--- Michael Pollak <mpollak at panix.com> wrote: >
> 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%.
John Kay had a slightly different take on Milken's economics. In his PhD dissertation, MM proved that the 4% default rate was what was implied in prices, but noted that the 2% rate had actually prevailed. Kay, however, pointed out that the bonds studied by Milken were qualitatively different from the ones he issued. In the pre-Milken era, "junk bonds" were the bonds of companies which had once been of investment grade, but were going through temporary financial distress. In other words, when the bonds had been originally issued, the issuers in good faith expected them to be paid back. This is rather different from someone selling bonds which they know to be high-risk from day one.
dd
===== “It is necessarily part of the business of a banker to maintain appearances and to profess a conventional respectability which is more than human. Life-long practices of this kind make them the most romantic and the least realistic of men” -- JM Keynes
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