>So what do you think of the argument that Ben Stein (of Win Ben Stein's
>Money) made in Barron's in the late 80s? He argued that what made Milken
>such a huge criminal was he created the junk bond market out of nothing,
>and that it was all smoke and mirrors. As I remember it, Stein said that
>Milken argued that up until him, investors had under-priced junk bonds
>because they figured on a 4% average default rate, whereas, if you had a
>large enough portfolio of them -- and if someone like him was around to
>produce a large enough supply to make such portfolios possible -- then the
>default rate was only 2%. So there were huge amounts of money waiting to
>be made. Except, Stein argued, it wasn't true. When the smoke cleared,
>the default rate was 4%, just like everyone had always thought.
"The smoke cleared," you mean at the end of the 1980s, or over the entire 100 years or so Milken studied? Junk had a spectacular resurrection after that smoke cleared, so it probably all depends on where you set your start and stop points. Junk did very well in the late 1990s, though it may be about to go all to hell now.
> But,
>Stein continued, this wasn't mere hype, like a normal bubble. Rather what
>underlay it was a concerted effort of triangular and pyramidal trading,
>all of it illegal, whereby (a) huge returns were generated by insider
>operations to bid up each other's bonds, and (b) S&L's and companies that
>would have gone under at key moments and collapsed the market were propped
>up by similarly illegal interventions.
A lot of this sounds like a normal bubble. The details always vary, but the structures are similar. The dot.com mania was sustained by firms spending IPO money on ads at other dot.coms.
> Essentially, according to Stein,
>Milken didn't invent a market so much as create an incredibly huge Ponzi
>scheme that took the entire S&L industry down with it.
Milken was hardly responsible for the collapse of the S&Ls. As Yoshie pointed out, the S&Ls collapsed because of deregulation. As a Wall Street Journal retrospective on the disaster put it, it represented the corruption of the entire professional class of the U.S. - lawyers, accountants, regulators, politicians. Milken serves in a lot of imaginations as the person to be punished for that.
Doug