The Streets Were Paved with Gold - Ken Auletta [55]
The UDC Defaults
The sixty-four-page annual report of the state Urban Development Corporation (UDC), the powerful housing construction agency, began: “1975 can be a banner year.…” It was, of sorts.
On January 1 of that year, Governor Carey captured banner headlines by blasting the housing agency’s “mismanagement.” Fifteen days later, UDC President Edward J. Logue—sounding like Abe Beame would a few months later—charged that his agency’s inability to borrow was due not to mismanagement or revenues that did not equal expenditures, but to a refusal to “knuckle under” to the dictates of the banks. State Comptroller Arthur Levitt, sounding like a broken record, again deplored the UDC’s reliance on “moral obligation” bonds, claiming that they avoided the constitutional requirement for voter approval of all state bonds. Levitt also castigated the banks for “cooperating with a vengeance” to reap handsome profits from the UDC over the years.
The UDC was in trouble. The moral obligation debt of the state had grown by about $8 billion between 1964 and 1974, with the UDC as the largest benefactor. By 1974, the state had almost onequarter of all the outstanding nonguaranteed long-term debt in the nation. Rushed through the legislature in 1968 by Governor Rockefeller, ostensibly as a memorial to the slain Martin Luther King, the UDC had extraordinary powers to slice through red tape and build housing. The UDC was a national model. But its revenues fell short of its debt service payment needs because most of its projects were not self-sustaining. By late 1974, the most powerful housing agency in the nation was enfeebled, and the incoming governor, Hugh Carey, ordered a task force to seek ways to prevent its collapse.
Since UDC Bonds were backed only by the state’s “moral obligation,” investors were naturally nervous. After a series of frantic meetings and touch-and-go negotiations with the banks, on February 26 Governor Carey shaped a bipartisan plan to provide the UDC with continuous financing and stave off its collapse. There was statesmanship on all sides, and the plan was duly saluted. Largely overlooked, however, was the fact that the UDC defaulted on the repayment of $104.5 million of notes due on February 25 when the state legislature refused to appropriate the monies. Governor Carey double-talked: since these were short-term notes, he said, they “do not carry the moral obligation of the state.”
Four weeks later, the state made good on the money. But the psychological damage was done. The UDC became the first major government agency to default since the Depression. The message communicated to investors was clear: state “moral obligations” were not legal obligations—the state could unilaterally break a contract. “People did business with the UDC—small businessmen, architects, civil rights organizations—thinking they were doing business with the state of New York,” explained Richard Ravitch, the man Carey installed as the dollar-a-year UDC chairman after replacing the discredited Logue. “The fact that they technically were not doesn’t matter now.”
The consequences were swift. Out-of-town investors, the key to the banks’ underwriting function, got cold feet about all New York securities. “Why should I buy the moral obligations of immoral politicians?” screamed one Wall Street bond trader. That same day, The Wall Street Journal reported, “Public authority bonds fell an average of $15 for each 1,000 face amount.” Michigan’s Housing Department Authority couldn’t sell some of its bonds. The New Jersey Housing