The Streets Were Paved with Gold (20 page)
Read The Streets Were Paved with Gold Online
Authors: Ken Auletta
The city’s defense (really Beame and Goldin’s) also pleaded that the staff report was unduly legalistic and narrow—ignoring not just the other actors but the larger social forces and responsibilities influencing public figures. Dripping with sarcasm, the city’s brief states:
From a reading of the Staff Report one would believe that the City operated in a social, economic and political vacuum. One would assume that its social welfare programs and the means for financing them were enacted by its own City Council; that it was unaffected by the national inflation, recession, tight monetary policy and oil embargo; that it was divorced from the federal and state governments and existed as a politically autonomous entity, with inherent powers of taxation. Indeed, one would conclude that the City was subject to no national or state policy and was governed by no national or state law, with one exception—the federal securities laws. It is perhaps understandable that a specialized agency would take such a parochial view of the laws it administers.…
Their earlier brief made the point a different way: “To the extent that this investigation has been directed to the City and its officials, it is not truly a securities investigation. It is an inquiry into the political, social and economic forces which have shaped the City of New York. It is an inquiry into the nature and operations of the governmental process. As such, it is beyond the competence and authority of the SEC.…”
“Hell, five years ago all the so-called ‘budgetary gimmicks’ were being called genius,” Lindsay’s former chief of staff, Jay Kriegel, told writer Harry Stein. “It wasn’t Lindsay, it was the times.” And the times were optimistic. John Kennedy kicked off the decade of the sixties promising to “get this country moving again.” Lyndon
Johnson’s first State of the Union message, in 1964, announced “a national war on poverty. Our objective: total victory.” Vietnam was to preserve the world for democracy. When John Lindsay captured the mayoralty in 1965,
Newsweek
’s cover story rhapsodized that his campaign was “the most important political operation in America today.…”
In addition to optimism, the sixties featured social upheaval. A new wave of immigrants—from Puerto Rico and the South—came to New York seeking opportunity. The anti-poverty effort spawned new community-based organizations. There were civil rights, welfare rights, and antiwar demonstrations. There were near-riots in New York streets, and city officials lived in constant dread of racial polarization and even warfare. The peaceable techniques of the civil rights movement were adopted by community groups demanding greater government services. Thus, the city’s brief argued, “Mayors, Comptrollers, City Councilmen, Governors, and State Legislators were constantly called upon to make what was in essence the same choice—whether to provide services or exercise draconian fiscal restraint.”
It would not have been easy to cut city spending. When cuts were proposed in the projected 1972 budget, City Council Finance Chairman Mario Merola, reflecting the consensus of the time, said, “I don’t believe that the City of New York could close hospitals, libraries or schools.…” Mayor Lindsay used to prepare annual scare scenarios, outlining the cuts and “payless furloughs” that would be necessary if no new aid or taxes were granted. They were usually not taken seriously—probably even by the Mayor himself—as they were not taken seriously when Beame repeated them in 1974 and 1975.
The SEC staff’s parochial concerns, in the city’s view, led them to confuse political rhetoric with a bond prospectus. The staff report charges, for instance, that Beame and Goldin’s press releases and public statements “did not provide investors with accurate and balanced information as to the City’s finances and its securities.” In their defense, city leaders replied that in the critical months before the shutoff of credit, these reassurances were
no different from President Roosevelt’s assurances, during the depths of the Depression in 1933, that “the only thing we have to fear is fear itself.” Under the standards by which the staff seeks to judge the City this statement would be deemed to be misleading and an “unwarranted
reassurance.” Was President Roosevelt faulted for seeking to reassure the nation? The answer, of course, is no—he was praised for his leadership. A President—or a Mayor—in making a speech to his constituency has far greater leadership obligations than does a corporate officer discussing a corporate balance sheet. The responsibility of an elected official to his electorate does not include a prerogative to engender fear or panic when he does not believe that the cause for fear or panic exists.
There was also a difference between the SEC and the city as to what constitutes disclosure. The SEC said the city failed to disclose
all
the material facts, including “gimmicks” used to balance the budget. Yet Beame’s testimony before the SEC reminded them that government operates in “a fishbowl,” and as his legal brief stated, “One cannot find any material facts about the city’s fiscal condition which were not fully disclosed.” As proof, the city submitted a “Disclosure Appendix,” consisting of sixteen volumes containing 2,000 separate documents—speeches, press releases, newspaper and magazine accounts—published between December 1973 and April 1975. The SEC chastised the city for omitting negative information from their bond prospectus. The city chastised the SEC for ignoring negative reports in the press. The SEC said investors were not warned. The city responded: “It is difficult to conceive how the staff of a financially sophisticated agency can look at the difference between an interest rate of 3.73% on a State BAN, and an interest rate on a City BAN at about the same time of 8.1–8.75%, and conclude that the market and investors were not aware of the City’s financial plight.” (A BAN, incidentally, is a bond anticipation note. That the city was permitted to borrow so excessively against borrowing—like a compulsive gambler borrowing in anticipation of a loan-shark loan—tells something about its finances.)
A similar perceptual chasm separated the SEC staff and Comptroller Goldin. The SEC charged that the Comptroller, like the Mayor, “misled public investors.” Yet Goldin—after waiting two days to let the dust from the SEC charges settle (and candidate Beame take all the heat)—summoned the press to his office in the Municipal Building to release 448 pages of his SEC testimony and a collection of press releases, newspaper reports and other items. “On more than 50 major occasions,” he declared, “in increasingly grave and urgent language, I warned the public about the city’s worsening fiscal condition and budget practices. To say I did not
disclose the city’s fiscal condition is like saying Ralph Nader did not warn consumers about unsafe cars because people continued to get killed in auto crashes, or Gen. Billy Mitchell did not warn the Navy about air power.”
And, finally, city officials didn’t understand why the SEC berated them for failing to heed the admonitions of bankers that the credit market would close. To city officers, such warnings were not new. On March 23, 1975, as the crisis was nearing a climax, Beame told the public, “You have to realize that I’ve been dealing with some of these bankers for a long time, since I was Comptroller.” He told the press he was calm, despite harsh criticism and growing bankruptcy threats. As the SEC notes, the banks were demanding that Beame impose new austerity measures. But Beame was demanding that the banks and other underwriters do what they had always done: support the city. Beame, like most city officials, saw the banks as salesmen, not policemen. “I think the banks have to exercise the responsibility to let the public know that New York securities are good investments, to restore confidence in their investors,” he said then. Also, like many others, Beame assumed that the underwriters and “the market” were one and the same—a handful of individuals who talked to each other and treated David Rockefeller as if he were the Pope.
Besides, people hear what they want to hear, not always deliberately. Through March 1975, for instance, the Mayor and Comptroller met regularly with top bankers who served on the Financial Liaison Committee and with their staffs, who composed what was called the Working Group. “In a sense,” retorted the city’s brief, “the fact that these meetings were even taking place can be said to evidence the shared feeling of the City and the financial community that the securities markets had not yet closed to the City. This was certainly the City’s view.” City officials were also not unmindful of 1974, when similar warnings were issued that the UDC was about to default. But the banks, to help their friend Nelson Rockefeller and his candidate for governor, Malcolm Wilson, extended the due dates on their loans until after the election.
The financial community’s defense against the SEC staff report charges is remarkably similar to the city’s. Regarding the first charge—failure to disclose—they, too, responded that the SEC was guilty of nitpicking legalisms, ignoring the larger reality of what was going on at the time; that is, how they were trying to keep the city afloat, tiying to avoid panic. How could they have secret, inside
information not shared with investors, they ask, when the danger signals were “generally known”?
“The SEC staff offers the explanation that naive investors were deliberately misled by unscrupulous underwriters,” said Walter B. Wriston, chairman of Citicorp, ridiculing the SEC report:
As proof, they submit a survey of individual investors, 90 percent of whom now deny that they had any awareness of potential risk when they bought City notes. I suppose, in theory, it is possible to imagine a person at that time who had at least $10,000 to invest, who never read a newspaper, who never saw a fiscal crisis headline, who never heard a high-decibel debate on radio or television, and who invested without the least inkling that there might be a worm in the apple. It is possible to imagine
one.
Two is extremely doubtful. And 90 percent is ridiculous on the face of it.
There is a more believable explanation. New York City had a credibility problem in reverse. Rather than too
little
investment credibility, it had too
much.
Wriston’s testimony, which was given to the State Assembly Committee on Banking in October 1977, went on to note that these were anticipation notes and city officials were offering assurance they would be paid promptly. Who could believe that a city of 8 million people—the Big Apple—couldn’t come up with the funds?
In his book
A Time for Truth
, former Treasury Secretary William Simon has a chapter on New York in which, for half a page, he stops pointing his finger at others and elaborates on his own role:
No one—whether the New York politicians or the unions or the most prominent bankers of New York or the New York press—has ever given a coherent explanation of why a collapse that had been building for a decade had not been anticipated. I cannot point the finger in this respect, for I hadn’t expected it either. It was particularly ironic in my case, for in the late sixties and early seventies, when I worked at Salomon Brothers, I had been a member of the Technical Debt Advisory Committee set up by Abraham Beame when he was Comptroller of New York. We supplied the city market advice on its financial transactions, but at no point during any of these sessions did any one of us seriously question the underlying fiscal condition of New York. We all worked with the numbers given us by the city itself, just as do the advisory committees to the federal government. It never occurred
to us to disbelieve those figures, which always indicated that New York would be able to repay its debt.
Twenty-seven pages later he accused the banks of “cowardice” for not standing up to the city.
“Even with the benefit of hindsight, it is difficult to see what more the underwriters could have done,” claimed Wriston, the city’s foremost banker. They had no authority to compel city officials to disclose new information, nor, he declared, in the crisis-wrenched atmosphere, was there time to prepare such a prospectus. “To state it flatly,” he said, “there were more urgent problems to solve at the time. When the house is on fire, you don’t sit on the curb drafting new safety regulations.” A vice president of Wriston’s bank put it another way: “We were cowards.” Rather than risk the political heat and blame for a city default—vituperative charges, vengeful legislation, Congressional investigations—the banking community played ball.
The banks’ defense against the charge of dumping revolves around facts as well as perceptions. Again, the SEC is accused of molelike vision, of failing to consider the larger picture of what was happening to the banking world during the time of the city’s travail. This larger picture was sketched by the city in their November 1976 brief to the SEC. Offering a defense of their own actions, the city also, perhaps inadvertently, offered a defense of the banks:
The problem for the City in this period of increasing capital scarcity, was compounded by the growing inability of its principal supplier of credit—the banking community—to purchase its securities. This difficulty was not necessarily related to any particular City problem. Rather, it reflected difficulties which the banks themselves were having—difficulties largely the product of a serious depletion of their available capital caused, among other things, by losses in Real Estate Investment Trusts (REITs), major bankruptcies (such as W. T. Grant) and foreign loans. And at the same time as their capital base was shrinking, banks began to view alternative tax shelters as more beneficial to them than municipal investments.
Such tax shelters as the leasing of equipment and foreign loans were competing with municipal securities. According to the Comptroller of the Currency’s figures, 259 banks leased $412 million worth of equipment in 1967. By 1975, 691 banks invested $3 billion in such equipment. Not only was the leasing of this equipment
tax-free, but the banks could deduct the depreciation of this asset against their ordinary income. A similiar boom took place in foreign loans. According to the Federal Reserve Board, between 1965 and 1976 the number of American bank branches overseas exploded from 13 to 126; their assets, from $8.9 billion to $229 billion.