The Streets Were Paved with Gold (21 page)

In 1972, commercial banks were purchasing half of all municipal securities in the U.S. But, according to a study by Lynn E. Browne and Richard F. Syron, in 1974–75 these purchases plunged 70 percent nationally, and insurance company purchases declined by one-third. Disinvestment wasn’t happening just to New York. The Congressional Budget Office has released figures showing that nationally banks purchased $3.4 billion less of
all
municipal securities from 1974 through the first quarter of 1975. But also—contradicting the conspiracy view—their investment in municipals rose by $6.7 billion in the next quarter of 1975.

In addition to tunnel vision, the banks accused the SEC of being blind to the facts. William Haddad, the Assembly Banking Committee’s chief staff interrogator charged: “The city’s major banks quietly and quickly divested themselves” of $2 to $2.5 billion of city securities between the fall of 1974 and the spring of 1975. In testimony before the Committee, five of the six major city banks came armed with refutations. Of the six, only Chase was shown to have reduced its city note holdings in the period prior to the market’s closing on New York (by $93 million). Morgan Guaranty said its holdings almost tripled, from $51 to $148 million. Bankers Trust went from $38.5 to $50 million; Citicorp’s own investments remained zero throughout, but its dealer account grew from $24 to $30 million; Manufacturers’ holdings remained constant at $164 million; and Chemical, as the SEC reported, expanded its holdings.

To buttress their case, the banks point to a September 7, 1977, letter from SEC Chairman Harold Williams. The letter to the banks acknowledged that his staff’s “interpretations and conclusions” of certain facts were contestable. “Naturally,” he wrote, “others may reach conclusions different from those of our staff.” The “key question,” he said, was not whether the banks dumped but whether, in effect, they
should
have “in the face of increasingly adverse information—unavailable to the public in an understandable form—which cast severe doubt on the city’s financial capabilities.”

Confronted with this evidence, Haddad told
The New York Times
that his use of the words “dumping or divestiture” was not meant to apply just to the banks’ portfolios: “He said that by
‘dumping’ he was referring to all notes that the banks sold to individuals in that six-month period in their capacity as underwriters of city securities.” The banks countered that Haddad and critics are stretching the English language beyond recognition. How can the banks be blamed when investors refuse to purchase securities that the banks, themselves, are underwriting? After all, didn’t the SEC produce evidence showing that the banks repeatedly warned city officials that the market was closing? Critics, say the banks, are trying to have it both ways: first charging them with “dumping” city paper on unsuspecting investors, then, when that doesn’t stick, charging the banks with failure to sell city paper to suspicious investors.

The SEC staff report is both important and somewhat irrelevant. Important, because it tried to hold public figures accountable for their acts. Somewhat irrelevant, because it focused on a narrow oneyear period and, primarily, on the harm done investors. One needs no legal brief, no delineation of the securities laws, to understand the harm done taxpayers. It is worth remembering that the City Charter—passed by the voters—requires a balanced budget. Robert Wagner, John Lindsay and Abe Beame are guilty of knowingly failing to honestly balance city budgets. By not disclosing the truth, they burdened future taxpayers with costs they were never given an opportunity to reject—taxation without representation. But mayors were not alone. Also guilty were Governors Rockefeller and Wilson, state legislators, City Council members, comptrollers, City Council presidents, borough presidents and platoons of appointed and career civil servants.

They—the entire political system—failed. “The Mayor and the Comptroller—not just this Mayor and this Comptroller—were at fault for twenty years,” says Bernard Nussbaum. Since Mr. Nussbaum is a partner in one of the two law firms defending Beame and Goldin, his candid testimony is important. Over a long lunch early in 1978, Nussbaum reflected on what he learned preparing the defense: “Politicians see it as in their interest to make bad long-run decisions if they will look good in the short run. They’re competent at getting themselves elected, not in running the city.”

Incompetence was clearly a factor—the city’s books were a
mess. Marty Lipton, Nussbaum’s senior partner at Wachtell, Lipton, Rosen & Katz, recalls: “They were all wrong on the size of the deficit. Not out of stupidity but out of an inability to cope with the technology. When we came in to act as bond counsel, there was this Czechoslovakian with a green eyeshade sitting on a ledger stand in the Municipal Building with his own ledger book. It was right out of Dickens! That ledger book was the only record we could find to justify the bonding.”

But there was also a reason for ignorance. It was safer. It allowed city officials to lie while believing, sometimes sincerely, that they might be telling the truth.

Which brings us to the question of disclosure. In their formal briefs to the SEC, Beame and Goldin say they made full public disclosure. As proof, they offer hundreds of press reports and warnings from organizations like the Citizens Budget Commission. Their definition of “disclosure” would please Orwell. One of the city’s defense briefs, for instance, quotes the Staten Island
Advance
of March 15, 1974. The
Advance
reported that Councilman Biondolillo voted against the 1974–75 capital budget “because of the inclusion of approximately $500 million in funds which he asserted belonged in the expense budget.” This constitutes disclosure, the city says, though it doesn’t say that the city and the Council approved the budget—with the gimmicks. Another example of “disclosure” is a 1974
Times
editorial which warned, “This city is sliding into bankruptcy with dismaying speed.” What remains unsaid in the city’s brief is that this same editorial prompted an angry letter from Beame and Goldin, published on November 11, 1974. After presenting their facts, they concluded, “This picture [of the city’s fiscal condition and debt] should be very reassuring to all city investors.” Still another example of “disclosure”: the SEC is reminded that David M. Breen, an analyst for Weeden & Company, issued a similar warning in January 1975. But it is not reminded that Beame and Goldin, in a joint press release, denounced Breen as “irresponsible.”

The logic is comical. It asks us to assume that an attack on Beame equals a disclosure by Beame, that a press disclosure—usually buried in paragraph 20 and refuted at the time—constitutes full public disclosure by the mayor of New York. Here, the city’s defense is as narrowly legalistic as it claims the SEC’s charge to be. Even if one concludes that investors who could read had reason to worry about the city’s finances, that is not the same as saying taxpayers
were told the truth by their elected officials. Thus the city pleads innocent to a lesser charge (failure to disclose) while, implicitly, pleading guilty to a far more serious one (fraud).

The financial community’s disclosure defense parrots the city’s. Investors, they are saying, should have known. But banks did not disclose to investors the devastating information contained in their own memorandums, which were published by the SEC. They kept this information private. The same can be said for the rating services and bank bond counsels. If they had done their job, White & Case’s tardy but courageous refusal to sign off on a note offering would have occurred sooner. A
Wall Street Journal
editorial the day after the SEC report sliced through the pretense: “Surely the prescription for rose-colored glasses does not extend to underwriters, bond counsel or the like. These gentlemen knew their duty well enough back in 1975. If they had done it, if they had found the courage to voice the truth, a lot of small investors would have been spared their savings, and New York would be a lot further on the road to recovery today.” Because the investment community is more aware of the rules and securities laws, their culpability is greater. For many years these people eagerly placed the city’s bonds, in effect printing the city’s money and collecting huge profits. When the bubble—which they helped puff—burst, investors were not the only victims.

The lies come at you like machine-gun bullets. Beame, for instance, blamed his budget difficulties on the $1.5 billion deficit he said he “inherited” from Lindsay. Yet as comptroller, he approved each of Lindsay’s last four budgets. Lindsay says it wouldn’t have happened if he had been mayor. Yet it was happening while he was mayor. Sometimes the lies came under oath. Testifying before the SEC on September 1, 1976, the official transcript contains the following exchange with Beame:

Asked by the SEC attorney whether he agreed that state and federal aid was sometimes overestimated, Mayor Beame responded:
“Based on the information given to me by my staff, I disagree with the statement.… You have to remember, of course, that—as I want to stress—that I don’t get into that estimating area. I am sure you understand the Mayor has got enough things to do besides sitting down with a pencil and estimating revenues for the city.”

After Beame, unbelievably, released this testimony in August 1977, the
Daily News
socked him good: “To hear His Honor tell it, he was nothing but an innocent bystander, a detached observer.…” Candidate Ed Koch was no less direct: “In taking great pains to avoid any implication of wrongdoing, Mr. Beame has made a lie out of his campaign for re-election, in which he is telling us that ‘he made the tough decisions,’ and of his campaign for election in 1973 when he assured us that he ‘knew the buck.’ His testimony to the SEC is a catalogue of all the ways Abe Beame failed to get involved in the important decisions affecting city finances.” But, of course, Beame was involved. Before becoming mayor in 1974, he had been comptroller for eight of the twelve previous years and budget director from 1952 to 1962. On June 15, 1971, to cite one instance, Comptroller Beame issued a press release charging that Mayor Lindsay “underestimated” revenues by $330 million. His colleagues cheered. Beame had found $330 million. Beame had saved them from the perils of voting on higher taxes or cutting the budget.

Another commonly accepted falsehood is that there were only two choices open to city officials in 1974–75: do what they did or go bankrupt. The city’s brief responding to the SEC charges explicitly states that the federal agency seems to have expected the city to say “there was no hope for its future.” The sub-headline of a
Times
story after the report was released probably reflected the common view:
DECEPTION MAY HAVE KEPT THE CITY SOLVENT
. A few days later, Beame elevated his lack of leadership to a patriotic virtue: “I’d have done the same thing over again. I could do it no better than I did.” (Goldin made the same preposterous claim.) This is the same mayor who confessed, in a September 10, 1975, address to the people of New York, “I accept the responsibility, along with officials past and present,” of using what he called “fiscal gymnastics.”

Straining to be fair, a mushy editorial in the
Times
outlined the terrible choice between the Mayor’s “financial and political responsibilities,” asserting there was “no easy answer.” The editorial then climbs to Olympian detachment: “Hence the final judgment on the wisdom of the Mayor’s asserted deceptions in 1974–75 must
turn on whether the city was better off defaulting early or defaulting late. We don’t think there is a clear answer to that question. Nor, for that matter, do we think the answer is very important. The critical issue is whether Abe Beame or any prospective Mayor will have sufficient incentive to avoid taking similar short cuts in the future.”

That is not, I think, the “critical issue.” How do we draw lessons from the past unless we understand it? In effect, the
Times
was saying let bygones be bygones. To assume city officials had only two choices—what they did (fraud) or bankruptcy—is to ignore a third option: tell the truth, really cut the budget and drastically improve the city’s management. This is the option pressed in a series of 1974–75 memorandums to Comptroller Goldin from staff members Steve Clifford and Jonathan Weiner. The memos are quoted extensively in the SEC report. They were not acted upon; certainly not by the Mayor. Instead, Beame contented himself with the traditional warnings, phony layoff figures, and the pretense that he was cutting the budget while in fact it was growing. Comptroller Goldin, who is unfairly lumped with Beame in the SEC report, did make a decision late in 1974—after Beame blamed him for high interest rates—that caution was the better part of political valor. So this young, ambitious public official who intended to run for state comptroller in 1978 stopped criticizing Beame, swallowed the memos, denounced White & Case’s suggestion that the city did not have income to cover borrowing, and joined the Mayor in a united front.

What would have happened if the city had fully disclosed the bleak facts in 1974–75? “The answer, in the view of everyone interviewed yesterday,” concluded a front-page
Times
story, “was simple: The City would have gone bankrupt.” Why? Because, the story ended, it was “likely” that “the political climate in late 1974 and early 1975” was not right for disclosure. Perhaps that is true. But city officials failed to test that climate. Instead of rising to a difficult challenge, they collapsed. They never gave the public a chance.

Nor, frequently, did the press give the public a chance. As Kriegel said, “all the so-called ‘budgetary gimmicks’ were being called genius”—particularly by the press. Because of his ability to invent funds, when James Cavanagh was assistant budget director, he sported the nickname “Cash Cavanagh.” When Beame devised the 364-day year, front-page headlines heralded his “solution” to
the budget crisis. Lindsay’s threats of budget cuts were seen as a clever political ploy to put the state on the defensive and extract more state aid. After Mayor Beame’s first ninety days in office, the
Times
printed a news analysis in the form of a report card. “The budget is the most important document a Mayor deals with,” the story said. “Mr. Beame understands it thoroughly.” So the Mayor was awarded an A for “Arithmetic.”