Bankers' Coup in New York City
Felice, Bill
INTRODUCTION In June 1975, the municipal government of New York City faced an unprecedented fiscal crisis, and over the following six months came perilously close to defaulting on its bank...
...Rohatyn's firm, Lazard Freres (in addition to serving as an investment banker for Chase), is the investment counselor for three firms headed by Governor Carey's appointees to the EFCB - New York Telephone (president William Ellinghaus), Colt Industries (president David Margolis), and American Airlines (chairman Albert Casey...
...Welfare: needy people not now on welfare find it almost impossible to get it...
...Within the FCLG, David Rockefeller has played an active role and, according to the New York Times, has maintained "most intimate involvement...
...significantly affected Chase's profits, since interest earnings on the city bonds (being tax-exempt) go directly into the bank's net earnings - i.e., their profits...
...1 s The particular interests of Chase and the Rockefellers are also well represented on all the boards...
...However, as the conditions in the city continue to deteriorate, the situation will remain volatile...
...Robert C. Weaver of MAC is also a board member of Metropolitan...
...cit., p. 26...
...NYT, January 24, 1976...
...They published a letter written by David Rockefeller callin on the city to take drastic and immediate action to cut costs, thereby declaring that before they would restore "investor confidence" in the city, their policy recommendations would have to be carried out...
...The Bankers thus openly ran New York City from 1934 to 1938.** In 1975 the banks could not be quite as overt in their intervention in city policymaking...
...NYT, September 8, 1975...
...o In 1975, the bankers gained as much power as they had in 1933, but they did it in a quieter way, so as to minimize public reaction...
...government aid to the city...
...NYT, January 4, 1975...
...Ibid...
...It would create enormous levels of demonstrations, and redirect the demonstrations from City Hall to Wall Street...
...Federal aid was seen as the only way to prevent the New York City dilemma from escalating into a national financial crisis...
...2 While the banks' interest rate went up to 11 percent, the union leadership agreed to cutbacks in workers' wages to stave off the fiscal crisis and the supposed resulting loss of jobs...
...Bums' gradual shift - and the later shift of the entire Ford administration - to support for assistance to New York can in good part be attributed to Volcker's persistent persuasive efforts...
...2 THE FEDERAL BAILOUT In the debate within the ruling class over whether the federal government should bail out the city, the New York bankers were united on the need for federal funds to prevent the city from "defaulting" on its outstanding bonds.* Federal assistance had little to do with whether wages were slashed or people were fired - both of the sides for and against federal aid approved of such actions...
...NYT, October 17, 1975...
...sanitation workers have gone on wildcat strikes...
...Sanitation: by October 1975, 2,101 employees had been dismissed and garbage collection had considerably slowed...
...Chase heads one of the two main underwriting syndicates which normally bid for New York City notes, and reportedly is the largest holder of the city's debentures...
...The city complied by establishing the Emergency Financial Control Board (EFCB), the Management Advisory Board (MAB), and the Temporary Commission on Finances (TCF) (see box...
...3 ' Without strong leadership and organizations which under- stand that the interests of labor are irreconcilably opposed to those of capital, the working people of New York have been forced to respond through spontaneous actions...
...Two important factors help put the New York City crisis into perspective...
...The city must then acquire further loans to cover the debt service - and the vicious cycle repeats itself...
...The large stake the New York City banks then held in city debentures ($1.2 billion in city debt holdings) led to almost daily meetings of the FCLG in the spring of 1975 when they formulated their strategy.' 2 The bankers were united on the need to make the citizens of New York pay for the crisis by reducing the quality of life...
...THE BANK'S GRIP New York's municipal government exists to provide an infrastructure for private business...
...Monthly Review, op...
...more than the amount set aside for city employee pension funds...
...As a result, they again announced a lack of "investor's confidence" in the city and pushed for the creation of additional "oversight" and "advisory" boards...
...Drastic cuts have been made in bilingual educational programs and in special education programs for the handicapped...
...But we're talking about spectrums of being strong...
...NYT, August 15, 1975...
...INTRODUCTION In June 1975, the municipal government of New York City faced an unprecedented fiscal crisis, and over the following six months came perilously close to defaulting on its bank debt...
...1 3 The bankers intruded into many areas of city government...
...They successfully pushed for the dismissal of First Deputy Mayor James A. Cavanaugh and Budget Director Melvin N. Lechner...
...Heavy corporate taxation would increase the tendency of companies to leave New York...
...Sales, op...
...The New York Times credits Volcker with being an "important influence" in bringing about federal aid...
...DISMANTLING THE DEMOCRATIC FACADE One of the functions of the state under capitalism "is not to appropriate profits but to socialize losses and see that the system functions smoothly...
...Thus, New York City has increasingly developed a "dependent" relationship to the banks, finding itself in a debt cycle similar to that existing in many Third World countries dependent on U.S...
...NEW YORK CITY COUP I. "The Debt Economy," Business Week, October 12, 1974, p. 45...
...Even according to the Twentieth Century Fund, a liberal establishment policy study institution, there was "no justification" for using public pension funds to buy state and municipal bonds...
...Richard R. Shinn, a member of the MAB and TCF, is a board member of Chase and is the president of the Metropolitan Life Insurance Co., which is closely allied with Chase...
...New York, August 4, 1975, p. 33...
...David next made personal appeals to his "friends" in the Congress and in the executive branch...
...Chase played a major role in forcing the federal government to come to the aid of the banks...
...The large New York City banks own some 10 percent of the city's debentures and therefore receive 10 percent of the interest the city pays out...
...But, for the interim, the National Guard was not needed, for the union leadership refused to organize a general strike, and the bankers' government received federal loans thereby allowing the city to continue to give out welfare checks...
...Sources include: NYT, July 27, October 17, November 3, 6, 12, 21 & 30, and December 19 & 21, 1975...
...The interests of finance capital are well represented on these commissions...
...Liberation News Service (LNS), March 6, 1976...
...The investors who lacked confidence were largely the banks themselves and their wealthy clients...
...A moratorium was pronounced on new school construction, despite the fact that there is no high school in central Harlem...
...open, Volcker gradually began warning of the impact of a "collapse" of the city...
...It also draws up legislation on state takeover of the prisons and courts and Federal takeover of welfare...
...In July 1974, Chase demanded the highest interest rate in the city's history, 7.9 percent, for the purchase of a $438 million bond issue...
...These actions on the part of the union leadership resulted from their belief that the interests of U.S...
...But, since the debt economy stretches beyond the borders of New York City, other cities and states could quickly find themselves in the same situation, on the edge of default...
...Due to the inability to adequately tax those who have the money (i.e., the wealthy and the corporations) and due to budget priorities in other sectors, particularly military, all levels of government have been unable to generate necessary capital to provide an adequate infrastructure for business or to meet the social problems generated by the capitalist system itself...
...A report by the Fund claimed that the use of New York City and State pension funds was placing the interests of the pension fund beneficiaries - past and present employees - in jeopardy...
...According to one banker who attended the meetings: "We were all strong on reform (sic...
...The city at first tried to resist, with Comptroller Harrison J. Golding asserting: When New York City is asked to load on the backs of future generations the crushing burden of a tax-exempt interest rate of almost 8 percent, an increase of about 1.75 percentage points in only three months, some resistance must be offered...
...Sources: The New York Times, September 21, 1975, and The Black Scholar, November 1975, p. 27...
...Ibid...
...At the same time that the city must limit the corporate tax burden to attract companies and allow them to maximize their profits, it must also provide a tax-financed infrastructure for that business activity...
...Management Advisory Board (MAB): This board focuses on such areas as pensions, Medicaid billings, hospitals and sanitation in order to make the city run more efficiently and economically...
...Chase holds approximately $250 million of the city's notes and bonds and $150 million of Big Mac, Municipal Assistance Corporation (see box), bonds...
...MAC's staff of forty is headed by Herbert Elish, who is being paid more than the Mayor of New York...
...The New York Times reported that Chase pressed for the most stringent municipal "reforms," Morgan took an intermediary position and Citibank supposedly was more "dovish...
...Just a bond seller...
...Black, Puerto Rican and other Third World workers have been the hardest hit since they hold the jobs with the least amount of civil service or union protection...
...which protect private property and foster the regeneration of labor power...
...In the 1974-75 budget, debt service alone was $1.75 billion...
...Housing: work has been suspended on construction of 50,000 new publicly supported housing projects and on 20,000 apartment rehabilitations...
...New York City was hit first because of its size and its eroding tax base (partially caused by the flight of the wealthy and the corporations to the suburbs, leaving behind the poor who had no choice but to remain in the inner city...
...1 7 The man calling the shots within the EFCB is Rohatyn...
...Second, the deficit spending practiced in New York occurs at all levels of government - federal, state, and municipal...
...He is considered the second most powerful federal monetary official in the nation...
...5. WSJ, July 10, 1974...
...This tactic is similar to the one used by the oil companies during the energy crisis...
...The oil companies, by withholding their product, produced a demand for oil at any price, and then turned the oil back on at roughly twice the earlier price...
...This article will examine what is generally ignored by the press, but which in reality is the primary factor behind New York's fiscal maladies: the banks...
...By late 1974, U.S...
...Its goal is to force the city to come up with a revamped budget, and to develop a plan to wipe out the $3.3 billion deficit...
...2 ' Or, as a city official who attends all the meetings of the Emergency Financial Control Board said: What hasn't changed is that "the rich have power, the poor don't...
...Speculation that default during a time of general financial crisis could have threatened the entire banking system, caused normally stable bank stocks to fall...
...2. William W. Sales, "New York City: Prototype of the Urban Crisis," The Black Scholar, November 1975, p. 23...
...Still unsatisfied, the following year they forced the "Banker's Agreement...
...Thousands of teachers have walked off their jobs...
...23 There is also the question of who exercises power...
...From this post, Volcker is also a permanent member of the Federal Reserve's highest policy-making body, the Federal Open Market Committee...
...Ever since First Boston was created out of a 1933 merger of Chase's securities affiliate with two other underwriting firms, First Boston has maintained a close relationship with Chase and the Rockefellers (see Puerto Rico box...
...As the infrastructure maintenance costs have exceeded the tax base, New York City (like many other cities) has attempted to overcome this contradiction by borrowing...
...tenant and welfare groups have protested...
...4. New York Times (NYT), June 1, 1975...
...But what proved to be most important to the interests behind Chase was that they could rely on one of the bank's former vice-presidents, Paul A. Volcker, currently president of the New York Federal Reserve Bank...
...236 THE NEW CITY JUNTA Emergency Finance Control Board (EFCB): This state-mandated board now controls the city's budget and must approve all spending...
...In January, Mayor Beame asked David Rockefeller to head a committee of bankers to study financial reforms for the city...
...September 10 & 20, November 26, and October 8, 1975...
...We have seen...
...It is also involved in the revision of the city budget...
...Now the question is what is good for the bond markets...
...3 The center was scheduled to be closed due to the "budget crisis...
...it is only that any attempt to practice traditional conservatism quickly results in fiasco...
...Actually their efforts to keep New York City afloat have undermined the interests of the very workers they supposedly sought to protect...
...The bourgeoisie uses the state apparatus to protect their incomes, positions, and power...
...This would then lead to a further shortage of capital available to lend to other corporations as well as a shortage of resources to pay off the bank's own debt obligations...
...Then, with the internal lines of communication Coney Island Hospital workers demonstrating at the Health and Hospitals Corporation against cuts in services...
...During the last eighteen months, the city has laid off nearly half of its Spanish-speaking employees, 40 percent of black male workers and nearly one-third of its female employees...
...and 2) the interest they receive on the debentures they purchase...
...The rich have more power...
...but rather "underwrites" the sale of municipal notes and bonds...
...Sales, op...
...It is estimated that permanent unemployment now threatens half the work force in the black community in New York City...
...the first being Arthur Bums, chairman of the Federal Reserve Board...
...However, the bankers found that through Big Mac alone they were unable to adequately assert themselves over the city's policy decisions...
...Ibid...
...Alton Marshall, head of Rockefeller Center and former aide to Vice-President Rockefeller (as well as the recipient of a $306,000 gift from the Vice-President), 1 6 is on the TCF and the MAB...
...5 But the city's resistance proved weak, and three weeks later it caved in, granting Chase a $325 million long-term bond at 7.7 percent, an unprecedented rate.' Since then, the large banks have continued to push the interest rates higher...
...Welfare clients are paid a reward to report infractions by other clients...
...The most blatant example of class collaboration on the part of the union leadership was their agreement to invest $2.5 billion of workers' pension money in city securities...
...and NYT, August 15, 1975...
...Prior to this, only 9 percent of the city workers' pensions had been invested in New York City notes.s This action had the result of making the unions hostage to default...
...6. NYT, July 31, 1974...
...8. "The Economic Crisis: Part II," Monthly Review, April 1975, p. 7. 9. NYT, May 14, 1975...
...In addition, many observers felt that with default the bank-held bonds would devalue and thus have reduced earning power...
...Fire: by October 1975, 1,549 firemen had been laid off...
...7. NYT, August 23, 1975...
...Transportation: subway fares increased from 35 cents to 60 cents...
...Education: 11,000 regular school teachers have lost their jobs, as well as 15,000 para-professionals...
...The present economic crisis has deepened the state's involvement in this socialization of losses...
...Default would have * President Ford and Treasury Secretary Simon were the staunchest opponents of federal loans to New York City...
...Nearly all of the 1,800 inmates at the Rikers Island prison in the city seized control of the prison in November to dramatize the deteriorating conditions in which they are forced to somehow survive...
...And in September over 100 staff members, patients and community supporters of the Lincoln Detox Center, a unique community-run narcotics detoxification program, seized control of the offices of the city's Health and Hospitals Corporation...
...Since a higher percentage of untenured and substitute teachers taught in the ghetto schools, the resulting increase in class size in these schools has been proportionally higher than elsewhere...
...20 Chase chairman David Rockefeller briefs Mayor Abe Beame, during a break in congressional testimony on U.S...
...The purchasers of these city debentures are usually the same banks, institutional investors and wealthy individuals...
...But then he corrected himself saying: "No, something has changed...
...Seventeen of the forty members of these boards are bankers or executives of savings institutions or investment houses...
...The TCF has a budget of $1.2 million, and the MAB will have a staff of fifty to "monitor" various city agencies for "efficiency...
...To demand higher wages or fewer layoffs now meant that they would jeopardize their retirement income since it's now their retirement money that is keeping the city afloat...
...The bankers' assault on the working people of New York was facilitated by the cooperation of the city's municipal union leadership...
...As people's anger deepened and their responses became more militant, state officials began drawing up contingency plans for mobilizing the National Guard in case of a general strike of municipal employees and/or widespread rioting resulting from the city's inability to distribute welfare checks due to bankruptcy...
...the bond market take control of the fiscal policies of the city with no opposition...
...Pacific News Service, December 8, 1975...
...Police: by October 1975, 4,315 had been laid off...
...No new publicly financed housing construction is planned...
...NYT, January 26, 1976...
...THE PEOPLE PAY The bankers' government is attempting to restore the solvency of New York City by cutting back on social and educational services and reducing the standards of living of the city's workers...
...and highway tolls also increased...
...In the spring of 1975, ten prominent bankers formed the Financial Community Liaison Group (FCLG) to advise the city on how to govern and to make sure the state asserted itself so that losses were socialized (i.e., so that the burden is carried by the public at large, or more precisely, by the working class...
...They viewed federal government aid as anathema to fiscal conservatism...
...NYT, November 6, 1975...
...It maintains services - such as police, fire protection, social welfare, education, etc...
...In August 1975, a group of underwriters led by Chase raised interest rates on MAC bonds to 11 percent!** "The banks are having a field day," declared Robert Abrams, Bronx Borough President, while City Council President Paul O'Dwyer called their actions "unconscionable...
...9 "** David Rockefeller's first job after he graduated from college in 1940 was as Secretary to Mayor La Guardia (1940-41).35 THE BANKERS' GOVERNMENT The Municipal Assistance Corporation (MAC) was established as a superagency to handle the sale of new bonds...
...Millions of dollars of taxpayers' money has already been spent on staff and legal fees to set up this bankers' government...
...cit., p. 4. 24...
...because they did not know what to say...
...To finance these functions, the city levies taxes on the residents and businesses...
...The role of the banks - with emphasis on Chase - in creating and benefiting from the afflictions now confronting the people of New York will be explored...
...Chase had played a major role in the creation of the crisis by forcing up the interest rate on the city's debt obligations...
...As labor mediator Theodore Kheel * Financially these new boards have added to the crisis...
...For example, a city bond sale in 1973 to raise $668 million, will cost the city an additional $470 million in interest payments alone by the time it is paid off...
...8 In addition, the city's new budget director, Donald D. Kummerfeld (replacing Melvin N. Lechner, whom the bankers forced out) is a vice-president of the First Boston Corporation...
...In the fall, the bankers forced a budget reduction of $40 million, of which $20 million was to come from salaries...
...city employees have staged slowdowns...
...press has generally focused on the corruption, mismanagement and book-juggling in the city government (which undoubtedly occurred), the allegedly overpaid city workers, or has blamed New York's problems on the immigrants, the poor, and Third World people...
...In times of economic crisis, bourgeois control becomes obvious, but subtler forms of control occur in times of prosperity as well...
...3 The cost to the city for the "privilege" of borrowing is enormous...
...3 "37 The people of New York are under attack and are suffering the consequences of the bankers' policies in many areas of their lives: '1 Health care: fifty city clinics and four municipal hospitals (two in ghetto areas) are slated for closure...
...Thus the bankers dictated the parameters of city financial policies...
...A bank usually does not loan money directly to the city...
...Apparently David Rockefeller first had to convince his brother, Vice-President Nelson Rockefeller, who originally opposed federal aid, that Chase's (and the family's) interests were more important than Nelson's political career...
...Temporary Commission on Finances (TCF): This commission examines the city's financial prospects and makes long-range recommendations concerning revenues, tax base and Federal-state funding...
...An example of this occurred in August 1975 when the leader of the city's sanitationmen, John DeLury, and the head of the Municipal Employees Union, Victor Gotbaum, representing over 175,000 workers, agreed to give up a previously granted 6 percent wage increase...
...Ibid...
...Then, after34 withdrawing credit and opening the possibility of bankruptcy, the banks were able to demand that city bonds be sold at an increased interest rate.* By threatening to financially bankrupt the country's largest city government - thereby producing a national panic - the banks created a climate in which the public was actually relieved to emerge from the crisis with merely having to pay the higher interest rates while at the same time suffering a cut in public services...
...WSJ, August 1, 1975...
...The FCLG, headed by Chase chairman David Rockefeller, Citibank president William Spencer, and Morgan chairman Ellmore C. Patterson, demanded that the city "balance" its budget by laying off city workers, reducing wages, cutting back services, and investing the city workers' pension money in the bank-held New York City bonds...
...By the spring of 1975, the city faced a financial crisis, as Chase and the other banks reported a lack of "investor confidence" in city bonds...
...This takeover of city policymaking paralleled the role played by bankers during a similar New York City crisis in 1933...
...Could Ford or Simon have blocked aid to New York City...
...This represents over 25 percent of the total amount in the pension coffers ($8.5 billion...
...liberals were silent...
...WSJ, September 30, 1975...
...First, when the bankers in New York moved into the public sphere and took over decision-making that had formerly been left up to publicly elected officials (see Bankers' government below), they merely brought into the open the forces which for years have governed New York City...
...MAC has been authorized $3 million for operating expenses...
...and more than the total expenditures for health services...
...federal debt had reached a staggering $500 billion, while state and municipal debt stood at $200 billion.' The New York City crisis is not an aberration but rather the logical outgrowth of a financial system plagued by debt...
...See WSJ, November 3 and 10, 1975...
...In addition to all his other connections, David Rockefeller has a direct line to the Mayor's office as the largest individual contributor to Mayor Beame's runoff primary campaign.19 These four bank-dominated boards have taken over jurisdiction and established goals which formerly were the responsibility of the elected officials.* The municipal government has been reshaped along the lines of "sound business practice...
...Municipal Assistance Corporation (MAC): Created to borrow money for the city to help pay off its short-term notes and obligations by selling $5 billion in long-term bonds, which are guaranteed by $1 billion a year in city sales and stock transfer taxes, and by state aid...
...capital (see Chase-Latin America article...
...By raising the interest rates, the big banks are also making New Yorkers cover some of the banks' recent losses from such "problem loans" areas as real estate investment trusts...
...In December the federal government approved a $2.3 billion loan-authorization bill designed to avert default...
...4 This was more than what was paid in welfare and medicaid payments combined...
...The former chairman of Chase, George Champion, serves on the TCF...
...After being told that Simon, formerly a partner in Salomon Bros., Wall Street's major bond broker, disapproved of one of his plans, Nelson Rockefeller once remarked: "Who is Simon...
...3. Wall Street Journal (WSJ), August 19, 1975...
...As one bank official commented on the prospect of a formal banker's agreement: I suspect that in the politics of '75, they just couldn't sustain the political reaction it would engender...
...Unemployment reached 12 percent in August 1975, and Howard Samuels, a member of Governor Carey's Economic Development Board, predicted the rate would soar to 16 percent in 1976...
...In explaining the crisis, the U.S...
...As Monthly Review observed, "It is of course not that either Ford or Nixon developed, or even tried to develop, an economic policy on any principles other than traditional conservatism...
...Jobs lost due to banker-forced spending cuts and the recession, surpassed 99,000 in 1975 and Samuels predicted another 145,000 to 165,000 job losses in the next 12 to 18 months...
...At that time a formal "Bankers Agreement" was negotiated, under which the banks extended the city's short-term debt only after obtaining the right to dictate city taxing and spending policy.* One month after the Banker's Agreement, Mayor Fiorello H. La Guardia was elected, and his administration carried out the terms of the Bankers Agreement by imposing severe austerity measures on the people of New York...
...Patterson of Morgan) he has retained a vocal role within the FCLG...
...CREATION OF A CRISIS After a larger than usual deficit was announced for 1974-75, the major banks began to balk at buying New York City debentures...
...cit., p. 37...
...But there were differences among them as to the degree to which this should be done...
...Volcker at first "softpedaled" his views around federal aid to New York, so as not to antagonize Bums, who initially took a hard line against any federal assistance...
...Chase's stock, for example, reached a low point in November 1975, when its value per share was $25.50, down 35 percent from its 1975 high of $38.75.6 In the event of default, the bank's stock would have fallen even further...
...Also on the MAB is the chairman and president of Seamen's Bank for Savings, E. Virgil Conway, who was appointed first deputy superintendent of banks by then Governor Nelson Rockefeller...
...When these banks refused to underwrite, it didn't take long for the city to run out of money...
...Ibid...
...and thereby less likely to rebel against their declining standard of living...
...observed, "What we have witnessed is fantastic...
...Federal assistance was necessary because the banks could not afford to allow the earning power of their city securities to be threatened...
...Prison: cutbacks in services and dismissal of 654 guards (forcing compulsory overtime on the remaining employees) worsened prison conditions...
...As a result, the state borrows...
...To avoid this, Nelson Rockefeller as governor, cut New York's corporate taxes in half...
...In September 1975, when subway fares increased thousands of people went through exit gates and jumped turnstiles instead of paying...
...7 But these elected officials could do little more than complain, for at this point the city government had been taken over by the banks...
...Today, New York City's debt exceeds $13 billion, and debt service payments (interest and principal) alone will be $3 billion in 1976.2 To borrow money, New York City must go to the banks...
...The bankers chose Felix Rohatyn, a partner in the prestigious Lazard Freres investment house, as chairman...
...The banks profit through the relationship in two ways: 1) underwriting fees...
...Only after these actions were taken would the banks consider underwriting the new city debt...
...August 18, 1975...
...workers are best protected by maintaining the stability of the capitalist economy (see explanation of the role of union leadership in Pension article...
...But just as Nixon was forced to become a "Keynesian" in establishing wage and price controls and in devaluing the dollar despite his orthodox Republican principles, so with the New York City crisis, the Ford administration eventually changed its tune...
...Ken Auletta, "The New Power Game," New York, January 12, 1976, p. 32-33...
...Although he declined (in favor of Mr...
...NYT, January 1, 1973...
...But, an inherent contradiction exists in this situation...
...NYT, November 12, 1975...
...Out of the FCLG sessions came the decision to create Big MAC (Municipal Assistance Corporation), which New York Governor William Carey and Mayor Beame (having little choice) quickly agreed to, * In early 1932, the bankers, headed by Morgan, first refused to help the city meet a cash shortage...
Vol. 10 • April 1976 • No. 4
