The Man Who Saved New York

A new book shows there's much to learn about effective government from an unsung hero of the 1970s, Governor Hugh Carey. Read an excerpt from 'The Man Who Saved New York,' co-authored by Seymour Lachman, director of Wagner College's Carey Institute for Government Reform.

In January, a new chief executive will move into the governor's mansion in Albany. Immediately, he will have to address New York State's deep fiscal crisis. If the new governor fails to find a solution, the Empire State may be forced to default on its debt — a frightening prospect in the home of the nation's financial capital, Wall Street.

Thirty-five years ago, another incoming New York governor faced eerily similar circumstances: former Brooklyn Congressman Hugh L. Carey. Governor Carey and his team of advisers managed to put together a package of remedies that saved the City of New York from bankruptcy, a catastrophe that would have had a devastating impact on the state and the national economy.

That particularly timely tale is the one that is told in a new book co-authored by Seymour Lachman, director of Wagner College's Hugh L. Carey Institute for Government Reform, and Robert Polner, a public affairs officer at New York University. The Man Who Saved New York: Hugh Carey and the Great Fiscal Crisis of 1975 was published this summer by Excelsior Editions, an imprint of the State University of New York Press.

Already in its second printing, The Man Who Saved New York has been highly praised in the New York media.

“At a time when New York's state government seems more dysfunctional than ever, this new book recalls an era when Albany actually worked,” wrote conservative pundit E. J. McMahon in a full-page New York Post review.

“Hopefully, Andrew Cuomo already has a copy of The Man Who Saved New York,” Tom Robbins wrote in a review for the Village Voice during the 2010 gubernatorial campaign. “[T]he likely future governor will appreciate this dramatic saga of what it's like to be a brand-new occupant of the executive mansion who opens the cabinets to find they've been stripped bare.” Indeed, Cuomo took Robbins' advice, praising the book in a Labor Day op-ed published in the New York Daily News.

“Intellectually, academically, and politically, The Man Who Saved New York couldn't be more timely and vital for New York as the state slides toward its own rendezvous with insolvency,” wrote Giuliani biographer Fred Siegel.

Author Seymour Lachman came to Wagner College in the fall of 1996, just when the New Press was publishing his earlier collaboration with Robert Polner, Three Men in a Room: The Inside Story of Power and Betrayal in an American Statehouse. That book, based on Lachman's 17 years in the New York State Senate, was an indictment of the way things work in Albany: Only if the governor and the majority leaders of the Senate and the Assembly agree can anything get done in the state government. Over the last four years, Three Men in a Room has become one of the most often cited books among good-government advocates in New York state.

The following excerpts from chapter 5 of The Man Who Saved New York begin with Hugh Carey recruiting an indispensable member of his fiscal team, financier Felix Rohatyn, and end with Carey's insistence, despite opposition from several key advisers, that a New York City bankruptcy was “unthinkable.” — Lee Manchester

From The Man Who Saved New York

Building the Team

On an early spring afternoon in 1975, as New York City's problems with its lenders mounted, Hugh Carey traveled to Felix Rohatyn's vacation house, perched on dunes at the edge of the Atlantic Ocean, in Long Island's East Hampton. Accompanying the governor was Peter Maas, the author of Serpico, a best-selling book about a whistle-blower cop who nearly brought down the New York Police Department in the Lindsay years. Maas was friendly with Rohatyn, a player in the world of securities and corporate reorganizations, and Carey was planning to ask for Rohatyn's help placating and winning the cooperation of the financial community.

With his puckish grin and flecks of gray hair, Rohatyn, forty-six, was no stranger to the ways of prominent politicians, though he had never met Carey before. … [Rohatyn was then] a senior partner at the international investment firm Lazard Freres. Detractors tagged him “Felix the Fixer,” but Carey was impressed by Rohatyn's excellent reputation in the financial world. He took Rohatyn aside and popped the question he'd come to ask: Would he be willing to turn his full attention away from his successful career and serve instead in the less lofty world of state government?

In return, Carey told Rohatyn, he'd receive all the credit he would be due for helping to save the city, and would become known by his fellow citizens, not to mention his own sons, as “Felix the Savior” rather than “Felix the Fixer.”

“It's up to you,” Carey said. “Fixer or Savior.”

Governor Carey and Abraham Beame, New York City's mayor from 1974 to 1977 (shown here with the governor in 1975), joined forces to appeal to President Ford to help the city during its financial crisis. Photograph courtesy of the New York State Archive.

Around the time Carey made his sales pitch, Rohatyn got a call from a bond broker he didn't know, offering to sell him New York City notes paying an unusually high 9.5 percent interest. Rohatyn declined, saying, “If you're paying 9.5 percent for a triple-tax-free notes of the city, they can't be a very good risk.”

He also heard from the Democratic National Chairman, Bob Strauss, who told him he'd recommended him to Carey.

“Well, it would have been nice if you had asked me before you went and did it,” Rohatyn responded. “[I] had never heard of a bankruptcy of a city; but, certainly for a city like New York, I thought it would be a devastating thing, even global.”

In Rohatyn's remembrance, the most pivotal encounter with Carey occurred later, in the governor's “kind of shabby” midtown Manhattan office. The governor and David Burke began that meeting by presenting Rohatyn with some grim facts and figures. Carey pressed: Would he or wouldn't he help save the city from possible bankruptcy? Burke had already worked on Rohatyn, reminding the Viennese-born finance man of his public declarations that he owed his life to the United States, as his family had escaped to America from the Nazi occupiers in France, and wanted to repay the debt to his adopted country. Now was that day, Burke urged.

Rohatyn laid down conditions to Carey.

“I don't know enough and I can't do it alone,” he said. “But if you would put together a responsible group of business types, both Republicans and Democrats, I'd be happy to be one of them.”

Over the next ten minutes or so, Carey and Burke made a list.

Default Looms

… By the time [Carey] headed out to see Rohatyn on the dunes, it was becoming evident that the city could easily default on short-term debt payments any time now, with its monthly payments to bondholders totaling hundreds of millions of dollars. At the same time, some editorial writers and budget watchdog groups began faulting Carey for keeping his distance from the city's problems, as he continued to make trips upstate and resolutely focused on many other things. But his attempt to be governor of the entire state, and not just one part of it, was growing more challenging by the day.

For he was also aware that if the city defaulted and filed for bankruptcy, there would be hell to pay — possible walkouts by police, firefighters, sanitation workers, and teachers, and perhaps even outbreaks of looting, arson, and violence. In an atmosphere of civic breakdown, a federal judge would be empowered to take the entire city government and its day-to-day affairs under receivership, superseding all elected officials, labor agreements, and existing rules and regulations. The judge would seek to create immediate mechanisms for continuing public services and running the city's many departments down to the most minute levels — deploying police, regulating schools, ordering supplies, dispatching child protective workers, all the while beginning the possibly decade-long process of sorting through the claims of perhaps tens of thousands of creditors-bondholders and their lawyers, city employees, welfare clients, and suppliers.

In the wake of such dislocations, some argued, fear and loathing would roil the municipal bond market. The borrowing costs of cities and states might spike, causing service cutbacks and job losses, if not additional governmental defaults. If large or small banks tottered or closed, the troubled national economy, if not the entire international banking system, would be disrupted.

So Carey and his financial advisers worried at the time. But the implications of a city bankruptcy were less than agreed upon or clear to the public at large. Meanwhile, his staff debated how deeply he should involve himself and the state in the mounting series of New York City payment problems that were, after all, not of his making, and perhaps beyond his powers to contain or control.

Moment of Decision

In the spring of 1975, around the time Rohatyn was recruited, some aides to the governor, including [budget director] Peter Goldmark, warned that if the Big Apple failed to pay its obligations, the state government would follow, so interwoven and interdependent were their finances. Staying out of it, therefore, could be suicidal for the state.

Flanked by New York City Mayor Ed Koch, Governor Carey holds a press conference in Manhattan in 1980. Financier Felix Rohatyn, one of Carey's key advisers, is on the far left. Richard Ravitch, another businessman Carey recruited for his governing team, is on the right.

Other aides noted that in their upstate travels, they regularly met people who made no secret of their distaste for the big city — a drain on the rest of the state, in their eyes — and who felt just as adamantly that Carey should force its leaders to finally feel the consequences of years of financial profligacy. John Dyson, the state's agriculture commissioner, noted dutifully that Carey might alienate Republicans like Senate leader Warren Anderson if he intervened too forcefully on the city's behalf, especially since communities across the state were also experiencing hard times.

At one such staff discussion at the Executive Mansion, the issue reached a boiling point. Having listened to the back-and-forth for nearly an hour, Carey finally stood and jammed his hands deep into his pants pockets — the telltale sign that his fuse might blow.

He would not, he said, even consider standing idly by as the city sank. He rendered the case for assistance in the most personal terms. “I have a big family. If one of my children came to me and said he's broke, I'm not going to put him out on the street; I'm going to do what's best. I'm not going to leave him out in the cold. We're stopping this right now,” he said.

New York City, the governor added, was legally a child of the state — it existed only because the state granted it jurisdiction.

He sat down at his desk. No one spoke. The staff shot glances around the room. And then for good measure Carey added that if any or all of his aides strongly disagreed, he would be more than happy to accept their letters of resignation immediately.

Solid Commitment

Always influencing his judgment, Carey recalled years later, was his late father's view that bankruptcy was an irreversible stigma and what he had most sought to avoid for [his business,] the once-soaring Eagle Petroleum, during the years of the Depression. After Carey articulated his position to his staff, he never really looked back, or veered. Soon, in fact, he unilaterally advanced the city $400 million in state aid, directly involving the state in the city's quest for survival and thereby putting the state's own credit in potential harm's way. This was money raised from the sale of state short-term notes and technically requiring voter approval for its use. The cash narrowly allowed the city to avoid default on notes that had to be repaid at the end of April 1975. And Carey would advance the city a total of $400 million more in the months ahead.

Governor Carey converses with Peter Goldmark, director of the budget (left), and Howard Clark, deputy press secretary, at the economic summit held at Topridge, Marjorie Meriweather Post's Adirondack Great Camp, in October 1977.

“His force of will,” said Paul Gioia, who was an assistant counsel to the governor, “was the most important feature in keeping the city out of bankruptcy. When someone at the top makes a solid commitment like that, people working for him respond, 'We've got to figure out how to get it done' — and that's what happened.”

The word Carey would elect to describe a New York City bankruptcy was “unthinkable.”

Unthinkable, yes. But whether the collapse of the city was avoidable was another question completely, as was the continuously delicate matter of how far the “parent” could safely stick its neck out, and get involved, to protect its troubled “child.”

Read more about the book and watch interviews with Lachman and Polner.

Excerpt from The Man Who Saved New York: Hugh Carey and the Great Fiscal Crisis of 1975, by Seymour P. Lachman and Robert Polner (State University of New York Press, 2010). Reprinted with permission of SUNY Press.