President Carter

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President Carter Page 49

by Stuart E. Eizenstat


  The city’s financial plight was so dire that when Carter held his first postelection meeting with the newly named cabinet nominees and White House staff, incoming Treasury Secretary Michael Blumenthal brought along Roger Altman, a young financial wizard who was deeply familiar with the city’s problems and the only subcabinet nominee invited. He would soon be named assistant secretary of the Treasury for domestic affairs. The last thing Carter needed coming into office was a financial implosion in the nation’s largest city, which could impede his economic recovery plans, and Altman would be working with Kramer to avoid it.8

  It quickly became clear that we had a stark choice: Help save the city or let it go bankrupt. There really was only one answer, but the question was how to save it for the long term, with minimum federal support and maximum local concessions. During the first weeks of the administration, Beame and the city’s comptroller, Harrison “Jay” Goldin (who I found out years later was my distant cousin), came to the White House to remind the president of Beame’s support in winning New York, and to collect on the general commitment he had made to help the city. The president called in Blumenthal, who promised to deliver a rescue program within thirty days.9

  Altman and Kramer talked more than once a day, and I often joined them. They made an odd but effective couple. Altman had an MBA from the University of Chicago, and, within only five years of joining the firm, became a partner at Lehman Brothers in New York. He met Carter in early 1975 when members of the firm were invited to meet the candidate for breakfast and Altman offered to help in his campaign. He was intensely focused, laconic, and a quick study. Working with Kramer, they interviewed labor leaders, bankers, and officials from the governor and mayor on down to sketch out the concessions that each would need to make to obtain federal assistance. They also touched base with key members of Congress who would have to support any program proposed by the president.

  The union leaders were especially belligerent. Albert Shanker of the teachers’ union, Barry Feinstein of the sanitation workers, and—crucially—Victor Gotbaum, with 110,000 members of the American Federation of State, County, and Municipal Employees, were proud of the middle-class incomes they had negotiated with the city over the years. Gotbaum was a shrewd bargainer but also an expert in raw intimidation. He dismissed Beame as a “basket case,” his mayoral successor, Ed Koch, as a “bald-faced liar,” and the administration of their liberal Republican predecessor, John Lindsay, as a “disaster.”10

  But the city’s abiding problem was that it could not afford its workers’ high wages and benefits. A crucial player was Jack Bigel, who over the years had evolved from a union organizer to the financial adviser for the municipal unions. The leaders’ confidence in Bigel was essential because he persuaded them to make major wage and pension concessions that they would never have been able to make on their own. While Altman, Kramer, Blumenthal, and Rohaytn met with the unions together, informal and separate meetings were necessary with each union. At each stage, Bigel would tell Altman what he felt each union would be willing to do. But Altman, Kramer, and Blumenthal nevertheless had to cajole and threaten them at endless meetings, with bitter exchanges, table banging, and walkouts.

  The crucial break came when Gotbaum finally understood that bankruptcy would be a disaster for the city and his own members. He played a crucial role in persuading the other labor leaders to accept a partial wage freeze that was designed to protect the lowest-paid workers.

  Our team and eventually the president himself had to deal with the bankers who held much of the city’s debt. They were the bluebloods of New York and American finance—Walter Wriston of CitiGroup, David Rockefeller of Chase Manhattan, and John McGillicuddy of Manufacturers Hanover Trust. Their massive loans to the city were coming due, and they wanted to protect their shareholders from a default. Our plan was to require—not ask, but require—them to convert their short-term finance into long-term loans at a lower interest rate to give the city some breathing space. In all of these intense negotiations, the administration had to work in lockstep with Rohatyn’s Big MAC and the state’s Emergency Financial Control Board to stiffen the spines of the mayor and his team to stand up to the unions. I also worked to line up support from other cabinet departments, for example by encouraging Transportation Secretary Brock Adams to provide $280 million for New York City’s mass transit system, the largest in the country.11

  When Altman, Blumenthal, and Kramer traveled to New York, the “press attention was insane,” in Altman’s words. Blumenthal was surrounded by at least two dozen journalists whenever he stepped out of his hotel, which made it difficult to develop a plan. Because the package had to consist of concessions from so many of the city’s disparate and warring stakeholders, our recommendations had to be kept strictly among ourselves. By the middle of 1977, our team felt we had sufficient facts to begin to sketch out the details for a plan that we could push through a reluctant Congress. Blumenthal warned the cabinet in November12 that everyone in New York was going to have to make a major contribution. Ham Jordan, conscious of the politics of the negotiations, implored Blumenthal to avoid telling his interlocutors in the city that they should not expect long-term help from a tight federal budget that might force them to trim urban services.

  At the next cabinet meeting, Blumenthal bemoaned the fact that Governor Carey had complicated matters by cutting state taxes and then asking Congress for help.13 At our weekly EPG meeting at the end of January,14 I delivered a tough message on the hurdles we faced in Congress. The next day I repeated the warnings15 to Blumenthal and Ham and reminded them that the president was going to New York on February 5, and would have to clarify his position. This would mean publicly reversing Ford’s refusal to provide long-term help. Moreover, trouble loomed with a potential transit strike on March 31; each 1 percent wage hike would cost the city $33 million.

  Carter had shrewdly stayed out of the mess as long as possible and did not meet with the labor leaders or the banks. However, he was very much present in the way that a president should be: He laid down a marker of what he expected, kept abreast of developments, and left it to experienced officials to find the right place and time for him to intervene directly, which is exactly what happened. We brought the president into what had become a boiling political cauldron on February 2, 1978, at a meeting with the newly elected mayor, Ed Koch, Comptroller Goldin, and City Council President Carol Bellamy.16

  The English language is not rich enough to properly describe Ed Koch. He was middle-aged and bald, had won election as mayor after serving several terms as a reform congressman from New York’s Greenwich Village. Koch would give a bad name to the Yiddish term “chutzpah,” the formal translation of which is unmitigated gall—like someone calling tech support to report a bug on software he pirated!17 He was pompous, prickly, disrespectful, endlessly demanding, while being short on compliments and playing to his constituents in an offensive way, and would eventually stab the president in the back over a UN resolution involving Israel just before the 1980 New York primary, despite Carter’s having saved his city. There was no such thing as a private meeting with Koch; everything would be instantly leaked to make him look good. My mother, Sylvia, always taught me to look for the best in people, and I had difficulty finding it in Ed Koch. But his greatest faults became his essential virtue in the city’s financial crisis, when he served as an implacable political strategist in standing up to the powerful municipal unions, banks, and other major players.

  Koch treated everybody that way, and it was usually how he got what he wanted, which in beleaguered New York City took some political courage. The mayor presented us with a long list of requests, but to his credit he was on his best behavior at his first meeting with the president. More important, he understood the need for sacrifices on his side and put some on the table—reducing and extending the city’s short-term credit to $1.2 billion and keeping it there; repairing the city’s aging infrastructure by issuing long-term bonds with a government guarantee that un
derwrote major purchases by the city’s union pension funds; reducing municipal workers by 60,000, with another 20,000 if necessary; and finally, ending free tuition at the city’s colleges, long a signature of the path toward upward mobility symbolized by the promise of the city itself.

  Koch told us point-blank: “I will stand up to the municipal unions; they can’t strike. I won’t spend more than we have.” He pledged to end the pernicious practice of drawing operating funds from the city’s capital budget and argued that his plan dealt with all the issues that had locked the city out of the financial markets. It was an impressive performance. When the president joined the meeting, Carter firmly declared: “I do not want New York City to go into bankruptcy, but this must be based upon all the local parties doing their share.” He promised that the administration would take a “responsible attitude” at congressional hearings scheduled in three weeks, on February 24.

  After the president left, I stayed back with Altman and Kramer to go over further details with Koch and Goldin.18 From the administration’s perspective, we were particularly concerned, and so was Congress, with what economists call “moral hazard”—the realization that once saved, any individual, company, city, or even a nation may feel free to repeat risky financial behavior in the expectation of being bailed out again (a problem that came back in spades when banks were bailed out during the financial crisis of 2008). In this case we were concerned that other cities might follow the example of New York and line up for federal help. The New York delegation understood that fully, and Goldin said they were ready to meet municipal metrics “so substantial, so burdensome, so onerous” that no other city would reach out for federal loan guarantees, unless they were “in extremis” like New York. Koch then asked us to press Governor Carey for more state assistance in a package that would also make demands on the city’s unions and banks.

  We also wanted to put New York City’s problems in the context of a more comprehensive urban policy. During the first half of the 1970s, eleven of the twenty largest metro areas were located in the nation’s northern quadrant, and together they had lost 1.5 million residents, including New York City, eroding their tax base.

  During Carter’s early “cabinet government” phase, Patricia Harris, the secretary of Housing and Urban Development (HUD), was given the lead to coordinate more than a half-dozen agencies to focus funds on urban areas. During that early period, the effort got off to a dubious start in October 1977, when the president and Harris went with Bronx Borough President Robert Abrams to what looked like a war zone in the South Bronx, to draw attention to the plight of inner cities, and to show that a rural Southern president cared about the problems of urban America.19

  Four years later, however, that same site provided Ronald Reagan a campaign attack when it still looked as empty as when Carter visited. But on the thirtieth anniversary of his appearance, a New York Times article showed a vibrant neighborhood on the very site—although that could hardly be attributed to our urban policy alone.20

  Harris, a talented but turf-conscious cabinet officer, threw her hands up, and turned the lead over to me and my staff, telling me the other cabinet departments would take orders only from the White House. We worked effectively together to bring the president’s urban policy before a group of mayors and county officials in February 1978.21 Our plan changed federal policy to locate new government facilities in central cities from every department, even the Defense Department; offered public-private partnerships with federal incentives to encourage private investment in cities; and encouraged more state aid and neighborhood self-help projects. The centerpiece was the Urban Development Action Grant Program to leverage federal dollars for private investment.22

  For New York City we gradually put together a complex package combining state aid for the city’s budget, municipal austerity by all parties, and long-term bonds bought by the banks and the unions’ pension funds. If there was a hero in New York, it was Rohatyn, who knew the local players and was trusted by all sides. He backed up our demands with his own credibility, and he knew how to handle labor leaders like Gotbaum, who at six feet two inches towered over him. Afterward Rohatyn said: “I trust him, he trusts me. He is somewhat voluble, but so what if he bangs on the table? So does my son. I would make Victor Gotbaum the executor of my estate and the guardian of my children.”23

  * * *

  But the fulcrum for all negotiations was an innovative demand upon which Carter had insisted from the start: The federal government would not stand behind the bonds without commitments by Koch’s new administration, the unions, and the banks to restrain spending, wages, and bank fees. This established a principle that had been ignored in the largest previous government bailout, a $250 million loan authorized by the Nixon administration in 1971 to save Lockheed Aircraft, a major defense contractor.

  With Congress skeptical of New York’s promises, Blumenthal presented his rescue plan to Carter. Orin Kramer and I then sent the president another memo summarizing the city’s perilous situation and the political risks that were vital for Carter to recognize before he approved the plan.24 The greatest of these, we noted, was that the “package is fraught with contingencies which various parties would regard as difficult or unlikely,” the most significant of which was that the city would be unable to borrow cash short-term without federal help and that its unions would not buy a sufficient amount of long-term bonds. Bluntly we told him, “although we are hopeful that Treasury’s proposal is sufficient to avert bankruptcy, we are not certain that it is, and neither is Treasury.”

  We cautioned him to hold fast in negotiations during the months ahead, even if we had to revise the package later to avoid bankruptcy. We recommended a number of steps to which the president agreed: Call Governor Carey and Mayor Koch to endorse the plan, and warn that while it posed difficult choices for the local parties, Congress would nevertheless insist on them before approving government guarantees. We also proposed that the Treasury brief the editorial boards of the major New York newspapers and work closely with the White House to keep pressure on Congress and on New York. I felt I was doing my job combining both substance and politics by noting that “an expression of your personal concern would be very helpful,” and that strong public support by Carey and Koch “will improve the political climate for us in New York, and it will assist us in securing the necessary financing commitments.”

  Suddenly the plan sprang a leak, figuratively anyway. An early version of Blumenthal’s plan, less favorable to New York than the one we had finally gotten Carter to accept, appeared on the front page of the New York Times, causing a firestorm in New York and making things more difficult for Blumenthal in testifying to Congress on its latest incarnation. I was furious, and Altman was widely suspected. But the story says more about Washington than about either of us. Blumenthal quickly owned up to leaking it himself because, as he explained privately to Altman, he “wanted to know whether this thing [the tighter version] will fly or not.”25

  The essence of our strategy was that long-term financing would replace the city’s annual scramble to raise cash from the banks, along with a combination of wage, pension, and job freezes, fresh loans from the New York banks at favorable interest, and spending cuts to balance the municipal budget in four years with the help of $250 to $300 million in state aid.26

  And, central to its realization: No federal guarantees would be forthcoming without some twenty different certifications that all the local parties were making good on their commitments, including budget approval by the Emergency Financial Control Board. The process itself would be so tortuous and the concessions so painful, that, as Altman put it, repeating what City Comptroller Goldin had said earlier, “Nobody [else] would ever want to do it.”27

  Crucially, Gotbaum, Shanker’s teachers’ union, and other labor leaders permitted their unions’ pension funds to buy more than $3 billion in New York City bonds, avoiding even worse layoffs for municipal workers. As the tug-of-war between Washington and New York
was winding down, Gotbaum told a local reporter: “We could stop the collection of millions of dollars a day, turn off the water supply, pull out the ambulance drivers, leave Coney Island without lifeguards. We could rape the city. To me this would be disgraceful for any union to do it. I never think there’s validity in destroying the city. I really believe that a union has a responsibility to the public.”28

  The New York City Loan Guarantee Act not only passed the more liberal House with ease, but the Senate as well, 53 to 27, with twenty senators not voting. Most of those would have opposed, but Frank Moore’s White House lobbying team was able to persuade them to stand down. The president signed the bill in New York City on August 8, 1978.29 His signing statement was one of the best short speeches he made in office. He said the importance of the bill extended beyond the limits of the five boroughs of New York City through the entire nation. New York City, he said, was not only the greatest of cities because it was the “focus of ambition,” but because it “has long been the center of compassion as well, [offering] welcome and sustenance to generation after generation of newcomers looking for opportunity and for a better life—immigrants from abroad and people from the rural areas of the United States.”

  He told New Yorkers that the road ahead would not be easy but working together, all could ensure that once again—in the words of E. B. White—“New York is to the nation what the [white] church spire is to the village—the visible symbol of aspiration and faith.” I had a lump in my throat when the president referred to that “statue in the harbor [that] holds up her lamp not for New Yorkers alone but for all of us,” and I thought of my grandparents, who had come that way in that very century to this remarkable land of opportunity. But I also thought how remarkable a person Jimmy Carter was to have been raised in a hamlet in the Georgia backcountry and still be able to speak with such eloquence about the importance of a city that was light-years from his own—validating one of the things that had initially drawn me to him in his 1970 campaign for governor.

 

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