[FOUNTAIN]On fallen angels and junk bonds

“People forget that today’s junk is often tomorrow’s blue chip,” said Michael Milken, the high-flying American financier who was known in the 1980s as “the junk bond king.” He insists that the international ratings companies like Standard and Poor’s and Moody’s evaluated only a company’s past record, whereas the junk bonds he handled were issued by the corporations of the future. Junk bonds have high yield and high risk, but Mr. Milken said the ones he dealt in were fallen angels with the potential to fly much higher (and had little risk of bankruptcy). He said his junk bonds guaranteed higher yields than first-grade bonds from big companies like General Motors.
But Milken’s junk bonds turned out to be plunderers disguised as angels. They were used to capitalize hostile mergers and acquisitions. American corporations felt threatened by Mr. Milken and his surbordinate plunderers, who controlled 70 percent of the junk bond market. Though some say hostile mergers and acquisitions made American firms stronger, the truth is that Mr. Milken’s junk bonds scarred the American economy. He was indicted for fraud in 1989, the junk bond market collapsed and Drexel Burnham Lambert, where Mr. Milken worked, went bankrupt. Savings and loan associations that had bought his bonds went bankrupt, and the federal government spent billions on a bailout.
Recently, junk bonds have been shaking the international financial market again. Bonds issued by General Motors and Ford, the two biggest automakers in the world, were recently rated “below investment grade” by S&P, making them junk bonds. GM is the biggest company to have slid into this category; its debt stands at $291.8 billion. Ford's debt is approaching $161.3 billion. As a result, many hedge fund companies that invested in GM and Ford are reportedly on the verge of bankruptcy. These exemplary American manufacturers have become fallen angels. This case demonstrates the cruelty inherent in free enterprise. After Korea’s financial crisis of 1997, the country was also labeled unsuitable for investment. The news about GM and Ford brings back memories of those hard times.

by Lee Se-jung

The writer is a deputy economic news editor of the JoongAng Ilbo.