur, 223 minimum wage, 29, 63, 126, 137 mining industry, 44, 93, 154, 175, 176, 178–80 Miracle Year (2003), 3–6 misery index, 248–49 Mittal, Sunil Bharti, 204–5, 206, 209 mobile phones, 53, 86, 204–5, 207–8, 212, 237 Mohammed, Mahathir, 146–47, 148, 151 Moi, Daniel arap, 205 monetization, 225 Money Game, The (Smith), 234 Mongolia, 191 monopolies, 13, 73, 75–76, 178–79 Monroe, Marilyn, 129 Monte Carlo, 94 “morphic resonance,” 185 mortgage-backed securities, 5 mortgages, 5, 92, 105–6 Moscow, 12, 83, 84, 90, 91, 96, 136, 137, 232 mosques, 111 Mou Qizhong, 46 Mozambique, 184, 194–95, 198, 206 M-Pesa, 208 MTN, 212–13 Mubarak, Gamal, 218 Mubarak, Hosni, 92, 127, 218 Mugabe, Robert, 176, 181 Multimedia Supercorridor, 151 multinational corporations, 53, 73, 75, 81, 151, 158–59, 160, 184, 230 Mumbai, 43, 44, 79, 214, 244 Murder 2, 167 Murphy’s law, 11 Muslim Brotherhood, 127 Mutual, 178 mutual funds, 178–79 Myanmar, 30 Myspace, 41 Naipaul, V.

The Subterranean Railway: How the London Underground Was Built and How It Changed the City Forever
by Christian Wolmar
Published 30 Sep 2009

The £5m, though, was nothing like enough to fund the three new tube lines and the electrification of the District. A further sum of around £10m was needed and when an attempt to raise money for the Piccadilly was made in 1903, only 40 per cent of the shares were taken up. Here, Yerkes devised his master plan, an Edwardian version of junk bonds. The reasoning was that the tube lines were bound to make a profit and the price of the shares would go up. Therefore, he would raise money through what he called profit-sharing secured notes, a concept halfway between equity and debt. The notes, of which he sold £7m worth, would be redeemable for their value – which ranged between £100 and £1,000 in either dollars or pounds – in 1908 and would pay interest of 5 per cent.

…

Lloyd George fobbed them off by remarking that he was not going to come to the rescue with any ‘socialistic legislation’.3 Unable to seek government help, Speyer and Gibb had to persuade their shareholders to allow them to restructure the company’s finances. Not an easy task when, essentially, investors had been sold a pup. The crisis was brought to a head by the promise Yerkes had made to redeem his £7m worth of junk bonds, the ‘profit sharing notes’, on 30 June 1908. By the time the three tube lines had opened, the value of the £100 notes had fallen to a third of their sale price and Speyer had to bail out the company with his bank’s money by paying off shareholders who were threatening to launch bankruptcy proceedings.

Billionaires' Row: Tycoons, High Rollers, and the Epic Race to Build the World's Most Exclusive Skyscrapers
by Katherine Clarke
Published 13 Jun 2023

Though he had never met Kuba before, Heller was struck by the investor’s focused, intense bearing, and the pair fell into an easy rapport. CIM had been founded in 1994 by Kuba and his friend Avi Shemesh, both former Israeli paratroopers, and Richard Ressler, a former investment banker at Drexel Burnham Lambert, the firm famously forced into bankruptcy thanks to illegal dealings by the billionaire junk bond king Michael Milken. Ressler moved in extremely affluent and well-connected circles. His brother Tony had founded the private equity giant Apollo Global Management, which had quickly become one of the finance industry’s most influential dealmakers, and their sister Debra had married Apollo’s other co-founder, Leon Black.

…

The Extell portfolio comprised a number of stable rental buildings with steady income; Central Park Tower was by far the riskiest proposition, and the investors were watching it closely. As concerns grew in Israel about the state of the New York condo market, the yields on Extell’s bonds catapulted to 16 percent, as Israeli investors demanded higher returns in exchange for putting their capital at risk with the company, effectively making them junk bonds. The Israelis were worried that the building wouldn’t get built. Barnett had flown to Tel Aviv to meet with bondholders, but his visit did little to assuage their concerns. “He just put more fuel to the fire,” Shahar Keinan of Brosh Capital, an Israeli hedge fund that owned Extell bonds, told The Real Deal.

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street
by William D. Cohan
Published 15 Nov 2009

And then they announce a big stock buyback at $65 a share and they sell stock at $38 a share. I mean, they don't know what they're doing. And yet they get rewarded for doing that. It makes me sick.” Sedacca had witnessed firsthand a few blowups in his day. He worked at the investment bank Drexel Burnham Lambert—the former home of junk-bond king Michael Milken—when it was liquidated in 1990 and lost virtually overnight the stock he had in the firm as it plunged from $110 per share to zero (Drexel was a private company but the stock had been valued for internal purposes). “It was enough that it stunned,” he explained. “It was more than a twenty-nine-year-old would want to lose.”

…

Morgenson could have gone on to mention Bear's roles in both the mutual-fund scandal and the scandal involving the exchange of favorable research coverage for investment banking business, but she did not, as her point was already well made. “And so, Bear Stearns, a firm that some say is this decade's version of Drexel Burnham Lambert, the anything-goes, 1980s junk-bond shop dominated by Michael Milken, is rescued,” she wrote. “Almost two decades ago, Drexel was left to die. Bear Stearns and Drexel have a lot in common. And yet their differing outcomes offer proof that we are in a very different and scarier place than in the late 1980s.” Black insisted that the JPMorgan teams camped out on the firm's eighth floor read Morgenson's column.

…

Rubin's mortgage bond trading desk supposedly made some $150 million in profit in the fiscal year that ended in June 1993 and helped the firm make a record $362 million profit, allowing Cayne and Greenberg to take home $15.9 million each and Spector to get $11.7 million. “He's a superstar,” Cayne told the paper. Siconolfi explained that making such contrarian bets was part of the firm's DNA. That explained the hirings of Rubin, of Don Mullen, a former junk-bond salesman at the defunct Drexel Burn-ham, of Mustafa Chike-Obi, a mortgage trader fired from Kidder Pea-body because of a sexual harassment charge, and of investment bankers such as Curt Welling, from First Boston, and Dennis Bovin and Mike Urfirer, from Salomon Brothers and First Boston, respectively.

Three Felonies a Day: How the Feds Target the Innocent
by Harvey Silverglate
Published 6 Jun 2011

As is so often the case with federal criminal prosecutions, the fabrication consisted, in part, of dubious testimony given by rewarded witnesses, and felony charges for conduct (admitted to by Milken) that, to informed and objective observers, did not appear to constitute crimes. 98 Following (or Harassing?) the Money Michael Milken’s pioneering development of higher-risk, higher-yield corporate bonds (dubbed “junk bonds” by his detractors) gave birth to some of the most important start-up (and, in a real sense, upstart) companies of the decade. Among these were such now well-known challengers to America’s corporate status quo as McCaw Cellular, Barnes & Noble, MCI, and Ted Turner’s Cable News Network (CNN). Any ambitious entrepreneur with more ideas than cash could urge Milken to convince his wide network of wealthy risk-takers to invest in an innovative enterprise in exchange for a higher-than-normal interest rate on the company’s bonds, often combined with some stock option component (dubbed an “equity kicker”) to make the investment more attractive should the company succeed.

…

See bribery initial public offerings (IPOs), 106–108, 110, 113–114 IPOs (initial public offerings), 106–108, 110, 113–114 Iran, espionage and, 248 Iraq War, xiii, 207, 248 IRS (Internal Revenue Service), 138–141, 143–145, 147–149, 245 ISPs (Internet service providers), 258–260, 262 Jackson, Robert H., xxxv–xxxvi, l–li, 256 Jazz Pharmaceuticals, 95–96 Jefferson, Thomas, 196 Jeremijenko, Natalie, 236 328 index jihad, 243 Joint Terrorism Task Force, 233 labels (instructions for use of medical devices), 80–81 journalists. See news media Lachman, Walter L., 224–232, 264 judges propensity for following sentencing guidelines, 40 witness cooperation and, 270 ladder climbing, 10, 14–17, 27, 50 junk bonds, 97–105 law school accreditation, 181–185 juries credibility judgements by, 72 pre-trial publicity and, 269–270 Lay, Kenneth L., 122–125 Kagan, Elena, xv Kansas Rule of Professional Conduct, xlvii Kaplan, Lewis A., 149–151 Karatz, Bruce, xxi Kassirer, Jerome P., 67 Kehoe, James, 12 Keker, John, 110 Keller, Bill, 213 Kempthorne, Jeanne M., 35–36 Kennedy, Anthony, xvi–xvii, 138 Kennedy, Robert, xxx Kessler, Glenn, 207 Keverian, George, 32 Khodorkovsky, Mikhail, xxiii–xxiv kickbacks, 92, 94 Kirtley, Jane, 211 Knoll, Erwin, 205 Knox, Cecil, 58 Konop v.

Word Freak: Heartbreak, Triumph, Genius, and Obsession in the World of Competitive ScrabblePlayers
by Stefan Fatsis
Published 27 Jul 2001

You don’t need probabilities, you don’t need to win, you don’t need to care about anything else other than finding plays. It doesn’t matter. It’s just finding the plays.” Winning becomes a byproduct, I conclude on my own. Find the right play, and the winning follows. I think of Michael Milken, the junk bond Pied Piper, whom I covered as a reporter. Milken liked to say that money is a byproduct. Make the right deal, and the money will follow. Edley, I decide, is more Mike Milken than Darth Vader: tireless, single-minded, preachy, pensive, persuasive, unflappable, intellectually abstract, a bit of a charlatan.

…

If I knew this before I started, why didn’t I stop? What was I trying to prove? It was never entirely clear what attracted me to the game. A search for a quirky story — something to write about — was part of it. But I’d written hundreds of stories in my career, and I’d never wanted to do what my subjects did: sell junk bonds or prosecute white-collar criminals or negotiate athlete contracts or run minorleague baseball teams. Scrabble turned out to have a deeper connection. It recalled childhood snubs and competitive fears, the words of an editor who on a job interview lumped me favorably with the “insecure overachievers” the paper liked to hire (I got the job).

Vultures' Picnic: In Pursuit of Petroleum Pigs, Power Pirates, and High-Finance Carnivores
by Greg Palast
Published 14 Nov 2011

The law is called “champerty.” In New York, as in all states, you can’t buy stuff for the sole purpose of filing a lawsuit. For example, you can’t buy a wrecked car for $100 and then sue for $10,000, claiming, “Hey, this car is a wreck!” Singer took Straus under his dark wing. They bought Peru’s junk bonds and sued. A judge ruled “champerty” and threw Singer’s suit in the garbage can, but an appeals court backed Straus and Singer. Legal ping-pong can drag on for decades. But Singer got lucky. Peru’s President decided it might be prudent to flee his country. Something about murder charges on the way.

…

Campbell as a dull rock who should be thrown away, but that’s another matter.) It was in 2002, in the middle of civil war madness, with a tenth of the citizen population dead or dying, that Messrs. Straus and Hermann sued the Liberian government in federal court in New York demanding millions for the junk bonds held by their hedge fund, Montreux. Of course, it’s not clear there was a government in Liberia to sue. Straus and Hermann liked it that way. Not surprisingly, neither the cannibals who had roamed the presidential palace (really) nor the escaped convict Taylor nor anyone else showed up in the New York court to defend Liberia.

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market
by Steven Drobny
Published 31 Mar 2006

That’s one of the advantages of macro—while it’s impossible to deploy more than, say, $100 million to some styles, macro can deploy a huge amount of capital. You currently run a few concentrated themes.Will that still be the case if you are managing several billion dollars? Yes.The number of themes is not likely to grow in direct proportion to assets. Markets have become highly correlated—emerging market spreads are linked to junk bond and credit spreads, which are in turn correlated with the USD and high tech equities—and the tightness of those correlations is historically high. As a result, very broad diversification is neither practicable nor desirable. However, the interlinked distortions are extremely large, so the themes are highly scalable.

…

See also Bank of England; British pound; Sterling; United Kingdom Great Depression, 6 Greater Fool Theory, 205 Greece/Greek T-bills, 289, 305, 321–322 Greed, 207 Greenspan,Alan, 13, 17, 26, 84, 106, 160, 168–170, 172, 195–197, 206, 229–230, 350 Greenspan put, 13, 25, 29 Gross, Bill, 203 Gross domestic product (GDP), 265, 324 Growth stocks, 44, 59, 69 G7 countries, 93 G10 countries, 327–328 Guinness of Nigeria, 60 Gutfreund, John, 158 Hang Seng futures, 48 Harris,Yra, 12, 16, 199–215 Harvard Management Company, 53, 58 Head-and-shoulders pattern, 165 365 Hedge fund(s), xi, 129–130, 142–143, 186, 197–198, 204, 280–282, 286, 300, 312, 337–338 Hedging, 319 Heffernan, Mark, 171 Herd mentality, 20, 106–107 HFR global macro index, 17 HFR Group, x, 1 High-cost assets, 261 High-yielding currencies, 55 Historical returns, 62, 300 Home builders, 242–243, 252 Hong Kong, 63, 261 Horizon trader, 134 Hostetter,Amos, 9 Hot Commodities (Rogers), 217, 239 Hotimsky, Marc, 117–118 Housing bubble, 193, 195, 349 Housing market, 168–169, 194 Housing stocks, 274–275 Human bias, 50 Hungary/Hungarian forint, 277, 293 Hunt brothers, 206 Hurdles, 304 Hyperinflation, 197 Iceland, inflation index-linked housing bonds, 65–66 Icelandic krona, 66 Illiquidity, 60, 205, 336 Implied volatility, 46 India, 60–61, 67, 152, 239 Indonesia, 63 Indonesian recap market, 65 Inflation, implications of, 7, 32, 68, 110, 113, 123, 126, 166–169, 179, 196, 227 Institutional investors, 337 Interest rate(s), 13–15, 17, 26–27, 32, 46–47, 49–51, 64, 67–68, 82, 95, 106, 109–110, 112, 117–118, 122–124, 134, 138–139, 142, 146, 148, 167, 169, 173–174, 182, 195, 200, 205, 230, 285, 296, 300, 312, 315, 317, 319, 328, 331, 335 International equities, 8 International Monetary Fund, 5 Internet stocks, 272, 285 366 In-the-money options, 260 Inverse floaters, 51 Investment Biker (Rogers), 217 Investor pressure, 133 Irrational exuberance, 26 Islamic countries, 223–224 Italy/Italian government, bonds, 17, 85–87, 154, 167 January effect, 177 Janus, 281 Japan, 18, 77, 110, 117, 179, 184, 191, 197, 226, 261, 282–283, 286, 288, 289–290, 318, 327–328 Japanese yen, 19–20, 38, 76–79, 117, 122, 193, 221–222, 319, 336–337 Jones,Alfred Winslow, 8 Jones, Paul Tudor, 9–10, 12, 33, 163, 171–172, 203, 214, 253 JP Morgan, 246, 253–254, 283, 297, 309 Junk bonds, 188 Junk spreads, 251 Karachi Stock Exchange Index (KSE100), 298 Keynes, John Maynard, xiv, 5–6, 10, 31, 164–165, 277, 333–334 King’s College Cambridge Chest Fund, 5–6 Kooyker,Willem, 9 Korea, 261, 300, 305. See also North Korea Kovner, Bruce, 9–10, 33 Lamont, Norman, 16 Latin America, 239, 296, 306, 328 Leeson, Nick, 80 Leitner, Jim, 33–57, 60–68, 70, 107, 129 Lend long, borrow short strategy, 323 Lender fees, 26 Leverage/leveraging, 24, 54, 62, 75–76, 111, 135, 141, 195, 197, 232, 275, 280–281, 288, 311, 317, 332 Liar’s Poker (Lewis), 158–159 Liquid equity market, 7 Liquidation, 77 Liquidity, 11, 69, 79, 93, 111, 148, 195, 202, 252, 330, 333 Lockheed, 234–235 Lockup period, 142–143 INDEX London Diversified Fund Management (LDFM), 309, 313–314, 318 London International Financial Futures Exchange (LIFFE), 326 London School of Economics, 162 London Select Fund, 313 Long bonds, 29 Longer-dated options, 55 Long Term Capital Management (LTCM), 10, 23–26, 80, 137, 144, 157, 159, 192, 204, 230, 270, 310, 320 Loral, 235 Low probability, high impact events, 206 Low-yielding currencies, 55 Lunar cycles, 153–154 Maastricht Treaty, 110–111 Macroeconomics, 9, 29, 68, 218–219, 257, 346 Macro events, 234 Macromanagement, 166 Macro trader, success factors, 84–85, 339 Macro trading, 330–331.

A Man for All Markets
by Edward O. Thorp
Published 15 Nov 2016

To understand why it really happened, you need to go back to the 1970s, when first-tier companies could routinely meet their financing needs from Wall Street and the banking community, whereas less established companies had to scramble. Seizing an opportunity to finance them, a young financial innovator named Michael Milken built a capital-raising machine for these companies from within a stodgy old Wall Street firm, Drexel Burnham Lambert. Milken’s group underwrote issues of low-rated, high-yielding bonds—the so-called junk bonds—some of which were convertible or came with warrants to purchase stock. The higher yield was the extra compensation investors required to offset the perceived risk that the bonds would default. Filling a gaping need and hungry demand in the business community, Milken’s group became the greatest financing engine in Wall Street history.

…

To illustrate, PNP did this in the 1980s when it exploited the large discounts to liquidation value that frequently appeared among closed-end funds. Closed-end funds start out by selling shares to investors. They are called closed because this sale of shares happens one time only, at the launch of the fund. Management then invests the money in a stated category of securities, such as high-tech, Korean, junk bonds, green energy, or biotech. To illustrate how such a fund might work, suppose we’re in the midst of a precious metals boom. The promoters sell shares of stock in the “Pot of Gold” (POG) closed-end fund through brokerage firms, paying 8 percent of the proceeds to these firms and their sales forces.

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined
by Lasse Heje Pedersen
Published 12 Apr 2015

LHP: Can you give examples of some of the more memorable short sales that you did? JC: Obviously Enron was a story that put us on the map, and it was an interesting short story. I think that being short a number of the Drexel Burnham stocks back in the late eighties was also an interesting situation on the short side, including the junk bond companies Integrated Resources and First Executive. More recently, some of the real estate companies. Our biggest loser was America Online, which we shorted in 1996, I think, and basically covered in 1998, when the stock was up eightfold. We shorted it because we believed that the company was not properly accounting for its marketing costs.

…

See also fundamental value; value investing inventory risk, 155, 156 investment banks: prime brokerage service of, 80; risk arbitrage and, 314 investment management agreement (IMA), 25 investment–saving (IS) curve, 194, 194n investment styles, ix, 2, 14–16. See also specific styles iPhone, 115 IR. See information ratio (IR) irrational exuberance, 203 IS (implementation shortfall), 70–72, 73f IS-MP model, 194n iTraxx, 283 JOBS (Jumpstart Our Business Startups) Act, 20 Jones, Alfred Winslow, 20 Jones, Paul Tudor, 184 junk bond companies, 129 Kabiller, David, 161 Keynes, John Maynard, 13, 119, 137, 204 Keynesian Beauty Contest, 119–20 Kohlberg, Kravis, Roberts & Co. (KKR), 298–99 Krail, Bob, 161 Krispy Kreme, 46 Kynikos Associates, 15t, 127; Kynikos Opportunity Fund, 131. See also Chanos, James Law of One Price, 6, 7t LBO.

Mastering Private Equity
by Zeisberger, Claudia,Prahl, Michael,White, Bowen , Michael Prahl and Bowen White
Published 15 Jun 2017

Pioneered by KKR, CD&R and a handful of other firms, the use of leverage to buy and manage a company was a new idea. The development of the high yield bond market, led by Michael Milken of Drexel Burnham Lambert, made this practically possible on a much wider scale than previously thought. Heretofore, “junk bonds” were formerly high grade bonds of companies that got into trouble and were in or likely to be in default. The idea of a new issue “junk bond” was a new concept. In 1980 only $180 million was raised for buyout funds in the US. This grew to $2.7 billion in three years, and $13.9 billion by 1987. As with many things in the financial and investment markets, this was a good idea carried to an extreme, culminating in the takeover of RJR Nabisco in 1989 by KKR (as told in a book and a movie, both called Barbarians at the Gate).

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves
by Andrew Ross Sorkin
Published 15 Oct 2009

With GM’s support he attended Harvard Business School, graduating in 1978. After a period working in GM’s treasury department in New York, he was persuaded in 1986 by a former GM treasurer, then at Merrill Lynch, to join the brokerage firm on its junk bond desk. Through hard work and support from powerful mentors, O’Neal rose rapidly through the ranks. He eventually came to oversee the junk bond unit, which rose to the top of the Wall Street rankings known as league tables. In 1997 he was named a co-head of the institutional client business; the following year, chief financial officer; and in 2002, CEO. The firm for which O’Neal was now responsible had been founded in 1914 by Charles Merrill, a stocky Floridian known to his friends as “Good Time Charlie,” whose mission was “Bringing Wall Street to Main Street.”

…

A great deal of money can be made from derivatives, which are, in simplest terms, financial instruments that are based on some underlying asset, such as residential mortgages, to weather conditions. Like the bomb that ended the film Dr. Strangelove, derivatives could, and did, blow up; Warren Buffett called them weapons of mass destruction. Sosin had been at Drexel Burnham Lambert, Michael Milken’s ill-fated junk bond operation, but left before that Beverly Hills-based powerhouse folded amid an epoch-defining scandal that drove it into bankruptcy in 1990. Seeking a partner with deeper pockets and a higher credit rating, Sosin fled to AIG in 1987 with a team of thirteen Drexel employees, including a thirty-two-year-old named Joseph Cassano.

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite
by Daniel Markovits
Published 14 Sep 2019

Practical innovation followed almost at once, with forty fundamentally new financial products and practices introduced between just 1970 and 1982. The innovators became rich. In the early 1980s, for example, super-skilled workers at Drexel Burnham Lambert pioneered the high-yield bond market: “There wasn’t another firm in the world that knew how to price a junk bond,” a Drexel insider remembers, which made the junk bond business immensely profitable. The profits of course drew competition from other newly minted super-skilled workers, and this competition generated new innovation, including in the mortgage-backed securities that proved so profitable in the early 2000s and in the high-frequency trading platforms that are so profitable today.

…

See identity politics Industrial Revolution, 247–48, 250 industry, valorization of, 207 and competition, 157–58 and elite work intensity, 4, 11, 95–98, 157–58, 193, 202 and luxury goods, 219–20 and moral insult to middle class, ix, xiv, xvii, 24, 30–31, 60, 62–64, 187–88, 206 See also elite work intensity industry as source of elite income, 3, 13, 17–18, 32, 36, 88–92, 93–94, 292fig See also human capital; industry, valorization of innovation-based labor market polarization, 5, 9–10, 12, 161–63, 180 and class divide, 256 and competition, 158 and cycle of meritocracy, 239–40, 254, 267–68 fast-food industry, 160–61 finance industry, 9, 162, 164, 165, 167–69, 238–39, 254, 266 and leisure, 185–86 in management, 9, 83, 161, 162, 170–71, 172–73, 174–75, 243–44, 246–47, 266 manufacturing industry, 9, 179 and middle-class job loss, 23–24 origins in finance industry, 236–38 and productivity measurement, 266–67 and reform agenda, 283–84 as result of elite human capital, 239–40, 248–50, 251–52, 254, 259 retail industry, 177, 178 Instagram, 179 internships, 142 Iraq war, 205 Jaimovich, Nir, 304fig James, LeBron, 178 JD.com, 175 Jefferson, Thomas, 71, 260 Jobs, Steve, 214 Johnson, Lyndon B., 78, 101–2, 104 JPMorgan Chase (bank), 18, 192 junk bonds, 238 Kaplan, Steven, 314n(5), 335n(88), 336nn(89-90), 363n(164) Katz, Lawrence F., 347n(120), 362n(158), 363n(161), 372n(183), 374n(183), 375n(186), 385n(227), 389nn(240, 242), 392nn(248), 393nn(251–52), 394nn(252-53), 401n(283) Kennedy, John F., 101 Keynes, John Maynard, 185, 186, 187 King, Martin Luther, Jr., 60 Koch brothers, 52 Kodak, 140, 141, 179 Kohlberg Kravis Roberts & Company, 243 Kolko, Gabriel, 100 labor market polarization, 4, 70, 158–59, 304fig and class divide, 182, 202–3, 204, 255 and consulting industry, 246 and education, 182–84, 305fig entertainment industry, 178 finance industry, 12, 164–66, 167–69, 238–39, 302fig, 303 increasing trends in, 180–81 international comparisons, 252–53, 307fig as labor market polarization, 158 management, 175–77, 204 manufacturing industry, 12, 179, 180 and middle-class income, 23–24, 104–6, 294fig and middle-class workplace subordination, 173, 205–6 and moral insult to middle class, ix, xiv, xvii, 24, 30–31, 60, 62–64, 187–88, 206 and postgraduate schooling, 184–85 and race, 206–7 reform agenda, 275–76, 279–84 retail industry, 9, 177–78 and social mobility, 27 and tax policy, 281–82 and work intensity, 192 See also innovation-based labor market polarization Lafargue, Paul, 185 Lamborghini, 220 Langone, Ken, 283 La Rochefoucauld, François de, 263 law firms clerical jobs in, 178 competition, 33 elite income explosion, 11, 18, 90, 184 income defense function, 54–58 industry as source of elite income in, 90 luxury services, 222 male domination of, 209 and management innovations, 244–45 and midcentury elite leisure, 82 mid-skilled job promotion in, 280 and postgraduate schooling, 141 valorization of industry in, 97 work intensity, 10, 32, 33, 43, 44, 84, 97, 190 workplace training, 140 legacy admissions practices, 17, 111–12 leisure under aristocracy, 3–4, 77, 79–80, 86–87, 95–96, 193–94, 207 and class divide, 215–16 elite contempt for, 98, 215 and exploit, 80, 84, 97 and innovation-based labor market polarization, 185–86 and meritocratic inequality, 85, 86, 292fig midcentury elite, 81–82 and poverty, 103 Leonhardt, David, 325n(48), 342n(105), 356n(137), 358n(138), 371n(182), 376n(188), 378n(202), 381n(215), 385n(227) liberalism, 214 life expectancy, 30–31, 65–66, 104, 231–32 Lipton (law firm), 243 lobbyists, 52–54, 57 London School of Economics, xi Lott, Ronnie, 43 Luce, Carolyn Buck, 315nn(10), 316n(12), 321n(32), 324n(44), 333nn(83), 338n(96), 339n(97), 368n(177), 376n(190), 377nn(191) Luddites, 248 luxury goods, 219–22, 224–25 Macdonald, Dwight, 101 Madonna, 221 Magowan, Robert, 241 management, 169–77 competition, 33–34, 82–83 and consulting industry, 176, 245–46 and corporate control, 243–44 and corporate restructuring, 173–74, 176 and debt financing, 242–43 early twentieth century, 169–70, 240–41, 242 executive stock compensation, 92 income explosion, 11, 18, 56, 90, 161, 176, 184, 247 innovation-based labor market polarization in, 9, 83, 161, 162, 170–71, 172–73, 174–75, 243–44, 246–47, 266 labor market polarization in, 175–77, 204 male domination of, 209 midcentury, 169, 171–72, 174, 241, 243 mid-skilled job promotion in, 280 nineteenth-century absence of, 169–70, 242 and postgraduate schooling, 141–42 work intensity, 32, 44, 82–83 workplace training, 140–41, 159, 171 Mankiw, Gregory, 97, 107, 109, 265 manufacturing industry elite wealth based in, 89 and gender norms, 209–10 innovation-based labor market polarization in, 9, 179 job losses in, 22, 23, 30, 163, 209–10 labor market polarization in, 12, 179, 180 midcentury, 9, 20–21 nineteenth century, 3, 169–70 marriage, 48, 116–17, 118, 207–8, 210–11 See also families Marshall Plan for America (Center for American Progress), 283 Marx, Karl, 40, 88 mass incarceration, 206–7 mass production, 171, 248 Matthew Effect, 115 Mayer, Martin, 81 McDonald’s, 159–60, 161, 162, 175, 176, 204 McEnroe, John, 84 McKinsey, Bain & Company (consulting firm), 176, 245, 246 median income, 21 medical profession elite income explosion, 18, 90 industry as source of elite income in, 90 luxury services, 221–22 male domination of, 209 mid-skilled job promotion in, 280 and postgraduate schooling, 141 work intensity, 83–84 workplace training, 140 medieval society, 59 meritocracy charisma of, x, xii, xiv, xviii, xix, 63–64, 79, 109, 155, 260 defenses of, 14–15, 31 educational inequality as triumph of, 149–50 elite acquiescence to, 44–45 as failure, 269–70 as inevitable, 5–6, 15–16, 259–60 as integrated system, xvi, xx, 12, 68 norms of, 260 Obama-era redemption of, 66–67, 68 overview, 71–73 paradox of, 79 as positive alternative to aristocracy, ix, xi, 14, 263–64 as promising equality of opportunity, ix, xiv, xix, 26, 148 as return to aristocracy, 15, 47, 260–62, 268–69 shared dissatisfaction with, xviii–xx, xxi–xxiii, 44, 71, 274–75 meritocratic divide.

The Man Who Knew: The Life and Times of Alan Greenspan
by Sebastian Mallaby
Published 10 Oct 2016

For a man who deplored his colleague’s leaks to reporters, Greenspan was remarkably cozy with the media.61 Sitting in the Post’s executive reception room, Greenspan assured Berry and his colleagues that the minicrash was behind them. But over the next months, the challenge of financial fragility persisted. Investors’ withdrawal from junk bonds exacerbated a larger problem: creditors of all kinds were scared of lending. Regional Fed presidents swapped stories of small businesses stymied by tightfisted banks; home builders were scrambling for funding; in February 1990, Drexel Burnham Lambert, the investment house that had pioneered junk bonds, collapsed, with the Fed resisting entreaties to save it. Amid this drying-up of credit, growth slipped to under 1 percent. The recession predicted by Darman began to seem all too possible

…

Cleaning up after an equity bubble was one thing. Cleaning up after a housing bubble might be quite another. • • • Two months after Syron sounded the alarm about housing, the Fed confronted another shock from the financial system. With the growth slowdown that summer, investors had begun to worry about junk bonds, the high-yielding debt used to finance corporate takeovers. On Friday, October 13, 1989, the jitters came to a head with the collapse of one of the largest leveraged deals of the decade, the $6.75 billion buyout of United Airlines. The collapse screamed out that the buyout boom was over. The Dow Jones Industrial Average ended the day down nearly 7 percent—a far bigger drop than it had registered on the Friday before Black Monday.

…

Inflation was accelerating, and might accelerate still further with oil prices heading up.8 For a Fed chairman who wanted more than anything to remain credible as an inflation foe, the challenge was how to keep monetary policy tight without losing colleagues’ backing. When the FOMC debate got under way, several members sounded the alarm about the weakening economy. “People are poorer; they have less money to spend; their wealth is reduced,” one governor remarked, before expounding on the difficulty of borrowing—“The junk bond market is gone; the banks are not forthcoming.”9 As to the Kuwait invasion, the committee seemed not to know quite what to make of it. Mike Prell encouraged people to consider the budgetary angle. War might expand the federal deficit. “The increment is less than a couple of Texas S&Ls, presumably?”

An Empire of Wealth: Rise of American Economy Power 1607-2000
by John Steele Gordon
Published 12 Oct 2009

Part of that bull market was a new wave of mergers and acquisitions, the fourth to work its way through the American economy and in many ways strikingly similar to the first one in the 1890s. Low stock prices in terms of corporate assets, falling interest rates, and new capital-raising techniques such as “junk bonds”—bonds that paid high interest rates and financed risky, often untried ideas, such as CNN, the first all-news cable network—fueled the movement. By the end of the decade, more than one-third of the Fortune 500 companies would be taken over or merged. Just as in the 1890s, some of these mergers produced greatly improved economic performance and leaner, more flexible organizations.

…

Ogden, 143–46 GI Bill of Rights, 363–64, 366 Girard, Stephen, 117, 119–20 Glass, Carter, 338–39 Glass-Steagall Act, 335, 337–39, 401 Glorious Revolution of 1688, 52–53 gold, 285, 335 Civil War speculation in, 197–98 Gould’s corner in, 224–27 weight of, 80–81 World War I and, 286–87 gold rush of 1849, 179–86 gold standard, 183–84, 196, 224, 277, 384, 405 1896 election and, 269–71 Great Depression and, 323–24, 334 inflation and, 265–66 Gompers, Samuel, 251–53 Gorbachev, Mikhail, 415 Gorgas, Josiah, 201 Gould, Jay, 213, 214–16, 225–26 Grand Illusion, The (Angell), 285 Granger movement, 236–37 Grant, Ulysses S., 219, 220, 225, 226 Grattan, Thomas Golley, 164 Great Britain, xiii, 8, 40, 83, 94, 95, 133, 153–54, 221, 281, 311, 321, 323, 376, 403, 407 after American Revolution, 63–64 banking industry and, 42–43, 332–33 colonialization style of, 10–12 concept of liberty in, xiv-xvi Corn Laws of, 175 cotton trade and, 88–90 Glorious Revolution of, 52–53 gold standard and, 183–84 national debt of, 53–54 Navigation Acts of, 41–42 Oregon Territory ceded by, 179 slavery abolished in, 52 and taxation of American colonies, 54–56 tobacco trade and, 15–17 in War of 1812, 117–18, 120 in World War I, 289–90, 293–94 in World War II, 349–52, 362 Great Depression, xviii, 317–31, 343, 370, 378, 381 bank failures in, 321–23, 324, 328 banking panic in, 330–31 Bonus Army and, 327 congressional legislation in, 325–27, 332–36 federal deficit in, 324–25, 328 gold standard and, 323–24, 334 1932 election and, 328–29 Smoot-Hawley Act and, 320–22 unemployment in, 322, 324, 328, 336 Great London Exposition of 1851, 175–76 Great Society, 382 Greeley, Horace, 182, 208, 231 Greenback Labor Party, 266 greenbacks, 196–97, 224, 226, 265, 266–67 Greenspan, Alan, 184 Gresham’s law, 47, 195–96, 267, 385 Hadley, Arthur T., 148–49 Hamilton, Alexander, xviii, 71, 92, 96, 99, 105, 115, 272, 337, 398 central bank proposal of, 76–81 named Treasury secretary, 71–72 national debt program of, 73–75 Hammond, James Henry, 89 Hargreaves, James, 88 Harper’s Weekly, 211 Harris, Benjamin, 158 Harrison, Benjamin, 198, 238, 239 Harrison, George, 319 head rights system, 16 Head Start, 382 Hearst, William Randolph, 260, 349 Heller, Walter, 380 Henrietta Maria, queen of England, 21 Henry, Joseph, 155 Henry, Patrick, 173 Higher Education Act, 383 Hill, James J., 278 History of the Standard Oil Company (Tarbell), 256 Hollerith, Herman, 406–7 Home Loan Bank Act, 325–26 Home Owners Loan Corporation, 335 Home Owners Refinancing Act, 335 Homestead Strike, 253 Hone, Philip, 130, 151–52, 165 Hooker, Thomas, 1 Hoover, Herbert, 207, 283, 332, 344, 391 FDR contrasted with, 338–39 Great Depression and, 317, 319–22, 325–28 House of Burgesses, Virginia, 17, 18 House of Representatives, U.S., 77, 117, 127, 275, 325, 333, 342, 353, 395 Commerce Committee of, 156 gold standard and, 265 Sixteenth Amendment in, 276 Ways and Means Committee of, 395 Howe, Elias, 176 Hudson, Henry, 4 Hudson River Railroad, 212 Hull, Cordell, 275 Hull, William, 118 Humphrey, George, 380 Huxley, Aldous, 297 IBM, 302, 407, 410 ICBMs, 403 ice trade, 176–79 Illinois, 122, 141, 235 immigration, 401 Civil War and, 201 ethnic diversity and, 244 labor relations and, 250 slums and, 243–44 income tax, 272–77, 388 on capital gains, 394 in Civil War, 194–95, 272–73, 274 in Constitution, 274, 276 on corporations, 276–77 Kemp-Roth proposals and, 390–91 progressive, 390 reform of, 394–96 in World War I, 292–93 in World War II, 358–59 indentured servants, 11–12, 16, 18–19, 50 India, 7, 40, 54, 83, 85, 416 Indiana, 122, 141 Indians, 4–6, 8, 11, 13, 15, 16–17, 22, 25, 54 indigo trade, 26, 82–83 Industrial Revolution, 26, 32, 49, 82, 88, 92, 102, 141, 149–50, 152, 162, 241, 243, 246, 409 Industrial Workers of the World (Wobblies), 250 inflation, 43–44, 47, 113, 267, 357, 379, 381, 390–91, 396, 405 in American Revolution, 60–61 Civil War and, 196 gold standard and, 265–66 in 1970s, 383–86 in postwar economy, 370–71 after World War I, 295–96 Insull, Samuel, 304–6 Intel, 408 International Monetary Fund, 378 International Typographical Union, 249–50 Internet, xiv, 12, 410–13 Interstate Commerce Commission, 238, 392 Iran hostage crisis, 391 iron industry, 32–36, 184, 246 see also steel industry isolationism, 349, 353, 362 Italy, 9, 311, 353 Jackson, Andrew, xviii, 92, 122–31, 151, 278, 281, 337, 389 national debt and, 125–26 nullification crisis and, 97 pet banks and, 129–30 Jackson, Charles Thomas, 155 Jackson, Howell, 274 James I, king of England, 10, 15, 17 James II, king of England, 38, 52–53 Jamestown colony, 8, 12–17 Japan, 204, 278, 311, 352, 353, 361, 363, 416, 417 Jefferson, Thomas, 52, 121, 122–23, 171, 173, 223, 326, 389, 398 and adoption of dollar, 68–69 assumption debate and, 74–75 central bank opposed by, 116 decimal dollar system and, 69–70 Embargo Act and, 94–95 Erie Canal opposed by, 106 national bank opposed by, 77–78, 80–81 Jenks, Joseph, 35 Johnson, Andrew, 215, 221 Johnson, Anthony, 19 Johnson, Hiram, 349 Johnson, Lyndon B., 382, 390 joint-stock company, 9–10 Jones, William, 126 Jones, W. M., 248 Jonson, Ben, 27 junk bonds, 397 Kaiser, Henry J., 354 Kay, John, 88 Keats, John, 366 Kellogg-Briand Pact, 311 Kemp, Jack, 390–91 Kemp-Roth tax proposal, 390–91, 395 Kennan, George, 282 Kennedy, John F., vii, 294, 327, 380–81, 382, 391 Kennedy, Joseph P., 340–41 Keynes, John Maynard, 173, 325, 378–80 Kilby, Jack, 408 King, Martin Luther, Jr., 374 King William’s War, 46, 54 Kipling, Rudyard, 350 Kitchener, Lord, 290 Knickerbocker aristocracy, 260 Knickerbocker Trust, 278, 279 Knights of Labor, 250, 252 Knox, Philander, 263 Korean War, 380, 403 labor relations, 249–54 factory system and, 250 pension programs and, 369–70 in postwar era, 371–73 reform of, 344–45 violent clashes in, 252–54 Laffer Curve, 394 La Guardia, Fiorello, 326 Lamont, Thomas, 320–23 Lansing, Robert, 291 League of Nations, 311 Lee, Robert E., vii, 201 Lend-Lease, 352 Levitt, William, 365–66 Levittown, 366 Lewis, John L., 345 liberty ships, 354 Lincoln, Abraham, 3, 137, 192, 196, 198 Lincoln, Benjamin, 65 Lippmann, Walter, 395 Liverpool and Manchester Railway, 147–49 Livingston, Robert, 135–38, 140 Locke, John, 24 London Stock Exchange, 287 Long, Russell, 273 Lothian, Lord, 352 Louis XIV, King of France, 52 Louis XVI, King of France, 75, 77 Louisiana, 86, 122 Louisiana Purchase, 78, 137 Louisville Courier, 185 Lowell, Francis Cabot, 93–97, 247 lumber industry, 30–31, 171–72, 177–78 Lynch, Edmund, 368 McAdam, John, 100 McAllister, Ward, 251 MacArthur, Douglas, 327 Macaulay, Lord, 220 McClure’s, 256 McCormick, Cyrus, 174–75 McKinley, William, 239, 270–71, 275 Madison, James, 64, 73, 74–75, 77–78, 105, 106, 116, 121 War of 1812 and, 117–19, 120 Man and Nature (Marsh), 172 Mansfield, Lord, 52 mark, German, 401 Marsh, George Perkins, 172 Marshall, Alfred, 378–79, 380 Marshall, George C., 351, 377 Marshall, James, 179–80, 187 Marshall, John, 144, 229 Marshall Plan, 377 Marx, Karl, 40, 57, 66–67, 206 Maryland, 87 Maryland colony, 21–22, 45 emigration to, 27–28 Massachusetts: canal program of, 102–3 Shays’s Rebellion in, 64–65 Massachusetts colony, 34–35, 46, 47 coin minting in, 44 Mass Transit Act, 382 Mauchly, John, 407 Maybach, Wilhelm, 296 Medbery, James K., 158, 200, 216 medical insurance, 360–61 Medicare and Medicaid, 382 Men and Mysteries of Wall Street (Medbery), 200, 216 mercantile system, 40–41, 66 Merrill, Charles, 368–69 Mexican War, 160, 179, 191 Mexico, 8, 179, 183, 291 Michigan, 141, 330 microprocessor, 408–9 Microsoft, 256, 410, 417 middle class, 28, 51, 161, 163, 244, 251, 275, 292, 308 credit and, 366–67 Miller, Joaquin, 218 Miller, Phineas, 84–85 Mills, Ogden, 182 Mineworkers Union, 345 Mining Exchange, 199 Mississippi, 86, 224 Missouri, 122 Mitterrand, François, 405 “Modest Enquiry in the Nature and Necessity of Paper Currency, A” (Franklin), 46 Moley, Raymond, 329, 333 money, 44–45, 68–70, 113 in American Revolution, 60–61 banknotes as, 113 in Civil War, 195–97 as commodity, 42–43, 45 deficit spending and, 380–81 “fiat,” 46–47, 195 gold collateralization and, 114–15 paper, 46, 47, 76–77, 121, 126, 128, 195, 196, 197, 202 see also banking industry; coins and currency monopolies, 256–57 Monroe, James, 126, 144 Moore, Gordon, 408 Moore, Henry, 50 Morgan, J.

Confessions of a Wall Street Analyst: A True Story of Inside Information and Corruption in the Stock Market
by Daniel Reingold and Jennifer Reingold
Published 1 Jan 2006

From its IPO price of $19, it was now at $48, having doubled in the first three months of this year alone. Before Global’s IPO, former president George H. W. Bush gave a speech to the company’s most important customers and opted to be paid in pre-IPO stock instead of taking his usual $80,000 honorarium. That decision netted him $14 million. Global Crossing’s founder was Gary Winnick, a former junk-bond salesman at Drexel Burnham Lambert, Michael Milken’s hotshot firm, whose fortunes had evaporated when Milken pleaded guilty to securities law violations in 1990.6 Winnick was a heavyset, wide-shouldered Long Islander who would have looked right at home in a used car lot. I initiated coverage of Global Crossing shares with a “2,” or Accumulate, rating, meaning I predicted a rise of 10–20 percent over the next 12 months—fairly unimpressive numbers in the context of what was happening to most stocks in the tech and Internet categories.

…

A doubling of CSFB’s telecom investment banking business to $300 million in the next year, for example, which was entirely possible, would mean an extra $3.75 million in my pocket. There were also payments for an I.I. ranking of number one, two, or three and additional incentives if CSFB ranked in the top five spots in three different league tables: telecom M&A, telecom stock underwriting, and telecom junk-bond underwriting. At our last breakfast, I had suggested some sort of bonus tied to the performance of my stock recommendations. Oddly, that was the one incentive that didn’t show up in this letter. Clearly the big money was coming from the banking. No one was home when I opened the letter, but I somehow felt guilty.

The Best Business Writing 2013
by Dean Starkman
Published 1 Jan 2013

As of October 2011, about 40 percent of them had been foreclosed on, as shown in the chart, taken from investor reports. Another 21 percent of the borrowers are behind on their payments and facing foreclosure. Moody’s and S&P now rate the safest classes of the security—once judged as having “minimal” risk—as having “very high” risk. It’s a junk bond. How Homeowners Are Faring in the Security That Includes Ramos’s Mortgage Sources: Deutsche Bank trust reports, ProPublica analysis. Similar securities have also fared poorly. Among the eighty-eight Merrill Lynch securities targeted by the Fannie Mae and Freddie Mac lawsuit, all have high rates of foreclosure and delinquency.

…

Some types of protection that do that are: • buying very short-dated credit protection, like a credit index set to expire in December 2012, so that if things get really bad really fast you are ready for it, • buying protection on something called “tranches,” which pay you relatively more for the next few defaults among the companies in the index, rather than paying you the same amount for all defaults in that index, and/or • buying protection on high-yield indexes (junk bonds!), which are likely to go bankrupt faster if things get bad It seems very likely that JPMorgan’s CIO did some or all of the above. It is hard to know! There is a deep mystery—if you like mysteries (and derivatives!) you can read the links above, but the deepest part of the mystery is that when all the hedge funds were complaining to Bloomberg about how JPMorgan was writing lots of protection on CDX.IG.NA.9 (next paragraph), no one was complaining that they were buying the protections mentioned above.

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
by Alan S. Blinder
Published 24 Jan 2013

Moving up the risk spectrum, the debts of the nation’s leading corporations carry some small risk of default. In order to induce investors to buy their securities, corporations must therefore pay somewhat higher interest rates than the Treasury. The lesson generalizes: Riskier borrowers pay higher interest rates than safer borrowers in order to compensate lenders for the risk they bear. For example, “junk bonds”—the debts of less-than-blue-chip companies—carry higher interest rates than, say, the bonds of IBM or AT&T. And the bonds of emerging-market nations carry higher interest rates than U.S. government bonds. The gap between the interest rate on a risky bond and the corresponding risk-free Treasury rate is called the risk premium, or spread, on that bond.

…

See Bailouts and Glass-Steagall repeal, 266–67 largest, asset sizes, 111 leverage ratio of, 52–53 opacity, benefits to, 78–79 in shadow banking system, 60 short-term borrowing problem, 52–53 TARP funds forced on, 200–203, 208 Ireland, financial crisis, 168, 170, 382, 410, 411–12, 413, 418, 428 Italy, financial crisis, 418, 419, 428 Job loss. See Unemployment Joint Select Committee on Deficit Reduction, 400 JP Morgan Chase and Bear Stearns bailout, 100, 105–8 credit default swaps (CDS), origin of, 65 as derivatives dealer, 61 TARP funds forced on, 201, 202 Washington Mutual purchase by, 155 Junior tranches, 74–75 Junk bonds, risk of, 41–42 Kashkari, Neel, 156, 178–79, 184 Kelly, Robert, 201 Keynesian economics elements of, 210–12, 350 Republicans against, 211, 235–36, 350–51 Killinger, Kerry, 155 King, Mervyn, 268 Kocherlakota, Narayana, 383–84 Kohn, Don, 105, 188 Koniak, Susan, 329 Korean Development Bank, 122 Kovacevich, Richard “Dick,” 160, 201.

Tailspin: The People and Forces Behind America's Fifty-Year Fall--And Those Fighting to Reverse It
by Steven Brill
Published 28 May 2018

Working at Drexel Burnham Lambert, a second-tier brokerage and investment bank, Milken—who would go to prison in 1991 for securities law violations—figured out that if companies had sufficient earnings or potential earnings, he could help what would become a group of buccaneer raiders, including Carl Icahn, Victor Posner, and Boone Pickens, borrow the money to buy them. The interest rates on what came to be called “junk bonds,” which Milken specialized in, would be high because the risk would seem high. However, if the raider took over and made the right expense cuts and sold off the right pieces, and then cashed out, the result would be a home run. Besides, in the 1970s, investors were willing to take the risk on bonds that paid high interest, rather than park their money in banks or in safer bonds, whose payouts often didn’t keep up with the era’s high inflation rates.

…

According to the Journal, Shad explained that “stock repurchases ‘confer a material benefit’ on a company’s shareholders by fueling increases in stock market prices.” By 1982, with corporate boards increasingly following Jensen’s cue and paying managements in stocks and stock options enriched by jumps in the stock price, those making the decisions to buy back shares would be the most immediate beneficiaries. Moreover, with raiders armed with all that new junk bond financing that they could use to offer shareholders a premium over current prices, and with shares increasingly held by unsentimental institutions that needed their stock picks to be validated every quarter, the use of buybacks to get the company’s stock price up closer to whatever premium might be offered by a raider was a perfect moat—a great way for CEOs and their lieutenants to ward off a takeover.

Triumph of the Optimists: 101 Years of Global Investment Returns
by Elroy Dimson , Paul Marsh and Mike Staunton
Published 3 Feb 2002

The relative quality and default risk of corporate bonds can be judged by the ratings given by agencies such as Moody’s and Standard & Poor’s. Moody’s ratings range from Aaa to C, with bonds below Baa regarded as below normal investment grade or “junk bonds.” Aaa and Aa 88 Triumph of the Optimists: 101 Years of Global Investment Returns bonds taken together comprise “high grade bonds.” Defaults on bonds currently rated as high grade are very rare, but such bonds can be downgraded and later default from a lower rating. Default rates on junk bonds can be very high, and in poor years have exceeded 10 percent. Default can range from having just a minor impact, such as a delayed interest payment, through to a total default on both interest and principal.

The Asian Financial Crisis 1995–98: Birth of the Age of Debt
by Russell Napier
Published 19 Jul 2021

It was a form of capitalism that combined individualism with the aggressive use of balance sheet management for primarily personal profit. As early as 1983, Michael Milken was helping corporate America supercharge returns through the issuance of a record amount of speculative credit instruments known as junk bonds. The particular beneficiaries of this form of financial engineering were corporate management and incentives were soon put in place, primarily in the form of stock options, to incentivise such behaviour. The world has seen speculative corporate debt binges before, but this one was launched in a period when interest rates had just begun a decline that would last 40 years.

…

I was lucky to arrive in Asia in 1995 when the unsustainable, more certainly by the summer of 1996, was beginning to look like it could not be sustained. 3 am Monday, 18 August 1969 18 March 1997, Global In February, David Bowie successfully securitised the future income stream from his back catalogue and sold the resulting security for US$55m. Now Crosby, Stills and Nash are approaching the market (it was 3 am on Monday, 19 August 1969 by the time the band, then including Neil Young, made it onto the stage at Woodstock). When global risk premiums are low and the spread on junk bonds is approaching new lows, this is the ideal time to securitise uncertain future earnings streams. The lower the interest rate which investors are prepared to accept, the higher the capital value for the new security. Thus the growing appetite for risk is likely to produce further such securitisations, and the Rolling Stones and Pink Floyd are also rumoured to be coming to the market.

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest
by Andrew W. Lo and Stephen R. Foerster
Published 16 Aug 2021

Thus, the value of the debt is the value of the assets less the value of the equity, and the riskiness of the debt can be determined through option pricing. Unlike his earlier option pricing research, the Merton Model took longer to catch on. As Merton later commented, “The [1974] paper didn’t exactly take the world by storm.”48 He noted that some investment banks used the model for pricing so-called junk bonds until a risk management firm called KMV used the model, altering it to assume that default could occur at any time, not only at maturity.49 Despite this change, KMV continued to refer to the altered model as the Merton Model. Around 1999, several large banks and investment firms, including JP Morgan, Goldman Sachs, Deutsche Bank, and Credit Suisse First Boston, which had been using proprietary versions of the model, attempted to establish a standard version.

…

On December 2, 1996, Shiller was part of a group having lunch with Greenspan in the Federal Reserve dining room in the Eccles Building in Washington, D.C., including his former student and coauthor, Campbell, and Goldman Sachs strategist Abby Joseph Cohen.32 Cohen began her career as an economist at the Federal Reserve in Washington before moving to Wall Street to work as a vice president of investment strategy at Drexel Burnham Lambert, known for its dominance in the junk bond market before its downfall in 1990. She joined Goldman Sachs in 1990 and then in 1996 was named a managing director. Cohen was well known for predicting the 1990s bull run and was particularly keen on tech stocks. In addition, several Federal Reserve board members were at the lunch. Over this elegant lunch, Shiller asked Greenspan when was the last time a Fed chairman warned the public that stock market prices were inflated.

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite
by Duff McDonald
Published 24 Apr 2017

There he made the claim that MBAs only buy into innovations after they’ve peaked. They were late to the junk bond boom, he pointed out, only arriving en masse in 1989, a year before Michael Milken went to jail. None of them went near Silicon Valley until 1999, he added, at which point “[graduates of] HBS perfectly timed the dot-com bubble.”1 It was all very entertaining, especially for non-MBAs. But it was also wrong. While Thiel was obviously generalizing about the herd behavior of MBAs, the experience of many HBS graduates, in particular, undercut those generalizations at their source. Fred Joseph (’63) was president of junk bond juggernaut Drexel Burnham Lambert during Milken’s heyday at the company.

…

He then proceeded to do everything he’d said he would, prompting the Wall Street Journal to deem it “the most sweeping deregulation in the agency’s 50 years.”2 Shad’s past and present careers then collided spectacularly, when Wall Street did what it so often does with a financial innovation, and took it too far. The rash of junk bond–fueled takeover activity led to a coincident rise in insider trading—by 1985, three-quarters of all takeover bids were preceded by suspicious surges in stock prices—and Shad suddenly found himself in the uncomfortable position of investigating and prosecuting not just people he knew but the companies they ran—Shad’s protégé at Hutton, Frederick Joseph, was CEO of Drexel Burnham Lambert when the Ivan Boesky/Michael Milken insider trading scandal broke.

Capitalism 3.0: A Guide to Reclaiming the Commons
by Peter Barnes
Published 29 Sep 2006

Spotting all this, corporate raider Charles Hurwitz offered to buy the company in 1985 through a holding company called Maxxam. At first the directors refused, but when Hurwitz threatened to sue them for violating their fiduciary duty to shareholders, the directors succumbed. Hurwitz financed his purchase with junk bonds, the interest on which was more than the historical profits of the company. To service this debt, he terminated the workers’ pension plan and began harvesting trees at twice the previous rate. Such were the fruits of the previous managers’ enlightened practices. It is possible for a company to pursue multiple bottom lines if it’s closely held by a group of like-minded shareholders—that was the 54 | THE PROBLEM case at my former company, Working Assets.

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success
by William Thorndike
Published 14 Sep 2012

He also made a series of significant investments in the electric utility industry through MidAmerican Energy, a joint venture with his Omaha friend Walter Scott, the former CEO of Kiewit Construction. During this period, Buffett was also active in a variety of investing areas outside of traditional equity markets. In 2003, he made a large ($7 billion) and very lucrative bet on junk bonds, then enormously out of favor. In 2003 and 2004, he made a significant ($20 billion) currency bet against the dollar, and in 2006, he announced Berkshire’s first international acquisition: the $5 billion purchase of Istar, a leading manufacturer of cutting tools and blades based in Israel that has prospered under Berkshire’s ownership.

Boomerang: Travels in the New Third World
by Michael Lewis
Published 2 Oct 2011

† Lenihan died in June 2011, seven months after this interview. IV THE SECRET LIVES OF GERMANS By the time I arrived in Hamburg, in the summer of 2011, the fate of the financial universe seemed to turn on which way the German people jumped. Moody’s was set to downgrade the Portuguese government’s debt to junk bond status, and Standard & Poor’s had hinted darkly that Italy might be next. Ireland was about to be downgraded to junk status, too, and there was a very real possibility that the newly elected local Spanish governments might seize the moment to announce that the former local Spanish governments had miscalculated, and owed foreigners a lot more money than they previously imagined.

Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School
by Andrew Hallam
Published 1 Nov 2011

If a company is financially unhealthy, it’s going to have a tough time borrowing money from banks, so it “advertises” a high interest rate to draw riskier investors. But here’s the rub: If the business gets into financial trouble, it won’t be able to pay that interest. What’s worse, you could even lose your initial investment. Bonds paying high interest rates (because they have shaky financial backing) are called junk bonds. I’ve found that being responsibly conservative is better than stretching over a ravine to pluck a pretty flower. Fast-Growing Markets Can Make Bad Investments A friend of mine once told me: “My adviser suggested that, because I’m young, I could afford to have all of my money invested in emerging market funds.”

Addiction by Design: Machine Gambling in Las Vegas
by Natasha Dow Schüll
Published 15 Jan 2012

One loses track of where one is and when it is.”3 Such spaces did not pretend to remedy the social ills of the “lonely crowd,” as sociologist David Riesman had despairingly designated the public at large, but instead responded to the escapist sensibilities of the American populace by satisfying them, without judgment.4 The publication of Learning from Las Vegas coincided with Nevada’s passage of the Corporate Gaming Act and the new wave of casino development that it ushered in. This wave gathered momentum in the 1990s, set off by the staggering success of the Mirage, a rainforest-themed resort financed with junk bonds in 1989 by an ambitious young casino tycoon named Steve Wynn. His winning venture inspired other companies to build competing properties on the Strip, turning the idiosyncratic structures that Venturi and his colleagues had lauded into gargantuan corporate megaresorts—“total environments” whose meticulous architectural calculations left little to chance.

…

As one gambling scholar reports, by 1976, 70 percent of casino revenues were being generated by nineteen casinos run by twelve publicly traded corporations on the Strip (Schwartz 2003). 22. This building boom was triggered by the astonishing success of the Mirage, a $640 million, 3,400-room, tropical-themed resort financed with junk bonds in 1989 by Steve Wynn. Nevada maintains a growth-friendly climate by imposing no personal income or general business taxes (companies pay no corporate income, franchise, inventory, or unitary taxes), filling its coffers instead by modestly taxing the gambling revenue of its 340 casinos (by 1997, the 6.7 percent tax on the gambling industry generated 33 percent of the state’s operating funds). 23.

Boom: Mad Money, Mega Dealers, and the Rise of Contemporary Art
by Michael Shnayerson
Published 20 May 2019

LISA SPELLMAN BROUGHT HER 303 GALLERY with her to Chelsea in 1996. Another arrival that year was a young woman with a famous surname, Marianne Boesky. As she said years later, Boesky started with more against her than most dealers: a felon as a father. Ivan Boesky had been caught up in one of the decade’s biggest insider-trading scandals, which also netted junk-bond financier Michael Milken and sent both men to jail. “Everyone presumed I was coming with my pockets filled with money, and that I would soon be out of business,” said Marianne Boesky. “In my case there was nothing—no support.” Initially, before moving to Chelsea, she borrowed $55,000 to rent a small space on Greene Street for $8,000 a month, two doors from David Zwirner’s first gallery.

…

As of 2018, there would be, by one count, 266 private museums around the world that were open to the public, the greatest fraction of those in Germany, with the United States not far behind.9 Just six years before, the total had been 216.10 Mitch and Emily Rales of the Glenstone museum were good examples—probably the best examples—of this new world of private museums. They were building a compound on 230 acres in Potomac, Maryland, that, when finished in 2018, would make Glenstone, at roughly 204,000 square feet, one of the largest private museums in the world. Rales had made his fortune in the 1980s with his brother using junk-bond financing to buy companies that made drill chucks, vinyl siding, wheel balancers, and other construction and automotive necessities. He was reputed to be worth $3.5 billion, his brother Steve worth $6 billion.11 For most of his leveraged-buyout years, Mitch Rales had bought a few artworks—a Mary Cassatt painting, a Matisse drawing—but no more than the average billionaire.12 Then came the fishing trip in Russia that changed Rales’s life in 1998.

Alpha Trader
by Brent Donnelly
Published 11 May 2021

Creative People outside Wall Street don’t generally associate the world of finance with creativity, but they should. Orthodox, follow-the-crowd thinking does not work in trading. Most of the legends of finance had some creative insight that took them to another level. Examples include Milken’s idea for high yield “junk” bonds, Paul Tudor Jones and Peter Borish’s idea to overlay past and present chart patterns to predict the crash of 1987, George Soros’ idea of reflexivity, and Ray Dalio’s idea for the All-Weather portfolio which came to be known as Risk Parity. Creative thinking does not have to mean you come up with ideas that completely revolutionize finance.

…

Huff), 44, 251, 259, 492 HSBC Positioning Indicators, 345 Huff, Darrell, 44, 251, 259, 492 Hunt, Ben, 300, 492 ideas, filtering trade, 392, 407—411 confirmation bias and, 410 considering alternative hypotheses and, 411 correlated markets and, 409 narrative cycle and, 407—408 positioning and sentiment and, 408 technical analysis and, 409—411 upcoming events and potential catalysts and, 408-409 ideas, generating trade, 392, 393—407 analogs, 402—405 bankrupt stock rallies, 406 bubble deflation before rebounding, 405—406 deviation from fair value, 392, 398—400, 407 economic event/news, 392, 395—398, 407 indicator scanning, 406—407 month-end dollar effect, 405 narrative understanding, 392, 393—395, 407 pattern recognition, 392, 400—406, 407 round number bias, 406 run-up trade, 396—397 trader bearishness and not short, 397—398 impulse control, 56 in the zone moments, 189 Inbox Zero, 58, 137 income, 44—45, 49—52 agreeableness and, 49, 50 conscientiousness and, 50, 51, 52 extraversion and, 50 good person—job fit and, 49 IQ and, 44, 45, 45 neuroticism and, 49, 50 personality and IQ on male, 49, 50 independent thinking, trader attribute of, 75, 82—83, 234 indicator scanning, idea generation and, 406—407 industriousness, 56 informational edge, 230 institutional traders, junior daily stop losses and, 368 intelligent/knowledgeable/informed, trader attributes of, 75, 77—78 interest rates Federal Reserve cuts, 78, 79, 399—400, 471 gold and, 319 stocks and, 260, 261 intraday activity patterns, market, 283—288 gold futures volume by time of day, 285, 286 S&P futures volume by time of day, 284 10-year bond futures volume by time of day, 284, 285, 285 volume by time of day, 283—288 introverts, 36, 84 intuition, 32—33, 69, 71, 481 See also gut feeling IQ, 62, 72, 77 academic success and, 45—46, 46, 51 effect of personality and on male earnings, 49, 50 income and, 44, 45, 45 RQ and, 62, 63 success and, 44—46, 49—50, 51, 52, 58, 71 trading success and, 71 versus RQ, 66, 68 Irrational Exuberance (R. J. Shiller), 247, 491 Japanese Candlestick Charting Techniques (S. Nison), 331 JDSU (JDS Uniphase), 472 added to S&P 500, 472 common stock 1998 to 2019, 476 July 26, 2000, rally, 473—476 Jones, Eric T., 294 Jones, Paul Tudor, 87, 163 journal, trading. See trading journal junk bonds, 87 Kaelen, Mendel, 382 Kahneman, Daniel, 198, 247, 491 Kaizen, 91 Kelly Criterion, 375, 379 Keynes, John Maynard, 311, 363 knowledge, 35 of specific markets, 268 ways to expand, 77—78 See also common knowledge, questionable; experience, trader Kovner, Bruce, 298 Lagarde, Christine, 427, 428 Lane, Philip, 427, 428—429 Langer, E.

Addiction by Design: Machine Gambling in Las Vegas
by Natasha Dow Schüll
Published 19 Aug 2012

One loses track of where one is and when it is.”3 Such spaces did not pretend to remedy the social ills of the “lonely crowd,” as sociologist David Riesman had despairingly designated the public at large, but instead responded to the escapist sensibilities of the American populace by satisfying them, without judgment.4 The publication of Learning from Las Vegas coincided with Nevada’s passage of the Corporate Gaming Act and the new wave of casino development that it ushered in. This wave gathered momentum in the 1990s, set off by the staggering success of the Mirage, a rainforest-themed resort financed with junk bonds in 1989 by an ambitious young casino tycoon named Steve Wynn. His winning venture inspired other companies to build competing properties on the Strip, turning the idiosyncratic structures that Venturi and his colleagues had lauded into gargantuan corporate megaresorts—“total environments” whose meticulous architectural calculations left little to chance.

…

As one gambling scholar reports, by 1976, 70 percent of casino revenues were being generated by nineteen casinos run by twelve publicly traded corporations on the Strip (Schwartz 2003). 22. This building boom was triggered by the astonishing success of the Mirage, a $640 million, 3,400-room, tropical-themed resort financed with junk bonds in 1989 by Steve Wynn. Nevada maintains a growth-friendly climate by imposing no personal income or general business taxes (companies pay no corporate income, franchise, inventory, or unitary taxes), filling its coffers instead by modestly taxing the gambling revenue of its 340 casinos (by 1997, the 6.7 percent tax on the gambling industry generated 33 percent of the state’s operating funds). 23.

Pity the Billionaire: The Unexpected Resurgence of the American Right
by Thomas Frank
Published 16 Aug 2011

A trader was not just an überconsumer but a bullying, self-maximizing, wealth-extracting he-man: a lout in full. The magazine’s panting worship of the truculent personality culminated in a bizarre spectacle it arranged in November of 2007: trader boxing. Before an audience chewing steak and guzzling luxury vodka, the furious fists of junk bond specialists would connect with the jaws of private equity managers, and the world would enjoy a graphic representation of the primal drama of capitalism. I bring up this forgotten catalog of crassness not merely because its pages are such an amusing trove of bull-market ephemera but because the attitude it celebrated was instrumental in bringing disaster down on the nation.

They Have a Word for It A Lighthearted Lexicon of Untranslatable Words & Phrases-Sarabande Books (2000)
by Howard Rheingold
Published 10 Mar 2020

And nothing can be funnier than some of the terms and customs that have grown up around economic activity. Business is a quintessentially social activity and thus is flavored by several key human traits, such as humor, irony, and pathos. When two opposing business leaders go head to head on Wall Street, they do it with hostile takeovers, junk bonds, and attorneys. When they do it in the Trobriand Islands, they use a particular ritual that one anthropologist noted produced more fear and anxiety than any other public event she had witnessed. Wait until you find out what common household object the Trobrianders use to mediate economic conflict.

Filthy Rich: A Powerful Billionaire, the Sex Scandal That Undid Him, and All the Justice That Money Can Buy: The Shocking True Story of Jeffrey Epstein
by James Patterson , John Connolly and Tim Malloy
Published 10 Oct 2016

Was it so remarkable that Prince Andrew would have been seen in Epstein’s company? Andrew’s philandering had been tabloid fodder for years. Randy Andy, they called him in the UK. And in the circles that Jeffrey Epstein moved in, philandering wasn’t seen as a vice. Epstein came of age just as industrywide deregulation took hold on Wall Street. Junk bonds were king. Call girls were charging ten thousand dollars a night. And in the shadows, you’d see things that would have made Caligula blush. Sights that would make Nero himself reach for the nearest fire extinguisher. When the urge presented itself, the new super rich didn’t have to swap wives. They could simply swap harems.

The Numerati
by Stephen Baker
Published 11 Aug 2008

It provided a math tool to count and calculate and compare a world of different things. And it eventually led to expanded commerce, global markets, the numbers blazing on the liquid crystal screens of the Tokyo Stock Exchange. Now Takriti and his team are turning us into symbols so that we can take our place in new human markets. Just the way brokers run portfolios of junk bonds or emerging market stocks, the Numerati are dropping us into portfolios of people. It's happening in industry after industry. Alamo Rent A Car, for example, buys a portfolio of romance-movie lovers from Tacoda and then compares its performance to that of others. If Takriti and his team manage to reduce IBM's work force into a coherent portfolio of skills—something a computer could understand—IBM could soon deploy its labor in much the way that it manages its financial investments.

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino
by Jim McTague
Published 1 Mar 2011

Robert Prechter, who the Wall Street Journal described as the reigning market guru, predicted in the first Barron’s cover story of 1987 that the DJIA would hit 3,600. Prechter, editor of the Elliot Wave Theorist newsletter, seemed prescient. The DJIA rose to what was to be its high that year of 2,722.42 in August—a level that contrarians felt was overvalued.2 But this had been a year of buying frenzy fueled by takeovers funded by junk bonds. The deals enriched corporate raiders, investment bankers, and investors, and the fever had not abated even when one of the era’s most successful buccaneers, Ivan Boesky, had been taken down on fraud charges by a young U.S. attorney named Rudolph Giuliani. Analysts cited the takeover boom plus a surge in cash from foreign and American investors as the basis for their bullish predictions.3 The public was so eager to swallow their malarkey that the market had continued its climb even when interest rates suddenly turned upward in April.

Choose Yourself!
by James Altucher
Published 14 Sep 2013

Nobody really knows its inflation. The first thing you notice is that you have more money. Inflation makes you feel flush at first. So suddenly everyone felt flush until prices started to rise too quickly in the 1970s. Then we felt sick again—which meant that we needed more money to pay for the price increases. Enter the ’80s junk bond boom. Creative ways were found to basically create money out of nothing. And this fueled a stock market boom. We had more money! When this started to slow down (stock market crash, people going to jail, etc.), thank god the Soviet Union collapsed. Peace dividend! But then recession again in 1993–94.

Without Conscience: The Disturbing World of the Psychopaths Among Us
by Robert D. Hare
Published 1 Nov 1993

And even when exposed, they can carry on as if nothing has happened, often leaving their accusers bewildered and uncertain about their own positions. Finally, white-collar crime is lucrative, the chances of getting caught are minimal, and the penalties are often trivial. Think of the insider traders, junk-bond kings, and S & L sharks whose financial depredations were so spectacularly rewarding—even when they were caught. In many cases, the rules of the game for greed and fraud carried out on a grand scale are not the same as they are for ordinary crime. Often, the players in the former form a loosely structured network to protect their mutual interests: They come from the same social strata and the same schools, belong to the same clubs, and may even be instrumental in setting up the rules in the first place.

Does Capitalism Have a Future?
by Immanuel Wallerstein , Randall Collins , Michael Mann , Georgi Derluguian , Craig Calhoun , Stephen Hoye and Audible Studios
Published 15 Nov 2013

Actually, however, it really started with Poland’s near default in 1980. The austerity measures that the Polish government put into effect in order to make debt payments were the trigger for Solidarność. The next set of debtors was the wave of large corporations which, beginning in the 1980s, issued the famous junk bonds as a means of overcoming their liquidity problems. This led to acquisitions by a group of ravenous investors, who made their money by stripping the enterprises of material value. The 1990s saw the beginning of extensive individual indebtedness, especially in the North, made possible by extensive use of credit cards and then later investment in housing.

Broken Markets: A User's Guide to the Post-Finance Economy
by Kevin Mellyn
Published 18 Jun 2012

They only embraced change when their future suddenly became insecure, and then it was mostly too late. No, the parade into the new Golconda was led by a motley crew of outsiders who saw gold in the sheer rottenness of the old regime. These included takeno-prisoners bond houses, such as the Solomon Brothers, who were immortalized by Michael Lewis in Liar’s Poker (Penguin, 1990). Michael Milken’s junk bonds fueled Drexel Burnham and the leveraged-buyout firms that followed. The entire venture capital industry that funded Silicon Valley and much else was equally new as a market force, though it traces its roots to the repressed 1940s. Private equity represented another essentially new industry in the 1980s, and the same is true for hedge fund industry that grew up a decade or so later.

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis
by Kevin Mellyn
Published 30 Sep 2009

Unless a borrower simply refuses to pay their bondholders, as the Soviet Union did after the Russian Revolution, bonds are always worth something. Even if a so-called sovereign default does take place, most countries eventually pay their bond holders some portion of what they are owed. In contrast, corporations that issue bonds can and do default all the time, especially on the high-yield, high-risk end of the market known as ‘‘junk’’ bonds. However, even in a bankruptcy, bondholders are in line to get paid from the failed company’s assets. Investors rarely lose their principal investment in highly rated bonds, in fact, if they hold them to maturity. If you put $1,000 into a highly rated bond that matures in twenty years, you will most likely get your $1,000 back in 2029.

Time Lord: Sir Sandford Fleming and the Creation of Standard Time
by Clark Blaise
Published 27 Oct 2000

The accumulation of new wealth—the emergence of the bourgeois model of Victorian affluence, so much a feature of literature on the Continent, as well as in England and America—is matched by the hazard of new fortunes, and the speculative losses that wiped out securities, and lives, as often as it created them. New wealth—dirty money, literally and figuratively—was won in high-stakes, high-risk operations in dangerous places. Bribes had to be paid, junk bonds floated, buffalo herds and recalcitrant Indians removed from the right-of-way by any means available. Consolidation and monopolization, starving out the competition, forcing mergers, calling in political debts, fighting the unions (most infamously by George Pullman himself): it was a glorious time to be a buccaneer capitalist.

Straight to Hell: True Tales of Deviance, Debauchery, and Billion-Dollar Deals
by John Lefevre
Published 4 Nov 2014

And that’s when he sees a very familiar face in almost every single picture. It’s Charles Widdorf, our regional head of equity capital markets. Our piece-of-shit back-office geezer just fucked Charlie’s maid in the bed Charlie shares with his wife. The Roadshow Selling a new high-yield bond (also called a junk bond) for a company usually involves conducting a full investor roadshow. It is an integral part of the deal marketing process and can be of pivotal importance in terms of lowering a company’s cost of borrowing. London-Paris-Frankfurt-Milan-Madrid is a typical European circuit, often traveling by private plane, always dining at the best restaurants and staying at the finest hotels.

Too Much and Never Enough: How My Family Created the World's Most Dangerous Man
by Mary L. Trump
Published 13 Jul 2020

By then Donald’s ventures already carried billions of dollars of debt (by 1990, his personal obligation would balloon to $975 million). Even so, that same year he bought Mar-a-Lago for $8 million. In 1988, he’d bought a yacht for $29 million and then, in 1989, the Eastern Air Lines Shuttle for $365 million. In 1990, he’d had to issue almost $700 million in junk bonds, carrying a 14 percent interest rate, just to finish construction on his third casino, the Taj Mahal. It seemed as if the sheer volume of purchases, the price tags of the acquisitions, and the audacity of the transactions kept everybody, including the banks, from paying attention to his fast-accumulating debt and questionable business acumen.

Fed Up!: Success, Excess and Crisis Through the Eyes of a Hedge Fund Macro Trader
by Colin Lancaster
Published 3 May 2021

Industrial production, a measure of factory, mining, and utility output, saw its steepest drop in records dating back over 100 years. But the S&P 500 is now up 30% from its lows in mid-March and back to where it was last October, when the outlook for 2020 corporate earnings looked sunshiny. Companies have sold record amounts of debt in recent weeks. Junk bonds, historically dodgy during an economic swoon, have roared back. To end the week, Obama made a virtual appearance. He never mentioned the Big D in his video commencement speech, but it was clear to everyone in the coronavirus lockdown that he was throwing shade. “Doing what feels good, what’s convenient, what’s easy, that’s how little kids think,” Obama told a multinetwork audience of millions of high school seniors, who won’t have an in-person graduation this year.

China's Superbank
by Henry Sanderson and Michael Forsythe
Published 26 Sep 2012

Canadian and US investors over the first decade of the twenty-first century have seen their investment in the country’s massive Las Cristinas and Las Brisas gold deposits disappear after Chávez, who came to power in 1998, nationalized their claims.8 In 2003, Chávez, who views founder Bolívar and his dreams for a United Latin America as his idol, moved onto the oil industry after taking control of state oil company, Petróleos de Venezuela SA (PDVSA), and using it as his cash cow for social spending. After two centuries of sovereign defaults, runaway inflation, and nationalized industries, global ratings agencies give Venezuela junk bond status. (See Table 4.1.) Table 4.1 Venezuela: Years of Default and Rescheduling Period Default/Rescheduling 1978–2008 1983, 1990, 1995, 2004 1875–1899 1892, 1898 1850–1874 1860, 1865 1825–1849 1826, 1848 Source: Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2009).

Escape From Model Land: How Mathematical Models Can Lead Us Astray and What We Can Do About It
by Erica Thompson
Published 6 Dec 2022

In 2019, academic economist Larry Summers, a previous chief economist of the World Bank, described the pandemic bond scheme as ‘financial goofiness in support of a worthy cause’. Failing to pay out in the event of an Ebola outbreak in the DRC, it had instead paid annual interest to investors of between 6.9% and 11.1% above the LIBOR interbank lending rate (about 2% over the 2017–19 period), a return considerably better than that generated by so-called ‘junk bonds’. The bond class paying 6.9% was capped at 16.7% loss while the 11.1% returns were only offered to investors willing to shoulder a possible loss of 100% of the initial investment in the event of a pandemic. So, if it didn’t release any cash for Ebola, you are probably wondering what happened to the pandemic bond when Covid-19 came along, since a three-year bond issued in June 2017 reached maturity in 2020.

Console Wars: Sega, Nintendo, and the Battle That Defined a Generation
by Blake J. Harris
Published 12 May 2014

The board of directors had the final word, and there were always ways for them to silently retaliate. By 1983 the board’s trigger-happy acquisition strategy, coupled with major losses due to the videogame crash, had led Mattel to the brink of bankruptcy. Miraculously, the company managed to survive—with the last-minute help of junk bond guru Michael Milken. He raised enough money to keep Mattel afloat while simultaneously making the company leaner by selling off its recent, unrelated acquisitions. In the face of failure, the board’s power weakened and some members were let go, but those who remained were not happy to have been proven wrong.

…

“Maybe you should think about leaving too,” Michael Milken suggested to Kalinske when they met for lunch in the summer of 1994. “Come join Larry and me—you’d be an absolutely perfect fit.” “That’s flattering,” Kalinske said, allowing himself for a moment to consider the possibility. Michael Milken, the renowned junk bond kingpin who had celebrated the eighties by shaking up Wall Street—which led to his starting off the nineties by serving twenty-two months in prison—was now a free man, and he wanted to do something good with his life. No, something great. And, like Kalinske, he’d always had tremendous passion for combining education with technology, which had led him to start a new company, with his brother and Oracle CEO Larry Ellison, which did just that.

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments
by Charles Goyette
Published 29 Oct 2009

We speak of the bonds of matrimony, chemical bonds, a father-son bonding experience. A bond is a written and sealed instrument or certificate representing the promise of an issuer to pay a certain amount of money at a certain time. There are all kinds of bonds: bail bonds, performance bonds, bearer bonds, convertible bonds, revenue bonds, junk bonds. And U.S. Treasury bonds. If the government’s intent is to pay today’s borrowers back with money of lesser value tomorrow, can it be said to be bound to its promise? If it does this year after year, does its credibility—its credit—rise or fall? Financial bubbles, like the dot-com bubble and the housing bubble, burst when credibility is destroyed.

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions
by Joshua Rosenbaum , Joshua Pearl and Joseph R. Perella
Published 18 May 2009

Wasserstein, Bruce. Big Deal: Mergers and Acquisitions in the Digital Age. New York: Warner Books, 2001. White, Gerald I., Ashwinpaul C. Sondhi, and Dov Fried. The Analysis and Use of Financial Statements. 3rd ed. New York: John Wiley & Sons, 2002. Yago, Glenn, and Susanne Trimbath. Beyond Junk Bonds: Expanding High Yield Markets. New York: Oxford University Press, 2003. Yasuda, Ayako. “Do Bank Relationships Affect the Firm’s Underwriter Choice in the Corporate-Bond Underwriting Market?” Journal of Finance 60 (2005): 1259-1292. Index A ability to pay ABL facility. See asset based lending facility accelerated depreciation accountants accounting accounts payable accounts receivable accretion/(dilution) analysis accretive accrued liabilities acquisition currency acquisition-driven growth acquisition financing adjusted income statement adjustments balance sheet capital expenditures capital structure changes management projections mid-year convention non-recurring items purchase price and financing structure recent events synergies year-end discounting administrative agent administrative agent fee advisor affiliate affirmative covenants Alacra all-cash transaction amortization acquisition-related intangible assets, of deferred financing fees, of term loan schedule, for term loans .

The Armchair Economist: Economics and Everyday Life
by Steven E. Landsburg
Published 1 May 2012

The income tax puts the burden where it belongs: on the present generation and on higher-income Americans. In the damaging legacy of the 1980's, excessive speculation and borrowing will play a prominent role. Unfortunately, your support for borrowing to bail out the savings and loans is, along with your previous support for the use of junk bonds in the private sector, consistent with that legacy. Your voice is, for many of us, the voice of reason. That, however, requires the support of reason in Government financing and private financing. Excessive borrowing is not reasonable. —Felix G. Rohatyn New York, June 25, 1990 I frequently scan the New York Times for letters that betroy extraordinary economic ignorance, and I save them in a folder 118 HOW TO READ THE NEWS indecorously labeled "Sound and Fury".

Bureaucracy
by David Graeber
Published 3 Feb 2015

Unsurprising, too, that this critique seems utterly irrelevant today.19 What began to happen in the seventies, and paved the way for what we see today, was a kind of strategic pivot of the upper echelons of U.S. corporate bureaucracy—away from the workers, and towards shareholders, and eventually, towards the financial structure as a whole. The mergers and acquisitions, corporate raiding, junk bonds, and asset stripping that began under Reagan and Thatcher and culminated in the rise of private equity firms were merely some of the more dramatic early mechanisms through which this shift of allegiance worked itself out. In fact, there was a double movement: corporate management became more financialized, but at the same time, the financial sector became corporatized, with investment banks, hedge funds, and the like largely replacing individual investors.

Toast
by Stross, Charles
Published 1 Jan 2002

I sighed and unkinked a little. “I was over-exposed. A complex derivative swap that was backward-chaining between one of the Septagon clades’ quantum oracle programs—I figured it would produce the goods, a linear-order performance boost in type IV fast-thinkers, within five mind-years—leveraged off junk bonds issued in Capone City. According to my Bayesian analysers nothing should go wrong in the fifteen seconds I was over-extended. Only it was just those fifteen seconds in which, um, you-know-what happened.” Normally, the Eschaton leaves us alone; nothing short of widespread causality violation provokes a strongly godlike intervention.

Social Life of Information
by John Seely Brown and Paul Duguid
Published 2 Feb 2000

S. adult education, has grown in twenty years (it was accredited in 1978) to a school with 61,000 students, 77 campus centers, and 450,000 alumni. As a sign of the new competition from the for-profit sector, the University of Phoenix has also charmed the stock market, allowing its parent company to double revenues and split stocks in the four years since its IPO in December 19944 From freelancing professors to the junk bond king Michael Milken, people are realizing that there is serious money to be made in education. For-profit colleges compete in particular with smaller, less-well-endowed conventional schools that cannot protect themselves with generous scholarships.5 But their strategy of what might be called "unplug and pay"offering individual courses at rates cheaper than the conventional college threatens all schools.

How to Speak Money: What the Money People Say--And What It Really Means
by John Lanchester
Published 5 Oct 2014

The agencies are immensely important to global financial markets, because the ratings they award don’t merely determine perceptions of risk; they often have a statutory force, since many institutions are forbidden by law from investing in any debt that has too low a rating. Debts above this threshold are “investment-grade”; debts below it are “junk bonds.” Mistakes in the assessments and mathematical models used by the ratings agencies played a central part in the credit crunch. There’s a dark comedy to the way the ratings agencies are still taken seriously by the markets, given that their performance so far this century has been the very definition, the epitome, of an epic fail.

A Theory of the Drone
by Gregoire Chamayou
Published 23 Apr 2013

Not only can there be no simple attribution of responsibility, but the description of that responsibility, diffracted amid this headless network of multiple agents, tends to become diluted. It changes from being intentional to being unintentional, from being a war crime to being a military-industrial accident. Rather, as in the case of the “junk bonds” skillfully elaborated by finance, it becomes very difficult to determine who is who or who has done what. This is a typical way of fabricating irresponsibility. But what, the roboethics experts chorus in reply, is the point of bothering to discover possible guilty parties, given that crime has been ruled out?

Stolen: How to Save the World From Financialisation
by Grace Blakeley
Published 9 Sep 2019

UK companies’ investment in fixed assets fell from around 70% of their disposable incomes in 1987 to 40% in 2008.46 Those firms that pursued the downsize and distribute model often ended up taking out debt to do so.47 In what came to be known as the “debt-leveraged buyout”, activist investors would take out “junk bonds” — or expensive debt — to buy out existing shareholders, before selling off chunks of the corporation and using this to repay bondholders. This makes the hierarchy of finance capitalism obvious — at the top are creditors, followed by shareholders, with workers at the very bottom. Firms came to operate according to the logic of finance-led growth: distributing earnings to shareholders and taking out debt to finance investment and new takeovers.

Big Business: A Love Letter to an American Anti-Hero
by Tyler Cowen
Published 8 Apr 2019

The unfortunate reality is that many of the payment methods used in China are now quicker and more convenient than those used in the United States, but I expect American business to catch up. There is today plenty of online lending, I would say with mixed results and probably a fair amount of misrepresentation. I think of this as a nascent market, a bit like junk bonds, still going through its teething phase and not quite ready for prime time. But someday it will be, and online lending will be a permanent part of the financial landscape, as is already the case in China. Some of today’s most significant financial innovations are relatively invisible. Consider Stripe, a payments company based in San Francisco, founded by two Irish entrepreneurs, brothers Patrick and John Collison.

Ten Lessons for a Post-Pandemic World
by Fareed Zakaria
Published 5 Oct 2020

The Federal Reserve’s action to guarantee a vast swath of assets—so as to provide the economy with a “floor” after the Covid crisis—has served to benefit established players, even those who have taken wild risks. The Fed is offering investors the upside of a range of risky investments, including junk bonds, while guaranteeing that there will be virtually no downside. It is a fundamental remaking of capitalism—one with no punishment for failure, no dangers of collapse, and no real mechanism for valuation of assets.* And because the people most likely to own and trade stocks also tend to be the wealthiest, the policy serves to hypercharge wealth inequality.

Liberalism at Large: The World According to the Economist
by Alex Zevin
Published 12 Nov 2019

Emmott called him ‘emotional’, a ‘doomster’ and argued that the ‘industrialized countries are chugging merrily along, apparently oblivious to the crash’ that had briefly spooked them in October 1987.22 In 1989 Michael Milken, the ‘king of junk bonds’ at Drexel Burnham Lambert, bankrupted the fifth largest US investment bank and went to jail. ‘There is nothing wrong, in principle, with junk bonds’, Emmott wrote. He bridled at caricatures of Wall Street as a ‘den of greed and chance’, which was a ‘harsh judgment to make of the freest-flowing and most sophisticated financial markets the world has ever known’.23 Made business affairs editor in 1989, Emmott surveyed the landscape from atop St James with optimism.

Stephen Fry in America
by Stephen Fry
Published 1 Jan 2008

For taking the name of the priceless mausoleum of Agra, one of the beauties and wonders of the world, for that alone Donald Trump should be stripped naked and whipped with scorpions along the boardwalk. It is as if a giant toad has raped a butterfly. I am not an enemy of developers, per se; I know that people must make money from construction and development projects, I know that there is a demand and that casinos will be built. I can pardon Trump all his vanities and junk-bonded dealings and financial brinkmanship, I would even forgive him his hair, were it not that everything he does is done with such poisonously atrocious taste, such false glamour, such shallow grandeur, such cynical vulgarity. At least Las Vegas developments, preposterous as they are have a kind of joy and wit to them…oh well, it is no good putting off the moment, Stephen.

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe
by Greg Ip
Published 12 Oct 2015

Mexico learned its lesson, and thereafter kept a floating exchange rate and stuck to borrowing in its own currency. When the rich world sank into crisis in 2008, Mexico’s central banker observed, with relief, “This time it wasn’t us.” Individual firms learned lessons, as well. While almost forgotten now, the collapse in 1990 of Drexel Burnham Lambert, home of the junk bond king Michael Milken, was the largest closure of an investment bank in the United States. Drexel had borrowed by issuing commercial paper, essentially a short-term loan from an investor rather than a bank, secured not by collateral, like a house or a Treasury bond, but merely by its promise to repay.

The Impulse Society: America in the Age of Instant Gratification
by Paul Roberts
Published 1 Sep 2014

Where the dominant figure of the postwar business world was the empire builder (the CEO methodically assembling vast armies of workers and arsenals of products), the new figure on the scene was more like a demolitions expert or a hit man. The raiders’ m.o. was simple: they looked for struggling companies whose sagging share price made them a bargain, quietly bought up a controlling stake (usually with high-interest loans, known as “junk bonds”), and then began what was euphemistically referred to as “restructuring.” In some cases, the raiders—epitomized by flashy characters such as bond trader Carl Icahn and real estate mogul Victor Posner—would go on a downsizing tear. They shut down underperforming divisions and laid off hundreds and even thousands of employees before selling the restructured firm at a substantial profit.

The Power of Passive Investing: More Wealth With Less Work
by Richard A. Ferri
Published 4 Nov 2010

investment-grade bond A bond whose credit quality is considered to be among the highest by independent bond-rating agencies. Jensen’s alpha A ratio created by Michael Jensen that measures the return earned in excess of the risk free rate on a portfolio to the portfolio’s total risk as measured by the standard deviation in its returns over the measurement period. junk bond A bond with a credit rating of BB or lower. Also known as a high-yield bond because of the potential rewards offered to those who are willing to take on the additional risk of a lower-quality bond. large cap A company whose stock market value is generally in excess of $10 billion, although the amount varies among index providers.

The Big Short: Inside the Doomsday Machine
by Michael Lewis
Published 1 Nov 2009

A friend of mine in my Salomon Brothers training program created the first mortgage derivative in 1986, the year after we left the program. ("Derivatives are like guns," he still likes to say. "The problem isn't the tools. It's who is using the tools.") The mezzanine CDO was invented by Michael Milken's junk bond department at Drexel Burnham in 1987. The first mortgage-backed CDO was created at Credit Suisse in 2000 by a trader who had spent his formative years, in the 1980s and early 1990s, in the Salomon Brothers mortgage department. His name was Andy Stone, and along with his intellectual connection to the subprime crisis came a personal one: He was Greg Lippmann's first boss on Wall Street.

When the Money Runs Out: The End of Western Affluence
by Stephen D. King
Published 17 Jun 2013

With the UK financial system now awash with liquidity, lending increased rapidly both within the financial system and to other parts of the economy that, frankly, didn't need any refreshing. In particular, the property sector boomed thanks to an abundance of credit and a gradual reduction in lending standards. Even as official interest rates were rising, interest rates on junk bonds were coming down. Meanwhile, the US had become dependent on serial bailouts. Alan Greenspan, ‘rescuer-in-chief’, established his bailout credentials when, as the newly appointed Chairman of the Federal Reserve, he saved the US from economic oblivion following the 1987 stock-market crash – thanks to both interest rate cuts and a browbeating session with bankers to make sure that they didn't starve each other of necessary funds.

The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance)
by Feng Gu
Published 26 Jun 2016

Reinsurance, however, is the major means of risk management, where part or all of the risk of an insurance portfolio is transferred to a reinsurance company for a portion of the premium received from customers.16 Some reinsurance contracts involve an “excess-of-loss” clause, where the reinsurance kicks in when the company’s loss exceeds a predetermined limit. Traditional tools of investment risk diversification come into play when managing the risk of the investment portfolio: avoiding high-risk investments (junk bonds), using financial derivatives (hedging), and investing in insured bonds (most of insurance companies’ investments are in fixed-income securities). Finally, regulatory risk is largely managed through lobbying the regulators and legislators. Strategic Resources & Consequences Report: Case No. 2 159 The Resource Preservation part of the Resources & Consequences Report (mid-column) should accordingly provide sufficient information enabling investors to evaluate the effectiveness of the company’s risk management, and the extent of risk exposure.

Broad Band: The Untold Story of the Women Who Made the Internet
by Claire L. Evans
Published 6 Mar 2018

Trying LSD for the first time, she laid on her back in the yard, watching her “mother-of-pearl” cigarette smoke coil beneath the stars, which seemed to her “like a TV set, moving around and forming words which I couldn’t read.” When she moved to New York in 1985—during the “Donald and Ivana Trump, merger-and-acquisition, junk-bond boom-time”—she discovered BBS culture, and The WELL. “Oh my God,” she thought. “This is just like PLATO but with interesting people!” She was eager to relive her adolescent flirtations, but The WELL didn’t do it for her. On today’s Web, geographical distance doesn’t count for much, beyond tonal differences—e-mails from abroad arrive at seemingly strange hours, and East Coast late-night Twitter dead-ends into the West Coast morning feed.

The Fourth Revolution: The Global Race to Reinvent the State
by John Micklethwait and Adrian Wooldridge
Published 14 May 2014

More important, some of the design faults in California’s structure have begun to be fixed, thanks to initiatives passed in Schwarzenegger’s time. Budgets no longer need a two-thirds majority to pass the legislature. The state has forged ahead with both open primaries and redistricting, with some interesting results. There is even something of a rebirth of centrist pragmatism. One trailblazer was Michael Milken, the former junk bond king, whose Santa Monica–based institute issues annual reports on the state of the state and produces a constant stream of ideas, many of them backed up by money, for fixing it. Another is Nicolas Berggruen’s Think Long Committee, a technocratic group of Republican and Democratic grandees and business leaders, which is trying to narrow the gap between Silicon Valley and Sacramento.

Bitcoin Billionaires: A True Story of Genius, Betrayal, and Redemption
by Ben Mezrich
Published 20 May 2019

He descended from two of the most prominent financial families in the country: on his father’s side, Judge Thomas Mellon had founded Mellon Bank in 1869, once one of the largest banks in the world, which in 2006 had merged with the Bank of New York, the oldest company in the United States, to become Bank of New York Mellon. On his mother’s side, he was a direct descendent of Anthony Joseph Drexel, the founder of Drexel Burnham Lambert, a Wall Street investment bank created in 1935 that had gone bankrupt fifty-five years later, in 1990, following the indictment of its rainmaker Michael Milken, dubbed the Junk Bond King. So Mellon had been born to banking royalty—and with that came all the ups and downs one would imagine. His father had killed himself when Matthew was in college at the Wharton School at the University of Pennsylvania. During his senior year, the younger Mellon had inherited $25 million at the age of twenty-one—and promptly bought himself a six-bedroom apartment off campus, a red Ferrari, and a black Porsche.

Hiding in Plain Sight: The Invention of Donald Trump and the Erosion of America
by Sarah Kendzior
Published 6 Apr 2020

You could tell yourself that later, when something you saw on tabloid TV struck too close to home—a rape or a beating or a breakdown or another hell sold as a commodity; you could repeat this refrain with a fervency to mask your fear. You would know on a gut level that your story would never be viewed with sympathy, because sympathy was for suckers now. Sympathy was a junk bond emotion. Sympathy was reserved for only the most virtuous victims—and even then, they always implied, it must have been the victim’s fault. Occasionally a great horror would shake Americans out of their smug voyeurism, a tragedy so awful it could not be sold as spectacle—the Oklahoma City bombing, the Columbine massacre—but these were dismissed as anomalies instead of sparks for future flames.

Green Swans: The Coming Boom in Regenerative Capitalism
by John Elkington
Published 6 Apr 2020

Many of the problems experienced by major banks in the financial crisis of 2007–2008 were due to such toxic assets, including “securitizations of subprime mortgages, where the original creators of the securities failed to take into account the real rate of mortgage default and the extent to which it would be contagious across securities.”52 Assets previously rated as AAA “suddenly looked like junk bonds and were worth a fraction of their previous value, if indeed it was possible to find a price at all in a market where no one wanted to buy them.” NEW STORIES The stranding of an asset can have regulatory causes, due to changes in legislation; economic causes, due to relative shifts in costs and prices; and physical causes, due to distance or environmental factors like drought or flooding.53 The race to tackle the climate emergency, when it really gets going, will strand flotillas, indeed entire armadas of once-valuable assets.

Ludicrous: The Unvarnished Story of Tesla Motors
by Edward Niedermeyer
Published 14 Sep 2019

Reuters, May 19, 2016. https://www.reuters.com/article/us-tesla-offering/tesla-raises-1-46-billion-in-stock-sale-ifr-idUSKCN0YB08W; Rishika Sadam. “Tesla raises $1.2 billion, 20 percent more than planned.” Reuters, March 17, 2017. https://www.reuters.com/article/us-tesla-offering-idUSKBN16O1NH; Evelyn Chang. “Tesla’s first junk bond offering is a hit, but now Elon Musk must deliver.” CNBC, August 11, 2017. https://www.cnbc.com/2017/08/11/tesla-debt-offering-raised-to-1-point-8-billion-300-million-more-than-planned-on-high-demand.html 10demand for all but the cheapest versions: Alexandria Sage. “Exclusive: Tesla’s delivery team gutted in recent job cuts – sources.”

The Unknowers: How Strategic Ignorance Rules the World
by Linsey McGoey
Published 14 Sep 2019

‘We have a mantra,’ Bannon said in an interview with journalist Joshua Green, ‘Facts get shares, opinions get shrugs.’ Bannon shares with Green his underlying mantra for amassing power, claiming that he learned the tactic when he was a banker with Goldman Sachs. ‘One of the things Goldman teaches you is, don’t be the first guy through the door because you’re going to get all the arrows,’ Bannon said. ‘If it’s junk bonds, let Michael Milken lead the way.’ He added that one of Goldman’s strongest principles is ‘never lead in any product. Find a business partner.’10 It’s a doctrine of deliberate anti-visibility: the strategic effort to make one’s idea seem to have originated elsewhere to avoid the appearance of primary involvement.

Corporate Finance: Theory and Practice
by Pierre Vernimmen , Pascal Quiry , Maurizio Dallocchio , Yann le Fur and Antonio Salvi
Published 16 Oct 2017

Conversely, bank and other financial borrowings equal to more than 2.5 times EBITDA are considered a heavy debt load, and give rise to serious doubts about the company’s ability to meet its repayment commitments as scheduled. As we will see in Chapter 46, leveraged buyouts can engender this type of ratio. When the value of the ratio exceeds 5 or 6, the debt becomes “high-yield”, the politically correct term for “junk bonds”. Naturally, these levels of ratios should be taken for what they are – indications and not absolute references. Bankers are more willing to lend money to sectors with stable and highly predictable cash flows (food retail, utilities, real estate), even on the basis of a high net debt to EBITDA ratio, than to others where cash flows are more volatile (media, capital goods, electronics).

…

Fabozzi, The Handbook of Fixed Income Securities, 8th edn, McGraw-Hill, 2011. On hybrid securities: F. Black, M. Scholes, The pricing of options and corporate liabilities, Journal of Political Economy, 81(3), 637–654, May–June 1973. J. Bulow, L.H. Summers, V.P. Summers, Distinguishing debt from equity in the junk bond era, in J. Shoven , J. Waldfogel (Eds), Taxes and Corporate Restructurings, Brooking Institution, 1990. M. Fridson, Do high-yield bonds have an equity component?, Financial Management, 82–84, Summer 1994. M. Jensen, W. Meckling, The theory of the firm: Managerial behavior, agency costs, and capital structure, Journal of Financial Economics, 3(4), 305–360, October 1976.

…

Godlewski, How to get a syndicated loan fast: The role of syndicate composition and organization, Revue de l’association française de finance, 31(2), 51–92, December 2010. J. Helwege, P. Kleiman, The pricing of high-yield debt IPOs, Journal of Fixed Income, 8(2), 61–68, September 1998. R. Taggart, The growing role of junk bonds in corporate finance, in D. Chew (Ed.), The New Corporate Finance: Where Theory Meets Practice, 3rd edn, McGraw-Hill, 2000. Section III Value Chapter 26 Value and corporate finance No, Sire, it’s a revolution! This section presents the concepts and theories that underpin all important financial decisions.

On the Edge: The Art of Risking Everything
by Nate Silver
Published 12 Aug 2024

The New York Times sent its architecture critic Paul Goldberger to review the property, and he compared its “crystal chandeliers and…purple carpeting” to “diets consisting only of chocolate mousse.” But the Taj was doomed less by its design choices and more by catastrophically poor financial planning. The Taj Mahal first filed for bankruptcy in 1991, only a year after it opened. Trump had financed it primarily through junk bonds with a 14 percent interest rate. When a financial analyst named Marvin Roffman pointed out how much the Taj would have to make to pay back its debts—amounts that seemed implausible in an Atlantic City market that was already seeing a decline in annual visitors—Trump successfully pressured Roffman’s firm into firing him.

…

New York, nytimes.com/1990/04/06/nyregion/it-s-themed-it-s-kitschy-it-s-trump-s-taj.html. GO TO NOTE REFERENCE IN TEXT filed for bankruptcy: Reuters, “Chapter 11 for Taj Mahal,” The New York Times, July 18, 1991, sec. Business, nytimes.com/1991/07/18/business/chapter-11-for-taj-mahal.html. GO TO NOTE REFERENCE IN TEXT through junk bonds: Robert O’Harrow Jr., “Trump’s Bad Bet: How Too Much Debt Drove His Biggest Casino Aground,” The Washington Post, May 24, 2023, washingtonpost.com/investigations/trumps-bad-bet-how-too-much-debt-drove-his-biggest-casino-aground/2016/01/18/f67cedc2-9ac8-11e5-8917-653b65c809eb_story.html. GO TO NOTE REFERENCE IN TEXT seeing a decline: Lenny Glynn, “Trump’s Taj—Open at Last, with a Scary Appetite,” The New York Times, April 8, 1990, sec.

Affluenza: The All-Consuming Epidemic
by John de Graaf , David Wann , Thomas H Naylor and David Horsey
Published 1 Jan 2001

I think there is nothing, not even crime, more opposed to poetry, to philosophy, ay, to life itself than this incessant business.14 “If a man should walk in the woods for love of them half of each day, he is in danger of being regarded as a loafer, but if he spends his whole day as a speculator, shearing off those woods and making earth bald before her time, he is esteemed an industrious and enterprising citizen,”15 Thoreau wrote, in words all the more relevant today, when corporate speculators shear off entire forests of old-growth redwoods to pay for junk bonds. For Marx, Thoreau, and many other oft-quoted, but more often ignored, philosophers of the mid-nineteenth century, industrial development could only be justified because, potentially, it shortened the time spent in drudgery, thereby giving people leisure time for self-chosen activity. Given a choice between more time and more money, these philosophers chose the former.

Work Less, Live More: The Way to Semi-Retirement
by Robert Clyatt
Published 28 Sep 2007

You may occasionally find actively managed funds that, through some credible difference in trading strategy, develop a consistent deviation from their index or benchmark. For instance, the Vanguard High Yield fund consistently varies from the high yield index by holding only the better quality “junk” bonds. During good times, the fund underperforms the index; during bad times, its better-quality bonds hold up better than those in the index. This may be a tradeoff you would feel comfortable making. In other cases, such as the private equity, oil and gas, market neutral hedge fund, and even commercial real estate asset classes, the fullest diversification and best returns may come, paradoxically, by moving outside the universe of indexes and funds entirely and making individual, illiquid investments—that is, investments in carefully researched private companies, partnerships, or buildings which cannot be readily sold.

Early Retirement Extreme
by Jacob Lund Fisker
Published 30 Sep 2010

The methods for doing so will be simple. I won't present any tips that haven't been seen before and which one can't find described in detail in hundreds of other books. Success won't depend on becoming famous on the Internet or getting a book deal, nor will it depend on a timely participation in a market bubble of junk bonds, internet companies, real estate, gold, or tulips. It also won't depend on successfully starting your own business. You won't need to develop a particular specialized skill such as real estate flipping. In fact, if you have a job, keep it. However, using the methods in a way that aligns your goals and side effects persistently and consistently to achieve financial or job-independence is not easy.

Family Trade
by Stross, Charles
Published 6 Jan 2004

"Hey, neat. I was worried about you, after I got home. You didn't look real happy, you know?" "Yeah. Well, I wasn't." Miriam relieved her of her coat and led her into the living room. "I'm really glad you're taking it so calmly. For me, I put in three years and nothing to show for it but hard work and junk bonds—then some asshole phoned me and warned me off. How about you? Have you had any trouble?" Paulette peered at her curiously. "What kind of warning?" "Oh, he kind of intimated that he was a friend of Joe's, and I'd regret it if I stuck my nose in any deeper. Playing at goodfellas, okay? I'd been worrying about you . . .

Losing the Signal: The Spectacular Rise and Fall of BlackBerry
by Jacquie McNish and Sean Silcoff
Published 6 Apr 2015

“I was afraid you wouldn’t,” came a nervous reply. Balsillie was on his way back to Ontario. His friends were stunned by his career choice. Wall Street was the number one destination of any aspiring finance grad. It was the nerve center of what was then the biggest corporate takeover binge in history. Junk bonds, buyout barbarians, and Michael Milken were such household names that Hollywood named a blockbuster movie Wall Street. Balsillie’s Harvard peers had never heard of Waterloo and Canadian friends knew nothing of Sutherland-Schultz. “We were astonished. It didn’t seem to fit Jim’s game plan,” said Wright.

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe
by Gillian Tett
Published 11 May 2009

AIG was considered a hefty but utterly reliable market player, and, like J.P. Morgan, it basked in the luxury of a triple-A credit rating. But within AIG, an entrepreneurial upstart subsidiary was booming. In the late 1980s, the company hired a group of traders who had previously worked for Drexel Burnham Lambert, which had infamously developed the junk bond business under the leadership of Michael Milken in the mid-1980s, before it blew up. They had been tasked by AIG with developing a capital-markets business, known as AIG Financial Products, which was based in London, where the regulatory regime was less restrictive. This was run by Joseph Cassano, a tough-talking trader from Brooklyn.

The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us
by Robert H. Frank, Philip J. Cook
Published 2 May 2011

Firms that fail to pay outstanding executives their due now stand to lose them to ag­ gressive rivals . Deregulation has provided an additional source o f increased com­ petition in the airline, trucking, banking, brokerage, and other indus­ tries in the United States. Added to that has been the increased threat of outside takeovers resulting from the introduction of junk bonds and other new sources of financial capital . These developments have increased the potential damage that could result from poor perfor­ mance, making it all the more important to bid for the most talented players in key positions. The Growth ofWinner-Take'-AII Markets 57 The Rise of Independent Contracting Several factors have caused traditional employment contracts to be in­ creasingly replaced by independent-contractor relationships.

The Myth of Capitalism: Monopolies and the Death of Competition
by Jonathan Tepper
Published 20 Nov 2018

If he can't buy a monopoly, he'll buy a duopoly. And if he can't buy a duopoly, he'll settle for an oligopoly. His record speaks for itself. Buffett was one of the biggest shareholders in Moody's Corporation, a ratings agency that shares an effective duopoly with Standard & Poor's. (You might remember they rated the toxic subprime junk bonds that blew up the economy as AAA gold). He and his lieutenants bought shares in DaVita, which has a price gouging duopoly in the kidney dialysis business. (They have paid hundreds of millions to resolve allegations of illegal kickbacks.) He's owned shares in Visa and MasterCard, which are a duopoly in credit card payments.

Value Investing: From Graham to Buffett and Beyond
by Bruce C. N. Greenwald , Judd Kahn , Paul D. Sonkin and Michael van Biema
Published 26 Jan 2004

When the Resolution Trust Company disposed of assets it had acquired in taking over failed savings and loan companies, its aim was to get itself out of business and get these assets back onto the tax rolls. Investors who had the expertise and made the effort to value these assets, whether real estate, junk bonds, or the savings institutions themselves, were able to purchase them at sale prices. Though opportunities such as these are not everyday events, they happen with enough frequency to keep value investors attentive to the next opportunity. There are also companies with divisions performing so poorly that the record of the whole company suffers.

Risk Management in Trading
by Davis Edwards
Published 10 Jul 2014

Assuming that defaults occur once per year, 249 Credit Value Adjustments (CVA) Moody’s S&P Fitch Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C AAA AA+ AA AA− A+ A A− BBB+ BBB BBB− BB+ BB BB− B+ B B− CCC+ CCC CCC− CC C D AAA AA+ AA AA− A+ A A− BBB+ BBB BBB− BB+ BB BB− B+ B B− FIGURE 9.5 Beginning of Year Rating Aaa Aa A Baa Ba B Caa-C FIGURE 9.6 High Yield (Junk Bonds) CCC CC C DDD DD D Default Bond Ratings End of Year Rating Aaa Aa 89.899 1.036 0.055 0.045 0.009 0.009 0 Investment Grade 6.724 87.885 2.573 0.208 0.056 0.049 0.036 A Baa Ba B Caa-C Default WR 0.54 6.918 88.124 4.92 0.483 0.169 0.036 0.191 0.269 4.946 84.716 5.652 0.412 0196 0.013 0.053 0.516 4.436 76.678 5.549 0.738 0.002 0.017 0.102 0.793 7.605 74.539 7.166 0 0 0.022 0.246 0.623 5.442 60.648 0 0.008 0.021 0.177 1.178 5.367 19.523 2.632 3.814 3.641 4.461 7.715 8.463 11.659 Average One‐Year Corporate Whole Letter Rating Migration Rates, 1970–2005 Source: Moody’s Investment Services, Defaults and Recovery Rates of Corporate Bond Issuers 1920–2005. 250 RISK MANAGEMENT IN TRADING KEY CONCEPT: CRITICISM OF CREDIT RATING MODELS The largest criticism of using credit ratings models for CVA work is that they are based on historical studies and don’t react as quickly as bond markets or credit derivatives markets to rumors of trouble.

Sickening: How Big Pharma Broke American Health Care and How We Can Repair It
by John Abramson
Published 15 Dec 2022

The number of hostile takeovers of companies worth more than a billion dollars increased more than tenfold from the 1970s to the 1980s. To preempt such takeovers, corporate management often participated in leveraged buyouts, in which they purchased controlling shares of their own companies. Both takeovers and buyouts required borrowing vast amounts of capital, typically provided by loans in the form of high-yield or “junk” bonds. In any case, corporate executives came under great pressure to squeeze out all the profits possible for shareholders and other investors; if they didn’t, they would be replaced by managers who would. Payroll, the largest expense for corporations, became the first target for management. This led to decreasing the number of workers, reducing wages, limiting the role of unions, and outsourcing jobs to decrease labor costs.

Living in a Material World: The Commodity Connection
by Kevin Morrison
Published 15 Jul 2008

Goldman Sachs entered the commodity business in 1981 when it bought one of its clients, J. Aron & Co, a family-owned commodity-trading business (Endlich, 2000) which had been a big precious metals trader until the gold price collapsed after its peak in January 1980. Morgan Stanley was also a new customer, as was Drexel Burnham Lambert, which is better known for employing junk-bond trader Michael Milken. ‘The cartel was breaking up and the trend was towards free-market oil pricing . . . once a commodity was established as a futures contract, it pretty much became a monopoly and a franchise . . . and I thought that if we could establish the franchise, it could last for ever and ever,’ said Marks.

The Docks
by Bill Sharpsteen
Published 5 Jan 2011

Before 6:00, Brooks invites me to dinner and heads down to the galley after Bill Privette takes the wheel. While we eat, Brooks and Henry watch the financial news on an overhead television that buzzes and pops from poor reception. While he flosses, Henry, a Hawaiian in his late thirties, begins a rambling dissertation on junk bonds. At the moment, the boat isn’t moving, just idling at the Mol Endurance’s stern. Privette and a trainee, Jim Brown, are waiting for a second tug, which hasn’t shown up because the port’s too busy at the moment. After about forty-five minutes, the pilot, Captain Jim Dwyer, decides he can manage with just one tug plus bow thrusters, and he orders the lines to the dock released.

The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead
by David Callahan
Published 1 Jan 2004

He resumed his career in finance after his release from prison in 1991. As the president of Adasar Group, Inc., Levine earned enough to afford an elaborately appointed 2,200-square-foot Manhattan apartment.38 By far the most successful of Milken's former pals is Gary Winnick, who worked closely with the junk bond king at Drexel. Winnick narrowly escaped prosecution for his involvement in Milken's crimes by agreeing to testify against his former boss. Winnick was never called to the witness stand and he went on to have a glorious new life on the shady side of the telecom industry. By 2000, Winnick was chairman of Global Crossing, a company worth over $50 billion, at least on paper.

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis
by James Rickards
Published 15 Nov 2016

In late 2016, the world was on the verge of finding out. Extraordinary policy measures used in 2008 had mostly not been unwound by 2016. Central bank balance sheets were still bloated. Swap lines from the Fed to the ECB were still in place. Global leverage had increased. Sovereign-debt-to-GDP ratios were higher. Losses loomed in sovereign debt, junk bonds, and emerging markets. Derivatives passed one quadrillion in notional value—more than ten times global GDP. Global elites gradually realized their monetary ease had simply spawned new bubbles rather than affording a sound footing. The stage was set for another collapse and the elites knew it. Now they doubted their ability to run the same playbook.

Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market
by Scott Patterson
Published 11 Jun 2012

Later that night, they’d be treated to a speech by the Right Honorable Gordon Brown, former prime minister of the United Kingdom. Ex–Clinton aide James Carville would address the group the following morning. (It was nothing unusual. Past keynote speakers at the conference had included luminaries such as former Federal Reserve chairman Alan Greenspan, former secretary of state Colin Powell, and the onetime junk-bond king Michael Milken.) Mathisson hit the button, calling up a chart showing that cash had flowed out of mutual funds every single month through 2010, following the Flash Crash. Legions of regular investors had become fed up, convinced the market had become either far too dangerous to entrust with their retirement savings, or just outright rigged to the benefit of an elite technorati.

The Clash of the Cultures
by John C. Bogle
Published 30 Jun 2012

Treasury notes is just 1.6 percent, and the yield on the total bond market index is just 2.03 percent, only slightly above the stock yield of 2.0 percent. My unvarying advice continues to be to accept the yield environment as it exists (no matter how painful). Most investors should avoid reaching out on the risky limbs of higher-yielding junk bonds and high-dividend stocks. With U.S. Treasury yields so low relative to investment-grade corporates, however, a holder of the total bond market index (72 percent in government-backed issues), might seek some increased exposure to corporate bonds, as suggested a few paragraphs earlier. Invest you must, however, for not investing is an iron-clad formula for failure.

In FED We Trust: Ben Bernanke's War on the Great Panic
by David Wessel
Published 3 Aug 2009

The call stretched on for more than two hours. “There were one or two points where someone said, ‘Well, suppose we don’t? What happens then?’” recalled Don Kohn, the Fed vice chairman. In 1990, the Fed had stood by when Drexel Burnham Lambert went under after it was accused of illegal shenanigans in the market for junk bonds pioneered by Michael Milken, the creative financier who ended up in jail. But this was a very different time. “It was the whole market environment,” Kohn said. “People were running from all kinds of financial counterparties,” he said. “Bear happened to be the weakest, so it was kind of the leading edge of the run.

The Unbearable Lightness of Scones
by Alexander McCall Smith
Published 31 Dec 2007

He was relieved that he was no poorer, but he was not sure if he necessarily wanted to be all that much richer. And he was convinced that he did not want to engage in profit-taking, either now or at some stage in the future. That sounded so greedy, he thought; the sort of thing that fat cats took, or the sellers of junk bonds, or speculators in currency. They took profits and gobbled them up in the way in which a greedy person cuts off the best part of a pie. He laid aside the financial report and attended to the rest of the letters. One was a hand-written note in a script he recognised: that of Angus Lordie. Dear Matthew, Welcome back!

The Physics of Wall Street: A Brief History of Predicting the Unpredictable
by James Owen Weatherall
Published 2 Jan 2013

And Princeton-Newport’s demise was particularly dramatic. On December 17, 1987, about fifty FBI, ATF, and Treasury Department agents pulled up in front of the firm’s Princeton office. The agents stormed into the building, looking for records and audiotapes regarding a series of trades the firm had made with the soon-to-be-indicted junk bond dealer Michael Milken. A former Princeton-Newport employee named William Hale had testified to a grand jury that Regan and Milken were engaged in a tax dodge known as stock parking. One downside to delta hedging and related strategies is that profits from short-term and long-term positions are taxed differently.

Free Market Missionaries: The Corporate Manipulation of Community Values
by Sharon Beder
Published 30 Sep 2006

Rather than meaning a sharing of power and decision-making, it generally refers to widespread access and participation in the stock market. New York Times’ columnist Thomas Friedman uses the term ‘democratization of finance’ in his 1999 book The Lexus and the Olive Tree. He points to the way the public were able to buy corporate bonds from the late 1960s, invest in securitized home mortgages in the 1970s, buy junk bonds in the 1980s, and invest in third world debt in the 1990s – either directly or more often through mutual funds and pension funds: ‘This gave you, me and my Aunt Bev a chance to buy a slice of these deals that had previously been off-limits to the little guy.’2 The new trend towards internet-based share trading which offers greater access to shares to those who do not have a stock broker has also been hailed as a democratic, levelling trend.

Money: The Unauthorized Biography
by Felix Martin
Published 5 Jun 2013

And not only the scale, but the scope, of the credit markets was being transformed. When Michael Milken was almost single-handedly creating the market for bonds issued by small or risky companies from his famous Beverly Hills office in the early 1980s, few would have predicted that two decades later issuance of what were then derisively called “junk” bonds would grow to U.S. $150 billion a year, and displace a substantial part of the banking sector’s financing of Main Street U.S.A.24 An even bigger revolution was taking place in the provision of debt finance to individuals. The development of techniques for pooling and securitising large numbers of mortgage, car, and credit-card loans to individuals generated a near-total shift in the organisation of these types of debt from banks to credit markets.

The Meritocracy Myth
by Stephen J. McNamee
Published 17 Jul 2013

When white-collar crimes are exposed, the sums procured in their commission are often shocking—often totaling in the millions and sometimes even in the billions of dollars. The Ponzi scheme stock fraud perpetrated by Bernard Madoff (an ironic surname for a white-collar criminal) totaling $65 billion is one particularly noteworthy example. Other examples include the notorious and illegal stock manipulations of Ivan Boesky (deal stocks), Michael Milken (junk bonds), and Charles Keating (the savings-and-loan scandal); corporate wrongdoing, including ethics scandals at Enron, WorldCom, Arthur Andersen, Adelphia, Global Crossing, Tyco, and many others; and suspected misconduct in the vast mutual funds and mortgage industries that led to the near collapse of credit markets and the debilitating Great Recession that followed.

Bit Rot
by Douglas Coupland
Published 4 Oct 2016

One second is basically a time patty, or “the duration of 9,192,631,770 periods of the radiation corresponding to the transition between the two hyperfine levels of the ground state of the caesium 133 atom.”* Romantic! Modern culture since 1900 has been about the relentless homogenizing of anything that can be homogenized: pig byproducts into hot dogs; coffee into Nespresso capsules; junk bonds into hedge funds. In this spirit of investigation, I began to wonder, “What, then, does money homogenize?” The average person with a high school education uses three thousand words a day but is able to recognize about twenty thousand. But when it comes to sequences and numbers, when does a word stop being a word?

The Weather Makers: How Man Is Changing the Climate and What It Means for Life on Earth
by Tim Flannery
Published 10 Jan 2001

The carbon in coal has been safely locked away for hundreds of millions of years, and would remain so for millions more had it not been dug up.14 Yet carbon locked away in forests or the soil is unlikely to remain out of circulation for more than a few centuries. In effect, by trading coal storage for tree storage of carbon, we are exchanging a gilt-edged guarantee for a junk bond. It’s clear that engineering solutions to the carbon problem have proved to be neither as straightforward nor as cost effective as industry would like. Yet scientists continue to work on the problem of safe, secure storage for carbon, and perhaps a solution will eventuate. There is even talk of creating artificial photosynthesis, thereby capturing carbon directly from the atmosphere.

Boom and Bust: A Global History of Financial Bubbles
by William Quinn and John D. Turner
Published 5 Aug 2020

Barberis, N., Greenwood, R., Jin, L. and Shleifer, A. ‘Extrapolation and bubbles’, Journal of Financial Economics, 129, 203–27, 2018. Barberis, N., Shleifer, A. and Vishny, R.‘A model of investor sentiment’, Journal of Financial Economics, 49, 307–43, 1998. Basile, P. F., Kang, S. W., Landon-Lane, J. and Rockoff, H. ‘Towards a history of the junk bond market, 1910–1955’, NBER Working Paper, No. 21559, 2015. Béland, D. ‘Neo-liberalism and social policy: the politics of ownership’, Policy Studies, 28, 91–107, 2007. Belsky, E. and Retsinas, N. ‘History of housing finance and policy in Spain’, Harvard University mimeo, 2004. Beltratti, A., Bortolotti, B. and Caccavaio, C.

California Burning: The Fall of Pacific Gas and Electric--And What It Means for America's Power Grid
by Katherine Blunt
Published 29 Aug 2022

Dan Richard, the government affairs head, and several other PG&E representatives appeared before the San Francisco Chronicle’s editorial board to convince a roomful of skeptics that the deal was a win all around. If PG&E collected less money from customers, Richard told them, the utility might have to resort to issuing high-interest junk bonds. That would also add to customer bills over time. The deal, as structured, was a bid to restore the company’s investment-grade credit rating. “The judge and jury is Wall Street,” Richard said. Five Transformation Peter Darbee knew what made Wall Street investors tick. He had, after all, been one of them, rising to become a Goldman Sachs investment banker focused on energy and telecommunications.

Your Money or Your Life: 9 Steps to Transforming Your Relationship With Money and Achieving Financial Independence: Revised and Updated for the 21st Century
by Vicki Robin , Joe Dominguez and Monique Tilford
Published 31 Aug 1992

How to balance a checking account. IRAs. IRS. Which insurance to buy—health, life, homeowner, disability, automotive, jewelry? What deductibles and riders and premiums are. Then there’s investing. Knowing the difference between a TIPS and savings bond. Buying and selling stocks, and futures, and options, and junk bonds. And we mustn’t forget that rite of passage—the credit card, ticket to the American Dream (whether you live in the United States or elsewhere). Which often leads to that all-too-common mid-life crisis, filing for bankruptcy. Then there’s tax planning and retirement planning. Income averaging. Trust funds.

Business Lessons From a Radical Industrialist
by Ray C. Anderson
Published 28 Mar 2011

Whether that means a photovoltaic array on your roof, investing in someone else’s wind farm (the renewable energy credit route), buying green power from your local utility, or solving your town’s landfill problems, there is no reason to stand by and wait for grid parity anymore than you would exclude Treasuries from your investment portfolios because their yield is not as good as those from junk bonds. In uncertain times, certainty, whether in energy supplies or your investments, can offer tremendous value. And nothing is more valuable than market share. As fossil fuels grow more expensive and less predictable, blending renewables into your energy mix is not just prudent diversification, it is sound financial practice.

The Everything Store: Jeff Bezos and the Age of Amazon
by Brad Stone
Published 14 Oct 2013

Eugene Wei, a strategic planning analyst who was there to take notes, recalls that Bezos’s guess was one of the highest in the group but suspects that no one came close to getting it right. They simply had no idea what was coming down the pike. To open new categories and build more warehouses, Amazon needed more than a plan: it needed additional capital. So that May, the company raised $326 million in a junk-bond offering, and the following February, another $1.25 billion in what was at the time the largest convertible debt offering in history. With a 4.75 percent interest rate for the latter offering, it was exceedingly cheap capital for the time. To their surprise, Covey and Bezos did not have to head back onto the road to pitch the Amazon story to hidebound institutional shareholders.

Commuter City: How the Railways Shaped London
by David Wragg
Published 14 Apr 2010

The LMS was renowned for its adoption of modern American management practices, and it also sorted out some of the sillier practices of its predecessor companies, amongst which the Midland, for example, had tended to build only smaller locomotives, so that double heading was frequently required, which, lacking the means of remote control usual on electric and diesel double or multiple-headed locomotives, also doubled labour costs and did not make the best use of coal. Despite this, the LMS failed to pay a dividend in 1935 and could only manage 1.25 per cent in 1936, and although this rose to 1.5 per cent in 1937, it disappeared once again in 1938! It would be unfair to describe railway stock in 1938 as junk bonds, but it took an act of faith, even of blind optimism, for anyone to consider investing in the railways. The directors and managers of the grouped companies had maintained their railways to the best of their abilities, and had invested as heavily as they could, especially after the incentives of 1929 and later.

The Age of Entitlement: America Since the Sixties
by Christopher Caldwell
Published 21 Jan 2020

“Drop a dime, stop a crime,” the billboards read, a dime being what it cost to make a call to the local police station from a public phone booth. Reaganism: a generational truce Reaganism was, like most political movements, a mix of high philosophy and low tactics. It cut deadwood out of the New Deal economy and guided American institutions as they began using computers, junk bonds, non-unionized labor, and outsourcing to re-establish the economy on different bases. It secured for another generation of Americans the exorbitant privilege of using the U.S. dollar as the world’s reserve currency and getting to write the rules of international commerce, an outcome that had seemed uncertain when Reagan took office.

Siege: Trump Under Fire
by Michael Wolff
Published 3 Jun 2019

Sheldon Adelson, worth $34 billion, was there, along with Harold Hamm, the shale oil mogul, worth $13 billion; Steve Schwarzman, the Blackstone CEO, worth $12 billion; Dan Gilbert, the founder of Quicken Loans and owner of several sports franchises, worth $6 billion; Michael Milken, the former Wall Street trader and junk bond king who went to jail in the early 1990s for insider trading, worth $4 billion; and Ron Cameron, an Arkansas poultry mogul, and Tom Barrack, the Trump friend and real estate mogul who had managed the president’s inauguration, each worth a billion. Also attending the party that night was Franklin Graham, the son of the evangelical preacher Billy Graham, who had been uncompromising in his support of Trump, and Betsy DeVos, the only cabinet secretary in attendance (and a billionaire herself).

Philanthrocapitalism
by Matthew Bishop , Michael Green and Bill Clinton
Published 29 Sep 2008

But this is changing, reports Handy in The New Philanthropists: a European tycoon who once would have said that paying taxes was enough to fulfill his responsibilities is nowadays more likely to give back as well. The causes that the superrich feel a responsibility to address often start with a personal experience. This was certainly true of disgraced-but-still-rich former “junk bond king” Michael Milken. The man who is often seen as the epitome of 1980s financial greed suffered from prostate cancer in the 1990s and has since given $750 million to fight the disease. The Larry King Cardiac Foundation was inspired by the veteran interviewer’s quintuple heart bypass in 1987. New York mayor Michael Bloomberg managed to give up his addiction to smoking, which has inspired him to dedicate his foundation to eradicating smoking everywhere.

Financial Statement Analysis: A Practitioner's Guide
by Martin S. Fridson and Fernando Alvarez
Published 31 May 2011

The 1970s brought the tactical shift to hostile takeovers, a type of transaction previously regarded as unsavory by the investment banks that acted as intermediaries in mergers and acquisitions. Hostile takeovers became especially prominent in the 1980s, fueled in part by the greatly increased availability of high-yield debt (informally referred to as junk bond) financing. High-yield bonds also financed scores of leveraged buyouts (LBOs), whose sponsors defended these controversial transactions in part by arguing that corporations could improve their long-run performance if they were taken private and thereby shielded from the public market's insatiable demand for short-run profit increases.

The Ascent of Money: A Financial History of the World
by Niall Ferguson
Published 13 Nov 2007

The response in Washington from both the Carter and Reagan administrations was to try to salvage the entire sector with tax breaks and deregulation,ap in the belief that market forces could solve the problem.37 When the new legislation was passed, President Reagan declared: ‘All in all, I think we hit the jackpot.’38 Some people certainly did. On the one hand, S&Ls could now invest in whatever they liked, not just long-term mortgages. Commercial property, stocks, junk bonds: anything was allowed. They could even issue credit cards. On the other, they could now pay whatever interest rate they liked to depositors. Yet all their deposits were still effectively insured, with the maximum covered amount raised from $40,000 to $100,000. And, if ordinary deposits did not suffice, the S&Ls could raise money in the form of brokered deposits from middlemen, who packaged and sold ‘jumbo’ $100,000 certificates of deposit.39 Suddenly the people running Savings and Loans had nothing to lose - a clear case of what economists call moral hazard.40 What happened next perfectly illustrated the great financial precept first enunciated by William Crawford, the Commissioner of the California Department of Savings and Loans: ‘The best way to rob a bank is to own one.’41 Some S&Ls bet their depositors’ money on highly dubious projects.

The Long Boom: A Vision for the Coming Age of Prosperity
by Peter Schwartz , Peter Leyden and Joel Hyatt
Published 18 Oct 2000

Starting in the 1980s, finance began a giddy fifteen-year run of innovation using the new information technologies. The computers themselves, the number crunchers, were used in new ways to assess risk and to create increasingly sophisticated financial packages. So we saw the appearance of new financial products like junk bonds and derivatives, as well as the proliferation of increasingly specialized mutual funds. More powerful computers allowed experimentation in computer models of the market that led to computers trading by themselves, with little direct human control. Then the telecommunications side of the networked computer revolution opened up whole new possibilities.

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy
by Mehrsa Baradaran
Published 5 Oct 2015

The Occupy Wall Street movement embodied this disdain for reckless moneylending with demands that bankers be sent to jail. Their signs could have been written by a modern-day Nehemiah or Andrew Jackson: “Tax Wall Street Leeches,” “Turn Wall Street into Tahrir Square,” “JP Morgan is a Kleptomaniac,” “Jail the Bankers,” “Tear Down this Wall Street,” “Jesus was the 99%,” and “Kick ‘M in the Junk Bonds.”29 (Timothy Geithner dismissed those who were uncomfortable with bailing out banks as demanding “Old Testament Justice,”30 which seems accurate given the admonitions against usury in the book, but the modern state is no longer persuaded by Nehemiah’s arguments.) And so, perhaps having inherited some of these long-standing prejudices and moral pronouncements, we find ourselves today in a society that disparages some mortgage holders, payday borrowers, and the bankrupt as irresponsible or even immoral.

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated)
by Charles Wheelan
Published 18 Apr 2010

With a $1,000 investment in a mutual fund, you can invest in five hundred or more companies. If you were forced to buy individual stocks from a broker, you could never afford so much diversity with a mere $1,000. For $10,000, you can diversify across a wide range of assets: big stocks, small stocks, international stocks, long-term bonds, short-term bonds, junk bonds, real estate. Some of those assets will perform well at the same time others are doing poorly, protecting you from Wall Street’s equivalent of bullies hurling eggs against the wall. One attraction of catastrophe bonds for investors is that their payout is determined by the frequency of natural disasters, which is not correlated with the performance of stocks, bonds, real estate, or other traditional investments.

The Levelling: What’s Next After Globalization
by Michael O’sullivan
Published 28 May 2019

Applying Western bankruptcy rules, corporate governance standards, and debt-resolution processes to China’s corporate sector would help integrate China further into international debt markets and would form a basis for more liquid markets in some of the newer securities that would emerge from a post-credit-crisis world, securities such as junk bonds and securitized debt in China. Alternatively, a more Chinacentric approach could form the basis for an entirely different form of capital market formation, one not unlike Rheinish capitalism in Europe. “Rheinish capitalism” refers to the European approach to corporate finance, which relies more heavily on the financing of business by banks than by debt and equity markets, on dual board structures, and on a lesser emphasis on mergers and acquisitions.33 In China, and more broadly in Asia, a homegrown approach to finance would probably take some time to crystallize, and its success would depend on the severity of a Chinese credit crunch.

The Fund: Ray Dalio, Bridgewater Associates, and the Unraveling of a Wall Street Legend
by Rob Copeland
Published 7 Nov 2023

If the market was up 10 percent and in the same period his longs were up 15 percent, Jones attributed the five-percentage-point difference to his skill. This worked until it didn’t, when disastrous stock picks sent Jones’s fund crashing 35 percent in 1970. As he faded from prominence, so did the industry he inspired. Investment bankers and junk bond financiers took the place of hedge fund managers in the popular imagination. The industry emerged from its two-decade hibernation with a bang largely thanks to the Hungarian-born trader George Soros. In what became front-page news in 1992, Soros was credited with breaking the Bank of England with billion-dollar bets against sterling.

Madoff: The Final Word
by Richard Behar
Published 9 Jul 2024

Notable cases that have been heard in that court range from life insurance claims from the 1912 sinking of the RMS Titanic, to the 2018 sentencing of Michael Cohen, who had served as Donald Trump’s longtime personal legal counsel and personal fixer. The 1951 espionage trials of husband and wife Julius and Ethel Rosenberg and Alger Hiss. The administration of President Richard M. Nixon’s failed attempt to stop the New York Times from publishing the damning Pentagon Papers in 1971. The Ivan Boesky insider trading case in 1986. Junk-bond king Michael Milken (1990). Mob boss John Gotti (1992). Omar Abdel Rahman, the “blind sheikh” behind the first terrorist bombing of the World Trade Center, in 1993. Plus dozens of other notable cases. And now the Madoff Five, a case brought by the most prestigious prosecutorial corps in the world: the US Attorney’s Office for New York’s Southern District.

The Prize: The Epic Quest for Oil, Money & Power
by Daniel Yergin
Published 23 Dec 2008

The building was virtually deserted; most of Gulf's operations were conducted in Houston, and the Chevron group was given its own floor. The Gulf board was certainly not going to surrender to Pickens's junk bond bid. But there were three other offers on the table. One was Chevron's. Some of the senior executives had come up with an alternative offer, a leveraged buyout by management using junk bonds, to be arranged by the firm of Kohlberg, Kravis, and Roberts. ARCO would also make an offer. So the Gulf board had three serious suitors to consider. Before the meeting, Lee laid down the ground rules to the bidders: "You have only one chance—no second chances.

…

Lee and his colleagues wooed the institutional investors, and Gulf managed to squeak to victory in the proxy vote in December 1983, by a bare 52 percent to 48 percent. It was only a reprieve. Pickens continued to move up and down the court. He submitted a written proposal to the Gulf board to spin off oil and gas reserves directly to shareholders. The board turned him down flat. Pickens then went to see the junk bond king, Michael Milken, at Drexel Burnham in Beverly Hills to explore raising the additional money through such bonds to make an outright takeover bid. Jimmy Lee knew that time was short. He had to get the stock price up. He looked at spinning off refining and marketing and the chemical operations into separate companies.

Trading and Exchanges: Market Microstructure for Practitioners
by Larry Harris
Published 2 Jan 2003

Straight bonds usually do not have attached options. Credit quality, the probability that a bond issuer will make all bond payments when they are due, greatly concerns bond investors. Investors expect that the issuers of investment grade bonds will make all interest and principal payments on time. The interest and principal payments on junk bonds are less certain. The latter are also called high yield bonds because investors require high yields to compensate for the probability that the issuers will default on their payments. The credit quality of a bond depends on the financial strength of its issuer and upon that collateral and bond covenants that the issuer uses to secure the bond.

…

See investment advisers; managers investment sponsors, 33 Investment Technology Group, 17 investors, 6, 33, 178–81, 193, 200, 205, 252 Iomega (co.), 254, 568–69 IOSCO. See International Organization of Securities Commissions IPO. See initial public offering Island ECN, 35, 73, 325, 543 Israel, 52 issuers, 39, 44, 179 issues, 39 Japan, 192 Japanese asset bubble, 570–71 Johnson, Phillip McBride, 63 juice. See vigorish junk bonds, 40 Kansas City Board of Trade (KCBT), 55, 371 KCBT. See Kansas City Board of Trade kickback schemes, 166 Knight Capital Markets, 544, 553 latent traders, 95 latent trading demands, 323–24, 332, 397 latent trading interest, 383 Lattice system, 103 law of one price, 233, 234 laying off, 294, 352 leaking of information, 324 leapfrog strategies, 114 Lee and Ready algorithm, 423 Leeson, Nick, 198 Lefevre, Edwin, 136 legal issues, 9–10 legs of arbitrage, 348 Lehman Brothers, 108 Leland O’Brien Rubinstein Associates, 328 Levitt, Arthur, 217 librarians, 396 LIFFE.

Conspiracy of Fools: A True Story
by Kurt Eichenwald
Published 14 Mar 2005

CHAPTER 11 EARLY ON A THURSDAY afternoon, Ken Lay escorted a man through crowds of Enron executives who were milling about the main floor at the Hyatt Regency Hill Country Resort. Several gaped as the two passed by, recognizing Lay’s guest. The ill-fitting toupee was gone, and the years had softened his sharp, angular features. Even so, no executive was likely to forget Michael Milken, the former junk-bond king who had once been at the epicenter of Wall Street’s crime wave in the 1980s. Weeks before, Lay had invited Milken to attend Enron’s annual San Antonio management conference out of a mounting sense of anxiety. In meetings, in hallways, in every discussion at the office, Lay had detected a growing swagger, an unrestrained boastfulness in the executive ranks.

…

But as they went from triumph to triumph, Milken and his acolytes had grown arrogant. They had displayed a ruthlessness toward rivals, a belief that they were above it all. And when prosecutors came down on the firm, pushing Milken out, his followers committed the sin of doing bad deals. After the marketplace refused some Drexel junk bonds, the firm bought them itself. As the junk market tumbled, so did the debt-laden Drexel—straight into bankruptcy. To Lay, the similarities between Drexel and Enron were too stark for comfort. Both had burst almost overnight from obscurity to world fame. Both were populated by young, well-paid, aggressive executives pumped up with their own self-importance.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor
by John Kay
Published 24 May 2004

Brittan, S. 1971. Steering the Economy. Harmondsworth, Penguin. ---. 1996. Capitalism with a Human Face. London: Fontana Press. Broadie, A., ed. 1997. The Scottish Enlightenment: An Anthology. Edinburgh: Canon gate. Bruck, C. 1989. The Predators, Ball: The Inside Story ofDrexel Burnham and the Rise ofthe Junk Bond Raiders. New York: Penguin. Brunekreeft, G. 1997. Coordination and Competition in the Electricity Pool ofEngland and Wales. Baden-Baden: Nomos-Verlag. Buchan, J. 1997. Frozen Desire: An Enquiry into the Meaning ofMoney. London: Picador. Buchanan,]., and G. Tulloch. 1962. The Calculus of Consent.

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money
by Steven Drobny
Published 18 Mar 2010

Not typically renowned as a hotbed of reactionary fervor, the fund is nevertheless radical in its construction and has come to typify the A-B-D stance. Harvard’s position could well be construed as a one-way bet. Almost half of the fund is invested in emerging market equities, commodities, real-estate, private equity, and junk bonds. It is as though the rap artist 50 Cent has taken over the advisory board. The fund is going to “get rich or die tryin’.” Harvard Endowment Portfolio (ABD), Fiscal Year 2010 SOURCE: Financial Times. Foreign Equities 11% Domestic Equities 11% Emerging Equities 11% Private Equities 13% Absolute Returns 16% Commodities 14% Real Estate 9% High Yield Bonds 2% Foreign Bonds 2% Domestic Bonds 4% Inflation Indexed Bonds 5% Cash 2% This portfolio will work if the dollar keeps falling or the world has inflation.

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing
by Vijay Singal
Published 15 Jun 2004

Thus, the investors and the markets were correctly valuing the peso all the time by incorporating the small probability of a devaluation—only the devaluation didn’t occur until twenty years later. The smallsample problem is not unique to currencies alone. Similar smallsample limitations can explain returns on many other financial assets, such as junk bonds, emerging bond debt, and so on. While this explanation is reasonable, when does the small sample problem cease to exist? How many years of data are sufficient? Given that there is strong evidence of a forward rate bias over a variety of different periods extending to thirty years and over many currency pairs and many forecast periods, it is probably reasonable to assume that the small-sample problem cannot adequately challenge the findings of a forward rate bias.

Framing Class: Media Representations of Wealth and Poverty in America
by Diana Elizabeth Kendall
Published 27 Jul 2005

According to sociologist Gregory Mantsios, the media send several messages about the wealthy as bad apples: On rare occasions, the media will mock selected individuals for their personality flaws. Real estate investor Donald Trump and New York Yankees owner George Steinbrenner, for example, are admonished by the media for deliberately seeking publicity (a very un–upper class thing to do); hotel owner Leona Helmsley was caricatured for her personal cruelties; and junk bond broker Michael Milken was condemned because he had the audacity to rob the rich.23 As Mantsios suggests, some of the wealthy can be viewed as bad apples because they seek the media spotlight to further their own causes and financial interests. New York real estate developer Donald Trump is an example.

The Death of Money: The Coming Collapse of the International Monetary System
by James Rickards
Published 7 Apr 2014

The most obvious form is a bidding up of the price of risky assets such as stocks and housing. This can be observed directly. Less obvious are asset-liability mismatches, where financial institutions borrow short and lend long on a leveraged basis to capture a spread. Even more opaque are collateral swaps, where a financial institution such as Citibank pledges junk bonds to a counterparty in exchange for Treasury securities on an overnight basis, then uses those Treasury securities as collateral on a higher-yielding off-balance-sheet derivative. Such transactions set the stage for a run on Citibank or others if the short-term asset providers suddenly want their securities back and Citibank must dump other assets at fire-sale prices to pay up.

How I Became a Quant: Insights From 25 of Wall Street's Elite
by Richard R. Lindsey and Barry Schachter
Published 30 Jun 2007

In short order, I was introduced to Tom Jorde, one of the two founders. Tom was a professor at Boalt Hall, the Berkeley law school, and a former U.S. Supreme Court clerk. He was bright, outspoken, cheerful, and aggressive; ready to take on all challenges and win. What followed was a string of cases, mostly related to junk bonds: the U.S. government’s case against Michael Milken et al., the bankruptcy of First Capital Holdings, and various S&L collapses. I analyzed data, reviewed business practices, and explained to the lawyers what the players were doing, and why. For me it was like instant experience. As I sifted through the endless memos and reports, I could follow the internal discussions in the subject businesses, review the decisions, analyze the motives, and evaluate the actions.

The Cleaner: The True Story of One of the World's Most Successful Money Launderers
by Bruce Aitken
Published 2 Mar 2017

He never skipped a beat, dealing electronically by email and phone—the consummate deal-maker. The weekend I visited him, I believe to impress me, he told me of his frequently calls with the likes of Saudi billionaire and “partner”Adnan Koshoggi and the wife, for some unknown reason, of convicted Brexel Burnham Lambert “Junk Bond King”, and wealthy philanthropist, and partner, Michael Milken. With failing health, an apparent stroke a year or two later, he was definitely better off in Bangkok where his family and children could visit him. There, he would have plenty of baht, and still might hopefully find something of real value in his life; something that couldn’t be squandered by an addiction to the thrill of the game.

Masters of Management: How the Business Gurus and Their Ideas Have Changed the World—for Better and for Worse
by Adrian Wooldridge
Published 29 Nov 2011

Yet from the 1970s onward, Sloanism came under attack on four fronts. The Japanese opened the first front by inundating Western markets with better, cheaper, more reliable goods through “lean” production based on teamwork, which avoided both the alienation and the waste of Sloan’s system. Michael Milken, the junk bond king, and Michael Jensen, the leading theoretician of shareholder value, opened the second front, demonstrating that Sloanism had allowed many American firms to be hijacked by managers more interested in their pay and perks than in shareholder value. Steve Jobs and other Silicon Valley entrepreneurs opened the third front, demonstrating that you can succeed in business without growing a giant bureaucracy.

Power Play: Tesla, Elon Musk, and the Bet of the Century
by Tim Higgins
Published 2 Aug 2021

He was hailed in The Wall Street Journal and other media for his gutsy call. He went on to set up his own fund and found continued success into the early 1990s, shorting regional banks and other financial institutions that had exposure to the collapse of real estate in Texas, California, and New England. He also found success in shorting Michael Milken’s junk-bond kingdom. His run saw his fund rise at twice the rate of what the S&P Index did in the same years, more than quadrupling in value until his luck ended in 1991, when the overall market turned sour. He had made some bad bets over the years. He took a short position on McDonnell-Douglas in the ’90s.

The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources
by Javier Blas and Jack Farchy
Published 25 Feb 2021

‘It was really the creation of the derivatives markets by the Wall Streeters going and selling to end users, airlines, marine fuel consumers, etcetera, that then started to add the extra drive to the markets,’ says Colin Bryce, an oil trader at Morgan Stanley from 1987 onwards, who went on to run the bank’s commodities business. ‘That was the game of the 1990s.’ 6 This financialisation of the oil market opened up a whole new way of doing business. The hot shots of Wall Street had already revolutionised markets for mortgages and junk bonds, and, in the late 1980s, they were turning their attention to the oil market. With new financial instruments at their disposal, they opened the market to an array of new participants, who had no intention of ever seeing a barrel of actual crude oil, and instead were happy to buy and sell notional quantities of what were soon dubbed ‘paper barrels’.

Unscripted: The Epic Battle for a Media Empire and the Redstone Family Legacy
by James B Stewart and Rachel Abrams
Published 14 Feb 2023

The guest list was a who’s who of current and former Hollywood moguls, although virtually everyone had some direct financial interest in being there: Philippe Dauman and Leslie Moonves, of course; Sumner’s old pal Robert Evans; Sherry Lansing; the producer Brian Grazer; Michael Eisner, the Disney ex-chair; and Jeffrey Katzenberg, the DreamWorks cofounder Eisner had forced out at Disney. (Viacom had bought DreamWorks’ live-action studio for $1.6 billion in 2006.) The former junk-bond king Michael Milken, who had advised Sumner about his prostate cancer, was there, too. Sumner had given $30 million to George Washington University, home to the Milken Institute School of Public Health. Al Gore showed up; the former vice president’s Climate Reality Project was the recipient of $10 million from Sumner.

Vanishing New York
by Jeremiah Moss
Published 19 May 2017

After this contentious Second Wave of gentrification, New York slipped into an economic recession from about 1989 to 1993. Property values and rents fell. Vacancies went up. Real estate investors panicked as journalists wrote of “degentrification.” In 1991, the Times announced that gentrification was in retreat and “may be remembered, along with junk bonds, stretch limousines and television evangelism, as just another grand excess of the 1980’s.” A few years later, the paper declared gentrification dead and buried. But it did not die. It came back bigger, stronger, and meaner than ever. Smith called the Third Wave of gentrification “Gentrification Generalized,” marking its beginning in 1994 with no end date.

When McKinsey Comes to Town: The Hidden Influence of the World's Most Powerful Consulting Firm
by Walt Bogdanich and Michael Forsythe
Published 3 Oct 2022

In one sense, McKinsey just rode the wave. The financialization of the American economy was well under way. The Depression-era regulations that had neutered the commercial banks and had tamed Wall Street began to loosen. Companies increasingly bypassed commercial banks to raise money, issuing commercial paper or junk bonds. Savers got much better rates with money-market accounts that invested in commercial paper. By 1986, the caps on the interest banks could offer for savings accounts were a thing of the past. Financialization meant that the days when the best-paid bankers in the land made less than $1 million a year were over.

Vulture Capitalism: Corporate Crimes, Backdoor Bailouts, and the Death of Freedom
by Grace Blakeley
Published 11 Mar 2024

Cal Turner and Sara van Horn, “Asset Managers Like BlackRock Are Controlling More and More of Our Lives,” Jacobin, May 2, 2023, https://jacobin.com/2023/05/our-lives-in-their-portfolios-interview-asset-management-society-infrastructure. 138. As one observer put it, “BlackRock has become a key player in the market with a clear conflict of interest.” Ramaa Vasudevan, “How Big Finance Is Making a Killing from the Pandemic,” Jacobin, June 11, 2020, https://jacobin.com/2020/06/federal-reserve-fed-coronavirus-covid-junk-bonds. 139. Christophers, Our Lives in Their Portfolios. 140. Jan Fichtner and Eelke M. Heemskerk, “The New Permanent Universal Owners: Index Funds, Patient Capital, and the Distinction between Feeble and Forceful Stewardship,” Economy and Society 49, no. 4 (November 2020): 493–515, https://doi.org/10.1080/03085147.2020.1781417. 141.

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System
by Henry M. Paulson
Published 15 Sep 2010

We were rushing this rescue through very fast. The Board of Governors of the Federal Reserve had not yet formally approved the loan, and we had not yet put out an announcement. But the market was about to open, so we needed to move rapidly. We asked ourselves again what would happen if Bear failed. Back in 1990, the junk bond giant Drexel Burnham Lambert had collapsed without taking the markets down, but they had not been as fragile then, nor had institutions been as entwined. Counterparties had been more easily identified. Perhaps if Bear had been a one-off situation, we would have let it go down. But we realized that Bear’s failure would call into question the fate of the other financial institutions that might share Bear’s predicament.

Wealth and Poverty: A New Edition for the Twenty-First Century
by George Gilder
Published 30 Apr 1981

Why should Warren Buffett be permitted to parlay positions in newspapers, insurance companies, and Coca Cola into a fortune that sometimes makes him the world’s richest man while Sarah Cinderella holds down two jobs—working as a receptionist during the day and waitressing at night—to make ends meet as a single mom? Why should coffee monger Howard Schultz command a fortune worth $5 billion while Harry Homeless lives on a blanket on a grate outside a Starbucks, holding out a discarded paper cup for spare change? And why should Michael Milken, the junk bond pioneer who spent time in jail for trumped up “economic crimes,” still be a billionaire, while the president of the United States earns some $450,000 per year? Does any of this make any sense? These huge disparities seem to defy every measure of proportion and propriety. They apparently correspond neither to need, nor to virtue, nor to IQ, nor to credentials, nor to education, nor to social contribution.

The Great Railroad Revolution
by Christian Wolmar
Published 9 Jun 2014

Although the Vans had originally been interested only in a small part of the railroad, the acquisition inspired them to build up a massive railroad empire that, at its height, before the 1929 Wall Street crash, had a paper value of $3 billion and stretched across thirty thousand miles. Their holdings, controlled through a complex web of companies that made it uncertain as to precisely how much money they invested personally and how much consisted of what are now known as junk bonds, included the Erie Railroad, the largely coal-carrying Chesapeake & Ohio Railway, and the Pere Marquette Railway, which had a series of lines in the Great Lakes area of the Midwest. Since the commission was debating the future structure of the industry and therefore few railroads attempted any consolidation, the short-lived empire built up by the Vans was the only new major railroad company allowed by the ICC to be established during the 1920s.

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge
by Faisal Islam
Published 28 Aug 2013

Arguments deployed in northern Europe to explain what had been done to Cyprus could have equally applied to Malta, or to Luxembourg. On the one hand, yes, taxpayers across the EU were being spared the brunt of the crisis. But across Europe depositors were now being told to treat a large deposit in a peripheral Eurozone bank as if it was a junk bond. Jeroen Dijsselbloem, president of the Eurogroup, made matters even more uncertain by implying that Cyprus was a model for future ‘bail-ins’. European bank shares slumped, as at this point it made no sense to have more than €100,000 in any periphery banks. Dijsselbloem was publicly slapped down, and was obliged to issue a ‘clarification’ of his remarks.

Good Economics for Hard Times: Better Answers to Our Biggest Problems
by Abhijit V. Banerjee and Esther Duflo
Published 12 Nov 2019

But its top incomes never went sky high. The same is true of many very different countries in Western Europe and also of Japan.45 What’s different between these countries and the United States? A part of the answer is finance. The US and UK dominate the “high end” of finance—the investment banks, junk bonds, hedge funds, mortgage-backed securities, private equity, quants, etc.—and this is where many of the astronomical earnings have shown up in recent years. Two finance professors at Harvard Business School (of all places) estimate that investors who use financial market intermediaries pay 1.3 percent of their total investment to their fund manager every year, which over the thirty-year horizon of an investor saving for retirement amounts to handing the manager a third of the assets initially invested.46 A chunk of change, but nothing compared to those who manage the hedge funds, private equity funds, and venture capital funds that epitomize high-end finance, where, at least until recently, you had to pay the managers between 3 percent and 5 percent of the amount invested every year.

Market Wizards: Interviews With Top Traders
by Jack D. Schwager
Published 7 Feb 2012

I came to the conclusion that the quintessential issue was a unique combination of phenomena occurring in the American equity markets—a substantial continuous reduction in the amount of equities outstanding, coinciding with a more liberal attitude toward debt. As long as banks were comfortable lending money, the junk bond market was good, and corporate managers saw repurchasing their shares as the right thing to do, I felt there would be an unusual upward bias to equity prices. That to me was the single most important reason in the seeming overvaluation of stocks that existed through most of 1987. Therefore, the important question was: What was going to change this situation?

The Relentless Revolution: A History of Capitalism
by Joyce Appleby
Published 22 Dec 2009

People worldwide can be counted on to seek out lucrative deals outside the patrolled precincts of regulation. When the good deals tank, governments rush in to fix what’s wrong, with varying results. Before the world recession of 2008–2009, the market’s stumbles had grown ever more frequent and painful, starting with the crash of 1987, followed by the junk bond crisis of the late 1980s, the 1989 sinking of the savings and loan industry, the Japanese depression, the Asian fiscal crisis of 1997, the Long-Term Capital Management near default of 1998, the bursting of the dot-com bubble of 2000, the Enron and WorldCom debacle of 2001, climaxing with the rippling losses from the mortgage-based securities debacle in 2008.

Who Stole the American Dream?
by Hedrick Smith
Published 10 Sep 2012

WaMu CEO Kerry Killinger was not satisfied with the plodding, modestly profitable business of plain vanilla thirty-year fixed-rate mortgages to carefully screened borrowers (the old “Power of No”). That strategy wasn’t getting WaMu or its CEO rich enough, fast enough. Killinger heard the siren call of Wall Street’s new mortgage money machine and its voracious appetite for high-interest, high-risk, high-profit mortgage bonds—in reality, “junk mortgages,” like the high-interest junk bonds of the 1980s. Moving into junk mortgages required a radical shift in thinking at WaMu, but the financial calculus was seductive. Instead of the old business of selling mortgages, hanging on to them, and collecting interest, a home loan bank such as WaMu could make much more money by originating high-interest loans and then selling them off to Wall Street.

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World
by Ruchir Sharma
Published 5 Jun 2016

The most recent example is the oil and gas binge in the United States, inspired by the new technology for drawing these energy sources from shale rock. In 2015, as the oil price has fallen below $50, many of the new shale companies can no longer make a go of it and are going bust. That has led to the loss of tens of thousands of jobs in the shale boomtowns of Canada and the American Midwest and sent tremors through the junk bond markets, which had been major supporters of the shale investment boom. But if the value of a binge is measured by what it leaves behind, this one left behind a brand-new industry that had put pressure on older players to lower oil prices, providing cheap energy that made the U.S. economy much more competitive.

The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund
by Anita Raghavan
Published 4 Jun 2013

But the opening of the capital markets in the early eighties and the advent of technology that powered the way to the growth of complex mathematically driven trading strategies changed Wall Street. What securities firms needed most were financial wizards who actually had the brains to dream up newfangled products—derivatives and junk bonds—and sell them to an ever-increasing number of clients, savings and loans, pension funds, and high-net-worth individuals. It needed analysts who could understand the sophisticated products and technologies of the corporations they analyzed—and not simply swallow the spoon-fed and curdled explanations that companies served them.

The Barbell Prescription: Strength Training for Life After 40
by Jonathon Sullivan and Andy Baker
Published 2 Dec 2016

Let’s start by having a donut. Glucose and fat metabolism: how to turn a donut into atp A donut is really an awful thing, if you think about it, which is why most people don’t think about it. It’s a lump of sugary dough cooked up in a deep fat fryer and then stuffed or painted with more sugar. It’s a nutritional junk bond, an abomination, a toxic toroid of carbohydrate and fat. It’s so energy-dense that unless you’re going to work out immediately, it will put you into a sugar coma at your desk and send fat molecules straight to your spare tire. But it contains a lot of food energy, and it sure is tasty. It will do as an example for our purposes.

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Revised and Updated
by Gautam Baid
Published 1 Jun 2020

“Investment banks are the investor’s enemy,” Chancellor says.2 Be wary of industries that are characterized by high levels of investment banking activities, such as mergers and acquisitions, initial public offerings (IPOs), and debt (especially high-yield) issuance. IPOs are a capital allocation decision that often represents a buildup of capacity in a company or industry. Chancellor says that the surge in junk-bond issuance by U.S. energy companies in 2016 was a sign that investors should have avoided the sector. • Beware of investor frenzy. Early signs include thematic investor conferences and growing levels of industry coverage by analysts, news channels, business magazines, and newspapers. • Look out for high levels of capital investment in an industry.

The Billion-Dollar Molecule
by Barry Werth

Aldrich, in his anger, refused to believe that Kidder couldn’t simply muscle a few of its regular customers into buying Vertex stock, that like the remote, recalcitrant doctor on the phone, it couldn’t resort to heroic measures. But as one of a number of less than dominant companies in the field and with its recent history of regulatory and business difficulties, Kidder was wary of too hard a sell. “Drexel used to have the ability in the junk bond market to tell Vernon Savings, ‘You buy this goddamn bond, or I’m never trading with you again,’ ” Holman says, “and guess what happened to Drexel. . . . Our style as a firm is not to work that way.” Boger, typically, wasn’t bitter about the sudden downdraft in Vertex’s fortunes; factoring everything, he still thought the company would go out at the upper end of its new range.

What Makes Narcissists Tick
by Kathleen Krajco

Yet the narcissist often capitalizes on the situation to gain other things as well. He or she would be a fool not to, because a reign of terror dummies everybody up and makes a perfect smokescreen. It's a distraction. The narcissist (who is, after all a con artist) can be robbing the place blind under cover of it. For example, some of those who conducted the Savings-&-Loan junk-bond schemes got away with it by conducting a reign of terror in the workplace. People ducking that wildly swinging axe (that blackballs as well as fires) are not going to worry about your retirement funds. It appears that some unscrupulous private institutions routinely hire such administrators, viewing them as hatchet men, to periodically go through the workforce, replacing everyone with new hires at the bottom of the (now-slashed) pay scale.

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown
by Philip Mirowski
Published 24 Jun 2013

Hence risk itself can always be commodified and traded away—that is the service the financial sector performs for the rest of the economy. That’s just Intro Finance 101, from CAPM to Black-Scholes. In academic doctrine, the system as a whole simply cannot fail to price and allocate risks; hence there is no such thing as virulently “toxic” assets. Crappy assets, junk bonds, dogs with fleas, yes; but inherently “toxic,” never. The other dominant metaphor was the biblical “Day of Reckoning.”24 Americans love a good apocalypse, and journalists found some figures who were willing to deliver it, from Naseem Taleb and his “Black Swan” to Nouriel Roubini as Dr. Doom. The evil will be punished, the last shall be made first, the moneychangers will be ejected from the temple, and the righteous shall triumph.

Aftershocks: Pandemic Politics and the End of the Old International Order
by Colin Kahl and Thomas Wright
Published 23 Aug 2021

.… The core was about to blow,” one Fed official told us. “We were staring into the abyss.” The Fed would have to take another route, one far more dramatic. On March 23, it committed to unlimited purchases of Treasuries.10 It would lend directly to American businesses, make massive purchases of corporate bonds and riskier junk bonds, provide emergency facilities to bolster credit markets, and work with foreign central banks to maintain liquidity globally. The Fed had bought large quantities of Treasuries before; what was truly unique in this case was expanding the scope of its buying to include a much wider array of private asset types.

Big Debt Crises
by Ray Dalio
Published 9 Sep 2018

But if policy makers couldn’t or wouldn’t save Lehman Brothers, how could they save the system? One of the Fed’s immediate responses, announced the night before, was an unprecedented expansion in the “Primary Dealer Credit Facility”: They were willing to lend to investment banks against almost any collateral, including extremely risky instruments—e.g., equities, subprime mortgages, and junk bonds. It should have been seen as an enormous step for a central bank to take, and in a more normal environment, it would have been. But the Lehman collapse overshadowed it. Paulson would later write in his book that he felt constrained from even being able to explain in a forthright way why Lehman had failed without creating more problems—a common issue policy makers face when communicating during a crisis.

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right
by George R. Tyler
Published 15 Jul 2013

Germain freed industry insiders from oversight, precipitating self-dealing and featuring improvident loans to themselves, their wives, and their cronies. Here is how economic historian Kevin Phillips describes events: “These once-solid institutions had been deregulated at the urging of the Reagan administration in 1981 and given effective carte blanche to borrow and invest (read: wheel and deal) in commercial real estate, junk bonds, and other temptations. Edwin Gray, the California Republican who headed the Federal Home Loan Bank Board (FHLBB) under Reagan, agreed that self-regulation was culpable because oversight was so badly neglected. ‘The White House was full of ideologues, particularly free-market types.’ They’d say, ‘The way to solve the problem is more deregulation’—and by the way, self-regulation means fewer bank examiners.”50 Reimbursing customers for deposits looted by S&L executives such as Charles Keating in the 1980s eventually cost taxpayers $256 billion (in 2008 dollars).

The Power Law: Venture Capital and the Making of the New Future
by Sebastian Mallaby
Published 1 Feb 2022

By freeing talent to convert ideas into products, and by marrying unconventional experiments with hard commercial targets, this distinctive form of finance fostered the business culture that made the Valley so fertile. In an earlier era, J. P. Morgan’s brand of finance fashioned American business into muscular oligopolies; in the 1980s, Michael Milken’s junk bonds fueled a burst of corporate takeovers and slash-and-burn cost cuts. In similar fashion, venture capital has stamped its mark on an industrial culture, making Silicon Valley the most durably productive crucible of applied science anywhere, ever. Thanks to venture capital, the Traitorous Eight were able to abandon William Shockley, launch Fairchild Semiconductor, and set this miracle in motion.

Hard Landing
by Thomas Petzinger and Thomas Petzinger Jr.
Published 1 Jan 1995

Rothmeier was no more famous for personal warmth than Wolf; running a couple of the largest airlines in America from the same city, the two men had never met. One evening they agreed to talk over dinner at a family steak house in St. Paul. Wolf was so intent on selling Republic that he met with junk-bond impresario Michael Milken to plan a hostile takeover of Northwest, should it prove necessary to provoke Northwest into making a defensive acquisition. But Rothmeier, it turned out, was actively searching for a way to secure more passenger feed within the United States for Northwest’s vital routes over the Pacific, where United had lately become a powerful new competitor.

Understanding Power
by Noam Chomsky
Published 26 Jul 2010

Well, notice that whatever the numbers are, it’s huge—but that money is not in the hands of labor unions, it’s in the hands of Goldman Sachs [investment firm]. And in fact, if the government enforced the laws, the trustees of those pension funds would be in serious trouble right now—because they have violated their legal responsibility to invest those funds in safe investments. For instance, they are investing your pensions in things like junk bonds in Mexico—and the people making those investment decisions would be legally liable for that, if we applied our laws, because they have a trust to invest those funds in secure investments, and they don’t do it. They just do whatever they want with them. Now, they’re not going to be in trouble, because we don’t have a real justice system—we only go after poor people.

Wired for War: The Robotics Revolution and Conflict in the 21st Century
by P. W. Singer
Published 1 Jan 2010

These pay gaps are made even worse by a U.S. health care system that acts like a massive anchor attached to American industry. General Motors, for example, was once the epitome of American industrial might in peace and war. During World War II, its automobile plants were converted to manufacture tens of thousands of tanks, trucks, and planes. Today, it has junk bond status and had to reduce its U.S. workforce by a third. The reason is not just that GM too long expected to sell ugly fuel-guzzlers, but also that it spends more on health care than it does for the steel that goes into its cars. Even a seemingly successful American firm like Starbucks has to spend more on health care than it does on coffee.

Darwin's Dangerous Idea: Evolution and the Meanings of Life
by Daniel C. Dennett
Published 15 Jan 1995

(Once again, retrospective effects loom large: if someone has invested his life chances in becoming a logger, and now we take away the opportunity to be a logger, we devalue his investment overnight, just as surely as — more surely, in fact, than — if we converted his life savings into worthless junk bonds.) At what "point" does a human life begin or end? The Darwinian perspective lets us see with unmistakable clarity why there is no hope at all of discovering a telltale mark, a saltation in life's processes, that "counts." We need to draw lines; we need definitions of life and death for many important moral purposes.

Powerhouse: The Untold Story of Hollywood's Creative Artists Agency
by James Andrew Miller
Published 8 Aug 2016

—JONI MITCHELL GRAYDON CARTER, Editor: Right after we started Spy magazine, I remember two or three people winning Oscars one night and thanking Michael Ovitz in their acceptance speeches. I had never heard of Ovitz up to that point and so we started asking around. We found out he was super-secretive, much like Mike Milken, the junk bond king. They both used to buy up photographs of themselves. CAA was very secretive internally as well; we were surprised when we learned that even people who worked at the agency didn’t know the firm’s entire client list. So we decided to start a showbiz column about the industry, and as it turned out, month in and month out, it focused largely on Ovitz—who was far and away the most powerful figure in Hollywood.

Basic Economics
by Thomas Sowell
Published 1 Jan 2000

People who bought bonds in California’s electric utility companies, as a safe investment for their retirement years, saw most of the value of those investments vanish into thin air during that state’s electricity crisis of 2001. The state forced these utilities to sell electricity to their customers for less than they were paying their suppliers. As these utilities went billions of dollars into debt, their bonds were downgraded to the level of junk bonds. {xxii} Although fatality rates from motor vehicle deaths are highest for drivers 20 to 24 years of age, the declining fatality rates end from 55 to 59 years of age, and then rise again, with drivers aged 80 to 84 having fatality rates from motor vehicle deaths being similar to drivers aged 16 to 19.

The Rough Guide to New York City
by Rough Guides
Published 21 May 2018

Morgan is considered the godfather of US merchant banking (that is, banking for governments and big companies rather than individuals), presiding over New York’s gradual replacement of London (largely bailed out by Morgan-led banks during World War I) as the world’s biggest financial market from his base on Wall Street between 1858 and 1913. Wall Street and its merchant banks (also “investment banks”) boomed in the 1920s, survived the Great Depression and regulation of the 1930s and led the world with innovative products such as “junk bonds” and derivatives into the 1990s. Yet today, all the big investment banks have gone and most of Wall Street has been converted into condos – so where did it all go wrong? A series of crashes, starting with the dot-com bust and 9/11 attacks in 2001, battered the markets and began the physical move away from the Financial District and Wall Street (as much for security as high rental costs).

Crashed: How a Decade of Financial Crises Changed the World
by Adam Tooze
Published 31 Jul 2018

It is barely too much to say that the new, deregulated world of national and international finance was made for the investment banks.26 Through their business of trading on their clients’ behalf and launching debt and other securities, they enjoyed an “edge” over all other participants in the market.27 In 1975 the abolition of fixed fees charged by Wall Street brokers for trading stocks led to fierce competition, wiped out smaller firms and forced the integration of trading, research and investment banking. In the 1980s, with interest rates coming down and bonds beginning their long bull run, trading in so-called fixed-income securities—as opposed to equities—became ever more important. Drexel Burnham Lambert pioneered the market in high-yield corporate bonds, also known as junk bonds. Meanwhile, Salomon Brothers helped the GSEs devise the securitization model and launch each new batch of mortgage-backed securities. For other clients, the investment bankers were hard at work figuring out how to hedge against fluctuations in currencies and interest rates. They developed swaps, for instance, that allowed clients to trade excessive exposures in currencies.

Nobody's Perfect: Writings From the New Yorker
by Anthony Lane
Published 26 Aug 2002

Instead, the film bundles together all its desires and smelts them into one gleaming character: a billionaire named John Gage, played by Robert Redford. Gage thinks that money can buy you love—or, at any rate, the kind of sex that might, you know, sprout into love. So when he sees Diana in a Vegas boutique the wheels of lust start to grind, and before you can say junk bond he’s asking her to kiss his dice and throw a seven. She wins, of course, whereupon he installs her and David—who have just lost all their cash—in an expensive suite. They look awed and pleased, although it’s probably the nastiest hotel room ever seen on film: a steel-blue mess, rounded off with a delightful touch, at least in the print I saw—a microphone nodding from its boom at the top of the frame.