Panel Will Try to Recoup S&L; Junk Bond Loss : Thrifts: The bonds were marketed by Drexel and Michael Milken. The government names a new task force to get some of its money back.
The Federal Deposit Insurance Corp. said Wednesday that it has created a special task force to recover millions of dollars lost by failed savings and loan associations because of investments in junk bonds.
The bonds were marketed by the bankrupt New York investment bank of Drexel Burnham Lambert and Michael Milken, the company’s former kingpin of high-yield securities.
The FDIC said the Securities and Exchange Commission is already holding $750 million--$350 million from Drexel and $400 million from Milken--for settlement of future successful claims against the firm and the man who made junk bonds a hot investment in the 1980s. These funds would be available for claims by the government as well as private citizens, and the task force could seek to establish claims for additional losses suffered in S&L; failures.
The FDIC said it believes that the government may have the biggest claim of all creditors involved in the Drexel bankruptcy.
The S&L; law approved by Congress last year requires thrifts to divest themselves of the risky, high-yield securities popularly called junk bonds, which have played a major role in the ongoing savings and loan catastrophe. Attracted by the yields, a number of S&Ls; were enthusiastic buyers of these issues from Drexel and Milken.
It wasn’t immediately clear how much money was plowed into junk bonds by thrifts that later failed, but a single institution--Columbia Savings & Loan of Beverly Hills--has already seen the value of its $4-billion junk-bond portfolio shrink to $3 billion in the past year. Columbia hasn’t failed yet, but it’s in danger, and a weak market for junk bonds has made a turnaround difficult.
The federal task force will include lawyers from both the FDIC and Resolution Trust Corp., the agency created by last year’s S&L; bailout legislation to handle the job of running thrift institutions seized by the government, closing the most hopelessly insolvent and paying off depositors. The FDIC supplies the personnel and management for the RTC.
The lawyers will conduct an intensive study of S&L; losses resulting from investments in junk bonds and will search for evidence of possible fraud or other misconduct in the sale of the bonds to these institutions.
“The FDIC always investigates failed institutions for signs of wrongdoing that may have contributed to the failure,” FDIC general counsel Alfred Byrne said. “In this case, we have preliminary information that links Drexel and Milken to millions of dollars lost by a number of failed thrifts in junk bonds.”
Drexel filed for Chapter 11 protection in February, and the bankruptcy court recently set a deadline of Nov. 15 for filing claims against the company.
“Although we have been investigating the link between Drexel and failed thrifts for some time,” Byrne said, the Nov. 15 deadline “is prompting us to step up our efforts to nail down these claims.”
The effort “has become one of our highest priorities,” he said. “We want the financial industry and the American public to know that we will vigorously pursue any and all claims we have against those who defrauded federally insured institutions.”
Drexel spokesman Steven Anreder said: “Since we have not yet seen the statement, we cannot comment on it. However, as with any other party, they (the FDIC) will have to present a provable claim. (It) will be up to the court to determine its validity.”
A spokesman for Milken declined to comment.
In December, 1988, Drexel pleaded guilty to six violations of federal securities law and agreed to pay penalties of $650 million. The agreement covered charges of mail and securities fraud.
Milken pleaded guilty in April to six counts of securities fraud and agreed to pay $600 million in fines and restitution.
