The Streets Were Paved with Gold - Ken Auletta [56]
The financial community was experiencing its own problems, and the UDC default hardened resistance to government securities. “The Nation was just recovering from the most severe recession of the post-war period,” Lynn E. Browne and Richard F. Syron observed in a 1977 issue of The New England Economic Review.
Memories of double-digit inflation were still fresh and the performance of the wholesale price index over the summer and fall was not reassuring. Bank loan losses were at record levels and the collapse of real estate investment trusts had affected the profits of many financial institutions. Prophets of doom abounded. A natural result of these developments was a significant increase in investors’ caution.
Coincident with this overall increase in caution was a major decrease in the demand for municipals by traditional purchasers. Commercial banks have traditionally been the single most important purchaser of municipal bonds and as late as 1972 bought 50 percent of all new issues. The tax-exempt feature of municipals has made them an attractive vehicle for sheltering commercial banks’ income. In the last several years, however, banks have developed alternative ways of sheltering income. Also, loan losses of banks in 1975 placed many of them in a position where they had little income to shelter and thus no real need for tax exemptions. As a result, commercial bank acquisitions of state and local obligations fell by 70 percent from 1974 to 1975. Property and casualty insurance companies, the second largest group of institutional buyers, also had a poor profit year in 1975 and reduced their purchases of municipals by 30 percent from 1974.
The spillover from the UDC default hit New York City in another way. For the first time, a bank bond counsel refused to automatically sign off on the issuance of city notes without confirming to its satisfaction that there were sufficient revenues to support repayment. This happened when lawyers for White & Case, who represented a Bankers Trust syndicate of underwriters, told Comptroller Goldin in a February 27, 1975, meeting that they wished to inspect the city’s tax receipts. “The Comptroller and the City Corporation Counsel stated that this request for more current information by White & Case was unprecedented,” the SEC staff report would later recall. “In response, concern was expressed that, in view of the recent default of the Urban Development Corporation (‘UDC’) on its debt securities, underwriters should be reviewing new and different types of information than had been previously requested.” The meeting in the Comptroller’s office dragged on into the wee hours, with the city finally consenting to permit the inspection of its tax receipts.
After studying these receipts on the morning of February 28, White & Case firmly decided not to issue an opinion approving the sale. In response, Comptroller Goldin issued a dissembling press release: “Contrary to inaccurate reports which have been circulated, there is no question concerning the sufficiency of City tax revenues to meet all obligations including the February 19th offering. The certainty of repayment is in no way an issue in the deliberations now taking place.” A joint statement from the Mayor and Comptroller chimed: “The recent default by the state Urban Development Corporation” has created an “unwarranted climate of suspicion in the marketplace.” New York City taxpayers, they said, should not be forced to pay for the mistakes of “another jurisdiction.”
The state Housing and Finance agency was forced to postpone a scheduled note sale. Construction on more than $1 billion in nursing homes, hospitals, facilities for the handicapped and other projects was halted for lack of investors. New York City’s market would have collapsed without