The corporate bond market bore the brunt of the price that was paid in getting inflation down to 4%. Macroeconomic industrial credit ratios as reflected in tax data, Compustat, or Standard & Poor's Industrial index indicated a 20-30% decline in credit ratios, but the lowest quartile of industries suffered a 52% decline. Their interest coverage declined a shocking 74%. The same oil-related, metals, commodities, and heavy equipment industries dominated this group that appeared in the underperforming stock group. There were also credit crises in the auto, electric utility, and farm industries. All told, the fifteen industries making up the lowest quartile of declining credits and the auto and electric utility industries accounted for 53% of publicly issued, nonfinancial corporate debt between 1970 and 1984.
Recovery from these crises was not a free-market result. Chrysler Corp. received a $1.5 billion federal loan guarantee on the condition of $2.5 billion in additional benefits from other governments, banks, suppliers, dealers, and unions, and the whole auto industry was aided by auto import quotas and reduced gas mileage and environmental requirements. The electric utility industry received almost $10 billion in indirect aid for nuclear power plant construction through the Rural Electrification Administration and substantial rate relief from state regulators. In the case of the Washington Public Power Supply System, where rate relief wasn't available, there was a record $2.25 billion bankruptcy. The farm industry's problems totally disrupted the Farm Credit Administration, which had to be reorganized and refinanced in 1985.
The junk bond market evolved in this period from its early arbitrage origins, when credit measures were sustainable and returns superior to treasuries and other corporate bonds into a merger-financing tool with credit ratios barely half of those previously. As we shall see in the next chapter, it and the changing circumstances in the oil industry were catalyzed into a fourfold expansion of the merger market by the Reagan administration's historic relaxation of the antitrust regulations.
Industry data for the above credit comparisons are drawn from industry aggregates in the Standard & Poor's 500 and Compustat, trade associations, and government reports. All of the data sources have inconsistencies and inconveniences, but these can be minimized by choosing carefully among sources. The Standard & Poor's data was the preferred