Milking Milken again

THE Resolution Trust corporation's current lawsuit against Michael Milken and other former Drexel employees represents the latest, and we hope last, phase of the largest financial coverup in U.S. history. The plaintiff's scenario runs like this: the junk-bond market was dying, as were many S&Ls; Michael Milken saw an opportunity; he agreed to pump Drexel's money into dying thrifts on condition that they buy his bonds, the risks of which were conveniently never spelled out. For a while the scam succeeded in artificially propping up bond prices. In the end, however, it killed the S&Ls.

Those who received their financial education via the pages of Bonfire of the Vanities will no doubt find this plasible. Unfortunately, real life is rarely so exciting. A voluminous public record attests to the opennness and extreme competitiveness of the junkbond market. Far from being snookered by fast-talking Masters of the Universe, the S&Ls made their own investment decisions, aided by teams of analysts, credit officers, and independent money managers. The level of risk of high-yield bonds was equally well known to federal bank regulators, who never questioned the judgment of the S&Ls who bought them. Indeed, a 1989 General Accounting Office report touted them as among the most profitable investments held by thrifts.

A few S&Ls undoubtedly got into trouble because of the junk bonds. But many more went bankrupt investing in real estate and oil, neither of which is mentioned in the federal complaint.

In any event, most of the S&Ls were insolvent long before they got into junk bonds. During the Seventies and early Eigties, failing S&Ls tried to stay afloat by investing federally insured deposits in high-risk ventures. Federal regulators--many of whom now work for the RTC--turnned a blind eye to early indications of the crisis. Rather than close hundreds of ailing S&Ls, they issued "special certificates" of net worth and sanctioned other accounting gimmicks designed to buy time for moribund S&Ls.

When the magnitude of the debacle could no longer be denied, government policy switched from malign neglect to regulatory overkill. The 1989 bailout bill forced even healthy thrifts to sell off their high-yield portfolios. That accelerated the fall in the value of junk bonds. So the S&L bailout precipitated the collapse of junk bonds, not the reverse. Maybe Mr. Milken should sue the government.