The Streets Were Paved with Gold - Ken Auletta [69]
The financial community’s defense against the SEC staff report charges is remarkably similar to the city’s. Regarding the first charge—failure to disclose—they, too, responded that the SEC was guilty of nitpicking legalisms, ignoring the larger reality of what was going on at the time; that is, how they were trying to keep the city afloat, tiying to avoid panic. How could they have secret, inside information not shared with investors, they ask, when the danger signals were “generally known”?
“The SEC staff offers the explanation that naive investors were deliberately misled by unscrupulous underwriters,” said Walter B. Wriston, chairman of Citicorp, ridiculing the SEC report:
As proof, they submit a survey of individual investors, 90 percent of whom now deny that they had any awareness of potential risk when they bought City notes. I suppose, in theory, it is possible to imagine a person at that time who had at least $10,000 to invest, who never read a newspaper, who never saw a fiscal crisis headline, who never heard a high-decibel debate on radio or television, and who invested without the least inkling that there might be a worm in the apple. It is possible to imagine one. Two is extremely doubtful. And 90 percent is ridiculous on the face of it.
There is a more believable explanation. New York City had a credibility problem in reverse. Rather than too little investment credibility, it had too much.
Wriston’s testimony, which was given to the State Assembly Committee on Banking in October 1977, went on to note that these were anticipation notes and city officials were offering assurance they would be paid promptly. Who could believe that a city of 8 million people—the Big Apple—couldn’t come up with the funds?
In his book A Time for Truth, former Treasury Secretary William Simon has a chapter on New York in which, for half a page, he stops pointing his finger at others and elaborates on his own role:
No one—whether the New York politicians or the unions or the most prominent bankers of New York or the New York press—has ever given a coherent explanation of why a collapse that had been building for a decade had not been anticipated. I cannot point the finger in this respect, for I hadn’t expected it either. It was particularly ironic in my case, for in the late sixties and early seventies, when I worked at Salomon Brothers, I had been a member of the Technical Debt Advisory Committee set up by Abraham Beame when he was Comptroller of New York. We supplied the city market advice on its financial transactions, but at no point during any of these sessions did any one of us seriously question the underlying fiscal condition of New York. We all worked with the numbers given us by the city itself, just as do the advisory committees to the federal government. It never occurred to us to disbelieve those figures, which always indicated that New York would be able to repay its debt.
Twenty-seven pages later he accused the banks of “cowardice” for not standing up to the city.
“Even with the benefit of hindsight, it is difficult to see what more the underwriters could have done,” claimed Wriston, the city’s foremost banker. They had no authority to compel city officials to disclose new information, nor, he declared, in the crisis-wrenched atmosphere, was there time to prepare such a prospectus. “To state it flatly,” he said, “there were more urgent problems to solve at the time. When the house is on fire, you don’t sit on the curb drafting new safety regulations.” A vice president of Wriston’s bank put it another way: “We were cowards.” Rather than risk the political heat and blame for a city default—vituperative charges, vengeful legislation, Congressional investigations—the