As the revelations of illegality and excesses in the financial community begin to be exposed, those of us who are part of this community have to face a hard truth: a cancer has been spreading in our industry, and how far it will go will only become clear as the Securities and Exchange Commission and Federal prosecutors pursue the various investigations currently under way. The cancer is called greed.
It has grown in a more feverish climate of speculation than any we have seen since the 1920s; and it is not wholly unrelated to our continued huge fiscal deficits. It is encouraged by deregulation and the prevailing market ideology; it is specifically concentrated in the recent wave of huge takeovers financed by junk bonds—high-yielding bonds with relatively small backing—and on the various financial activities related to them. Its most deeply disturbing aspect, so far, has been the Ivan Boesky affair, involving the illegal use of insider information in the trading of securities.
The stock market is at an all-time high, while business is relatively slow and major sectors of our economy are in serious difficulty. Furthermore, looking to the future, aside from the devaluation of the dollar, which cuts two ways, we see little or no evidence of a realistic willingness on the part of government to solve our most fundamental economic problems: our budget deficit, our trade deficit, and the vulnerability of our banking system. The financial markets now have a life of their own, seemingly unrelated to any underlying economic realities. The need for productive investment in this country, together with the risks created by the level of existing speculation, makes it more important than ever that the integrity of the financial markets be assured and that capital be used to build and not to speculate.
The questions raised by recent events should be examined from two perspectives. First, the illegal activity itself and the adequacy of existing laws and regulations to deal with it; and second, the implications for the economy of the present level of corporate takeover activity, with particular attention to potentially dangerous levels of corporate borrowing.
With respect to the illegal activity, I will leave it to others to comment on enforcement and the possible need for new ways to catch wrongdoers. I would emphasize the broader issue involved, namely the ethics of a profession where integrity has to be fundamental. After all, the word “credit” comes from the Latin meaning “to believe”; belief in the integrity of our financial system is certainly open to question at this time.
The explosive growth in financial services, and the huge rewards they bring, have caused obvious strains on the ability to maintain relatively old-fashioned standards and traditions while adjusting to the pressures of the new, deregulated environment and the technologies that allow ceaseless development of new products. Employment in many investment banking firms, law firms, arbitrage firms, investment advisers, etc., has grown tenfold over the last few years. Much of the growth has been …
Junk-Bond Finance September 24, 1987