Those Who Would Know Their Firms' Epitaphs Should Take a Look at Revisionist History Now

"This is the tale of two companies. One, Drexel Burnham Lambert Inc., was caught in a maelstrom of prosecutorial zeal and public outrage and hounded into near oblivion." -- The Wall Street Journal, Sept. 12, 1991.

"Before Michael Milken, the high-yield bond market was the final resting place for securities of bankrupt corporations. His genius turned it into a financial breeding ground for start-up companies. The transformation gave the 95% of American corporations that are too small, too new, or too unknown for investment-grade credit ratings (including nearly every company run by a minority member, a recent immigrant, or a woman) access to credit markets for the first time in history." -- National Review, June 24, 1991.

Thus, revisionist history. In 10 years, in 20 years, in 100 years, good conservatives will look up Drexel, and junk bonds, in these two notable organs, and this is what they will learn.

The Wall Street Journal's editorial page has been sounding this same, almost mournful note for, it seems, years. National Review's is a fairly recent voice added to the pernicious chorus.

The newspaper's front-page boys and girls, it must be said, found it easy enough to profit by the "prosecutorial hothouse" atmosphere of the 1980s, as one of its editorials put it. The newspaper used a number of well-placed sources, apparently in the federal prosecutors' office, to score a series of scoops, and so stoked the Drexel bonfire -- and incidentally won it some nice journalistic prizes.

The Occult

The magazine, on the other hand, like most journals of opinion, rarely delves into finance. Wall Street and its ways remain more or less an occult mystery to its writers. Hence the tone, which has the same sing-song rhythm and matter-of-fact certitude as a child's nursery rhyme. It almost might have been taken directly from Drexel's own smarmy television commercials, which loudly trumpeted its own virtue.

The revisionistas ought not be allowed the field without a fight. I go into my own files for a piece I wrote for The American Spectator in May 1990, called "Putting Junk to Rest." I interviewed James Grant, editor of Grant's Interest Rate Observer, for the story, with Mr. Grant being the Jeremiah in the wilderness of the 1980's junk bond jamboree.

"Drexel borrowed long, lent short, and lent to people who couldn't pay. Period," Mr. Grant observed.

But this simple lesson is lost on most conservatives and libertarians.

Instead, what they learned from the whole, sorry episode was that Michael Milken was a martyr. Mr. Grant called it "the infatuation with Milken, the Noble Entrepreneur. Because there were undoubtedly prosecutorial abuses, free-market minded people have leapt to the conclusion that it was the government that did Drexel in, whereas in truth, Drexel did itself in."

He continued, calling the Journal's editorials an exercise in "innocence, ignorance, and arrogance. The editorial was buncombe. Just appalling. Libertarians are children in financial matters. They don't know a good bond from a bad bond, or a promoter from a reasonably self-respecting banker. When someone says, ~The government did it,' they have Michael Milken to tea. Big mistake."

Mr. Grant summed up the situation neatly, saying, "The fact is that the American credit system has evolved away from liquidity and individual responsibility toward illiquidity and collective responsibility," what he referred to as the "socialization of credit risk. Without that, without the Too Big To Fail doctrine and the evolution of deposit insurance, and the partial deregulation of the thrifts, without all of this, there would have been nothing like the junk bond industry."

Take a Closer Look

I do not attempt a history of the junk bond market here, although that would be simple enough.

What I do think should be given some hard study is revisionist history, especially when it concerns finance, which is a pretty difficult field for most people anyway.

Drexel, in fact, was not "hounded" to death. It admitted to fraud, paid a big fine, and found that its market, and its client base, collapsed after the trouble.

More or less the same thing happened with E.F. Hutton, which pleaded guilty to fraud, paid a big fine, and found that its client base was severely eroded after the trouble. The firm, seriously hemorrhaging cash, clients, and employees, had no choice but to merge with Shearson Lehman Brothers, or close down.

The lesson to be learned, as a corporate officer is, that if you plead guilty to fraud, and pay a big fine, and are exposed as otherwise untrustworthy in a business built on trust, you should expect to lose business. As one banker told me, "loyalty is a basis point," whether talking about clients or employees, and whether talking about nice guys or heels.

Now we are faced with Salomon Brothers Inc., which admits it did bad things, like lie on bids at Treasury securities auctions and corner something like 94% of one particular auction.

Presumably, a big fine will follow.

The rest of the story has not been written yet. What will happen next is not even predictable. But what is predictable, at least from the gang who anoint the victims, is what will be written if Salomon disappears.

Salomon Brothers Inc. was caught in a maelstrom of prosecutorial zeal and public outrage and hounded into near oblivion. It broke some outdated regulations that ensured an archaic version of competition in the market, but it never cost the taxpayer a cent, and might have even saved him some.

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