The 1970's petroleum price hikes of 1973 and 1979 generated billions of surplus
dollars, fuelling major inflation and economic instability in the Western World
as the world's economy tried to cope with this massive change in terms of trade.
The terms of trade shifted from the West (mainly the US) to new centres of
economic growth, primarily the OPEC countries, but also Europe rebuilt after
WWII, Japan, South Korea and Latin America. OPEC producers deposited
their billions with Western (mainly US banks) and so much pressure was put on
the old, state-ordered financial system, that the system disappeared, with large,
multi-national commercial banks becoming the new powers - this glut of
petrodollars put major pressures on the international financial system that
changed it forever.
As banks and investors sought to "recycle" these surplus funds, interest rates
soared and government regulatory arms sought to control inflation by increasing
the controls on banks in the way they used their deposits. The high yield
derivatives market of the 1980's developed from the economic and financial
transformations that were taking place and the resulting instability, change and
uncertainty ofthe late 1970's and early 1980's.
The economic uncertainties were the result of the relentless pressures put upon
the Bretton Woods post-World War II economic and financial world, pressures
including rapid economic growth, fixed exchange rates, pegged commodity
prices and lack of wealth transfer in the face of major changes in the world and
economic power. At th~ same time, the balance of power had shifted
considerably towards the commodity producing countries, particularly the oil
producers in the light of the major oil price increases.
The traditional instruments held by institutions, namely plain vanilla bond and
equities of the 1950's and 1960's could not accommodate the rapidly changing
world of the 1970's and 1980's. The balance of economic and financial power at
the time was not only shifting towards the developing countries, particularly the
oil producers,and new emerging economies, in a macro sense. .
This was also taking place on the micro level as traditional government
institutions, such as central banks and traditional regulatory bodies, could not
cope quickly enough with these changes. This shifted power towards the multinational
financial institutions and the new financial players who were beginning
to emerge. These new players were fast acting, innovative and were able to
adapt to the rapid change and growth that the economy was experiencing.
The junk bond market that emerged filled a niche for new corporate financial
managers and altered the way in which they managed money. Portfolio
management as a whole took on new meaning in this new marketplace.
Insurance companies and pension funds alike began to adapt their game play to
take advantage of the new high yield derivatives markets.
