Junk Bonds Draw Junk Justice : Columbia S&L;’s Spiegel is the victim of Washington’s sabotage of the high-yield bond market.

After years of government propaganda against California’s Columbia Savings & Loan for its alleged wrongful investments in junk bonds, the federal government could not present enough evidence to convene a grand jury against Thomas Spiegel, Columbia’s former chairman and premier shareholder. Forced to abandon its charges of securities violations, the government is trying to save its badly tattered reputation by bringing Spiegel to trial this week in Los Angeles for having too many company perks.

The government charges that Spiegel is a criminal because he stayed on occasion in the S&L;’s corporate condominium, because his bank made a loan to a car dealer who subsequently loaned Spiegel a car and because he made personal use of guns and ammunition purchased by Columbia for security guards. At worst, these perks might be construed to add a few bucks to his tax bill, but they definitely do not explain Columbia’s failure.

The government even misconstrues Spiegel’s personal investment of $132,000 in junk bonds as an “inducement” given him by Michael Milken to have Columbia purchase junk bonds of dubious value. The government hopes to persuade a jury that Spiegel is of such limited intelligence that he would jeopardize his multimillion-dollar equity investment in the S&L; for a mite-sized bribe. And if the bonds were as unprofitable as the government claims, being permitted to buy on one’s personal account would not constitute an “inducement.”

If there were any justice in America, it would not be Spiegel in the dock, but the U.S. government, whose criminally irresponsible behavior wrecked his savings-and-loan along with many others. Columbia was among the nation’s most profitable S&Ls.; A Feb. 28, 1989, New York Times article on “Savings and Loans That Prosper” listed Columbia as one of four thrifts “in the best of health” with assets of $12.7 billion, $786 million in capital and annual profits of $65 million. Columbia’s economic strength, the article stated, resulted from its “large portfolio of junk bonds.”

Junk bonds cushioned Columbia from the collapse in real estate and mortgages that drove many S&Ls; to the brink. A March 2, 1989, General Accounting Office study praised junk bonds as good investments for savings and loans: “High-yield bonds have been attractive investments for thrifts compared to many alternative investments, and high-yield bond investments have not contributed to the thrift industry’s current problems.” Junk bonds were second only to credit cards in profitability, the GAO found, and were the best-performing, fixed-rate, long-term thrift investment.

The government is trying to pin Columbia’s collapse, at a cost to taxpayers of $1.1 billion, on Spiegel’s insignificant perks. But the real culprit is the government itself. Despite the GAO’s stamp of approval on junk bonds, the Financial Institutions Reform, Recovery and Enforcement Act, signed into law on Aug. 9, 1989, required the thrifts to dump their junk bonds on the market. As any fool could have foreseen, these requirements undercut junk bonds, resulting in a market decline of 20%. Columbia’s insolvency was entirely the consequence of the so-called reform law.

To make certain that Columbia failed, the Resolution Trust Corp. prohibited Columbia from selling its junk-bond portfolio at a favorable price to a group of investors. Meanwhile, the RTC was dumping junk bonds on the market at fire-sale prices, pulling down the value of Columbia’s assets.

After monitoring the performance of Columbia’s original junk-bond portfolio since 1989, economist Glenn Yago has shown that if Columbia had been left alone, it would have realized a sizable profit on its portfolio. His research has led him to conclude that Columbia was on the correct track in moving out of real estate to pursue diversified investment strategies and that its failure was due to the government’s gratuitous seizure of the S&L; and untimely dismantling of its investment portfolio.

Yago’s conclusion is hard to dispute in light of the Wall Street Journal’s “Investment Insight” report Oct. 17 showing that junk bonds far out-performed all other bonds, whether U.S. Treasury instruments or triple-A corporates, producing an average annual rate of return of 12% over five years from September, 1989, to last month.

The charges against Spiegel are the trumped-up charges of a corrupt government desperate to hide its responsibility for the collapse of S&Ls; at great taxpayer expense.