Do We Have The Courage?

I get up and get out of bed on the same side every morning, but for some reason I feel like I got out on the wrong side this morning. Perhaps it is all the stuff I have been reading lately that makes me realize that very little if anything is going to change with regards to the way business people influence the way business is conducted in Washington. I am not a pessimistic person by nature, so let me explain.

Yesterday I received an e-mail from a lawyer friend of mine with an article attached from The New York Times dated April 29. The title of the article, Dealbook: Junk Bonds, Mortgages and Milken by Andrew Sorkin is a nice short article and to the point. Basically, the article opens with the assertion by one "super lawyer" from a large New York law firm that Michael R. Milken, godfather of junk bonds, is responsible for the present credit crisis and sub-prime mortgage mess. That is just plain nonsense. But the article goes on to quote Milken at a recent conference that he holds in Beverly Hills where he discusses the economy and finance.

Milken is originally from California and makes his home in LA. I have read about him over the years in newspapers, magazines and even a book titled Predator’s Ball. In my humble opinion, Milken is the real deal. If you want to know more about him, just Google Michael R. Milken and start reading.

He is the inventor of the junk bond or as they are also known -- high yield bonds. Before Milken, Wall Street would only underwrite a corporation if it could get a Baa (by Moody) or a BBB (by Standard & Poors) on its corporate debt. No one would bring a new issue of corporate bonds to market with less than a Baa/BBB rating. Now after a corporate bond issue was priced and traded in the bond market for a few years, things could happen. If the corporation was mismanaged or would run into hard times, and its ability to pay principal and interest came into question, then the rating agencies might lower the rating on the entire issue of corporate debt. These bonds then became known as fallen angels. Milken made a study of these fallen angels and found that over the years, perhaps two percent of fallen angels never paid off, meaning that they were a total loss. But, the other 98 percent, despite being downgraded by the rating agencies did pay off, and the investor received the full principal and interest at maturity. With this knowledge Milken realized that corporate debt could be used like equity to get start ups financed. Thus the emergence of the high yield bond and what is referred to as the junk bond market. Junk Bonds played a role, but like anything else, the purpose could be abused. In some cases there was abuse and high yield bonds got a bad name.

In the conference in Beverly Hills, Milken is quoted as saying, “the question is whether the future will be like the past.” Knowing how business has been conducted in Washington in the past, I am not too optimistic that there will be real change as it pertains to regulation, oversight and auditing on Wall Street in the future. The world of finance requires knowledge and to make the necessary changes requires knowledge as well. The politicians don’t have the knowledge, nor are they going to take the time to learn what they need to know to make the right changes. Knowledgeable people from Wall Street will fill their collective heads with what Wall Street wants them to know and no more. We have been down this road before. Not too many years ago there were changes made to the laws regarding Savings & Loans, also known as Savings Banks. They at one time invested solely in mortgages. But Congress changed the laws, and permitted them to invest in other things besides mortgages, like junk bonds. Did you guess that? In other words, asking if things in the future are going to be different is like asking will dandelions grow in the fields this spring. Some things just don’t change, and Washington is one of them.

Back a few weeks ago, when the Fed stepped in and facilitated the sale of Bear Stearns to JP Morgan Chase, I received a comment from one of my readers that my opinion that the Fed had done the right thing was spoken like a true banker. Now, several weeks later, looking back and looking forward at what the situation is, I am beginning to wonder myself, just what did the Fed facilitate. I was more concerned with the innocent people that would have been affected than anything else. The families and lives that would have been disrupted and the unnecessary suffering that such a financial disaster would have created were foremost in my mind. Now that the winds have calmed down and all the greedy bastards on Wall Street have come out of their hole, I am having second thoughts.

There are several good people out there in the world of finance that know what needs to be done to curb abuse. This is a big country and among the experienced hands on Wall Street present and retired, there is an abundance of talent that could be harnessed to draw up the specs for a better system. The question that Milken should have asked, do we have the courage to make the future different. Stay tuned.