The Streets Were Paved with Gold - Ken Auletta [173]
The picture was considerably brighter for the banks. The major New York banks emerged in far better shape in 1978 than they were in three years earlier. During this period, they liberated their portfolios of most of their city notes and reduced their investment in city securities, converting the majority to more secure MAC bonds (unlike employee pension funds, which invested three times as much but got stuck with more precarious city paper). The banks had reason to celebrate. The Wall Street Journal, in a June 29, 1978, editorial, explained why, despite the city’s spreading deficit, the banks agreed in the summer of 1978 to purchase $500 million of MAC bonds to help the city through 1982. “It grows increasingly plausible,” the Journal said, “that the answer lies in what is known to insiders as the ‘10–b–5 issue.’ That is the section of the securities law that outlaws fraud. The banks underwrote huge volumes of New York City notes just before its fiscal crisis exploded in 1975; their critics have charged that they knew the crisis was mounting and made fraudulent misrepresentations to buyers of the notes. The significance of 1982 is that by then the statute of limitations will have run out.… As long as there’s a strong public market for MACs, the banks can argue that money losses were relatively small.… The [banks’] liability would obviously be far more serious in the event of a city bankruptcy, which could drag down MAC as well. So the bank defendants have an obvious interest in keeping the city afloat until a Friedlander settlement [noteholder suits] or the statute of limitations closes off any more damage suits.” Though the Journal overstated the case—all current suits will be adjudicated and will not be cut off by a 1982 statute of limitations—it is true that a city bankruptcy would invite a flood of lawsuits.
Senator Proxmire revealed still another reason to celebrate: the assets of the largest city banks jumped by 23.5 percent between September 30, 1975, and September 30, 1977. Yet their holdings of city and MAC securities dropped 3.4 percent. By the spring of 1978, the six major city banks had less than 1 percent of their assets tied up in city paper, compared to a scheduled 38 percent by the city’s pension funds. If the banks simply returned to their 1975 level of investment (0.92 percent of assets), Proxmire complained in 1978, “this would net New York City about $2.3 billion in long-term financing over the next four years.” “Certainly,” Proxmire and Massachusetts Senator Edward Brooke wrote in a joint letter to President Carter on December 23, 1977, “there is no reason to assume that such investments would be more risky than some of these banks’ foreign loans, which consume a far larger proportion of assets.”
Despite unprecedented “sacrifices,” the municipal unions didn’t do as badly as their rhetoric suggests. “The unions have been without any increase for almost three years,” declared PBA President Sam DeMilla in late 1977. A 1978 advertisement signed by Victor Gotbaum, Executive Director of D.C. 37, wailed: “After three years without raises …” Jack Bigel thundered, “We haven’t had a wage increase in three years.” These views were echoed by and widely believed both by the general public and the press. After all, the Emergency Financial Control Board legislation, passed in September 1975, ordered a three-year “pay freeze.”
Or so we were told. Buried in a black, 300-page transition briefing book for Mayor-elect Koch, was a five-page memorandum which suggested there was no “freeze.” Since December 1974, the memorandum revealed, city employment had been slashed almost 23 percent—yet city labor costs, which totaled $5.5 billion in 1977, declined by less than 1 percent.
How could it be? There had been 25,000 layoffs, another 36,000 workers had retired or resigned, there was a one-year 6 percent pay deferral,