Creature From Jekyll Island by G. Edward

again in a slightly different form. Capital, especially for small companies, was now coming from bonds which Drexel had found a way to mass market. In fact, Drexel was even able to use those bonds to engineer corporate takeovers, an activity that previously had been reserved for the mega-investment houses. By 1986, Drexel had become the most profitable investment bank in the country.

Here was $180 billion that no longer was being channeled

through Wall Street. Here was $180 billion that was coming from people's savings instead of being created out of nothing by the banks. In other words, here was growth built upon real investment, not inflation. Certain people were not happy about it.

Glenn Yago, Director of the Economic Research Bureau and

Associate Professor of Management at the State University of New York at Stony Brook, explains the problem:

It was not until high yield securities were applied to restructuringthrough deconglomeration and takeovers that hostilities against the

junk bond market broke out.... The high yield market grew at theexpense of bank debt, and high yield companies grew at the expenseof the hegemony of many established firms. As Peter Passell noted inThe Nezu York Times, the impact was first felt on Wall Street, "wheresharp elbows and a working knowledge of computer spreadsheetssuddenly counted more than a nose for dry sherry or membership in

Skull and Bones."1

The first line of attack on this new market of high-yield bonds was to call them "junk." The word itself was powerful. The financial media picked it up and many investors were frightened away.

The next step was for compliant politicians to pass a law requiring S&Ls to get rid of their "junk," supposedly to protect the public. That this was a hoax is evident by the fact that only 5% ever held any of these bonds, and their holdings represented only 1.2%

of the total S&Ls assets. Furthermore, the bonds were performing satisfactorily and were a source of much needed revenue. Nevertheless, The Financial Institutions Reform and Recovery Act, which was discussed previously, was passed in 1989. It forced S&Ls to liquidate at once their "junk" bond holdings. That caused their 1. Glenn Yago, funk Bonds: How High Yield Securities Restructured Corporate America (New York: Oxford University Press, 1991), p. 5.

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rices to plummet, and the thrifts were even further weakened as they took a loss on the sale. Jane Ingraham comments: Overnight, profitable S&Ls were turned into government-owned basket cases in the hands of the Resolution Trust Corporation (RTC).

To add to the disaster, the RTC itself, which became the country'sbrgest owner of junk bonds ... flooded the market again with $1.6

billion of its holdings at the market's bottom in 1990....

So it was government itself that crashed the junk bond market, not

Michael Milken, although the jailed Milken and other former officialsof Drexel Burnham Lambert have just agreed to a $1.3 billionsettlement of the hundreds of lawsuits brought against them bygovernment regulators, aggrieved investors, and others demanding

"justice."1

Incidentally, these bonds have since recovered and, had the S&Ls been allowed to keep them, they would be in better financial condition today. And so would be the RTC.

With the California upstarts out of the way, it was a simple matter to buy up the detested bonds at bargain prices and to bring control of the new market back to Wall Street. The New York firm of Salomon Brothers, for example, one of Drexel's most severe critics during the 1980s, is now a leading trader in the market Drexel created.

REAL PROBLEM IS GOVERNMENT REGULATION