“Junk bonds prove there’s nothing magical in an AAA rating.”
— Merton Miller
July 31, 2025 — In the late 1990s, every silly idea that came along could belly up to the credit bar and imbibe almost as much as it wanted. Today, we’re seeing a reprisal of the same easy money mistakes.
Trillions of dollars worth of capital were raised, spent, and then disappeared. What was left were IOUs, stocks, bank loans, and bonds.
The quality of these debt instruments was falling rapidly. By 2000, the junk bond market was suffering through its worst funk since at least 1990.
The average junk bond mutual fund lost 11% that year, its worst performance since 1990.
So-called TMT companies (telecommunications, media, and technology) were the worst creditors in the junk bond market. They borrowed huge sums to build out promising new communications networks.
ICG Communications Inc., for example, had borrowed $2 billion by the time it filed for Chapter 11 bankruptcy protection in November 2000. Falling prices for junk bonds meant rising costs of credit for the borrowers — and not just TMT borrowers.
J.C. Penney’s bonds yielded 18%, Tenneco Automotive’s bonds yielded 21.3%, and the gold producer Ashanti’s bonds could be bought to yield 27%.
These were all troubled companies. But that is what you get after a credit binge: companies with problems because they have taken up too much capital and spent it too freely.
You also get consumers with problems, for the same reasons.
When credit is too cheap, people treat it cheaply. The result is trouble. But was it not the sort of trouble that can be cured by even cheaper credit?
In 2000, the US economy was near the end of one of the biggest credit binges in history. The headaches and regrets could not be dodged or ignored. The zeitgeist of the market was changing. Instead of dreams, there would be nightmares.
Venture funds were being replaced by vulture funds. And hard-nosed, bitter-end investors and workout specialists were taking the place of naïve amateurs.
The focus of these serious investors was no longer on cleaning up in the market, but on merely cleaning up.
Moreover, investors, who used to believe everything was possible and who accepted every fairy-tale business plan, chapter and verse, were beginning to believe nothing and accepted only Chapters 11 and 7.
Among the sad stories making their way around the World Wide Web at the time was one from Philadelphia concerning Warren “Pete” Musser — one of Wall Street’s most aggressive promoters during the Internet mania. Musser was no fool.
The 73-year-old investor built one of the most successful new-tech incubation companies in the nation — with huge stakes in the well-known stars of the internet world — such as ICG, VerticalNet, and US Interactive. He did not get to this position overnight.
Instead, he began the firm decades ago and knew his business well. “Of all the guys who should have known better,” commented Howard Butcher IV, an investor, who had been a longtime Internet skeptic, “he’s a consummate stock promoter. You’d think he would have unloaded it and had his big nest egg of cash instead of being in debt.”3
But Musser apparently succumbed to the risk that all stock promoters take (and maybe even Greenspan): he came to believe his own hype. And to his own disadvantage.
He was forced to sell 80% of his shares to cover an old-fashioned margin call. The shares, worth $738 million a few months before, brought in less than $100 million.
It was too late for Musser, but the financial press worldwide continued to report that Greenspan was on his way with help. Shareholders also believed that Greenspan still held the big put option that would save them from losses. But did he? Could a change in policy by the Fed save the Mussers of this world? Or were their investments so suicidal, so hopeless that they could not avoid self-destruction?
In finance, there is smart money, dumb money, and money so imbecilic that it practically cries out for euthanasia.
Pets.com spent $179 to acquire each dog food customer. After the company had gone belly-up, what was left? How could a change in interest rate policy bring back the millions that had been spent?
Likewise, TheStreet.com lost $37 million in the first 9 months of 2000 — or nearly $400 for every one of its paying customers. TheStreet.com announced the closing of its UK office and a 20% cut in employees.
Maybe someday it would find a business model that worked. But how would a lower Fed funds rate help investors recover the $37 million? And, how would lower rates bring back the $100 billion that AOL/Time Warner lost in 2002?
A cut in the Fed funds rate does not suddenly make borrowers more creditworthy. No one was going to jump at the chance to lend money to TheStreet.com or Amazon or other CWI (companies with issues) borrowers just because the Fed cut rates.
For if a man borrows more than he can afford and spends the money on high living instead of on productive investments, lower interest rates do not make you want to lend him more. He needs to put his financial affairs in order first — and he cannot do that by borrowing more money.
The way to make money, according to George Soros, is to find the trend whose premise is false and bet against it. The premise of 2001 prices on Wall Street was that Greenspan, public servant, would be able to do what no one has ever been able to do before — prevent stock prices from regressing to the mean.
Many reasons were offered for his likely success: the “productivity miracle” was popular, until most figures showed productivity growth regressing to the mean. “Higher GDP growth rates” was also a winner, until GDP growth also slowed.
“Information technology” had a ring to it, but it needed the objective correlative of higher productivity and economic growth to give it substance.
How about “higher corporate profits?” Alas, that fell into the gutters of Wall Street as corporate profits slipped up along with everything else, including the myths of the “endless expansion” and the “perfect inventory control systems.”
Only one thin reed remained standing — the idea that Greenspan was in control of the US dollar and its economy. Yet, little in the history of the Fed justified the confidence people seemed to have in it.
As January 2001 began, economists must have been on the edge of their chairs. Would the Fed, which had debased the currency it was supposed to protect, now turn out to be the savior of the whole economy? Nowhere in the Federal Reserve–enabling legislation is there any mention of a “chicken in every pot.”
There is no discussion of “protecting Wall Street’s commissions,” of “bailing out underwater businesses,” of “stimulating consumers to buy,” of “helping Americans go further into debt,” nor of “reinflating leaky bubbles.” Yet, those were the things the Fed now aimed to do.
Regards,
Addison Wiggin
Grey Swan Investment Fraternity
P.S., This essay is an excerpt from the third post-pandemic edition of Financial Reckoning: Memes, Manias, Booms & Busts, Investing in the 21st Century.
Today, the bond market offers investors the highest yields in 15 years. Even “safe” U.S. Treasury bonds.
However, the cost of financing that debt at high interest rates continues to rise as older debts roll over.
If the U.S. wants to lower interest rates, they have a few options.
President Trump has opted to blame the Federal Reserve and tried to bully Jerome Powell and the FOMC crew into lowering rates.
Newsflash – it’s not working. And trying to bully a central bank trying to maintain independence may cause them to move in the other direction.
A better move? Stop passing spending bills – Big, Beautiful or otherwise – that increase the debt. The U.S. doesn’t have to have a plan to pay off all its debt – it just needs a spending policy that causes debt to grow more slowly than GDP growth.
That’s where President Trump’s Great Reset may succeed with tools like deregulation, not bullying. But the Fed isn’t responsible for fiscal policy – they just have to ensure that reckless fiscal policy doesn’t lead to runaway inflation.
The bond market will play an increasingly important role as Trump’s tariff policies impact the real economy. The Big Beautiful Bill piles on a historic level of new deficit spending and debt. The bond market will determine whether those new debts can be financed… and the old ones rolled over.
Your thoughts? Please send them here: addison@greyswanfraternity.com
