441. The Man Who Saved New York

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             The Man Who Saved New York

New York City Bankrupt?

It was 1975, not a good year for the city of New York.  Streets and bridges lacked basic maintenance, Central Park was littered with trash, its benches unrepaired, its plants untended.  Everything about the city looked shabby, dirty, neglected, and crime was high.  As a result, families were abandoning the city for the suburbs, shrinking a tax base just when more tax revenue was desperately needed.  Then, to make matters worse, citizens were startled by a shocking bit of news: New York City was on the verge of bankruptcy.  Not operating at a loss, as it had for years, but on the verge of real, actual, no-other-word-for-it bankruptcy.  Its bonds had fallen in price to unprecedented lows, sending the interest rates soaring.  But even at such bargain prices, who would risk buying them, if the city might default?  The banks, tired of 
making loans to a city that always needed more loans, had denied further credit. 

         “Who’s been minding the store?” citizens asked, their eyes flashing bewilderment and anger.  The answer: a long string of mayors who, to avoid the unpleasantness of proposing new taxes to voters, had come up with this or that stratagem, kicking the financial can down the street.  For what official, with an election approaching, wants to tell voters that higher taxes and fewer services are desperately required? 

         It even got personal.  When I visited a friend in Washington, and the New York crisis came up in conversation, he launched into a testy diatribe, beginning with “You New Yorkers” – an appellation that I always resented, since I didn’t go around saying “You Washingtonians” or “You  Inside-the-Beltway People.”  He then informed me, “New York is done, finished, played out!  Financially a ruin.  It will never recover.  A hick town from now on.  Kaput!”  This too I resented, but could in no way refute.  His assertions  seemed to be reinforced by the headlines every day.  

         A great debate raged: should the city be allowed to go bankrupt, or not?  Some, including the president, thought that the bankruptcy would and should be no one else’s concern, since the city’s failure would not affect the wider economy; in short, it was New York’s baby to tend to, and no one else’s.  But others insisted that New York’s bankruptcy would have a devastating affect on the U.S. economy and global financial markets, therefore the city must be rescued.  Being a financial ignoramus, I didn’t know who was right, and didn’t want to let personal bias – my love of New York – sway me.  So to my Washington friend and others I proposed, “Since we don’t know how a bankruptcy will affect the nation, the only way  to find out is to let it happen.  So let the city go bankrupt, and we'll see.”  Not the most enlightened solution, but a challenge to those opposing it.  Meanwhile, a savvy employee at my local bank was telling clients in no uncertain terms, “Buy New York City bonds!  This is the chance of a lifetime.  You’ll never see these interest rates again.  New York is not going to declare bankruptcy.  They won’t let it!”

         (In this controversy one sees, playing out yet again, the perennial conflict between upstate and downstate, New York City and Albany.  I have discussed it in post #18, “Upstate vs. Downstate: The Great Dichotomy,” which became chapter 21 in my award-winning nonfiction title No Place for Normal: New York / Stories from the Most Exciting City in the World.)

Fekix Rohatyn to the Rescue

         So how did it all turn out, and why bring up now this painful chapter of the city’s distant past?  I bring it up because the man who saved the city – yes, it was finally saved – was Felix G. Rohatyn, and he died on December 14, age 91 (my age --  hmm), at his home in Manhattan.  That his obit in the New York Times begins on the first page of the front (current news) section of the hefty Sunday Times (very rare), and continues inside for a full page and a half, indicates his significance.  So who, younger people may ask, was Felix G. Rohatyn?  A hero to some, a villain to others, but he saved the city from bankruptcy.

[This is where you'd expect a photo of Rohatyn, wouldn't you?  Sorry, there ain't one.  Not without paying a fee.  Odd, since he was such a public figure, and photos taken by  government photographers in the course of their duty are in the public domain.]

         In 1975 Rohatyn was a well-connected and highly respected partner of the Wall Street investment firm Lazard Frères.  A financial wizard, he was often consulted by influential businessmen and politicians.  “Felix the Fixer,” they called him, not always as a compliment.  He was a deal maker, a mastermind of mergers and acquisitions.  Then, in late May of 1975, he was summoned to the Midtown offices of Governor Hugh L. Carey and informed that the city was about to default on almost $3 billion in loans: $900 million due in June, $1 billion due in July, and another $1 billion in August.  For these men of power, default was out of the question, and they convinced the president.  Rohatyn was appointed to an advisory panel that quickly proposed the creation of a Municipal Assistance Corporation (MAC) that would oversee the city’s taxes and spending, a creature of the state that would be independent of the city, with Rohatyn as chairman. 

         Mayor Beame protested, local politicians fumed, and the city unions screamed, but the governor signed the bill and MAC became the city’s vigilant overseer, and would remained so until 1993.  Through financial legerdemain such as only he could orchestrate, Rohatyn got the city through its August obligations, but even that wasn’t enough; investors still didn’t trust the city, wouldn’t buy the bonds that MAC issued.  So Albany set up the Emergency Financial Control Board with Rohatyn in charge, to manage the city’s finances.

         In September, Governor Carey and his staff met with President Gerald Ford and his advisers in the Cabinet Room in the West Wing of the White House to discuss the financial crisis in New York: a good indication that more than the city was involved.

The governor and his people on the left, and the president and
his people on the right.  Rohatyn in the middle on the left.
Hopefully, the coffee and snacks helped them reach a decision.

Suddenly, a hitch:  the president threatened to veto the federal loan guarantees proposed by Rohatyn.

This was reported memorably by the Daily News of October 29, 1975:

  

                                                FORD TO CITY:

                                                   DROP DEAD

The president was still convinced that a city bankruptcy would be temporary and tolerable.  He changed his mind only when Arthur F. Burns, chairman of the Federal Reserve, returned from a meeting with European leaders to report that his threatened veto would roil global financial markets.  So the president backed down and Rohatyn's plan went through.

The Price That New York Paid

         The city was saved, but at a cost: it had surrendered control of its finances to the state.  Was Rohatyn a hero or a villain?  As an unelected official, he now had unprecedented control over the city’s finances.  To judge by photos, he was a sober, stern-faced man.  “I get called in when something is broken,” he explained in an interview.  “I’m supposed to operate, fix it up, and leave as little blood on the floor as possible.”  What made his intervention successful was his skill in negotiating, backed up by his access to power, his management of public opinion, and his adept use of words as well as numbers.  He extracted agreements from bankers and union leaders alike.  The result: police layoffs, higher taxes and transit fares, tuition fees for the City University of New York, and subjection to the solons of Albany.  Editorialists editorialized, politicians raged, and mayor after mayor complained of the time they had to spend in Albany, begging favors from the state.  But the city, at a price, was saved.  Only Felix Rohatyn could have pulled it off.  No saint, but a hero, not a villain, and that’s how he should be remembered.

         In time, the hardy souls who bought MAC bonds at depressed prices reaped a rich reward.  As well they might.  Think twice and three times before consigning to the financial trash heap the city of New York.  If it has the chutzpah to use it, the city has one resource always available: the power to tax, and millions of citizens obliged to pay.  (Unless, of course, they have the wealth and wits to hire a good accountant or financial adviser.)  But at times the city needs a Felix Rohatyn to plead, wheedle, and browbeat it into action.  And the city too, thanks to him, benefited.  MAC came to reap substantial surpluses, and Rohatyn channeled these funds into schools, transit, low- and middle-income housing, and the hiring of more police to deal with the crack epidemic of those years.

Felix Rohatyn: From Refugee to Wall Street

Rohatyn's career was spectacular.  Here are some facts about it.

·      He was born in Vienna in 1928, the only son of a Jewish brewer, his mother the daughter of a prosperous banker.

·      Hitler’s coming to power in Germany in 1933 prompted the family to move to France in 1934.

·      In 1942, after France’s defeat, German occupation, and the installation of the collaborating Vichy regime, Rohatyn’s mother, now divorced and remarried, fled Europe, taking few possessions with her.  She had her son carry gold coins stuffed in toothpaste tubes.

·      Resettled in Manhattan, Rohatyn learned English and majored in physics in college.

·      After time in the U.S. Army, he joined Lazard Frères on Wall Street and was with them for forty years.

·      Having met her by chance while returning from a trip to Europe, he tutored Edith Piaf in English in the Park Avenue apartment that she shared with other nightclub singers.

·      By the mid-1970s he felt nostalgia for the world of gentlemen’s agreements that he had known, which was then giving way to hostile takeovers, corporate raiders, and high-risk trading, operations that enrich only a lucky few.

Source note: This post is indebted to Sewell Chan’s obit of Rohatyn in the  New York Times of Sunday, December 15, 2019.

Coming soon: The King of Harlem.

©   2019   Clifford Browder