Perceptions and the politics of finance: Junk bonds and the regulatory seizure of first capital life

Perceptions and the politics of finance: Junk bonds and the regulatory seizure of first capital life In May 1991, one month after seizing Executive Life, California regulators seized First Capital Life (FCLIC). Both insurers were Drexel clients with large junk bond holdings, and both had experienced ‘bank runs’. FCLIC's run followed regulators' televised comments that its poor condition necessitated a substantial cash infusion. Yet FCLIC's statutory capital — with junk bonds, real estate, and mortgages marked to market — was far from lowest among major insurers with California policyholders. It becomes lowest if junk bonds alone are marked to market at year-end 1990 (ignoring larger market declines in real estate/mortgages and the junk bond market's 21% return in early 1991). Our findings suggest a regulatory bias against junk bonds in the political backlash against the 1980s. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Perceptions and the politics of finance: Junk bonds and the regulatory seizure of first capital life

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Publisher
Elsevier
Copyright
Copyright © 1996 Elsevier Ltd
ISSN
0304-405x
DOI
10.1016/0304-405X(95)00866-D
Publisher site
See Article on Publisher Site

Abstract

In May 1991, one month after seizing Executive Life, California regulators seized First Capital Life (FCLIC). Both insurers were Drexel clients with large junk bond holdings, and both had experienced ‘bank runs’. FCLIC's run followed regulators' televised comments that its poor condition necessitated a substantial cash infusion. Yet FCLIC's statutory capital — with junk bonds, real estate, and mortgages marked to market — was far from lowest among major insurers with California policyholders. It becomes lowest if junk bonds alone are marked to market at year-end 1990 (ignoring larger market declines in real estate/mortgages and the junk bond market's 21% return in early 1991). Our findings suggest a regulatory bias against junk bonds in the political backlash against the 1980s.

Journal

Journal of Financial EconomicsElsevier

Published: Jul 1, 1996

References

  • Barbarians at the gate
    Burrough, Bryan; Helyar, John
  • Why do NASDAQ market makers avoid odd-eighth quotes?
    Christie, William; Schultz, Paul
  • Incentives, downsizing, and value creation at General Dynamics
    Dial, Jay; Murphy, Kevin J.
  • The losses realized in bank failures
    James, Christopher
  • Corporate control and the politics of finance
    Jensen, Michael C.

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