The Streets Were Paved with Gold - Ken Auletta [57]
IN MARCH AND APRIL 1975, the market slammed shut to New York City securities. To save New York from bankruptcy, the state advanced the oity $800 million: As default—the inability of the city to pay its creditors, including its workers, on time—again loomed, in June Governor Carey shepherded the creation of the Municipal Assistance Corporation (MAC) to monitor city finances and to create “investor confidence in the soundness of the obligations of the City.” In August, all agreed the city’s cumulative deficit was over $3 billion. MAC was authorized to borrow $3 billion for the city, pledging specific revenues as security, and it was assumed that by September the city would be back on its feet and in the bond market.
It didn’t work that way. Investors remained wary. So, in September 1975, the state created the Emergency Financial Control Board, consisting of four elected officials—the governor, mayor, city and state comptrollers—and three nonelected business executives. The Board was granted tougher “emergency” powers to police the city’s budget, to approve or reject city contracts, and to order the preparation of a three-year city fiscal plan. Still, the Control Board did not succeed in restoring investor confidence.
Regular cash deadlines neared, and nerve-ending dramas were played out as all the participants marched to the brink of bankruptcy—each time pulling back at the point of no return. Usually, employee pension fund trustees would relent at the last minute and agree to invest more of their members’ money. Sometimes the banks agreed to roll over due dates on securities. With notes coming due in November, the state legislature, at the instigation of city officials, declared a moratorium on the repayment of $2.4 billion of outstanding city notes. Next, the federal government came to the rescue, narrowly approving a $2.3 billion annual seasonal loan to the city (to be repaid with interest) after assurances that this loan would put New York back on its feet. Without it, MAC Chairman Rohatyn warned, the Western world’s economy might collapse. Without it, warned former Under Secretary of State George Ball, communism would achieve a great victory.
For the next three years, the city limped along, again barely escaping bankruptcy when the New York State Court of Appeals declared the Moratorium Act unconstitutional in November 1976. By the winter of 1978, the city once again admitted a huge deficit, once again returned to the Congress, once again issued dire warnings that without new federal loans New York—perhaps the country, perhaps the world—would go bust.
Chapter Three
Is Anyone Responsible?
THE FRANKLIN NATIONAL BANK retains the distinction of being the largest bankruptcy case in American banking history. In October 1974, the bank went broke. And in August 1975, eight Franklin National officers were indicted by a federal grand jury. The indictments charged them with trading in foreign currency without adequate collateral; filing fraudulent financial statements claiming profits of $79,000 at a time when losses were totaling $30 million; defrauding investors and creditors by issuing false financial statements to obtain a $35 million credit extension from Manufacturers Hanover Trust Company. Several laws were broken, including: Title 18, U.S. Code, Sections 1001 and 1014; and Section 32 and Rule 10b-5 of the Securities and Exchange Act of 1934. Most of the defendants received stiff fines and prison sentences.
The City of New York has the distinction of being the largest potential municipal bankruptcy in American history. In August 1977, the Securities and Exchange Commission issued an 800-page staff report accusing past and present officials of fraud. “The city,” they concluded, “employed budgetary, accounting and financial practices which it knew