I recently saw the play “Junk”, a retrospective of the 1980s, when the junk-bond kings of Wall Street were revered and then vilified.
It was a time when financial wonders understood how to use massive amounts of debt to keep buying follies, leaving a path of devastation. Think of an invasion of locusts swarming businesses while wearing suits and ties.
“Junk,” by Pulitzer Prize-winning playwright Ayad Akhtar, made an appearance on Broadway and won a 2018 Tony nomination for Best Play. It is now playing in Washington. If you have the chance to see a production, you should go. At the very least, read the play, which is this month’s Color of Money Book Club pick.
With a certain perspective, “Junk” is a look not only at complicit and greedy financiers, but also the legacy they left behind.
At the center of this story is Robert Merkin, apparently a replacement for the infamous Michael Milken. Do you remember him ? At one point, he symbolized the “decade of greed”. Milken, now a philanthropist, is considered the mastermind behind high yield, high risk bonds known as junk bonds. Milken pleaded guilty to six crimes related to securities fraud.
In the play, Merkin stages a hostile takeover of a family manufacturing business. He lies and cheats to make a deal that destroys many lives.
You know the story – corporate looters, insider trading, rigged stock purchases, laid off employees and, finally, a business buried in so much acquisition debt that it ends up collapsing.
But there is another equally fascinating subplot to “Junk”. In the midst of all this mess is another form of fallout – how the masters of the junk bond taught Americans to embrace the inevitability of debt. Like the grasshoppers that devour businesses, American consumers often run into heavy debt to the detriment of their financial health.
At the end of last year, total household debt stood at $ 13.540 billion, an increase of $ 32 billion from the third quarter of 2018, according to the Federal Reserve’s Center for Microeconomic Data. Bank of New York. In the fourth quarter of 2018, credit card balances increased by $ 26 billion to $ 870 billion.
Auto loan origination for 2018 is at an all time high, and some cannot bear the debt burden. More than 7 million Americans were 90 days or more behind on their auto loans at the end of 2018. “The overall performance of auto loans has slowly deteriorated,” the Fed reported.
“What is debt if not the promise to pay?” From that promise, everything else flows, ”Merkin says. “Debt is nothing that gives birth to everything.”
In the play, businessman Leo Tresler disdains Merkin’s buyout tactics, though he too uses debt to fund deals.
“You know city councils and state governments will follow suit,” he says. “Then the consumers. And now what? So we are no longer a country. And the only thing we’ll do in America? Debt.”
Just as junk bonds allowed corporate looters to buy what they couldn’t afford, credit cards allow families to pledge future income to receive goods and services today. Americans have learned to make the most of their own lives, often replicating the ruinous nature of debt.
But what about mortgages, you might ask.
Yes, most people can’t buy a home without a mortgage, and it’s a liability that can help families build wealth. However, a healthy hatred of borrowing can get people thinking before buying a home they can’t afford. The housing crisis that helped push the economy into recession was fueled by oversized mortgage debt.
Right now, it’s college admissions season, when many parents and students are going to bury themselves in student loans. They will justify the decision by saying to themselves that it is “good debt”. They believe loans are an asset.
Student loans outstanding stood at $ 1.46 trillion in the fourth quarter of last year, according to the Fed. And that’s getting too much for many of these borrowers – 11.4% of those loans were over 90 days past due or in default.
In a note on the directing of “Junk,” Akhtar writes, “The mid-80s innuendo in costumes and design should not be overstated. For the world evoked in the events described – the origins of debt financing – are not just a matter of the past, but represent a very central philosophy and ontology to what we call the world of today.
And what is at the heart of American culture?
It’s the debt.
Businesses and consumers aspire to build wealth using borrowed money. But too often borrowers end up collapsing under the weight of this debt.
We should all consider the moral of this story: “Debt is not an asset,” Tresler said at one point. “Debt is debt.”
– Washington Post Writers’ Group