By SEYMOUR P. LACHMAN and ROBERT POLNER
As published in the Opinion section of
the Syracuse (N.Y.) Post-Standard
In the spring of 1975, just a few months after his inauguration, Gov. Hugh Carey was informed by budget director Peter Goldmark and senior adviser Stephen Berger that New York City might default on its debt, something he considered unthinkable. This excerpt from our political biography, “The Man Who Saved New York: Hugh Carey and the Great Fiscal Crisis of 1975,” begins with Carey’s visit that spring to the East Hampton vacation home of 46-year-old financier Felix Rohatyn. Carey hoped Rohatyn would help him win the cooperation of the financial community in his plan to save New York.
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.” …
[The governor’s personal secretary, David] Burke had already worked on the Viennese-born finance man, reminding Rohatyn 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 10 minutes or so, Carey and Burke made a list.
The New York City underwriting community had begun to wrestle with and reconsider its historic habit of indulging the city’s appetite for borrowing and profiting handsomely from the relationship. In 1974, [Abe] Beame’s first year as [New York City] mayor, banks weighed their wish to continue earning great underwriting fees against their growing concern that the city might be unable to meet its debts to bondholders. For the first time, the bankers raised questions about the city’s management — an issue that had never come up before.
Meanwhile, they walked a fine line: On the one hand, they realized that they could be exposed to liability under federal securities laws if they knew of any risks associated with the city’s securities and failed to disclose them to prospective investors. On the other hand, they didn’t want to panic the market, because doing so would cause the value of the city securities in their portfolios to plummet, damaging the wealth and stability of their institutions.
Their nervousness made it difficult, if not impossible, for Carey to avoid getting more directly involved in the city’s money woes for too much longer, for by the time he 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. …
[Carey] 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. …
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. …
In the spring of 1975, around the time Rohatyn was recruited, some aides to the governor … 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.
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. …
“[Hugh Carey’s] force of will,” said Paul Gioia, 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.”
Hugh Carey, who passed away last Sunday, was one of New York’s greatest governors. Not only did he save New York City from bankruptcy, but the way in which he did it provided a powerful example for today’s government leaders. He brought together Republicans and Democrats, labor leaders and bankers, working people and business people to address a crisis facing all of them. He asked everyone to give up something, for the common good — but no one was asked to give more than their fair share.
Seymour P. Lachman is the director of the Hugh L. Carey Institute for Government Reform at Wagner College on Staten Island. Robert Polner, a public affairs officer at New York University, is a senior research associate at the Carey Institute.