Financial History 142 Summer 2022 - Page 28

deviation produces the risk-adjusted return measure known as the Sharpe ratio . Through 2021 by that standard , originalissue high yield bonds , at 0.36 , underperformed fallen angels , at 0.55 . Both varieties of high yield bonds fared worse than investment grade corporates , at 0.68 .
If high yield drumbeaters in the early days had been able to foresee these results , they legitimately could have pointed to their asset class ’ s diversification and current-income benefits within a multi-asset portfolio . They were on less firm ground , however , in their representations about high yield financing ’ s benefits to the economy . The ardent advocates asserted that capital raised in non-investment grade bond offerings created hundreds of thousands of jobs . Such statements , according to former Council of Economic Advisers Herbert Stein , embodied “ an error that is common to people who have not been exposed to economics .” Stein explained that high yield underwriters did not create the capital that they raised , but merely
channeled it in different directions than it otherwise would have flowed .
Some identifiable companies received capital as a result , but there were also unidentifiable companies and home mortgage seekers who were consequently unable to obtain capital . It was wrong , said Stein , to assume that workers employed at the high yield-funded companies would not have found jobs elsewhere if not for the high yield underwriters ’ efforts . Nor , he added , was it feasible to demonstrate that high yield financing improved the economy-wide allocation of capital by steering it toward more productive uses than otherwise would have been the case . Directing capital into high yield bond issuance might even have had the opposite effect , Stein noted .
If a valid rebuttal to Stein ’ s arguments existed , high yield financiers made no effort to present it , leaving objective parties to infer that there was , in fact , no such set of cogent counterarguments . In short , the boosters ignored the critique by a highly reputable authority , published in the nation ’ s largest-circulation daily newspaper . They simply went on claiming to be rendering a great public service by creating employment for many who , but for high yield bankers ’ noble efforts , presumably would have been relying on unemployment benefits .
Certainly , overzealous high yield advocates had no monopoly on dubious pronouncements . The market ’ s detractors were equally energetic in their efforts to arouse public support for clipping the “ junk bond ” financiers ’ wings through government regulation . Among the high yield market ’ s outspoken adversaries were corporate managers who feared ouster from their positions if their companies became targets of hostile takeovers . Access to vast funding in the high yield market represented a potent new weapon in the hands of corporate raiders .
Also prominent in the anti-high yield firmament were some leading life insurers . Their predominance was threatened by
High yield bonds played a key role in RJR Nabisco ’ s record-breaking , fiercely contested 1988 leveraged buyout , chronicled in Barbarians at the Gate ( 1990 ), by Bryan Burrough and John Helyar .
Collection of the Museum of American Finance
26 FINANCIAL HISTORY | Summer 2022 | www . MoAF . org