The Streets Were Paved with Gold - Ken Auletta [54]
Repeal of the Port Authority’s Bond Covenant
One of the biggest trades in New York history did not involve George Steinbrenner’s Yankees. In 1962, the tristate Port Authority, architect and toll collector on many a bridge, tunnel and road, made a swap with the governors of New York and New Jersey. In exchange for its agreement to take over and modernize the Hudson River commuter rail link between the two states, the Port Authority received permission to build a world trade center in lower Manhattan. The legislatures of the two states also passed covenants solemnly pledging that the Authority and its bondholders would never again be asked to take over a deficit-plagued mass transit system. Since such systems chronically lose money, the covenant effectively prevented the rich and powerful Authority from investing in mass transportation. It also reassured bondholders that their investments would continue to be secured by revenuegenerating projects.
Years passed. The Authority’s surpluses grew. Mass transit revenues shrank. Slowly, a chorus of critics also grew—lashing out at the Authority’s refusal to invest in mass transit, at the $850 million lavished on the World Trade Center, at the miles of “profitable” concrete ribbons strangling New York. The leading critic was labor attorney Theodore Kheel. He filed suit in federal court, challenging the covenant as unconstitutional. He organized citizens’ committees to support the worthwhile goal of improved mass transit.
By 1973 and 1974, political support for repeal of the covenant was widespread. Before turning over the reigns of state government to Malcolm Wilson in late 1973, Governor Rockefeller extracted a pledge that he would repeal the covenant. On April 30, 1974, Governor Brendan Byrne of New Jersey signed the repeal. The legislature of the State of New York also voted repeal. But Governor Wilson hesitated. He worried, he said later, that repeal would “overturn a solemn pledge of the state.” Kheel responded: “Repeal of the 1962 statutory covenant will in no way impair the security of Port Authority bondholders.” Wilson was attacked by fellow Republicans, who warned that failure to repeal would lead to failure in the November elections. Hugh Carey and Howard Samuels, the two Democratic challengers for governor, blasted Wilson, as did the City Bar Association, The New York Times, and just about everyone in politics, including me. As Samuels’ campaign manager, I gleefully encouraged the attack on Wilson, even helped write it. Meanwhile, a handful of bankers prattled about the loss of something called “investor confidence,” whatever that meant.
Just moments before the June 15 veto deadline, Governor Wilson relented and signed the repeal. After an agonizing appraisal, he said, it was determined to his satisfaction that the repeal was constitutional. The courts disagreed, deciding in 1977 that repeal of the covenant was unconstitutional.
But the damage had been done. This strange term “investor confidence”—which couldn’t be tasted, smelled, measured or quantified because, like air, it is invisible—suddenly took center stage. According to former state Banking Superintendent John Heimann, repeal was “a critical first step” and had a “profound effect on investor confidence” in government securities. “The abrogation of this covenant without consent or compensation, I believe, is not only illegal, but shortsighted,” wrote Staats M. Pellet, Jr., of the Firemen’s Fund American Insurance Companies to Paul Belica of the state HFA. “You are aware that credit rests not only on covenants between borrower and issuer, but also importantly on trust. With this action, the bond holder’s faith in New York State has been shaken.…”
Repeal came at a bad time. Following the Arab oil boycott, energy costs were soaring, the national economy was in a recession, there was an international crisis, the financial community was suffering