thedrifter
01-04-07, 08:17 AM
Ford to City: OK
How the 38th president saved New York.
BY FELIX G. ROHATYN
Thursday, January 4, 2007 12:01 a.m. EST
NEW YORK--The year 1975 was a difficult one for the city. A new mayor, Abe Beame, and a new governor, Hugh Carey, were elected as the economy was faltering due to a recession, an Arab oil boycott, the war in Vietnam and inflation. At the national level, Watergate and the Nixon resignation suddenly elevated Gerald Ford to the presidency.
But a crisis had been building up here for some time. The city's financial condition was deeply concerning, running a significant deficit as a result of an exodus of private sector jobs and an influx of new municipal employees. Politically New York was always a Democratic city, a union city, with a strong Republican business community and little contact between the two. Morale was bad, the city was dirty, crime was up and the economy was weak.
In April, New York and its lead underwriter, the Bankers Trust Co., was preparing its spring financing when I took a call from a broker offering to sell short-term city notes. "It is a bargain," he said, "9.5% interest, triple tax free, backed by the city's credit. How can you say no?" The terms reflected desperation more than a bargain. Sure enough, soon thereafter, Bankers Trust refused to proceed with the offering to underwrite the city's financing on the grounds that there was "insufficient assurance of repayment." Almost without anyone noticing, the markets had closed on New York.
Year after year, and with the support of the state, the city spent more than it took in. It had the choice of raising taxes, cutting spending or borrowing. Naturally the politicians chose to borrow and, in addition, characterized tens of millions of expenses as capital investments. The result was to constantly reduce the city's ability to make capital improvements while, simultaneously, increasing the debt by $1 billion annually. While the mayor had just agreed to a major pay increase for the municipal work force, no one really knew the level of the city's deficit.
By the beginning of May we had little over a month to avoid a default--the next debt maturity of $1 billion would occur on June 18. At that point, Gov. Carey, brilliant and courageous, stepped into the picture. Since the state did not have the wherewithal to bail out the city, he and Mayor Beame turned to Washington and to President Ford for an emergency loan. Ford was a man of decency and common sense. He was also in the middle of the presidential campaign of 1976, which pushed him further to the right. His most important advisers and cabinet members were ideological conservatives, led by Treasury Secretary Bill Simon. New York was viewed as the liberal capital of the U.S. and any thought of "bailing out" the city unleashed strong opposition in Congress. Secretary Simon rejected our request and suggested we return with a plan. His idea of a plan included large increases in sales taxes and transit fares, tuition at City University and significant cutback in labor costs and benefits, conditions no Democratic governor could accept.
Gov. Carey appointed a bipartisan committee of business leaders to review the impact of a New York bankruptcy. The committee unanimously recommended against it because of its unfathomable risks and we turned to a structure which became the Municipal Assistance Corp. The MAC was a financing mechanism, which could sell its own bonds backed by the New York sales tax and which might give the city time to bring its budget into balance. The banks and labor leadership joined in the recommendation and on June 18 the state legislature voted to create MAC. Gov. Carey immediately christened it "Big MAC" and the underwriters began selling its bonds.
Unfortunately, Mayor Beame, who had obtained significant concessions from labor in our prior negotiations, gave them all back as soon as MAC was established; the result was a collapse in the price of MAC bonds, a market loss of $100 million after the public offering and a closing of the public market for MAC bonds, as well as for city bonds. By now we knew we had to take authority for the city's finances away from the mayor if we had any hope of avoiding bankruptcy. We could only rely on the governor and, ultimately, we knew we would need federal assistance.
We created the Emergency Financial Control Board, chaired by the governor, to control the budget. With the EFCB in control of the budget and the MAC in control of the financing, the state effectively controlled the city. The unions went along even though they were kept outside these structures because they knew this was the city's only chance. They committed to investing part of their pension funds in MAC bonds while the banks extended their existing loans.
During the summer we floated a few bond issues but we knew we only had limited capabilities and that we would run out of capacity before Christmas. By the beginning of November things looked bleaker and bleaker.
In Washington we testified in front of congressional committees, facing the opposition of the president, although that opposition seemed to soften somewhat due to the weakness of the securities and the foreign exchange markets facing a New York bankruptcy. And then, on Oct. 29, Ford gave his famous "drop dead" speech. He never spoke those words; but he indicated that he would veto any legislation proposing a financial bailout--and the meaning was quite similar. The Daily News engraved them in stone.
At the first Western Economic Summit in France, with Ford in attendance, Fed Chairman Arthur Burns asked French President Valery Giscard d'Estaing and German Chancellor Helmut Schmidt their opinion of the potential economic impact of a New York bankruptcy. They were direct in their answer: "It would be a catastrophe. It would cause a global dollar crisis."
Ford deserves great credit for his willingness to change his mind. On his return to Washington, he signed legislation providing credit to the city; this unlocked other pieces of the package: from the banks, the pension funds and insurance companies. It saved New York but it did not save his presidency. Jimmy Carter was elected in 1976.
In 1980 the city balanced its budget; in 1981 it re-entered the securities markets and repaid the government guarantees. Since those dark days the city's recovery was uninterrupted, except for 9/11. New York's present economic boom is ample proof that those who opposed bankruptcy were right, and that in a crisis, bipartisanship and business-labor cooperation will go a long way. One of Ford's greatest achievements may have been that he knew when he had pushed New York City to the limit and that, contrary to some of his colleagues, he also knew when to stop.
Ellie
How the 38th president saved New York.
BY FELIX G. ROHATYN
Thursday, January 4, 2007 12:01 a.m. EST
NEW YORK--The year 1975 was a difficult one for the city. A new mayor, Abe Beame, and a new governor, Hugh Carey, were elected as the economy was faltering due to a recession, an Arab oil boycott, the war in Vietnam and inflation. At the national level, Watergate and the Nixon resignation suddenly elevated Gerald Ford to the presidency.
But a crisis had been building up here for some time. The city's financial condition was deeply concerning, running a significant deficit as a result of an exodus of private sector jobs and an influx of new municipal employees. Politically New York was always a Democratic city, a union city, with a strong Republican business community and little contact between the two. Morale was bad, the city was dirty, crime was up and the economy was weak.
In April, New York and its lead underwriter, the Bankers Trust Co., was preparing its spring financing when I took a call from a broker offering to sell short-term city notes. "It is a bargain," he said, "9.5% interest, triple tax free, backed by the city's credit. How can you say no?" The terms reflected desperation more than a bargain. Sure enough, soon thereafter, Bankers Trust refused to proceed with the offering to underwrite the city's financing on the grounds that there was "insufficient assurance of repayment." Almost without anyone noticing, the markets had closed on New York.
Year after year, and with the support of the state, the city spent more than it took in. It had the choice of raising taxes, cutting spending or borrowing. Naturally the politicians chose to borrow and, in addition, characterized tens of millions of expenses as capital investments. The result was to constantly reduce the city's ability to make capital improvements while, simultaneously, increasing the debt by $1 billion annually. While the mayor had just agreed to a major pay increase for the municipal work force, no one really knew the level of the city's deficit.
By the beginning of May we had little over a month to avoid a default--the next debt maturity of $1 billion would occur on June 18. At that point, Gov. Carey, brilliant and courageous, stepped into the picture. Since the state did not have the wherewithal to bail out the city, he and Mayor Beame turned to Washington and to President Ford for an emergency loan. Ford was a man of decency and common sense. He was also in the middle of the presidential campaign of 1976, which pushed him further to the right. His most important advisers and cabinet members were ideological conservatives, led by Treasury Secretary Bill Simon. New York was viewed as the liberal capital of the U.S. and any thought of "bailing out" the city unleashed strong opposition in Congress. Secretary Simon rejected our request and suggested we return with a plan. His idea of a plan included large increases in sales taxes and transit fares, tuition at City University and significant cutback in labor costs and benefits, conditions no Democratic governor could accept.
Gov. Carey appointed a bipartisan committee of business leaders to review the impact of a New York bankruptcy. The committee unanimously recommended against it because of its unfathomable risks and we turned to a structure which became the Municipal Assistance Corp. The MAC was a financing mechanism, which could sell its own bonds backed by the New York sales tax and which might give the city time to bring its budget into balance. The banks and labor leadership joined in the recommendation and on June 18 the state legislature voted to create MAC. Gov. Carey immediately christened it "Big MAC" and the underwriters began selling its bonds.
Unfortunately, Mayor Beame, who had obtained significant concessions from labor in our prior negotiations, gave them all back as soon as MAC was established; the result was a collapse in the price of MAC bonds, a market loss of $100 million after the public offering and a closing of the public market for MAC bonds, as well as for city bonds. By now we knew we had to take authority for the city's finances away from the mayor if we had any hope of avoiding bankruptcy. We could only rely on the governor and, ultimately, we knew we would need federal assistance.
We created the Emergency Financial Control Board, chaired by the governor, to control the budget. With the EFCB in control of the budget and the MAC in control of the financing, the state effectively controlled the city. The unions went along even though they were kept outside these structures because they knew this was the city's only chance. They committed to investing part of their pension funds in MAC bonds while the banks extended their existing loans.
During the summer we floated a few bond issues but we knew we only had limited capabilities and that we would run out of capacity before Christmas. By the beginning of November things looked bleaker and bleaker.
In Washington we testified in front of congressional committees, facing the opposition of the president, although that opposition seemed to soften somewhat due to the weakness of the securities and the foreign exchange markets facing a New York bankruptcy. And then, on Oct. 29, Ford gave his famous "drop dead" speech. He never spoke those words; but he indicated that he would veto any legislation proposing a financial bailout--and the meaning was quite similar. The Daily News engraved them in stone.
At the first Western Economic Summit in France, with Ford in attendance, Fed Chairman Arthur Burns asked French President Valery Giscard d'Estaing and German Chancellor Helmut Schmidt their opinion of the potential economic impact of a New York bankruptcy. They were direct in their answer: "It would be a catastrophe. It would cause a global dollar crisis."
Ford deserves great credit for his willingness to change his mind. On his return to Washington, he signed legislation providing credit to the city; this unlocked other pieces of the package: from the banks, the pension funds and insurance companies. It saved New York but it did not save his presidency. Jimmy Carter was elected in 1976.
In 1980 the city balanced its budget; in 1981 it re-entered the securities markets and repaid the government guarantees. Since those dark days the city's recovery was uninterrupted, except for 9/11. New York's present economic boom is ample proof that those who opposed bankruptcy were right, and that in a crisis, bipartisanship and business-labor cooperation will go a long way. One of Ford's greatest achievements may have been that he knew when he had pushed New York City to the limit and that, contrary to some of his colleagues, he also knew when to stop.
Ellie