The Streets Were Paved with Gold - Ken Auletta [70]
The banks’ defense against the charge of dumping revolves around facts as well as perceptions. Again, the SEC is accused of molelike vision, of failing to consider the larger picture of what was happening to the banking world during the time of the city’s travail. This larger picture was sketched by the city in their November 1976 brief to the SEC. Offering a defense of their own actions, the city also, perhaps inadvertently, offered a defense of the banks:
The problem for the City in this period of increasing capital scarcity, was compounded by the growing inability of its principal supplier of credit—the banking community—to purchase its securities. This difficulty was not necessarily related to any particular City problem. Rather, it reflected difficulties which the banks themselves were having—difficulties largely the product of a serious depletion of their available capital caused, among other things, by losses in Real Estate Investment Trusts (REITs), major bankruptcies (such as W. T. Grant) and foreign loans. And at the same time as their capital base was shrinking, banks began to view alternative tax shelters as more beneficial to them than municipal investments.
Such tax shelters as the leasing of equipment and foreign loans were competing with municipal securities. According to the Comptroller of the Currency’s figures, 259 banks leased $412 million worth of equipment in 1967. By 1975, 691 banks invested $3 billion in such equipment. Not only was the leasing of this equipment tax-free, but the banks could deduct the depreciation of this asset against their ordinary income. A similiar boom took place in foreign loans. According to the Federal Reserve Board, between 1965 and 1976 the number of American bank branches overseas exploded from 13 to 126; their assets, from $8.9 billion to $229 billion.
In 1972, commercial banks were purchasing half of all municipal securities in the U.S. But, according to a study by Lynn E. Browne and Richard F. Syron, in 1974–75 these purchases plunged 70 percent nationally, and insurance company purchases declined by one-third. Disinvestment wasn’t happening just to New York. The Congressional Budget Office has released figures showing that nationally banks purchased $3.4 billion less of all municipal securities from 1974 through the first quarter of 1975. But also—contradicting the conspiracy view—their investment in municipals rose by $6.7 billion in the next quarter of 1975.
In addition to tunnel vision, the banks accused the SEC of being blind to the facts. William Haddad, the Assembly Banking Committee’s chief staff interrogator charged: “The city’s major banks quietly and quickly divested themselves” of $2 to $2.5 billion of city securities between the fall of 1974 and the spring of 1975. In testimony before the Committee, five of the six major city banks came armed with refutations. Of the six, only Chase was shown to have reduced its city note holdings in the period prior to the market’s closing on New York (by $93 million). Morgan Guaranty said its holdings almost tripled, from $51 to $148 million. Bankers Trust went from $38.5 to $50 million; Citicorp’s own investments remained zero throughout, but its dealer account grew from $24 to $30 million; Manufacturers’ holdings remained constant at $164 million; and Chemical, as the SEC reported, expanded its holdings.
To buttress their case, the banks point to a September 7, 1977, letter from SEC Chairman Harold Williams. The letter to the banks acknowledged that his staff’s “interpretations and conclusions” of certain facts were contestable. “Naturally,” he wrote, “others may reach conclusions different from those of our staff.” The “key question,” he said, was not whether the banks dumped but whether, in effect, they should have “in the face of increasingly adverse information—unavailable to the public in an understandable form—which cast severe doubt on the city’s financial capabilities.”
Confronted with this evidence, Haddad told The New York Times that his use of the words “dumping or