In the first three parts of this series, we covered Michael Milken building the high-yield bond market, Ross Johnson triggering the RJR Nabisco bidding war, and KKR winning the biggest LBO in history. But there is a missing piece to the puzzle: where did all the money come from?

The answer leads us to Fred Carr, a largely forgotten figure who may be the most important person in 1980s finance that almost nobody has heard of. A scrappy outsider from Watts, Los Angeles, he first rose to fame as the hottest mutual fund manager in America during the go-go years of the late 1960s before flaming out spectacularly with the Enterprise Fund.

His second act was even bigger. In 1974, Carr took over a near-bankrupt life insurance holding company called First Executive Corporation and transformed it into a powerhouse. He pioneered single premium insurance products that offered higher yields than competitors, built a revolutionary sales incentive model, and earned top-tier safety ratings that unlocked massive institutional capital flows from pension plans and municipalities.

First Executive became the largest buyer of high-yield bonds in America, participating in 90% of all Drexel underwritings between 1982 and 1987. But when the junk bond market collapsed, the same concentration that fueled Carr’s rise became his undoing.

Along the way, we explore how insurance companies work, why the end of the Great Inflation broke every financial business model in America, how regulatory gaps allowed risk to build invisibly, and why the California aftermath of First Executive’s collapse became very relevant to one of the biggest financial institutions in modern finance.

Chapters

(01:36) Set up to sources of capital for the junk bond boom

(07:11) Fred Carr’s origin story: from Watts to Wall Street outsider

(12:16) The go-go years and the Enterprise Fund’s meteoric rise and fall

(19:30) First Executive: taking over a near-bankrupt insurer and starting over

(23:23) The Great Inflation breaks insurance: why old business models stopped working

(27:22) The Milken-Carr flywheel: high-yield bonds meet single premium insurance products

(39:03) First Executive becomes a junk bond giant: growth, ratings, and warning signs

(48:56) The collapse: Drexel’s bankruptcy and its consequences for the junk bond market

(1:03:15) Seizure, conservatorship, and the wild aftermath with Apollo and Credit Lyonnais

References

The Fall of First Executive: The House That Fred Carr Built by Gary Schulte

Perceptions and the politics of finance: Junk bonds and the regulatory seizure of First Capital Life, Journal of Financial Economics, 1995 (link)

Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken by Robert Sobel (link)

Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn how EQT is unlocking energy to power AI, go to PoweredByEQT.com.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

We pick up where we left off in Part 2. Ross Johnson, CEO of RJR Nabisco, presents a management buyout bid for $75-per-share—a number he’s certain will get the deal done without competition.

Instead, as soon as the board issues the customary press release announcing the buyout bid, RJR Nabisco is in play as the most prized buyout target on Wall Street.

Ross Johnson alienates not one, but two major players on Wall Street: Henry Kravis from buyout specialist firm KKR and Jeff “Mad Dog” Beck from junk bond specialist Drexel Burnham Lambert. It turns out $75-per-share is far from a winning bid.

What follows is the most dramatic LBO fight in history: bear hugs and tender offers, bank exclusivity plays, bidders posturing and bluffing, interlopers wanting to plant their flag in the LBO game, and directors getting ambushed in the hallways by bankers hunting for an edge.

Chapters

(01:04) Recap: Ross’s $75 management bid frames as an “inside raid”

(03:30) The board meeting and the press release that put RJR in play

(06:31) Kravis takes it personally: why KKR has to enter the fight

(07:54) Meet Drexel’s “Mad Dog” Jeff Beck (and why he matters)

(14:33) The stock becomes a battlefield: arbitrage, piling in, and momentum

(17:11) KKR goes on offense: the $90 tender offer and the greed narrative

(25:30) The auction gets hot: new bidders, higher prices, and board pressure

(42:28) The final vote—structure, certainty, and the aftermath of the deal

(45:54) Lessons learned

References

Barbarians at the Gate: The Inside Story of America’s Most Notorious Corporate Takeover by Bryan Burrough, John Helyar (link)

RJR Nabisco: A Case Study of a Complex Leveraged Buyout, Financial Analysts Journal, 1991 (link)

Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)

Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken by Robert Sobel (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn how EQT is unlocking energy to power AI, go to PoweredByEQT.com.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

In 1987, America is riding one of the greatest bull markets in history—until it all comes to an abrupt end on Black Monday, October 19th 1987. Portfolio insurance, a fragile strategy built on unrealistic market assumptions, helps turn a selloff into the single worst day in stock market history.

Ross Johnson, the CEO of RJR Nabisco, watches as his stock price gets cut in half in a day… even though the business and the economy are fine.

Over the next year, he tries everything from asset sales to share buybacks to convince the market there’s a lot more value at RJR Nabisco than they’re giving him credit for. Nothing works.

Meanwhile, leveraged buyouts are hot on Wall Street but that’s the one solution Ross Johnson isn’t willing to try. He’s a brilliant political operator who can manage board members, who loves perks, and hates constraints. But above all, he can’t stand that the market keeps pricing RJR Nabisco like a doomed tobacco company. That frustration overcomes his aversion to LBOs, and he makes his move on October 19th, 1988—exactly one year after Black Monday.

Chapters

(00:43) Welcome + recap: from junk bonds to the LBO era

(03:35) 1987 at the top: bull market euphoria, Berlin Wall optimism, Fed hikes

(05:24) Portfolio insurance: Black-Scholes in the wild and the “mechanical” selling logic

(09:58) Black Monday: the crash day and why it shocked everyone

(11:35) RJR’s stock collapse: the bargain that changes the story

(11:45) Meet Ross Johnson: perks, power, and the 80s CEO archetype

(28:17) LBOs 101: the mortgage analogy + why leverage can create value

(31:54) ERISA & pensions: Prudent Man Rule clarification unleashes institutional capital

(41:22) KKR’s rise: Henry Kravis, fund economics, and the LBO machine

(52:03) Ross’s playbook: buybacks, tobacco overhang, and the $75/share MBO spark

References

Barbarians at the Gate: The Inside Story of America’s Most Notorious Corporate Takeover by Bryan Burrough, John Helyar (link)

RJR Nabisco: A Case Study of a Complex Leveraged Buyout, Financial Analysts Journal, 1991 (link)

Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)

Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken by Robert Sobel (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn how EQT is unlocking energy to power AI, go to PoweredByEQT.com.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.