The Junk Bond Fallout Continues : Executive Life is another casualty of go-go ‘80s
Junk bonds, once the darlings of finance during the go-go 1980s, are now the bane of many a weary investor. No one knows this better than the hundreds of thousands of policyholders of Executive Life Insurance Co. They face months, even years, of uncertainty about the value of their policies and annuities as California regulators try to undo the biggest failure of a U.S. insurer.
“Unfortunately, the fallout from the junk bond era continues to rain on innocent American investors,” said state Insurance Commissioner John Garamendi. “One casualty is the Executive Life Insurance Co.”
The company’s huge exposure to risky junk bonds is hardly typical--thankfully--of life insurance companies. Executive Life had nearly two-thirds of its assets in junk bonds, which have been plummeting in value. The industry average in junk bond holdings is about 6%. Executive Life’s troubles thus are atypical of the $1.4-trillion industry. But the collapse shows that insurance companies, too, like Wall Street brokerages and savings and loans, can be vunerable to junk bond losses. So far, however, the industry is healthy despite a squeeze on profits that came with the recession.
California regulators seized control of Executive Life Thursday to protect policyholders and some pension funds, while a team of bankers, attorneys and accountants try to stabilize the troubled L.A. firm. Garamendi blamed Executive Life’s troubles on “the excesses of the ‘80s. The go-go attitude that created the junk bond phenomenon and the ensuing scandal--the company was very much a part of it.”
Indeed, Executive Life’s high-flying former chairman, Fred Carr, was a buddy and big customer of junk bond king Michael Milken, who now sits in jail after pleading guilty to six counts related to securities and tax law violations. Carr’s upstart company grew by leaps in the 1980s to become one of the nation’s 20 biggest insurance companies.
It promised high rates of return to policyholders. In an effort to produce such returns, Executive Life invested the money from policyholders in high-yielding junk bonds instead of more conventional, predictable bonds.
When the junk bond market collapsed in 1989, shortly after the criminal investigation that led to Milken’s sentence, the value of Executive Life’s $6.4-billion portfolio dropped dramatically. The company disclosed a $466-million fourth-quarter loss. State regulators rightly stepped in when Executive Life was flooded with requests from policyholders to cash in.
State regulators have put a moratorium on cash-ins, but will continue payments on death benefits and medical claims and to retirees who depend on monthly checks from the insurer.
The ultimate cost of the Executive Life debacle is yet to be known. Salvaging the house-of-cards empire built on junk bonds will be a challenge to state regulators. The painful effects of the free-wheeling 1980s that spawned junk bonds unfortunately will continue to haunt this generation of taxpayers, as well as generations to come.
