In the spring of 1975, the nation’s large commercial banks, fearing a default on New York City notes they had bought and sold for decades, severed their business ties with the city. Mayor Abe Beame’s City Hall was caught short â€“ no longer could it turn to the powerful gatekeepers of the municipal bond market for the financing necessary to keep up with its bills, including a vast and growing pile of short-term debt. The recently elected Democratic governor of the state, Hugh L. Carey, stepped into the fray, fearing that a city bankruptcy would wreck the state’s entire financial system and generate national and even global repercussions.
Remarkably, Carey set the stage for approval by Congress and President Gerald R. Ford of billions of dollars in federal loans to the city, reform of the city’s scrambled finances, and the eventual return of the big banks. This dramatic story is drawn from an era, 35 years ago, when New York confronted a fiscal meltdown more imminent than the deeply entrenched but equally serious fiscal problems now facing the state. It is colorfully told in the new book "The Man Who Saved New York: Hugh Carey and the Great Fiscal Crisis of 1975," by Seymour P. Lachman and Robert Polner.
The following excerpt touches on the Washington phase of Carey's campaign to save the city from default and bankruptcy.
Time magazine’s Oct. 20, 1975, issue illustrated how far the city had sunk. Its cover depicted New York’s Mayor Abe Beame as a genteel hobo wearing a tattered top-hat, shaking a tin cup and pleading, “Brother, Can You Spare $4 Billion?” But Washington was unmoved. Tip O’Neill Jr., the majority leader of the House and a proponent of federal assistance for the debt-beleaguered New York City, said shortly after Governor Hugh Carey gave an impassioned plea before the Senate Banking Committee that an aid package was well short of the votes needed for approval. “If there were a vote today, I would have to say that New York would not prevail,” O’Neill said.
President Gerald Ford, as he would write in his autobiography, remained torn between his concern about the impact that a city default would have on residents and the desire not to let local leaders -- and lenders -- off the hook for decades of fiscal irresponsibility.
In the end, the president reconciled the competing forces with a bill that would add “Chapter 16” to the federal Bankruptcy Act to facilitate a gentle and “orderly” bankruptcy. It would keep some of the city’s remaining operating funds from getting tied up in the bankruptcy litigation, while allowing the court to authorize the sale of debt certificates secured by future city revenue, providing a short-term source of funds to carry on “essential services.”
“The bankruptcy option,” wrote Charles J. Orlebeke in a definitive study of the Ford White House during the city fiscal crisis, “appeared to offer him [the president] both a morally satisfying and administratively feasible path.”
But in a speech to the National Press Club on October 29, in which Ford laid out his new bankruptcy provision â€“ delivering first formal statement on the New York crisis since May â€“ his tone and message were noticeably un-gentle.
Ford, in the fateful speech, ignored the Herculean efforts made by Carey and Beame over the past six months, such as the sale of MAC bonds to stretch out of the city’s massive short-term debt, and the imposition of a financial control board to enforce deep cuts in city spending (including a planned 60,000 layoffs over the next three years). The president labeled the city, and its inability to meet its obligations, “unique among municipalities through the United States,” and alluded back to “a steady stream of unbalanced budgets, massive growth in the city’s debt, extraordinary increases in public employee contracts, and total disregard of independent experts who warned again and again that the city was courting disaster.”
He denounced “scare talk” used by New York politicians and bankers—“the blatant attempt in some quarters to frighten the American people and their representatives in Congress into panicky support of patently bad policy”—and added: “The people of this country will not be stampeded. They will not panic when a few desperate New York City officials and bankers try to scare New York’s mortgage payments out of them.”
The city’s “high wages and pensions . . . its tuition-free university system, its city-run hospital system, and welfare administration,” as Ford depicted them, meant, too, that the city must be taken to task. But he said the city’s political leaders had shown that they could not be trusted to exert spending discipline. An unearned and undeserved bailout by Congress, he said, would only set a “dangerous precedent,” signaling the willingness of the federal government to provide “immediate rewards and eventual rescue for every other city that follows the tragic example of our largest city.”
New York, Ford said, must face its “day of reckoning.”
“I can tell you, and tell you now,” he pronounced, “that I am prepared to veto any bill that has at its purpose a bailout of New York City to prevent a default.”
New York, Drop Dead
Ford’s speech stymied some inroads Gov. Carey had been making with key congressional committeees. More broadly, the address was a line in the sand, marking the beginning of a profound change arising in American political life, one that would be expressed in the angry citizen property-tax revolts a few years away. California voters in 1978 would approve Proposition 13, which deprived that state of increased taxes to pay for its systems of transportation, education, sewerage and potable water in an anti-tax movement that helped set the stage for the election of former California governor Ronald Reagan as president in 1980, not to mention his inaugural address in January, 1981, in which he declared, “Government is not the solution to our problems—government is the problem.”
The debate in 1975 over New York’s fiscal fate offered an early clue to the anti-tax fervency that was soon to gather to a gale force, although few imagined how successful that ideology would become, the vast social inequalities it would foster, or how ferocious and long-lasting would be the public and political backlash against unions, government, and public regulation of private industry and Wall Street. These first gusts emphasizing the finite nature of the public purse—which liberalism, in its view of government as the principal vehicle of opportunity and advancement, had never really defined—eventually turned into cyclonic winds in the 1980s, as corporate interests and influence rose, dominated and flourished.
Ford’s immediate need to court the right-wing of his party in the face of a Reagan challenge was a crucial factor in his giving New York the cold shoulder. He also made up his mind that fall to exclude from his reelection ticket Vice President Rockefeller, known as a liberal Republican and inextricably identified with his home state of New York, selecting instead the conservative Kansas Senator Bob Dole as his vice-presidential running mate.
Carey adviser Felix Rohatyn recalled that he and Carey watched Ford deliver his National Press Club speech on a television set in the governor’s Manhattan office and were “thoroughly depressed” as they sat down afterward for a late dinner at Elaine’s on Manhattan’s East Side. A newsboy walked into the casual bistro favored by Manhattan notables at about ten o’clock, hawking the early edition of the New York Daily News, and no one could believe their eyes. The front page headline in 144-point type, soon to be seen by millions of readers, screamed: “FORD TO CITY: DROP DEAD,” followed by the explanatory words: “Vows He’ll Veto Any Bail-Out.”
Powerful and unsettling—and immediately famous—the headline was an “unfortunate overstatement,” as James Cannon put it years later at a Hofstra University forum on the fiscal crisis, for Ford had never actually uttered the words “drop dead.” And he did not harbor malice toward its citizenry.
Ford himself was deeply stung by the headline. As late as 2001, five years before his death, he approached David Burke, who served as secretary to the governor under Carey, at a gala dinner honoring the ex-president with the John F. Kennedy Library’s “Profile in Courage” award for having delivered his controversial pardon of Richard Nixon “I want to get one thing straight,” Ford told the former Carey aide. “I never said â€New York City drop dead.’ I never said that.”
The headline, however, reflected the fact that the president was, as he put it, “prepared to veto any bill that has at its purpose a bailout of New York City to prevent a default.” It arguably cost him New York State’s 41 electoral votes in the close presidential election that followed in November, 1976, against Democrat Jimmy Carter of Georgia, after Ford’s defeat of Reagan in the primary. Former Wisconsin senator and Ford friend Melvin Laird said years later that the headline was exceeded only by Ford’s pardon of Nixon in the degree of damage it caused his popularity and chances in the 1976 election. “That headline caused him a lot of harm, almost as much harm as the pardon did.”
According to Rohatyn, Carey glared at the News headline before him at Elaine’s and pronounced: “Now we’re going to win.” It seemed to everyone sitting at the table that night that he was right and that Ford would not be able to withstand the ensuing heat. Yet Carey worried privately. Despite what he told his dinner companions, he felt the headline might cause Ford to harden in opposing a New York aid package so he wouldn’t appear to waffle or flip-fl op at a critical moment, with the eyes of the country and the world upon him. Still, he felt that Ford would remain true to his word of September 2 and support federal assistance if Carey could bring Republicans (as well as many reluctant Democrats) around in Congress.
Carey all the same moved quickly to exploit the headline’s national impact and point a finger of accusation at Ford and the Republicans in Congress for promoting the city’s demise at the risk not just of the city itself but of almost everyone. Speaking to a gathering of the AFL-CIO in upstate New York, the governor was indignant, saying it “isn’t fair when the President of the United States hauls off and kicks the people of the city of New York in the groin.”
On the first of November, he delivered a blistering statewide radio and television address, emphasizing that the threat of a default had already raised the cost of borrowing in many cities and states. Knowledgeable and well-organized, he further declared that the “Ford formula deliberately unravels every step we’ve taken to solve our own problems,” as the easier bankruptcy option he proposed would scare off prospective investors in municipal bonds.
“Who would risk his funds knowing that the government could avoid repayment simply by slipping into bankruptcy?” the governor asked. Carey accused Ford of effectively running for reelection at the expense of the city’s millions of residents, with his “simplistic, self-defeating plan . . . designed more to appease the Republican Party’s Reagan wing than to help New Yorkers.”
If the city defaulted on its obligations, Carey stated, the holders of the city’s $14 billion in outstanding bonds and notes would conservatively lose $6 billion in the value of those securities. “That money will be written off on tax returns, and that means $2 billion less in federal tax payments.”
Carey added that it would be left to the U.S. Treasury to pay the cost of unemployment insurance and welfare assistance when businesses owed money by the city, including those “in communities such as Grand Rapids, Michigan”—Ford’s hometown—went under, while there would be “tremors and collapses in local governments around America, including agencies of New York State.”
Even so, Carey acknowledged that Ford was correct in describing the city’s history of fiscal irresponsibility. But he said the blame belonged to many, mentioning “city officials and interest groups; banks that did not ask the hard questions; a state legislature and hand-picked vice president”— former Gov. Nelson Rockefeller—“that specifically authorized every fringe and pension benefit and every unwise borrowing Mr. Ford now attacks so righteously; and presidents who diverted tens of billions of dollars to foreign dictatorships and senseless war, and who plunged our economy into its worst crisis in 40 years.”
Carey acknowledged the existence of a “skeptical, hostile” Congress, and the antipathy that New York City aroused in many quarters.
“Our city,” he conceded, “is often abrasive and arrogant, sometimes cold and unfeeling, always challenging. For a lot of reasons it has incurred the scorn of some of our countrymen; because of our pace and tone of voice, because of the colors of our skins and the accents in which we speak, and our tradition as a magnet for the disaffected, the dispossessed. What we’re hoping to buy” from the White House and Congress “is time to finish the job we’ve started. We don’t want to be bailed out. We don’t want to be a ward of the federal government. I ask Mr. Ford not to work against us to make New York bankrupt. I cannot believe that the specter of temporary political gain will lead him into driving a city into bankruptcy and risking the loss of taxpayers’ dollars . . . If the financial structure of government is shaken, Mr. Ford will be accountable to all the people.”
But he had faith in the president, Carey concluded.
“I spent more than a decade with Gerald Ford in Congress. We disagreed about many things. But I always found him a man ready to negotiate and compromise for a practical result.”
(The Man Who Saved New York is published by SUNY Press. For further information about the book or to purchase a copy, go here)
Last Updated (Jun 06, 2012)