Junk Bonds

1. Ivan Boesky and Michael Milken, who were known as "junk-bond kings."
2. Junk bonds are high-paying bonds with a lower credit rating than investment-grade
corporate bonds, Treasury bonds, and municipal bonds.
3. They have been rated as not investment grade by Standard & Poor's or Moody's because
the company that issues them is not fiscally sound.
4. Junk bonds are typically rated 'BB' or lower by Standard & Poor's and 'Ba' or lower by
Moody's.
5. Despite their name, junk bonds can be valuable investments for informed investors, but
their potential high returns come with the potential for high risk.
6. The main issuers of such bonds are capital-intensive companies with high debt ratios,
or young companies that have yet to establish a strong credit rating.

Junk bonds can be broken down into two other categories:

 Fallen Angels – This is a bond that was once investment grade but has since been
reduced to junk-bond status because of the issuing company's poor credit quality.
 Rising Stars – The opposite of a fallen angel, this is a bond with a rating that has been
increased because of the issuing company's improving credit quality. A rising star may
still be a junk bond, but it's on its way to being investment quality.
History of Junk Bonds

The United States government started using junk bonds in the 1780s as a way of financing an
unproven government. At the time, the country’s risk of default was high. Therefore, not
many international lenders were willing to lend unless the investment offered high returns.

Junk bonds returned in the early 1900s as a form of financing startups. Companies like
General Motors and IBM were at their early stages at the time. Few banks were willing to
extend credit to companies without a track record

Drexel Burnham used this research to build a large junk bond market. Their investments in
junk bonds grew from $10 billion to $189 billion between 1979 to 1989.

Present Junk Bond Market:

 The U.S. junk-bond market racked up another monthly record after borrowers sold
more than $47 billion of the risky debt in September to borrow at some of the
cheapest rates ever.
 Between 2009 and 2015, the U.S. junk bond market rose 80 percent to $1.3 trillion.

Michael Robert Milken

 Nicknamed "The Junk Bond King" in the 1980s, Milken earned between $200 million
and $550 million a year at the height of his success.
 Milken in 1988 he went to prison
 Milken became the first recipient of the Ig Nobel Economics Prize in 1991
 President Donald Trump pardoned Milken on February 18, 2020.
Harshad Mehta was an Indian stockbroker, well known for his wealth and for having been
charged with numerous financial crimes that took place in 1992.

Of the 27 criminal charges brought against him, he was only convicted of four, before his death
at age 47 in 2001.

It was alleged that Mehta engaged in a massive stock manipulation scheme financed by
worthless bank receipts, which his firm brokered in "ready forward" transactions between
banks.

Mehta was convicted by the Bombay High Court and Supreme Court of India for his part in a
financial scandal valued at 4999 Crores which took place on the Bombay Stock Exchange
(BSE).

The scandal exposed the loopholes in the Indian banking system, Bombay Stock Exchange
(BSE) transaction system and SEBI further introduced new rules to cover those loopholes.

He was tried for 9 years, until he died in late 2001

SCAM DETAILS
Let's say we have three banks A, B and C. And a broker X. In addition, obviously, the
government.
Now the banks want to make as much profit as they can by using the money just the way they
want. And the government wants to regulate them by making it compulsory for them to invest
some of the money in Government bonds. So the government puts a simple rule that at the end
of every day, A,B and C have to show them a balance sheet and a minimum amount has to be
invested in bonds.

The banks do it for some time but they ask the government for some kind of relaxation. So a
new rule comes where you need to show the balance sheet only on Fridays. The average amount
per day in the bonds has to be over the fixed amount, however, there is no such limit on the
daily amount now.

Now X comes into the scenario. Since A would sell some bonds to invest elsewhere and B may
buy some bonds as well, the banks will now have different amounts of money invested in bonds
everyday and some will have less while some will have more. But all of them need to have that
minimum amount on Friday, so the banks with lesser amounts, i.e, A in this case, would need
to buy the bonds to keep up with the average.

So what does A do? It contacts X to get it some bonds from either B or C.

X is a trusted broker and all the banks know him pretty well. So X tells A that he'll get the
bonds but right now he isn't sure that from whom will the bonds come, B or C. So instead of
making the cheque on the bank's name, A should sign the cheque for X. (Which was illegal,
BTW).
So A does that. Now X goes to B and ask for the bonds and using the power of trust, X tells B
that he'll pay the money the next day to which B agrees because he also offered a good return
on the money. See, bonds are important, money may come later too.
Using this trick, X makes sure he always has some money with him.
Now comes part two. The money he had, he invested heavily in the stock market to create a
turmoil, specifically for a few companies like ACC. The market saw a huge run like never
before and share prices of ACC and some others went over the tops.
Once he knew the market was at a peak, he started profit making and markets crashed. The
bank people who were involved with him in the illegal acts panicked and one of them even
committed suicide.
The Satyam Computer Services, scandal was a corporate scandal affecting India-based
company Satyam Computer Services in 2009, in which chairman Ramalinga Raju confessed
that the company's accounts had been falsified
It is about corporate governance and fraudulent auditing practices allegedly in connivance with
auditors and chartered accountants. The company misrepresented its accounts both to its board,
stock exchanges, regulators, investors and all other stakeholders.

What: The scandal broke in 2009 when founder-chairman of Satyam Computers Ramalinga
Raju confessed that the company’s accounts were tampered with. He disclosed a Rs.7,000-
crore accounting fraud in the balance sheets.
Who: The 10 people found guilty in the case are: B. Ramalinga Raju; his brother and Satyam's
former managing Director B. Rama Raju; former chief financial officer Vadlamani Srinivas;
former PwC auditors Subramani Gopalakrishnan and T Srinivas; Raju's another brother B
Suryanarayana Raju; former employees G. Ramakrishna, D. Venkatpathi Raju and Ch
Srisailam; and Satyam's former internal chief auditor V.S. Prabhakar Gupta.
When: The timeline of the scam
January 7, 2009: Ramalinga Raju dropped a letter-bomb on unsuspecting investors, employees
and the government confessing to a Rs.7,136-crore fraud committed by him and his close circle
of relatives and employees at the company. Ramalinga Raju resigns.

 January 8, 2009: Citibank freezes Satyam's 30 accounts.

 January 9, 2009: Ramalinga Raju and his younger brother B. Rama Raju arreste. Central
govt disbands Satyam’s board, to appoint its own 10 directors.
 Jan 9, 2009: Satyam removed from Sensex, Nifty.
 Jan 10, 2009: Satyam’s former CFO Srinivas Vadlamani arrested. >Read more
 Jan 11, 2009: Government appoints Deepak Parekh, Kiran Karnik and C. Achuthan to
Satyam board.
 February 2009: CBI takes over investigation, goes on to file three chargesheets.
 Mar 6, 2009: Gets SEBI nod for bidding process to select investor.
 April 22, 2009: Tech Mahindra makes open offer to Satyam shareholders at Rs.
58/share, offer to close June 9.
 June 22, 2009: Mahindra unveils new brand identity for Satyam, Mahindra Satyam.
 2010: Raju says charges levelled by CBI are false.
 November 2, 2011: Supreme Court grants bail to Raju since CBI failed to file
chargesheet on time.
 October 28, 2013: Enforcement Directorate files a criminal complaint against 47
persons and 166 corporate entities headed by Ramalinga Raju.
 December 8, 2014: Ramalinga Raju and three others given six months jail term by
SFIO.
 December 23, 2014: Judge postpones verdict citing voluminous documents.
 March 9, 2015: Special court defers verdict till April 9.
 April 9, 2015: All 10 accused found guilty