Summary: Pursuant to a legislative requirement, GAO discussed the high-yield bond market, focusing on: (1) federally insured thrifts' investments in high-yield bonds; (2) state and federal regulation of such investments; and (3) the relationship of high-yield bonds to federal monetary policy.
GAO found that: (1) the Federal Home Loan Bank Board (FHLBB) and thrift institutions lacked comparative data on high-yield bond investments, but a 3-year study by an economic forecasting firm showed that high-yield bonds had a high risk of default compared with other credit assets; (2) other studies also showed that high-yield bonds provided investors high net returns which outweighed the default losses; (3) in 1985, high-yield bond investments were a factor in one thrift institution's failure, but generally unsafe lending and investment practices caused the failure; (4) 11 thrift institutions reported a 2-percent default rate, resulting in over $9 billion in losses from high-yield bond investments, with expected actual losses totalling about $73 million; (5) economic experts believed that a severe economic downturn could impact default rates for high-yield bonds; and (6) FHLBB issued guidelines to protect thrift institutions investing in high-yield bonds from incurring unnecessary or unreasonable risks.
