Word: junks
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...Curb corporate raiding. Dukakis has latched on to an important issue, but he is wrong to talk as if all mergers and acquisitions are equally bad. Friendly combinations may improve U.S. competitiveness. The more disturbing deals are the hundreds of hostile takeovers carried out by raiders financed with junk bonds. No wonder corporate executives focus on short-term profits and their companies' stock prices if they constantly have to look over their shoulders for a raider. Even worse, hostile takeovers often saddle the target companies with huge debts that make them weaker than they were before the raid. The solution...
...problems, however, go much deeper than that. The deregulation of the financial markets has helped produce a stunning amount of corporate and personal debt. In particular, almost $200 billion worth of high-yielding junk bonds has been issued over the past few years, a substantial part of which was used in connection with takeovers and restructurings. In certain instances, the use of a reasonable amount of high-yield debt can easily be justified. However, it is questionable whether businesses can service all of this debt while investing for growth. A recession could bring a wave of defaults...
...proliferation of speculative financial instruments is tied to the new role of institutional investors. In fact, the term institutional investor is becoming a contradiction in terms. Too many institutions no longer invest. Instead they speculate -- in every type of financial vehicle from options to junk bonds, from real estate to foreign exchange. They are active players in the takeover game, encouraging corporations either to sell out or to engage in highly leveraged restructurings essentially aimed at maximizing short-term trading profits. But while the managers of institutional funds engage in this speculation, the money is not theirs. They are risking...
...Junk bonds are piling up on top of a huge mountain of existing debt. The world's commercial banks hold almost half of the $1.2 trillion in Third World debt. That debt is choking growth in half the world, and most of it will never get repaid. At the same time, both banks and savings and loan associations have made billions of dollars' worth of bad loans to the real estate and energy industries...
...protect the taxpaying public and promote investment instead of speculation, Government regulators should sharply limit the amount of junk bonds and other risky investments held by institutions insured by federal and state agencies. In addition, the federal deposit insurance system should be revamped to ensure that it encourages prudent management at financial institutions. At the moment, regulators bail out mismanaged S and Ls and often turn them over to new owners who commit little or no capital of their own and who get a free ride to continue the institutions' speculative activity at no risk to themselves...