Closer to the Edge: New York City and the Triumph of Risk

DISSERTATION

Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy

in the Graduate School of The Ohio State University

By

Joseph Andrew Arena, M.A.

Graduate Program in History

The Ohio State University

2014

Dissertation Committee:

Professor Kevin Boyle, Advisor

Professor Paula Baker, Co-Advisor

Professor David Steigerwald

Copyright by

Joseph Andrew Arena

2014

ii

Abstract

“Closer to the Edge: New York City and the Triumph of Risk” explores the

historical construction of “the culture of risk.” The dissertation posits the culture of risk

as an alternative to neoliberal frameworks of American society in the contemporary

period. The work begins in 1973, with the city already unraveling from structural

economic decline alongside racial and class polarization, a graphic example of the

failures of mid-century “high-modernist” planning. It then moves to the city’s 1975

brush with bankruptcy, which became a starting point for New York’s elite to reimagine

the city’s economic future. Financiers, with the cooperation of political leaders and the

city’s labor movement, created an urban economy based on the most speculative kinds of

deregulated financial capitalism. The city’s leadership deliberately risked social

disintegration by using funds from public health, safety, and welfare to attract and retain

global capital. The dissertation examines the historical impact of these policies on the

city’s role as a financial center, its real estate market, and on the lives of the very poor.

The city that was created by taking these risks radiated its influence outward to the nation

as a whole through capital markets, intellectual discourse, cultural production, and new

activist movements that arose in the midst of the AIDS epidemic. By 1992, the resulting

belief in business/government risk-taking as a social good or as a necessity had become

the dominant ethos of both New York City’s politics and of the United States as a whole.

iii

As recent events such as the 2008 financial crisis have demonstrated, the influence of the

culture of risk endures to the present day.

iv

Acknowledgements

As the author of this dissertation, I take full responsibility for the arguments,

facts, and interpretations, along with any errors or omissions, presented in this work. I

would never have had the chance to make that statement, however, without the people

and institutions that gave me the opportunity to complete this project. So it gives me

great joy to express my thanks.

Without time, money, and the right infrastructure, nothing can be accomplished in

a city, or in research. The Ohio State University has supported this project through a

University Fellowship, a Humanities Summer Research Award, and two College of

Humanities Small Grants. The Department of History provided a Research Fellowship

and the opportunity to work as an instructor, teaching assistant, research assistant and

grader. Thank you to my students who inspired me to write for a wide audience.

The help of archivists and librarians in New York included those at the Archives

on Municipal Finance and Leadership, Baruch College, The LaGuardia and Wagner

Archive, Fiorello H. LaGuardia Community College, the Center for Oral History and the

Rare Books & Manuscripts Library at Columbia University, and the Tamiment Library &

Robert F. Wager Labor Archive at New York University. Further afield, I wish to thank

the Digital Collections and Archives of Tufts University in Boston and the M.E.

Grenander Department of Special Collection and Archives at the University at Albany.

Closer to home, the Ohio State University’s Libraries provided further assistance.

v

None of what follows would have been possible without Kevin Boyle. He opened

the door to a world that I had dreamed of joining. When I got his first e-mail, I felt like

the luckiest aspiring writer in America. I still do. In all of our work together he has

combined the sharpest professional skills with the deepest sense of patience and

compassion. He gave me the freedom to push the envelop of historical writing and

insight, then supported me every step of the way. He shares his prodigious gifts with me,

and so many others, without counting their cost to him. For all of these acts, and so much

more, I give him my deepest thanks.

From the earliest drafts of my master’s thesis, Paula Baker has been a guiding

light for my graduate studies. Our many conversations about political history and

everything related to New York grounded this dissertation in time, space, and the daily

cut-and-thrust of making a city and a state work. Her sense of humor kept me going.

David Steigerwald provided vital insights into the intersection of money, culture, and the

intellectual life, then and now. His combination of unflinching rigor with warm

friendship is a model that I hope to follow.

At the University of Wisconsin-Madison, Nan Enstad taught me the historian’s

craft as an undergraduate and exemplified the courage that I needed to pursue my work in

graduate school. At Ohio State, Judy Tzu-Chun Wu taught me early in my career how to

work at the intersection of race, gender, and sexuality. She has supported my work ever

since. David Stebenne shared his considerable knowledge of American political

economics and his experience of living in New York during the 1980s. Daniel Rivers

helped me fill in my analytical gaps on LGBT history. James Bach skillfully guided me

through the maze of university bureaucracy and was always ready with his

vi

encouragement for the project. Mansel Blackford and William Childs introduced me to

the Business History Conference. The members of the BHC, through their generous

support of the Alfred D. Chandler Jr. Travel Grant program enabled me to present work

at the conference’s annual meetings in 2009, 2011, and 2013.

In 2012, I was selected to present my work at the BHC’s Doctoral Colloquium.

The experience honed every aspect of my argument. My thanks go out to BHC members

Barbara Hahn, Richard John, Pamela Laird, Mark Rose, and Elizabeth Tandy Shermer for

all of their input into this project and their assistance in the profession, then and now.

My fellow graduate students shared everything with me, from insights into my

work, to lesson plans and football tickets, to comfort, inspiration, and joy. I had the

privilege of traveling on this road in good company. Thank you to my friends at Ohio

State and elsewhere: Charles Carter, Megan Chew, Robert Denning, Annette Dolph,

David Hadley, Gregory Kupsky, Danielle Olden, Keith Orejel, Melissah Pawlikowski,

Colin Stephenson, William Sturkey, Brandy Thomas, Scott Ward, Colin Stephenson, and

Matthew Yates.

In New York, the Bonnie and Daniel Olson generously shared their home and

table with me as well as their own takes on New York’s history. Dan also proved an

intrepid tour guide to both high finance and bohemia’s past and present. My cousins,

Katie, Douglas, and Emily give me faith in the power of art, whether as word, food, or

photograph.

In the end, as at the beginning, there are the four people closest to me. My dear

sister, Carolyn Arena is the best that any brother could hope to have. She gave me no end

of practical aid in New York. More importantly she has given me the gift of her love and

vii

joy. Her intellect is as strong as her heart. Limitless. Her husband Matthew Merguerian

makes me want to take the “in-law” out of brother-in-law. Finally, I thank my parents,

Jillayne and David Arena. They never doubted my path and kept their faith in me as I

wrote this dissertation. For their support and love in the face of all obstacles, from the

first moment of the very beginning, this project is for them.

viii

Vita

December 19, 1983…………………………Born, Milwaukee, Wisconsin

2005………………………………………...B.A. History, Political Science

The University of Wisconsin-Madison

2009.………………………………………..M.A. History, The Ohio State University

2008 to 2014………………………………..Graduate Teaching Associate

Department of History

The Ohio State University

Publications

Articles

“Confronting Agrarian Crisis: Historical Food Insecurity, the Indian State, and the Green

Revolution,” Archive: A Journal of Undergraduate History 8, (May 2005): 28-41.

Book Reviews

David Scheffer, All the Missing Souls: A Personal History of the War Crimes Tribunals,

eHistory at the Ohio State University, (May 1, 2012).

Steven Bryan, The Gold Standard at the Turn of the Twentieth Century, eHistory at the

Ohio State University, (March 1, 2011).

Field of Study

Major Field: History

ix

Table of Contents

Abstract………………………………………………………………………………….ii

Acknowledgements……………………………………………………………………..iii

Vita……………………………………………………………………………………...vii

Introduction: Risk, New York, and Twentieth Century America.……………..….........1

Chapter One: In The Shadow of Empty Towers, New York City, 1973……………….21

Chapter Two: The City at Risk, 1974-1976……...……………………………………..88

Chapter Three: The Triumph of Risk, 1977-1981……………………………………...149

Chapter Four: The Contagion of Risk, 1982-1987……………………………………..207

Chapter Five: The Price of Risk, 1988-1992…………………...……………………....271

Conclusion: By the Daylight and the Twilight of Risk, 1993-Present……………........335

Bibliography……………………………………………………………………………366

1

Introduction: Risk, New York, and 20th

Century America

Don’t push me cause I’m close to the edge

I’m trying not to lose my head

It’s like a jungle sometimes it makes me wonder

How I keep from going under?

“The Message,” Grandmaster Flash and the Furious Five, 19821

This is a history of how an American city fell apart and rebuilt itself. This is the

story of the price that city paid in the process and of the radically changed nation that it

helped to create.2 It is the story of the creation of what I call “the culture of risk.”

This dissertation argues that following New York City’s 1975 fiscal crisis, the

city’s elite chose, deliberately and consciously, to take two related risks. The first risk

was that the city should invest its limited resources into building an economy based on

speculation in financial instruments and real estate. The second risk was to accept that by

subsidizing the private sector, there would be limited funds to provide for public goods,

for everything from fire and police service to drug treatment and subsidized housing.

This disinvestment deliberately increased the risk of social disorder, racial conflict, and

even of civic collapse. In this reimagined society there was much more risk, and even

less reward, in the lives of the very poor. There also lived a handful of New Yorkers who

1 Grand Master Flash and the Furious Five, The Message, Sugar Hill Records, 1982.

2 In this dissertation “New York,” “New York City,” the “City of New York,” and “the city” along with the

occasional use of colloquialisms like Gotham, are used to refer to the same metropolis and its five boroughs

(Manhattan, Brooklyn, Queens, The Bronx, and Staten Island) taken together. When an issue is the domain

of state government, “the State of New York,” “New York State,” or “Albany,” its capital, is used.

2

took some of the oldest risks of human history—of creating art. Finally, activists in the

gay and lesbian movement took their own risks, to try to build a community safe from

harassment and discrimination and then, in the face of the AIDS crisis, to create a

counter-cultural narrative of responsibility and community against what became the

dominant norm of individuality freed from public responsibility.

I tell this story in New York City, and its characters are New Yorkers. But

through the power of capital and cultural markets this story became an American one.

The story of this culture, although it has evolved since the dissertation’s end point,

continues to the present day.

Its roots, however, stretch back much further.

American Risk

Studying risk is how human beings try to understand the present to predict their

future possibilities. Understanding risk, believing that it is possible to measure and even

mitigate the odds of future success or failure, is integral to the rise of modern capitalism.

The accumulation of investment, the formation of capital, is a futile endeavor if the future

is unknowable. Knowing “the odds” creates the confidence required to use such power to

shape the present and the future according to human designs rather than the whims of

chance.3 The tools of risk measurement are mathematical and statistical. They carry with

them the ideal of scientific objectivity. Measuring the consequences of risk taking,

however, also has a substantial subjective component. Risk is deeply intertwined with

3 Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk (New York: John Wiley & Sons,

1996), 1-8.

3

political, cultural, and indeed moral judgments about the extent to which individuals can

use the power of foresight. Society creates the context where choices are made about

what chances are worth taking and which are unacceptable. Risk is thus further

connected to questions of distribution, about who reaps the rewards of a successful

forecast and who pays for the costs of failed predictions. These debates about risk

undergird the development of American society in the 20th Century.

The Gilded Age finished the process begun during the Market Revolution of the

early 19th

Century that submerged what historian Robert Wiebe termed “island

communities” into a truly national system of transportation and communications

alongside the rise of national, indeed global, markets in commodities, manufactured

goods, and capital. This process, encouraged by the federal government through measures

ranging from protective tariffs to subsidized canal and railroad construction, created the

context for capital to take risks, to invest in the future, on an unprecedented scale. The

resulting complexity of this risk taking required the simultaneous development of the

specialized organization, especially the modern corporation, and the technical experts of

all kinds required to make it function.4 The growth of new financial markets, such as the

expansion of life insurance, enabled individuals to project themselves forward in time, to

manage risks. This, Jonathan Levy argues in Freaks of Fortune, created a new paradox.

4 See Charles Sellers The Market Revolution, Robert H. Wiebe, the Search for Order, 1877-1920 (New

York: Hill and Wang, 1967), Alfred D. Chandler, Jr, The Visible Hand: The Managerial Revolution in

American Business (Cambridge, MA: The Belknap Press of Harvard University Press, 1977).

4

The ideal of “self-ownership came to mean “mastery over a personal financial ‘risk.’ ”5

Yet this mastery required “a new form of dependence” on “a new corporate financial

system, the central nervous system of a rising capitalism that fed off radical uncertainty

and ceaseless change.”6 New York was at the heart of that transformation as the owners

of different kinds of capital, whether in wealth or the “human capital” of expertise

merged together into what Sven Beckert terms, “a national upper class.”7 This process

created the opportunity to make fortunes.

The power of a small number of people to shape the present and future of

America, however, clashed with deep-seated beliefs in democracy. The ideal that,

through the ballot box, individuals could freely choose how to allocate the costs and

benefits of risk-taking, often violently, clashed with the day-to-day reality of everyday

life in an industrial society. The choices available to capitalists in New York and the

nation’s other great cities, could shape the earth itself—cutting down forests, reversing

rivers and turning prairies into feedlots for hogs and cattle.8 Workers, whether on the job

in the nation’s factories, mines, farms, and sweatshops, or at home in slums and poor

small towns, hard far less control over what chances they took, faced greater losses, and

reaped few, if any, rewards. And there were Americans, such as African-Americans

5 Jonathan Levy, Freaks of Fortune: The Emerging World of Capitalism and Risk in America, (Cambridge,

MA: Harvard University Press, 2012), 5-6. 6 Ibid, 6.

7 The definitive work on this process of class-formation is Sven Beckert, The Monied Metropolis: New

York City and the Consolidation of the American Bourgeoisie, 18150-1896 (New York: Cambridge

University Press, 2001), quoted on 238. 8 William Cronon, Nature’s Metropolis: Chicago and the Great West (New York: W.W. Norton &

Company, 1991).

5

caught in the convict-lease system, who had no choice at all.9 Workers did seek to

mitigate the risks that they faced. In burial societies, fraternal lodges, and churches they

carved out spaces of personal action and dignity. On a larger scale, the great “labor

wars” and Populist tides of the Gilded Age were in many ways a struggle to build the

powers required to gain control over risk in the factory and on the farm through collective

action. A combination of external repression and internal division, however, doomed

these efforts to fundamentally socialize political and economic power and the risks of

modern society.10

The reformers of the Progressive era sought to find compromise between risk and

reward that would preserve what they saw as the benefits of large-scale capitalist risk-

taking while mitigating its individual and social costs. Piecemeal, one rat-catcher, meat-

inspector, and settlement house worker at a time, middle-class reforms began to move

parts of the nation’s life away from risk without limit.11

So too did some business owners

who were tired of the risks entailed by industrial conflict and of endless worker turnover

and retraining. The most profitable firms began to give their workers safer places to

work, better pay to take home, even insurance in case they were maimed or killed.

“Welfare capitalism” sought to limit the risks of the shop floor, much as the cartel, the

9 Thomas G. Andrews, Killing for Coal: America’s Deadliest Labor War (Cambridge, MA: Harvard

University Press: 2008); Douglas A. Blackmon, Slavery by Another Name: The Re-Enslavement of Black

Americans from the Civil War to World War II (New York: Doubleday, 2008). 10

Lawrence Goodwyn, The Populist Moment: A Short History of the Agrarian Revolt in America (Oxford:

Oxford University Press, 1978); David Montgomery, The Fall of the House of Labor: The Workplace, the

State, and American Labor Activism, 1865-1925 (New York: Cambridge University Press, 1987). 11

Michael McGerr, A Fierce Discontent: The Rise and Fall of the Progressive Movement in America,

1870-1920 (New York: Free Press, 2003).

6

monopoly and the oligopoly had tried to take the free out of the free-market capitalism

that ruined profit margins and wrecked long-range plans. Then these efforts fell apart in

1929. And, by default rather than choice, the owners, the workers, and the reformers,

turned to the potential insurer of last resort, the federal government.12

And so it was that by stops, starts, half-measures, and failed experiments,

American liberalism was remade—to try to stabilize a society that had risked all, and

gained much, but could not risk any more. Or so it seemed. The New Dealers lacked a

great plan, but it had good instincts for the times. The architects of the mid-century

welfare state understood how the tools of a modern society, the planning and expertise

that formed the foundation for risk-taking, could also be used in innumerable ways to

limit risk. The term “social insurance” captures the compromise made by American

liberals between public and private risk, the group and individual freedom of action. The

best definition of their worldview comes from David Kennedy in his major synthesis of

the Roosevelt-era, Freedom From Fear. Faced with the economic and social crisis of the

Great Depression, liberals sought to build a society based on the principal of security. As

Kennedy writes:

That pattern can be summarized in a single word: security—security for vulnerable

individuals to be sure, as Roosevelt famously urged in his campaign for the Social

Security Act of 1935, but security for capitalists and consumers, for workers and

employers, for corporations and farms and homeowners and bankers and builders as well.

12

For a discussion of 1919, David Kennedy, Over Here: The First World War and American Society (New

York: Oxford University Press, 1980, 2004), for welfare capitalism in the twenties at a national level see

Ellis W. Hawley, The Great War and the Search for a Modern Order (St. Martin's Press, New York;

1979), for a discussion of how welfare capitalism worked, and failed, on a local level, Lizabeth Cohen,

Making a New Deal: Industrial Workers in Chicago, 1919-1939 (Cambridge: Cambridge University Press,

1990)

7

Job security, life-cycle security, financial security, market security—however it might be

defined, achieving security was the leitmotif of virtually everything the New Deal

attempted.13

It worked up to a point. In the last twenty-five years historians have illuminated

American liberalism’s structural weakness that limited its ability to provide the kind of

security that it promised.14

As a political-economic program, they argue, the acceptance

of “compensatory liberalism,” the American state eschewed direct economic intervention,

outside of managing interest rates and trying, half-heartedly, to bring the marginalized

into the economic mainstream. When the post-war boom came to an end in the early

1970s, the federal government’s response proved woefully inadequate.15

The trade

unionism of the Congress of Industrial Organizations (CIO) saw its influence shrink as a

combination of red baiting and race baiting limited its ability to organize more workers,

especially those in the South, those of color, and much of the service sector. And the

steady grind of automation, persistent managerial opposition, and the pursuit of free-trade

slowly shrank employment in the organized sectors of the economy and limited the

bargaining power of its unions.16

Finally, white liberals’ arguably misguided attempt to

13

David M. Kennedy, Freedom From Fear: The American People in Depression and War, 1929-1945

(New York: Oxford University Press, 2005), 365. 14

Steve Fraser and Gary Gerstle, eds, The Rise and Fall of the New Deal Order, 1930-1980 (Princeton:

Princeton University Press, 1990). 15

Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War (New York: Knopf,

1995). 16

For the development of automation, David Noble, Forces of Production: A Social History of Industrial

Automation (New York: Oxford University Press, 1984); for management’s offensive against post-war

labor, Howell Harris The Right to Manage: Industrial Relations Policies of American Business in the 1940s

(Madison: The University of Wisconsin Press, 1982); the labor movement’s internal limitations, Nelson

Lichtenstein, Labor’s War at Home: The CIO in World War II (Cambridge: Cambridge University Press,

1982). For the role of free-trade, Judith Stein Running Steel, Running America: Race, Economic Policy

and the Decline of Liberalism (Chapel Hill: The University of North Carolina Press, 1998).

8

redress racial inequality through legal and psychological adjustment rather than by

tackling the political and economic structure that continued to underpin de facto racial

discrimination in the United States circumscribed the victories of the civil rights

movement.17

In short, the pursuit of security, for all of its successes, still left many

Americans in a position of vulnerability.

Historians have also shown how conservatives created a compelling ideological

and electoral coalition that displaced the New Deal and its heirs at the heart of American

politics.18

White suburban and urban homeowners abandoned liberalism, rhetorically and

electorally at least, and became either well-to-do “Goldwater Republicans” or blue-collar

“Reagan Democrats” as the drive for the integration of schools and housing threatened a

segregated status quo they held dear.19

Intellectual elites on the right, from Ayn Rand to

Milton Friedman and Arthur Laffer, re-legitimated the ideals of free-market absolutism

that had been discredited by the Depression.20

This shift in ideas then merged with the

“common-sense” beliefs of many corporate executives to create a class of “business

conservatives” who organized themselves against New Deal-style “big government,” and

17

Jacquelyn Dowd Hall’s “The Long Civil Rights Movement and the Political Uses of the Past,” Journal of

American History 91 (March 2005). This is elaborated on in Thomas Sugrue’s Sweet Land of Liberty: The

Forgotten Struggle for Civil Rights in the North. (New York: Random House, 2008). 18

For a summary see Donald Critchlow, The Conservative Ascendancy: How the GOP Right Made

Political History (Cambridge: Harvard University Press, 2007). 19

For the making of “Reagan Democrats,” begin with Thomas J. Sugrue, The Origins of the Urban Crisis:

Race and Inequality in Postwar Detroit (New Jersey: Princeton University Press, 1996); follow that with

Thomas and Mary Edsall, Chain Reaction: The Impact of Race, Rights, and Taxes on American Politics,

New York: WW Norton, 1991). For the origins of suburban “Goldwater Republicans,” Lisa McGirr,

Suburban Warriors: The Origins of the New American Right (Princeton, NJ: Princeton University Press,

2001); Kevin M. Kruse, White Flight: Atlanta and the Making of Modern Conservatism (Princeton:

Princeton University Press, 2005). 20

Angus Burgin, The Great Persuasion: Reinventing Free Markets Since the Depression (Cambridge, MA:

Harvard University Press, 2012).

9

who paved (and paid) the way for Ronald Reagan’s electoral victory in 1980.21

Electorally popular parts of the welfare state, like Social Security and federally

subsidized mortgages survived. These programs, however, persisted in a system of

political, economic, and culture values that no longer sought security but instead turned

towards the embrace of risk.

Towards a Culture of Risk

When historians have attempted to move past the watershed election of 1980,

however, they have struggled to connect the events of the past thirty years. The title of

Daniel Rodgers’s intellectual history of this period Age of Fracture, with its depiction of

“a contagion of metaphors” in the world of ideas is a very apt one indeed.22

In his

survey of the 1980s, Transforming America, Robert Collins identified the disjuncture

between politics and culture with which historians, other students of the period, and this

author, have struggled. In a general sense the economic policy and electoral politics of

the United States moved decisively towards the hawkish, free-market “right.” Yet an

increasingly diverse American society appeared to decisively reject the remnants of

“bourgeois values” and shifted “left” towards an open and permissive culture.23

One

attempt to bridge this gap has been to label the shift as “postmodern,” a description that

suffers from the amorphousness of the phenomenon that the phrase attempts to

21

Kim Philips-Fein, Invisible Hands: The Making of the Conservative Movement from the New Deal to

Reagan (New York: WW Norton, 2009). 22

Daniel Rodgers, Age of Fracture (Cambridge, MA: The Belknap Press of Harvard University Press,

2011), 10. 23

Robert M. Collins, Transforming America: Politics and Culture in the Reagan Years (New York:

Columbia University Press, 2007).

10

describe.24

One is hard-pressed to identify the basic ideological framework of a “post-

modern” state, much less its organizational capabilities and the specific policies that such

a state would pursue. More concrete attempts at systematizing the post-1980 period have

created a series of models including deindustrialization, neoliberalism, and Jefferson

Cowie and Nick Salvatore’s “long exception” wherein the twentieth century ends as it

had begun, in a “Gilded Age” dominated by the power of capital.25

The neoliberal paradigm in particular has attracted considerable attention for its

ability to connect economic theory with policy-making and a specific set of political-

economic actions (deregulation, curbs on trade union power, and shrinking the state

through fiscal austerity) that have been undertaken in both the developed and developing

world.26

Yet by emphasizing the regressive character of neoliberalism vis-à-vis the

“coordinated capitalism” of the immediate post-war period, the neoliberal synthesis

marginalizes the cultural forces that made a “return to the market” politically attractive

and culturally legitimate.27

Neoliberal analysis therefore struggles to overcome the

difficult terrain of fusing the cultural “left-turn” with the economic “right-turn.”

Closer to the Edge argues that the past forty years has seen the rise of a risk-

taking culture that connects economic, cultural, and social forces. Rather than taking

24

David Harvey, The Condition of Postmodernity: An Enquiry into the Origins of Cultural Change

(Oxford: Basil Blackwell, 1989) and Fredric Jameson, Postmodernism, or The Cultural Logic of Late

Capitalism (Durham, NC: Duke University Press, 1991). 25

David Harvey, A Brief History of Neoliberalism (New York: Oxford University Press, 2005); Jefferson

Cowie and Nick Salvatore. “The Long Exception: Rethinking the Place of the New Deal in American

History,” International Labor and Working Class History 74 (Fall 2008), 3-32. 26

David Harvey, A Brief History of Neoliberalism (New York: Oxford University Press, 2005). 27

For the idea of “coordinated capitalism” see Barry Eichengreen, The European Economy Since 1945:

Coordinated Capitalism and Beyond (Princeton, NJ: Princeton University Press, 2007). The extent to

which their existed a similar post-war settlement in the United States remains open to debate.

11

strictly a rational actor response to macro-economic “stagflation,” leaders in politics and

business began to promote economic risk-taking as moral good. The breakdown in

modes of political and cultural representation that erupted in the 1960s (such as the

rejection of bureaucratic liberalism and the aesthetic blurring of “high” and “low”

cultural forms) fused with the end of the post-war boom in the early 1970s to produce a

fertile ground for economic innovation.28

While the embrace of risk initially took place

on an ad hoc and piecemeal basis, it ultimately became the definitive solution to what

Jürgen Habermas and others have identified as the “legitimation crisis” of post-1973

democratic capitalism.29

At the level of a specific “business culture,” the rise of the culture of risk bridges

the gap between the values of “business conservatives” and the “entrepreneurs” who

superseded them in the 1980s. As historians such as Judith Stein have noted, by the early

1970s the American political economy had begun to decisively shift from manufacturing

to services, especially to finance.30

By the end of the 1980s, the managerial heirs of

General Motor’s Alfred Sloan and General Electric’s Lemuel Boulware who formed the

core of John Kenneth Galbraith’s mid-century “technostructure,” were departing the

28

For a description of the connection between disruption in the arts and political-economics see Daniel

Bell, The Cultural Contradictions of Capitalism (New York: Basic Books, 1976); Thomas Frank, The

Conquest of Cool: Business Culture, Counterculture, and the Rise of Hip Consumerism (Chicago: The

University of Chicago Press, 1997). 29

Jürgen Habermas, trans Thomas McCarthy, Legitimation Crisis (Boston: Beacon Press, 1975). 30

Judith Stein, Pivotal Decade: How the United States Traded Factories for Finance in the Seventies (New

Haven, CT: Yale University Press, 2010).

12

“commanding heights” of the American economy.31

If there was a “business

conservative” victory in 1980, it appears to have been a very short-lived triumph, at least

from the perspective of established managers. Yet, as Bethany Morton and Elizabeth

Tandy Shermer have shown, the culture of American enterprise was not monolithic—

especially in the broad “Sunbelt” periphery left largely untouched by the managerial

capitalism of the Second Industrial Revolution.32

These regions nurtured a distinctive business culture—one that was not only

hostile towards organized labor, but also that valued risk-taking “entrepreneurship” over

bureaucratic “management.” One mechanism for the transmission of these values into

the mainstream of American business was competition, in the form of Wal-Mart for

example, that forced firms to adopt new business practices or go under.33

Another

mechanism for this shift in values was through the exercise of financial power, such as

the hostile takeover battles waged in the name of upholding “shareholders rights” and the

use of leveraged buyouts to create a new class of “owner-managers.” What remains to be

established was how such behavior became acceptable, even celebrated, by American

society as a whole—in other words, to explain how a marginal subculture went

mainstream. The place to find that cultural shift, though, is not the Sunbelt but in New

31

John Kenneth Galbraith’s The New Industrial State (Boston: Houghton Mifflin, 1967); Judith Stein

Running Steel, Running America, for the fall “big steel.” 32

Bethany Morton, To Serve God and Wal-Mart: The Making of Christian Free Enterprise (Cambridge,

MA: Harvard University Press, 2009); Elizabeth Tandy Shermer, Sunbelt Capitalism: Phoenix and the

Transformation of American Politics (Philadelphia: University of Pennsylvania Press, 2013). One might

draw a parallel between the return of “vernacular capitalism” with the “vernacular architecture” celebrated

by Robert Venturi in Learning from Las Vegas: The Forgotten Symbolism of Architectural Forum, Revised

Edition (Cambridge, MA: MIT Press, 1977). 33

Nelson Lichtenstein, The Retail Revolution: How Wal-Mart Created a Brave New World of Business

(New York: Metropolitan Books, 2009).

13

York City during and after its fiscal crisis. This dissertation opens a discussion of the

post-1980 economy not simply as a reactionary impulse but as a revolutionary

transformation of the culture as a whole. It highlights the desire to replace stultifying

institutions with the empowered individual, entropic stability with dynamic volatility.

Ultimately, it highlights a rejection of safety in favor of risk.

This is not to argue that New York was the only place where the culture of risk

took shape. Other American cities and regions—Silicon Valley, Phoenix, Los Angeles,

Las Vegas, and Houston, to name a few—can certainly make claims to being a part of

this transformation in American life.34

But the 1975 fiscal crisis quickly, and visibly,

catalyzed political, economic, and cultural change in New York. And the city’s capital

markets gave it a truly exceptional power to draw other cities and towns into this

culture—whether they sought it or not. This focus extends to the places within the

dissertation—the work gravitates to where power was wielded, at Wall Street and City

Hall, and in two neighborhoods, the East Village and the South Bronx, that prominently

highlighted the effects of the culture of risk. This makes for a largely but not exclusively

“Manhattan-centric” history of a city that, for its residents, is often centered in

neighborhoods where life goes on at a remove from the economic and political center of

the metropolis. But power—organized, institutional power—is at the heart of this story.

34

For example, Shermer, Sunbelt Capitalism; Mike Davis, City of Quartz: Excavating the Future in Los

Angeles (New York: Verso, 1990, 2006).

14

This dissertation is thus a history written from “the top-down,” a story told largely

from the perspective of the powerful. Much of its evidence comes from their perspective:

from their speeches and press releases, from the annual reports of their companies, from

the minutes of meetings that they held, and from their own opinion-pieces, oral histories,

diaries, and autobiographies. They drew their power from different sources: controlling

pools of liquid capital, owning real estate, holding political office, leading labor unions

and activist groups, and creating art that found favor in the marketplace. A few wielded

influence because they had ideas that found an audience or a publisher. As will be

demonstrated those sources of power were not equal—but taken together the principal

characters in this dissertation created the context in which ordinary New Yorkers,

especially the poor and the otherwise marginalized, made choices about how to live their

lives. Ordinary life features prominently in this story, but the people who lived through

this period are often, but not always, seen in this work from the perspective of power, as

voting blocs, racial and ethnic groups, and as part of the city’s statistics on crime, disease,

and unemployment.

The Dissertation’s Chapters

The first chapter of this dissertation, “To the Dawn of Risk,” follows the pivotal

year of 1973 in the life of New York City to highlight the city’s sharp juxtaposition of

high modernism and its discontents.35

To meet the challenges of managing a diverse

35

This use of a city as a template for broader cultural analysis can be seen in Carl Schorske, Fin-de-Siècle

Vienna: Politics and Culture (New York: Vintage, 1980); David Harvey Paris, Capital of Modernity (New

York: Routledge, 2003); Ann Douglas, Terrible Honesty: Mongrel Manhattan in the 1920s (New York:

Farrar, Straus, and Giroux, 1995).

15

metropolis, the city had by the early 1970s developed an exceptionally dense “permanent

government” that integrated labor unions, especially municipal unions, an expansive City

Hall, and quasi-public organizations such as Robert Moses’ interlocked bureaucracies

and the Port Authority of New York and New Jersey.36

Taken together, these structures

epitomized a kind of civic apex in building order through organization and planning.37

Given that New York had moved further, faster than other cities, it is not surprising that

the “urban crisis” became apparent earlier and with greater force. Some of the city’s

problems—for example deindustrialization and “white flight”—were common across

American cities, while others, such as the costs of brute-force “urban renewal” became

apparent more quickly in the city due to its density and self-conscious historicity.38

At

the same time, however, there was a deliberate push within the financial community to

overcome the limitations of both the corporate “technostructure” and the Bretton Woods

system of managed exchange rates during that order’s slow collapse between 1968 and

1971.39

By the end of the chapter two points become clear. First, by the early 1970s,

36

Joshua B. Freeman, Working-Class New York: Life and Labor Since World War II (New York: The New

Press, 2000); for an overview of municipal politics Chris McNickle, To Be Mayor of New York: Ethnic

Politics in the City (New York: Columbia University Press, 1993); for the standard take on Moses see

Robert, Caro, The Power Broker; for a reassessment of his legacy Hilary Ballon and Kenneth T. Jackson

eds, Robert Moses and the Modern City: The Transformation of New York, ed (New York: W.W. Norton,

2007). 37

Wiebe, The Search for Order, 1877-1920. 38

Thomas J. Sugrue, The Origins of the Urban Crisis; the classic critique of urban renewal is Jane Jacobs,

The Death and Life of Great American Cities (New York: Vintage Books, 1961); for a more nuanced take

on mid-century urban renewal highlight the simultaneous rise the “urban crisis” and the “world city” see

Samuel Zipp, Manhattan Projects: The Rise and Fall of Urban Renewal in Cold War New York (New

York: Oxford University Press, 2010). 39

John Brooks, The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s (New

York: Weybright and Talley, 1973); Philip Zweig, Wriston: Walter Wriston, Citibank, and the Rise and

Fall of American Financial Supremacy (New York: Crown, 1995).

16

intellectuals and ordinary New Yorkers saw the high modern system as discredited:

impersonal and conformist in its values, imperious in its exercise of power, and inept in

its management. This disaffection took many forms. Some of it, such as anger over the

rising crime rate and inflation, represented a longing for a world that was quickly slipping

away. Others, such as the successful push by gay and lesbian activists to remove

homosexuality from the American Psychological Association’s list of psychological

disorders, looked forward to a reimagined society. Second, the system could no longer

easily deliver a rising standard of living, remedy the social ills that it had sought to mend,

or insure the stability that it had promised. Many New Yorkers, and Americans, called

for a better way of living—although what that life ought to be remained unknown. By

the end of 1973, in the wake of the OPEC embargo, the uncomfortable began sliding into

the unbearable.

The second chapter, “The City at Risk,” follows the city’s fiscal crisis from its

stirrings in 1974 through the crisis itself in 1975 to the city’s uneasy financial

stabilization in 1976. It is the story about how, under intense pressure to avert default,

the city’s elite began exercising its power to determine the answer to the two most serious

questions that confronted them. First, who would pay the price of municipal austerity?

Second, how would the city create a sustainable economy and a viable tax-base for the

longer term? There were no immediate answers to either question. City services were

slashed across the board. Capital flight continued. Proposals for the wholesale

abandonment of poor neighborhoods “planned shrinkage,” were proposed and then

17

shelved in the face of fierce local opposition. The city apparently could not, at least as a

matter of official policy, shrink. The prospects for an urban “Marshall Plan” of federal

aid were dim. Financial services and to a lesser extent real-estate development offered

the prospect of economic growth—if, leaders in these fields argued, they were provided

with the proper incentives of lower taxes, tax subsidies, and of less regulation. By the

end of 1976, a model for a very different New York had taken shape.

The third chapter of the dissertation, “The Triumph of Risk,” shows how the ad

hoc ideas of 1975-76 were transformed into a coherent and official policy by New York’s

leading business executives and political leaders—with support from the city’s labor

movement. The chapter looks at how the recommendations of elite groups within the

city—the Business/Labor Working Group, the Temporary Commission on City Finances,

and the Municipal Union Financial Leaders Group—developed a vision for the city based

on encouraging the growth of speculative finance. The chapter then shows how the City

and the State of New York used their financial and political resources to encourage these

developments in the fight to retain the American Stock Exchange (AMEX), the formation

of the New York Insurance Exchange, and the creation of deregulated International

Banking Facilities. These developments were spearheaded largely by Democrats, notably

President Jimmy Carter, and Mayor Ed Koch, elected in 1977 and not by Reagan

Republicans.40

They fit in well, however, with President Reagan’s agenda for the United

40

For the continuity between the economic policies of the Carter and Reagan Presidencies see W Carl

Biven, Jimmy Carter’s Economy: Policy in an Age of Limits (Chapel Hill, University of North Carolina

Press, 2002).

18

States. By 1982 what had begun as desperate experiments had become a way of life—

filled with promise, but also one that created inequalities and social strife.

The fourth chapter, “The Contagion of Risk,” shows how the culture of risk

diffused outward into the city and the nation between 1983 and 1987. Moving from the

institution-building of chapter three, chapter four shows how the deregulation of Wall

Street encouraged specific financial practices—corporate raiding, securitization, and

leveraged buyouts (LBOs)—that made New York’s financial markets a much more

profitable place to do business. These profits enabled a broader macro-economic recovery

of New York City and allowed the Koch administration to begin repairing some of the

damage done to the city’s physical and social infrastructure caused by the fiscal crisis and

the city’s strategy of supply-side redevelopment. At the same time, the power of

deregulated finance enticed and forced managers of businesses across the United States to

reorganize their firms and destabilize the lives of their employees and their communities.

The boom in finance also transformed the art market. Finally, the growing toll of

HIV/AIDS spurred the creation of a counter-culture that, operating through the Gay

Men’s Health Crisis and the AIDS Coalition to Unleash Power (ACT UP), sought to

build community in the face of indifference and outright hostility.

The dissertation’s fifth and final chapter, “The Price of Risk,” begins with the

stock market crash of October 1987 and ends with the “New Democrat” Bill Clinton’s

acceptance of the Democratic Party’s nomination for the presidency in 1992. The chapter

demonstrates how the crash subsequent recession revealed the inherent problems of

19

basing the city’s economy on elite speculation. By the early 1990s, however, the culture

of risk had become the status quo among political and economic elites.41

Instead of

causing a practical reexamination of the city’s policies, the recession spurred a push for

more financial deregulation, additional aid to real estate development, and the further

reduction of city services. David Dinkins, who defeated Ed Koch in the 1989 Democratic

primary, to become the city’s first African-American mayor, pursued these policies.

While Dinkins had established his political reputation in opposition to Koch, he was

willing to sacrifice the interests of his core constituencies—municipal labor unions,

African Americans, and Latinos—to maintain a balanced budget and provide tax

incentives to the financial service sector. Indeed, Dinkins’ central effort towards creating

a stable city was the expansion of the police force and the aggressive use of its power

against suspected criminals and the homeless—an approach towards governance that

would be intensified by his successors. The culture of risk had matured to a point where

it existed beyond an particular group of political leaders. It was a cultural norm.

The dissertation’s conclusion, “The Twilight of Risk,” shows in broad strokes

how the culture of risk has persisted at the center of New York City economy and politics

after 1993. The mayoralties of Rudy Giuliani and Michael Bloomberg, through the

former’s offensive against crime and public disorder and the latter’s attempt to build the

city into a global luxury brand, did change the life of the city—but they also continued to

41

For free-market triumphalism see Daniel Yergin and Joseph Stanislaw, The Commanding Heights: The

Battle Between Government and the Marketplace that is Remaking the Modern World (New York: Simon

and Schuster, 1998, 2002)

20

use municipal political power to encourage the growth of ever more speculative forms of

financial capitalism. In 2008, another financial bubble burst ushering in the worst

recession since the Great Depression.42

In September 2011 the protestors of Occupy

Wall Street descended on Zuccotti Park in Lower Manhattan. And in 2013 Bill de Blasio

was elected mayor on a platform that repudiated both the speculative economy his

predecessors had built and the deep inequalities that lay at its heart. How far he will go

with that politics, and how successfully he will be in enacting the policies that arise from

it, remains an open question.

Beneath the triumph of the “free men and free markets” there lies a sense of

unease. Although William McKibben was writing about climate change in The End of

Nature (1989), his words apply to the unstable terrain of the age of risk as a whole. “But

what happens when that context itself is a source of fear? When the world around us is

going crazy. It will be a little like living in wartime,” he says.43

At the end of my

dissertation, the horizon of our times in the United States opens to reveal a city and a

nation rich in innovation and alive with cultural creativity, socially dislocated,

economically unstable and savagely unequal.44

42

The literature on the crisis is already voluminous see for example Menzie Chinn and Jeffry Frieden, Lost

Decades: The Making of America’s Debt Crisis and the Long Recovery (New York, W.W. Norton, 2011);

for a long-term perspective see Carmen M Reinhart and Kenneth Rogoff, This Time Is Different: Eight

Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2009). 43

William McKibben, The End of Nature (New York: Random House, 1989), 109. 44

William Leach, Country of Exiles: The Destruction of Place in American Life (New York: Pantheon,

1999); Robert D. Putnam, Bowling Alone: The Collapse and Revival of American Community (New York:

Simon and Schuster, 2000)

21

Chapter One: In The Shadow of Empty Towers, New York City, 1973

City of Glass

“I think of it as one, not two,” she said.

“Even though there are clearly two towers. It’s a single entity, isn’t it?”

“Very terrible, but you have to look at it, I think.”

“Yes, you have to look.”1 Don DeLillo, Underworld

Lower Manhattan, Wednesday, April 4, 1973, early spring in an age of endings.

The previous day, almost 13 million shares had traded hands on the New York Stock

Exchange (NYSE) as the Dow Jones Industrial Average (“the Dow”) closed at 927.75,

down 8.43 points. As one reporter described it, “[The] malaise afflicting investors

continued to hang like a shroud over Wall Street.”2 Two stabbings made the day’s

police blotter in The New York Times. One had taken place on the main concourse of the

Port Authority Bus Terminal. The other occurred on the “F” train from Manhattan to

Brooklyn, where a pair of robbers stabbed their sixteen-year-old victim in the throat. The

other passengers did nothing to pursue the assailants.3 Other New Yorkers were even

less fortunate. In 1960, there had been 390 homicides in the city.4 In 1973, murder

1 Don DeLillo, Underworld (New York, Scribner Paperback Fiction, 1998) 372.

2 Terry Robards, “Stock Prices Drop Again As Volume Remains Low,” NYT, April 4, 1973.

3 “Metropolitan Briefs: From the Police Blotter,” NYT, April 4, 1973.

4 Michael T. Kaufman, “Illegal Market in Pistols Found Flourishing Here,” NYT, December 2, 1973.

22

claimed the lives of 1,669 New Yorkers. 5 That April 4

th, the Times reprinted an excerpt

from a speech by Senator Charles Mathias (R-Maryland) who declared amidst the

unfolding revelations of the Watergate cover-up: “No danger that faces the United States

today is more serious than the possibility that a significant number of our people are

losing faith in the validity and purpose of our Government.”6 The forecast called for

overcast skies and showers over the city.7

Gotham’s spring rains suited the banker-gray latticework of aluminum girdling

the exterior of World Trade Center’s (WTC) twin towers as a crowd of dignitaries

arrived—4,500 in all.8 All of them, that is, except for the Nixon administration’s

Secretary of Labor, Peter J. Brennan, who had refused to cross a picket line of striking

PATH (Port Authority Trans-Hudson) workers who had shut down the “tubes” over

which the towers had been built. Also missing was Austin Tobin who had led the Port

Authority of New York and New Jersey (Port Authority or PA) from 1942 to 1972 and

remained miffed over his recent ouster from power. Tobin had spearheaded the

construction of the World Trade Center while also presiding over the expansion of the

public corporation from a staff of 800 to 8,500. By 1973, the PA managed a $3 billion

budget and controlled $1 billion of autonomous bonding authority.9 After the

5 For the 1973 statistics see Deirdre Carmody, “With Murders Here Down 9.1%, Police See a Downward

Trend,” NYT, May 24, 1974. 6 Charles Mathias Jr., “That Corny Old Guidepost, Truth, “ Op-Ed, NYT, April 4, 1973.

7 “Weather Reports and Forecast,” NYT, April 4, 1974.

8 Public Affairs Department: Port Authority of New York and New Jersey, 1973 Annual

Report. (New York: 1974), 39. 9 Eric Darton, Divided We Stand: A Biography of New York’s World Trade Center (New York: Basic

Books, 1999), 53, 142.

23

expenditure of $700 million dollars by the Port Authority, including $225 million in cost

overruns, it was time to cut the ribbons on 9 million square feet of office space, delivered

three years behind schedule and still “more or less” finished. The marbled lobby also

made a good place to indulge in the old regional rivalries. The new towers, in the words

of the Governor of New York, Nelson Rockefeller, would “enable the Port of New York

to retain its accustomed place as the major capital of world commerce.”10

Jack Zwick,

the director of the complex’s World Trade Institute, held forth on the Institute’s ability to

find information for importers and exporters on tariffs and quotas while also matching

prospective on buyers and sellers. “The rest of [the center], that’s just real estate,” said

Zwick, “fascinating engineering, but just real estate.”11

The infrastructure of the port,

however, and the longshoremen’s jobs that went with it, had largely moved across the

Hudson River. Rockefeller ruefully remarked to his New Jersey counterpart, William

Cahill, during the dedication ceremony that, looking-out from the towers, “You can see

those magnificent container ports, that took all those jobs away from New York.”12

By the middle of the 1950s it had become clear that the Manhattan piers, for all of

their storied history, were rotting-out, cramped, and without direct freight rail access.

The brave new world of international shipping—that replaced the muscle of gang labor

with the automated handling of standardized shipping containers—demanded new

facilities. At the same time, New York’s real estate interests looked covetously on the

10

Frank J Prial, “Governors Dedicate Trade Center Here; World Role Is Cited,” NYT, April 5, 1973; Robert

T Jones “Highest Building—for New—Debuts in N.Y.,” The Lost Angeles Times (LAT), April 5, 1973. 11

Michael T Kaufman, “World Trade Institute Is Labeled ‘Heart’ of Center, NYT, April 5, 1973. 12

Frank J Prial, “Governors Dedicate Trade Center Here; World Role Is Cited,” NYT, April 5, 1973.

24

riverfront land occupied by the “blight” of the old warehouses, obsolete docks, and small

businesses that had occupied the future site of the WTC. The Port Authority thus chose

to build its new container terminals at Port Elizabeth, New Jersey. The Garden State

could take what would remain of the waterfront’s gritty blue-collar past. The city would

literally soar into future of managing global commerce.13

It was a brilliant plan, in theory. Except now the towers loomed over a city and a

nation that had come to question why the World Trade Center, and the other

megaprojects of its era, had been built in the first place. The buildings were easy to hate,

not just for their unapologetic girth, but also for what they seemed to symbolize—a

powerful, even unhinged, high-tech state. Urbanist Lewis Mumford described the towers

as a “a characteristic example of the purposeless giantism and technological

exhibitionism that are now eviscerating the living tissue of every great city.”14

The

Washington Post’s architecture critic Wolf Von Eckardt visited the towers shortly before

they opened. He saw in them the end of an era. “I see it, rather—optimist that I am—as

part of the apogee of 20th

century infatuation with technology, a misapplied technocracy

which has polluted the earth, which has gotten us to the moon, where we found nothing

but yellow dust, and which as given us an architecture that simply does not add up to a

livable environment.”15

Ada Louise Huxtable, architecture critic for the Times, wrote

that “the towers are pure technology, the lobbies are pure schmaltz,” and the structures

13

James Glanz and Eric Lipton, Cities in the Sky: The Rise and Fall of the World Trade Center (New York:

Times Books, 2003), passim. 14

Lewis Mumford, The Myth of the Machine: Volume II The Pentagon of Power (New York: Harcourt,

Brace, Jovanovich, 1964, 1970), caption to illustration number 20. 15

Wolf Von Eckardt, “Scraping the Top With Arrogance: Cityscape,” Washington Post, January 13, 1973.

25

were an example of how to make “megalomania compatible with economics.”16

For its

efforts, “the Port Authority has built the ultimate Disneyland fairytale blockbuster,”

Huxtable continued, “It is General Motors Gothic.”17

For the Port Authority, however,

there was a more immediate problem than the project’s brute-force aesthetics and the

wraith of architecture critics. The towers’ were struggling to attract tenants.

The completion of the World Trade Center symbolized the end of New York’s

post-war real-estate boom. Developers had overpowered the polished art deco of the

Empire State Building, Rockefeller Center, and their kin, with the slick steel and glass

boxes of the International Style. The new skyscrapers had shifted the center of corporate

real estate from the claustrophobic environs of Wall Street, to broad expanses of Park

Avenue and Midtown Manhattan. The scale of the new construction was staggering.

Between 1947 and 1972 the city’s builders had completed 263 office buildings containing

a little over 129 million square feet of rentable square footage.18

Placing those figures in

perspective, the Office of the Comptroller, headed by Abraham D Beame, bragged to the

credit rating agencies in 1972 that the city had built more office space than “all of the

nation’s 22 largest cities combined.” Beame went on to say, “This is the mark of a city

always looking ahead, always planning to surpass the seemingly unsurpassable.”19

But

the biggest occupants of the World Trade Center were not international merchants but

16

Ada Louise Huxtable, “Big But Not So Bold,” NYT, April 5, 1973, 34. 17

Ibid. 18

Carter B Horsley, “Office Market Improves Slowly,” NYT, March 4, 1973, 484. 19

The City of New York, Office of the Comptroller, “The Case for Upgrading New York City’s Credit

Rating,” Jack Bigel Papers, Archives of Municipal Financial Leadership (AMFL), Baruch College, New

York, page III-10, February 1972.

26

government agencies: the State of New York, the U.S. Customs House, and the Port

Authority itself. Two years after the official opening, five years after the first tenants

moved in, in 1970, forty percent of the building’s total square footage sat empty.20

In

desperation, the Port Authority sought to bring the brokerage firm Dean, Witter & Co

into the complex. The PA justified its decision by announcing, “We have always

contemplated that a small portion of the center’s space would be occupied by tenants with

a lesser involvement in international trade.”21

Barely born, the complex was already

taking on its future shape, as harbor, not for the trade of ships and cargos, but as a nexus

for the accelerating ones and zeroes of global capital.

Meanwhile, in the shadow of the World Trade Center, in the old immigrant ghetto

of the Lower East Side, a local resident offered some pointers on self-defense. “A quick

hard look in the eyes, I found, was enough to deter potential muggers. Not a challenging

stare, just a quick hard look—and keep walking.”22

Life in the streets, as well as the

skies, had taken on shades of cold steel.

For many workaday New Yorkers on April 4th

, 1973, however, the most pressing

issue was not the city’s changing economic base or the overbuilt commercial real estate

market, but what would be on their meatless dinner tables that evening. The meat

boycott, part of a nationwide grassroots protest, had begun on April 1, and New Yorkers

responded enthusiastically. The wholesale volumes of meat sold in the city had dropped

20

James Glanz and Eric Lipton, Cities in the Sky, 380-381. 21

Carter B Horsley, “Office Market Improves Slowly,” NYT, March 4, 1973. 22

Michael Newman, “In Praise of East Fifth,” NYT, January 27, 1973.

27

fifty percent—from 150 to 200 carloads to 75 to 100 carloads “tops.”23

On the Avenue of

Americas, women marched with picket signs for “Operation Food Price Rollback” and a

banner marked “Devalue Pot Roast, Not Dollars!”24

The rise in meat prices was the most

visible symptom of a wave of inflation rolling through the American economy. That

month industrial prices rose at the fastest rate since 1951.25

If the liberal optimism of a

decade earlier, of a “New Frontier” and a “Great Society,” had been stranded in the

quagmire of Vietnam, the price of steaks, bacon, and other delicious post-war birthrights

could still mobilize an aggrieved citizenry.

Victor Gotbaum, the President, District Council 37, of the American Federation of

State, County and Municipal Employees Union (DC 37, AFSCME) that represented

120,000 “non-uniform” (i.e. not police, fire, or sanitation) city employees, had placed the

local’s considerable resources, and his own combative personality, behind the boycott.

Gotbaum had built the local through his willingness to organize everyone from hospital

aids to the tree-trimmers in the parks, “1200 job titles, and 61 local unions.”26

They were

men and women, often African-Americans and Puerto Ricans, who had done the city

government’s daily labor for paltry wages. Even after organizing yielded improvements

in their pay and benefits, the local’s members made an average of only $8,000 per year.

Thus, there was ample motivation for members to support the campaign. “What’s the

23

Grace Lichtenstein, “Wholesalers Say Volume Is at 50%,” NYT, April 4, 1973. 24

Robert D. McFadden, “Boycott of Meat Ends With a Call for New Protests,” April 8, 1973. 25

Edwin L Dale Jr. “Industrial Prices Spurted in April,” NYT, May 4, 1973. 26

“DC 37 100,000,” Pamphlet, Undated (possibly 1972), AFSCME District Council 37 Papers (DC 37

Papers), Tamiment Library & Robert F Wagner Labor Archives (Tamiment Library), New York, Box 45,

Folder 13.

28

sense of an 8 or 9 or 10 percent increase when steak is going up every day,” Gotbaum

told a reporter.27

DC 37 printed up a million “Boycott Meat” leaflets, 5,000 posters, and

tens of thousands of meatless menus.” Support for the boycott, however, went beyond

proverbial “pork-chop” unionism and into Gotbaum’s tireless liberal advocacy. Indeed,

it was always political with Gotbaum, who told the press, “I’d love the boycott to bring

meat prices down. But more important is to show that the whole shiny apple that Nixon

presented is really rotten at the core.”28

If a man could put up this kind of fight over the

dinner plate, it took little imagination to understand his willingness to confront DC 37’s

employer—The City of New York.

The office towers and the meat aisles at the supermarkets were not the only

buildings that were emptying out that April. There were only 17,028 fans in the stands on

opening day, April 9th

in Yankee Stadium’s for the 50th

anniversary of the “House that

Ruth Built”—leaving 47,972 empty seats. Adding insult to emptiness, the Cleveland

Indians won, 3-1.29

The only consolation for Yankees fans was that the team had come

under new ownership. On January 3, 1973, CBS had announced that it had sold the

franchise for $10 million dollars to a group lead by the team’s president, Michael Burke,

and Cleveland shipbuilder George M. Steinbrenner.30

In a sign of the team’s diminished

fortunes, out of the fifteen members of the new ownership group, only two were New

27

Deirdre Carmody, “Behind the Metropolitan Boycott, A Militant Union,” NYT, April 6, 1973. 28

Ibid. 29

Steve Cady, “Memories Are Full but Many Seats Empty on Yankee Anniversary,” NYT, April 10, 1973. 30

Joseph Durso, “C.B.S. Sells Yankees for $10 Million,” NYT, January 4, 1973.

29

Yorkers.31

And this was after the decision in 1971 by the Lindsay administration to

spent $24 million for the city to take over and modernize Yankee Stadium, motivated by

fears that its eponymous home team would join the Giants and Dodgers in fleeing the city

for a more lucrative market somewhere else.32

It had been left to a band of outsiders to

save a sports-loving city’s iconic franchise.

Just outside Yankee Stadium, eleven miles from the marble lobbies of the World

Trade Center, the visitor could step into an even more profound emptiness—the

spreading ruins of the South Bronx. A local physician described the area as “a

necropolis, a city of death. There’s a total breakdown of services, looting is rampant,

fires are everywhere.”33

A patrolman at the 41st Precinct, nicknamed “Ft. Apache” by the

officers assigned there, wrote that spring about what he saw: “Killing, stabbing, rape,

murder, burglaries, arson, fires, garbage, rats, bums, drunks, addicts, prostitutes, all in

one area.” He paused to wonder, “How did it form? Why did it form? One thing I

know, it’s there.”34

An academic from Rutgers, George Sternlieb, who worked on urban

policy, passed hardheaded judgment on the neighborhood. “Washington isn’t going to do

anything. Basically there are no votes in the ghetto . . . The South Bronx is a remnant, a

left-behind for which there is no economic base and no economic need. It’s a place that

people avert their eyes from and use as a dump heap for our society.”35

That year, 1973,

was an election year in New York City. The Times editorialized: “The next Mayor of this

31

Murray Chass, Yanks’ New Owners Got a Deal They Couldn’t Refuse,” NYT, January 11, 1973. 32

“New York City to Buy Yankee Stadium, Seen As Vital Cultural Need,” WSJ, March 3, 1971. 33

Martin Tolchin, “South Bronx: A Jungle Stalked by Fear, Seized by Rage,” NYT, January 15, 1973. 34

John J. Goldman, “A Cop’s Diary: Enforcing Law in N.Y. Ghetto,” LAT, May 7, 1973. 35

Martin Tolchin, “Future Looks Bleak for the South Bronx,” NYT, January 18, 1973,

30

city should be the man who can convince the people that he has the determination and

intelligence to rescue the South Bronx and the other slums of New York—and, with

them, the city itself.”36

Whether anyone, short of Superman, could, was another question

entirely.

Mayor John V. Lindsay was clearly falling short of the task—and did not want

any more of it. On March 7th

, he ruled out running for a third term.37

In an editorial on

Lindsay’s decision the Wall Street Journal wrote, “Put simply, the American public is no

longer in a mood for political heroes.”38

Lindsay’s supporters had already backed away.

In February, Victor Gotbaum described the Mayor as having “had it” and went on to tell

the Times reporter, “His second term has been downhill and lost its dynamism. I can’t

see myself or my union supporting him for Mayor again.”39

Lindsay had come into office in 1965 as a Republican reformer eager to shake up

City Hall. Instead, the city’s growing racial conflicts had shaken him. In 1968, 60,000

teachers had gone out on strike in a dispute over community control of the Oceanville-

Brownsville school district. The fight took on ugly overtones as African-Americans

leaders, who favored community control, hurled charges of racism at the largely Jewish

leadership of the United Federation of Teachers (UFT), led by Albert Shanker. The UFT

leadership, who argued the strike was over the preservation of contractually negotiated

work rules, counter-charged with claims of anti-Semitism. Later, the construction of a

36

Editorial, “Urban Cancer,” NYT, January 18, 1973. 37

Jane Rosen, “Unlamented Lindsay Shies Away From Third Term,” The Guardian (UK), March 8, 1973. 38

Editorial, “No Time for Heroes,” WSJ, March 14, 1973. 39

Emanuel Perlmutter, “Gotbaum Won’t Back Lindsay Again,” NYT, February 5, 1973, 58.

31

public housing project in Forest Hills, Queens, pitted a largely white neighborhood

against City Hall and poor blacks. Lindsay’s charisma and personal courage, his walks in

shirtsleeves to “cool off” restless neighborhoods, could only go so far in bridging the

polarized city. New York had been “spared the holocaust of major riots,” but Lindsay

had never, in the words of an anonymous labor leader, built “a base—any constituency—

and that is the saddest thing of John Lindsay” 40

Above it all, on clear winter days and in smoggy summer skies, the twin towers

stood. They reached 1350 feet, 110 stories, upward—fitting moments to the end of an

age that had been as imperious at it was fragile.

“Frankly, I Don’t Believe In Master Plans”: The End of the High Modern

No one could have understood this fragility better than the towers own architect,

Minoru Yamasaki. A little less than a year earlier, demolition charges had begun the task

of leveling his first major work, the Pruitt-Igoe public housing project. A local housing

activist borrowed from Marx to describe the complex as a “specter . . .[that] socially,

physically, and financially—haunts St. Louis.”41

Nothing, it appeared, could be done

with the towers other than to set the dynamite and the bulldozers to work. In the famous

words of critic Charles A. Jencks, “Modern Architecture died in St. Louis, Missouri on

40

John J Goldman, “Lindsay Era Ending in New York—Time of Change, Chaos, Charisma,” LAT,

December 25, 1973; for a comprehensive, and critical, biography of Lindsay see Vincent Cannato, The

Ungovernable City: John Lindsay and His Struggle to Save New York (New York: Basic Books, 2001); a

counter to Cannato’s work are the essays collected in Sam Roberts, ed, America’s Mayor: John V. Lindsay

and the Reinvention of New York (New York: Columbia University Press, 2010). 41

“St. Louis Is Revising Housing Complex,” NYT, March 19, 1972.

32

July 15, 1972 at 3:32 pm. . . . Boom, boom, boom.”42

The complex had the faults, Jenks

argues, “of an age trying to reinvent itself totally on rational grounds.”43

While the ruins

of Pruitt-Igoe and the promise World Trade Center lay at a great distance from one

another, in geography, race, class, and power, both complexes had been birthed from the

organizing ideology that anthropologist James Scott calls “high modernism.” High

modernism, in Scott’s definition, was “a strong, one might even say muscle-bound,

version of the self-confidence about scientific and technical progress, the expansion of

production, the growing satisfaction of human needs, the mastery of nature (including

human nature), and, above all else, the rational design of social order commensurate with

the scientific understanding of natural laws.”44

The ignominious end of Pruitt-Igoe can

be read as the end, not just of a project, but also arguably of the project of mid-century

America, a project of modernization through planned development. The City of New

York had embraced this demanding lover in a thrilling, dangerous, and ultimately

doomed liaison.

The technocratic redevelopment of New York began under the administration of

Fiorello LaGuardia (1934-45) and continued during the terms of his successors William

O’Dwyer (1946-50), Vincent R. Impellitteri (1950-53) and Robert F Wagner Jr. (1954-

65). It had begun as an act of faith that high modernism could save the city from the

ravages of the Depression and decades of accumulated “blight.” Municipal bureaucrats

42

Charles A Jencks and Maggie Keswick, The Language of Post-Modern Architecture: Third Revised

Enlarged Edition (London: Academy Editions, 1977, 1978, 1981), 9. 43

Ibid, 10. 44

James C. Scott, Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed

(New Haven, CT: Yale University Press, 1998), 4.

33

and private interests turned that faith into public works. This process, loosely defined as

“urban renewal,” served a multitude of civic purposes. Under the direction of arch-

bureaucrat Robert Moses and his network of interlocking public agencies and private

capital, the machinery of redevelopment took on a life of its own.

The developers and planners reshaped the city with overdrive. The planners

overlaid the old subway and street grid with a thicket of freeways, bridges, and tunnels.

They built parks, pools, and public housing in poor neighborhoods and subsidized

middle-income housing in not so poor ones. They helped the city’s universities expand

their campuses, staged two World’s Fairs, and built, as if acknowledging their own urban

“imperium,” the New York Coliseum. The redevelopment process drew on federal

money, New York State money, and money from selling bonds that could be supported

by tolls and rents. Aid and debt provided the fiscal bricks that could, in turn, be

pyramided into new projects that yielded yet more tolls and rents—supporting the issue

of yet more bonds. The machine threw off well-paid construction and engineering jobs

and a dazzling array of fees, retainers, bond-sale commissions, and contracts for lawyers,

insurance brokers, and the real estate men to ingest. Robert Caro estimates that $27

billion dollars worth of construction, in 1968 dollars, went through Moses’ organizations

alone.45

Old ethnic neighborhoods, now designed as “slums,” were bulldozed to build the

dazzling new monuments to the “American Century” such as the United Nations

45

The standard, and very critical narrative of Moses’ career is Caro, The Power Broker, this summary is

based on 1-37, for a reassessment Hilary Ballon and Kenneth T Jackson, eds, Robert Moses and the

Modern City: The Transformation of New York (New York: W.W. Norton, 2007).

34

Headquarters and Lincoln Center.46

The Port Authority, under Tobin, had equally

grandiose ambitions. It also possessed the political and financial autonomy necessary to

achieve them. In the post-war period, not only did the PA build the New Jersey container

terminals and the World Trade Center, but it also constructed a massive consolidated bus

terminal in Midtown Manhattan, built-out three “jet-age” airports, and worked with

Moses to construct the Throgs Neck and Verrazano-Narrows bridges.47

Mid-century

New York became a monument to an age of heroic engineering unencumbered by red

tape or environmental impact statements or by the slog through rounds after round of

community consultation and public interest litigation. It was an age of faith, in the slide-

rule and the blueprint, in concrete and steel set into motion, in the march of progress by

design.

This material progress was not limited to the city’s “power brokers.” At a

national level McCarthyism and the post-war boom had apparently put the kibosh on

national politics that went beyond Keynesian economics and a “rights-based liberalism”

that would integrate the marginalized into the mainstream.48

New York City, where

politics remained on the left of the liberal “consensus,” faced fewer such constrictions.

Indeed the city’s “municipal socialism” relied upon an intimate relationship between the

power of planning and the achievement of social welfare goals. After VJ-Day, the city’s

46

Zipp, Manhattan Projects. 47

Jameson W. Doig, Empire On the Hudson: Entrepreneurial Vision and Political Power at the Port of

New York Authority (New York: Columbia University Press, 2001), 315-335, 373-390. 48

For the limitations of the New Deal see Brinkley, The End of Reform; for the persistence of liberalism

that went in important ways beyond the “politics of consensus,” Kevin Boyle, The UAW and the Heyday of

American Liberalism (Ithaca, NY: Cornell University Press, 1995).

35

wartime rent controls remained in effect. New York used its borrowing power and tax

abatements to build “no-cash subsidy” housing developments for the middle and

working-classes who earned too much to qualify for federally subsidized public housing.

Robert Moses, collaborating with the labor organized United Housing Foundation, used

Title I of the 1949 Housing Act to condemn “slum” properties, assemble the parcels into

“superblocks.” He then resold the land at a discount to “limited dividend” cooperatives--

with the federal government picking up the difference. The UHF, for its part, provided

equity funding and political allies for the new construction. Workers could move out of

the tenements into modern, comfortable (if architecturally nondescript) new apartments,

and remain in the city, even as the expressways Moses built accelerated the departure of

the better off to radiating sprawl of Long Island, Westchester, and New Jersey.49

This exercise of unchecked expert power, however well intentioned, bred

resistance both to the specific projects themselves, and to the system that had given the

planners their power. Jane Jacobs, among others, began campaigning in the mid-1950s,

first against punching a road through Washington Square Park (1955-56). Activism

intensified in successful fights to prevent the leveling the West Village for urban renewal

(1961) and to stop the proposed construction of the Lower Manhattan Expressway in the

mid-1960s.50

In the midst of these fights, Jacobs published The Death and Life of Great

American Cities (1961) that decried the top-down planning mentality she abhorred. “By

49

Joshua Freeman, Working-Class New York: Life and Labor Since World War II (New York: The New

Press, 2000), 105-119. 50

Roberta Brandes Gratz, The Battle for Gotham: New York in the Shadow of Robert Moses and Jane

Jacobs (New York: Nation Books, 2010), 40.

36

carrying to its logical conclusion the thesis that the city, as it exists, is a problem in

disorganized complexity,” Jacobs wrote, the “housers and planners reached—apparently

with straight faces—the idea that almost any specific malfunction could be corrected by

opening and filling a new file drawer.”51

As the decade progressed, Jacobs’ battles with

Moses merged into a broader strand of intellectual criticism that came to associate the

autonomous technocracy of high-modernism with the pesticides that killed songbirds, the

cars that killed their drivers, and the Vietnam War that killed 58,000 Americans. For a

growing number of dissidents, it was the arrogance of the “experts” that had made all of

these deadly works possible.52

In 1964, Lewis Mumford voiced his dissent in The Myth

of the Machine Volume II: The Pentagon of Power:

The modernized megamachine has reproduced all the early features of the ancient form

of pyramid building on an even larger scale. And just as the static physical structures

supported the worshipper’s belief in the validity of the Pharaoh’s claim to divinity and

immortality, so the new dynamic forms of the pyramid-complex—the skyscrapers, the

atomic reactors, the nuclear weapons, the superhighways, the space rockets, the

underground control centers, the collective nuclear shelters (tombs)—seem equally to

validate and exalt the new religion . . . .The miracles performed by the technocratic

priesthood are genuine: only their claims of divinity are spurious.53

The criticism of city governance in mid-century New York was not limited to

Greenwich Village intellectuals and the residents of neighborhoods marked for

immediate demolition. The machinery of redevelopment that had built so much had also

built in prejudice, discrimination, and exclusion. “Whites only” was not only the rule in

51

Jane Jacobs, The Death and Life of Great American Cities (New York: Vintage Books, 1961), 437. 52

Respectively see Rachel Carson, Silent Spring. Fortieth Anniversary Edition, Introduction by Linda

Lear. Afterward by Edward O. Wilson (New York: Mariner Books, 1962, 2002); Ralph Nader, Unsafe at

Any Speed: The Designed in Dangers of the American Automobile (New York: Grossman Publishers,

1965); David Halberstam, The Best and the Brightest (New York: Random House, 1972). 53

Mumford, The Myth of the Machine: Volume II, 300.

37

Levittown on Long Island, but also of the great middle-class urban developments of the

post-war period, such as Stuyvesant Town.54

People of color, and the poor and

politically marginal of all colors, watched as their neighborhoods were sliced apart by

freeways and parkways to accommodate cars that they themselves could not afford, cars

traveling to suburbs where they could not live. The billowing ribbons of concrete then

allowed the affluent and white to take their tax dollars to the suburbs, leaving the city

with its poor. Little thought went into relocating the residents displaced by Title I—who

were often pushed from one dilapidated neighborhood into others, equally impoverished,

even more overcrowded and segregated. Even defined in its own terms of retaining the

white middle and working classes, planning had serious limits. According to the 1970

Census, the city remained two-thirds white. School enrollments, both public and private,

however, were only fifty-two percent white in 1972.55

Future generations of the city

would look very different from those of the past.

A loss of faith--one could call it that. By 1973, Mumford, Jacobs, and their ilk

were far from alone in his fears and “heretical” dissent. All of the high-tech martial

paraphernalia, from M-16 rifles to B-52 bombers, had not brought victory in the paddies

of Southeast Asia. Lyndon Johnson declared an “unconditional war on poverty” and the

nation’s African-American ghettos, with their dry timber of accumulated grievances, had

gone up in flames, summer after long hot summer. As the American economy ran white

54

Martha Biondi, To Stand and Fight: The Struggle for Civil Rights in Postwar New York City (Cambridge,

MA: Harvard University Press, 2003). 55

Edward C. Burks, “Middle Class Whites Still Leaving City, Blacks and Puerto Ricans Nearing Majority

Here, Analysis Shows,” NYT, May 29, 1973.

38

hot to meet the demands of the Vietnam War, wages and prices began chasing each other

like a merry-go-round with an unstuck governor. Then there were the Pentagon Papers

and Watergate—the revelation in page after page of official cynicism, deception, and

lies.56

Something, somewhere, had gone very wrong in the life of a nation. The

formidable “technostructure,” the blending of corporate and government power, of

expertise and rational planning, of General Motors, IBM and the like, that economist

John Kenneth Galbraith had described in the New Industrial State (1967) could no longer

make good on the promised plenty of the post-war dream.57

Leonard Silk of the Times

editorial board asked: “Can the American people take thought and triumph over mindless

technology—and their own narrow, irresponsible pursuit of self-interest? Will a new

generation of leaders come forward that can find a way to correct . . . institutions that

have become empty, cruel, even murderous?”58

Doubt seeped into the cracks of high

modernity. This left an unquiet air hanging over New Yorkers in the spring of 1973 as

they struggled to make sense of the muggings, murders, meat prices, and municipal burn-

out.

The planners still had plans stockpiled in their file-drawers. Robert Moses, in late

1972, proffered a characteristically confident high-modern solution to the physical

degradation that had helped precipitate the “urban crisis.” Moses proposed that the city

build new housing on vacant land, for example on Jamaica Bay, and then demolish and

56

Maurice Isserman and Michael Kazin, America Divided: The Civil War of the 1960s, Third Edition ,New

York: Oxford University Press, 2008); David Steigerwald The Sixties and the End of Modern America

,New York: St Martin’s Press, 1995) 57

John Kenneth Galbraith’s The New Industrial State (Boston: Houghton Mifflin, 1967), 75. 58

Leonard Silk, “A Disappearing Way?” NYT, January 1, 1973.

39

replace the city’s old slums: Bedford-Stuyvesant, Brownsville, East New York, and

elsewhere. Bulldozers, concrete: here was a comprehensive solution to the urban crisis,

ready to go, if only the politicians could stop their dithering. As if the present facts were

not dire enough to spur action, Moses concluded his proposal with chilling warning about

the future of the city: “I am serious about the imminent danger of violence beyond police

control in our New York City ghettos. The recent seizure at the Olympic Village at

Munich demonstrated how easily a few fanatical saboteurs can terrorize a village. Why

not a whole city?”59

Perhaps the architect of the city’s modern landscape understood

better than either Jacobs or Mumford both the incompletion of his design, and, more

importantly the fragility, of his creation. When the machinery of “redevelopment”

stopped there would be little to replace it as an economic engine and an organizing

principle for public life. But even if Moses had been able to gain a serious hearing for his

scheme, there was no longer the capital—financial or political—to implement his latest

dream.

That was because in 1973 the Master Plan for New York City died, stillborn. The

plan had its genesis in a requirement of the city’s 1938 Charter—New Deal luminary

Rexford Tugwell had been the first chairman of the City Planning Commission. Suffice

it to say, there had been delays in the process. Under Donald Elliot, however, a draft had

been completed in 1969 with the last volume, on Manhattan, released to the public in

59

Robert Moses, “New York: City of Contrasts, Crisis,” Op-Ed, Amsterdam News, September 30, 1972.

40

December 1970.60

Its goal was clear: “We must support and strengthen the national

center role of the city, which is its true genius . . . .The dynamic concentration of people

and activity which this creates is our greatest strength, the sources of our economic

vitality. Without this role, New York City would be just another large city.”61

To

preserve the city the plan embraced not only traditional physical reconstruction but also

social engineering.

The plan argued that only thirty eight percent of the city’s population lived in

“sound areas.” The rest of the city’s neighborhoods would either have to be designated

as “major action arenas,” marked for whole-scale physical rebuilding and social-service

action, or buttressed as “preventive renewal areas.” The former were largely white

neighborhoods, such as Washington Heights, that were close to “slums” and required a

more limited program to “stabilize” them. An effort of this scale would not come cheap.

The planners estimated that their full program would cost $52 billion beyond the city’s

budget. This number included $5 billion for city infrastructure, $7 billion for housing

and urban renewal and $40 billion to improve social services—everything from

healthcare to policing. The planners hoped that money would come from New York

State and the federal government, since, “The social and economic forces that are

concentrating the poor in urban ghettos are not of the city’s making. They are national

60

Richard Reeves, “New Master Plan Outlines Wide Social Changes Here,” NYT, February, 3, 1969, for

the final volume see Michael Stern “6th

and Last Part of Master Plan on City Released,” NYT, December 8,

1970. 61

Richard Reeves, “New Master Plan Outlines Wide Social Changes Here,” NYT, February,3, 1969.

41

problems, and they must be solved by national efforts.”62

It was a brave and earnest

attempt to overturn the grim logic of the Kerner Commission’s 1968 warning that

American was being divided into “two societies, one black, one white—separate and

unequal.” Subsequent events, however, killed that dream.

The Nixon administration did include serious and sophisticated advocates for the

“Frostbelt” cities afflicted by the “urban crisis” in Daniel Patrick Moynihan and Housing

and Urban Development (HUD) Secretary George Romney. Solving urban problems,

however, was an interest decidedly not shared by Nixon or his inner circle of political

confidants. Instead, they dreamed of building an electoral “New Majority” out of the

white homeowners who resided in the Sunbelt and the suburbs. True to his political-

legislative instincts, Nixon therefore did not so much eliminate the largess of the Great

Society’s urban programs, but “spread the wealth” of redevelopment dollars to include

Republican-friendly regions. There were also outright cuts: the budget for HUD was

halved from 1969 to 1971.63

In January 1973, the president declared a moratorium on the

construction of new public housing units. Mixing Jane Jacobs and Barry Goldwater,

Nixon declared: “I have seen a number of our public housing projects. Some of them are

impressive, but too many are so monstrous, depressing, places—run down, overcrowded,

crime-ridden, falling apart . . . . All across America, the Federal Government has become

62

“City’s New Master Plan Calls Middle Class Vital,” NYT, November 16, 1969. 63

Quoted in Roger Biles, The Fate of Cities: Urban America and the Federal Government, 1945-2000

(Lawrence, University Press of Kansas, 2011), overall urban policy 197-199, HUD funding cuts 179,

moratorium, 187; for Nixon’s use of the tools of the activist liberal state in his quest for political

realignment, Bruce Schulman’s The Seventies: The Great Shift in American Culture, Society, and Politics

(Cambridge, MA: De Capo, 2001).

42

the biggest slumlord in history.”64

Bricks and steel, and the power of mayors and

planners that went with them, would be replaced by a hybrid market-mechanism through

Section 8 housing vouchers. The planned “Model Cities” of the Great Society would be

gradually replaced by what one might call “Market Cities” shaped by less-visible hands.

The risks and (limited) rewards of the low-end residential marketplace would no longer

be socialized, but would, ideally, be born by individual tenants and private landlords.

Given this shift in Washington’s ideological currents, by 1973 an expanded round

of federally funded urban renewal for cities like New York was clearly no longer in the

cards. That month, Elliot, sensing his work was done, resigned his position. 65

In June

of that year, a thirty-five-year-old Brooklyn lawyer, John E. Zuccotti, Elliott’s

replacement as chairman, sounded the Plan’s death-knell. Zuccotti described the plan as

an “invaluable and heroic accomplishment.” Then he proceeded to call it “outdated,”

adding for good measure, “Frankly, I don’t believe in master plans.”66

The Wall Street

Journal praised Zuccotti’s scrapping of the Plan as an acknowledgement “that there are

definite limits to planning, limits which derive not from political obstructionism but from

human unpredictability.” The paper then went on to contrast the Master Plan with one

proposed by the Downtown-Lower Manhattan Association (D-LMA), a coalition of

developers, bankers, and corporate chieftains, for that neighborhood. The latter plan, the

Journal concluded, “depends for its motivation and success on flexible economic

64

Biles, The Fate of Cities, 187-188. 65

Peter Kihss, “Elliott Is Leaving City Planning Post; Commissioner Zuccotti Is Slated to Be Named

Chairman,” NYT, January 28, 1973. 66

“Master Plan: Dead at the Age of 3, Unloved,” NYT, June 10, 1973.

43

incentives, rather than elephantine political judgments,” and, as such, “is given a good

chance of succeeding.”67

It was not only free-market boosters, however, who had grown to distrust the

state’s capacity to organize cities. The Journal’s attitude echoed that of Robert Venturi’s

contemporary study of “vernacular architecture,” the spaces and structures of commercial

development, specifically the suburban tract house and the Strip that he observed in

Learning from Las Vegas (1972). Venturi argued, “Only the very poor, via public

housing, are dominated by architects’ values. Developers build for markets rather than

for Man and probably do less harm than authoritarian architects would do if they had the

developer’s power.”68

The blinkered vision of the marketplace, it appeared, could see

what the “commanding heights” of the state could not.

In a quiet way, these same doubts had already filtered into ordinary lives. In late

1971, Leonard Kriegel reported from Penn South, just down the street from the bohemian

haunted Chelsea Hotel. The development had been designed and financed by the

International Ladies Garment Workers Union (ILGWU), assisted by a mortgage from the

New York State Teachers’ Retirement System, and by the residents’ own hard-earned

equity. The land had been purchased and cleared of almost all of its existing structures

by Robert Moses as part of the Title I. Completed in 1962, it contained 2,820 units in

ten, plain, twenty-two-story brick towers.69

President Kennedy had spoken at their

67

Editorial, “The Best Laid Plans,” WSJ, June 18, 1973. 68

Venturi, Learning From Las Vegas, 154-155. 69

“Penn Station South Title I,” Robert Moses and the Modern City: The Transformation of New York, ed

Hilary Ballon and Kenneth T. Jackson (New York: W.W. Norton, 2007), 293-295.

44

dedication. Kriegel talked with retired ILGWU members. One man, a former organizer

for the Fur Workers union, still a dues-paying Socialist, reflected on “the sense of an

ending” that Kriegel found among the residents. “Why I distrust liberals? That’s what

you want to know?” asked the aging furrier. “Because they never learn. The more they

live, the less they know.”70

The residents were dealing with inflation in the grocery isles

of their co-op supermarket, muggings in the streets, tensions between African-Americans

and Jews, and the simmering question in their old age about whether the struggle to build

their unions had been worth the sacrifices they had made for a bit of dignity in the “rag

trade.” “And these men and women are not so much confused as disappointed,” Kriegel

wrote. “For this is it. This is all there is. In certain respects, Penn South, with all of its

limitations is as close as they have come to the commonwealth of their dreams.”71

The

world, the system, that had built the development, was falling-down. But the towers

themselves remained. How would the next generation fill them?

In The Shock of the Old, historian David Edgerton writes: “Many of the most

important technologies of the twentieth century were invented and innovated long before

1900. Some, but not all, declined during the twentieth century. Their importance should

not be underestimated, for even as technologies disappear they remain significant.”72

Edgerton shows how “obsolete” artifacts such as horse and oxen transportation, asbestos-

cement, corrugated iron, and rickshaws, not only persisted, but were often hybridized into

70

Leonard Kriegel, “Silent in the Supermarket,” Dissent, January 1972, 92. 71

Ibid, 96. 72

David Edgerton, The Shock of the Old: Technology and Global History Since 1900 (New York: Oxford

University Press, 2007), 29.

45

innovative new forms, or what he terms “creole” technologies.73

The same can be said

for the technologies of social organization. New York’s existing civic infrastructure,

both in terms of artifacts like Penn South or organizations such as the ILGWU, did not

disappear in 1973 thereafter. Rather, the system of the city became fractured into

competing centers of power and detached from the progressive and liberal ideals that had

created and sustained it. Rather than seeking to limit risk, as the old system had tried to

do, the vacancy of ideology began, slowly, to promote risk. “Winners” gained the

freedom to take all that they could. The “losers,” those without the power to create an

order in the urban vacuum, would suffer what they must.

“We Are Falling Apart in the City”: The Monied Men and Their Vision

The sense of crisis in New York took its context from the city’s accumulated

social problems and the loss of faith in the ability of the city, or the nation, to remedy

them. At a day-to-day level, the city’s problems had their origins in the steady

degradation of the city’s economy. Superficially, New York was doing well with the

city’s job market running at close to “full” employment. In March of 1973 the city’s

unemployment rate stood at 4.4 percent—better than the New York State’s level of 5.1

percent. The direction of job growth, however, was a gradual downward slide.74

The

city’s population growth had stagnated, from 7,781,984 million New Yorkers in the 1960

to 7,894,862 million in 1970. Between 1965 and 1972, when the American economy had

enjoyed a historic boom, the city had actually lost 32,000 jobs. And the trend was getting

73

Ibid., 28-51; for Edgerton’s definition of creole technology, 43. 74

“Employment Rose in State For March; Jobless Rate at 5.1,%” NYT, April 26, 1973.

46

worse, with a total of 252,000 jobs lost since 1969, 68,000 of them in 1972 alone. The

regional director of the Bureau of Labor Statistics told the press, “I don’t think New York

is dead or dying, but it is certainly very sick.”75

The contagion continued to spread. In 1973, the city lost an additional 21,000

jobs. By December of that year, the number of working New Yorkers had dropped to

levels last seen in 1958.76

At the same time the city’s welfare rolls had mushroomed

from 500,000 in 1965 to 1.25 million in 1973.77

Mayor Lindsay dismissed the doubters.

On a press junket in Lower Manhattan he told a reporter, “What you guys don’t report is

businesses moving into the city. We’re putting up more offices in this downtown area-

and renting them—than the next 10 largest cities combined. New York is the strongest

city in the United States and may well be the strongest in the world. Politicians who

think cities should be avoided are making a big mistake.”78

But corporate America was

putting its money on the line—and moving out.

Indeed, in an age of ascendant computer networking, would the city even need to

exist at all? AT&T had already given its answer. Company executives had announced

that the firm’s headquarter would stay in the city, but 10,000 employees would move to

office parks in New Jersey by 1980. Western Union had begun moving 1,100 employees

to the Garden State in January 1973. GAF, and Matsushita were also relocating—closer

75

Emanuel Perlmutter, “Jobs in City Down 3d Year in a Row,” NYT, March 1, 1973. 76

Damon Stetson, “Jobs in City Down By 21,000 in 1973,” NYT, February 22, 1974. 77

Jeffrey A Kroessler, New York Year By Year: A Chronology of the Great Metropolis (New York: New

York University Press, 2002), 314. 78

Murray Schumach, “Lindsay Extols Virtues of Downtown Manhattan,” NYT, August 8, 1973. See also

John J. Goldman, “Renaissance Under Way in Birthplace of New York,” LAT, July 22, 1973.

47

to their employees’ suburban homes, their manager’s golf clubs, and away from the city’s

municipal income taxes and street crime.79

Even the securities industry was in trouble. After growing from an average of

40,700 jobs in 1958 to a peak of 105,200 jobs in 1969, the number of employees had

gradually drifted lower to an average of 87,900 positions in 1972.80

The number of

securities firms, meanwhile, had declined to a post-World War II low of 543, from over

650 at the beginning of the sixties, and the ones that remained were losing money, laying-

off employees, and cutting the wages and commissions of those who stayed.81

Venerable

firms, including Hayden Stone, Goodbody, and Francis I. du Pont and Company, all

found themselves taken over by outside investors or forcibly merged into larger firms—a

shakeout that built the reputation of the Lazard Frères investment banker Felix Rohatyn

as a financial statesman.82

The problems of the investment banks and brokerage houses (firms that were

barred by the Glass-Steagall Act of 1933 from taking deposits) resulted from the cyclical

bear market and the changing structure of the capital marketplace. The traditional core of

their business, underwriting new-issues stocks and bonds, had come under pressure as

Fortune 500 companies came to rely on their own funding, either from retained earnings

or by directly issuing their own short-term loans (“commercial paper”). Between 1950

and 1973 seventy percent of corporate profits were reinvested, enabling non-financial

79

Ania Savage, “State’s Greener Pastures Luring Major Companies,” NYT, May 13, 1973. 80

Vartang G. Vartan, “Jobs Outlook Ominous on Wall Street Merrill and Paine, Webber, Among Others,

Cut Back,” NYT, April 30, 1973. 81

Terry Robards, “Wall St. Is Again Gripped By Serious Financial Crisis,” NYT, July 23, 1973. 82

Felix Rohatyn, Dealings: A Political and Financial Life (New York: Simon and Schuster, 2010), 76-98.

48

corporations to self-fund ninety-three percent of their capital requirements.83

Wall

Street’s other key business, brokering the sale of securities, was also scheduled for a

revolutionary change—the end of fixed commissions scheduled for 1975. As Robert S.

(Bob) Rubin, partner at Lehman Brothers, later described it:

When fixed commissions went out it changed the whole equity-trading business.

Before, what the hell, you didn’t have to do anything. A guy wants to buy stock; you sell

it to him and collect your commission. You didn’t have to put up your capital or

anything. It was a gravy train for people who were in the equity-trading business.84

The pressure to cut cost,s combined with the rise of relatively cheap reliable

computing power, placed a tremendous amount of pressure on the labor-intensive “blue-

collar” side of the Street. Automation no longer just meant job losses in coal country or

Detroit’s hollowed-out assembly lines. Electronic data processing had hit the Street’s

“back-office” and shrunk the number of clerks and other functionaries needed to keep the

paperwork moving. As a Merrill Lynch vice president explained, “In the early sixties,

when there were 3 million share days [on the Big Board] we had 300 people handing the

communications. The only way to handle volume was to put more hands on board. Now

volume has expanded to 15 million-share days, and there are 360 people. That’s been

possible because of automation.”85

In his observation of the previous decade’s bull-

market, The Go-Go-Years, John Brooks wrote what might have been the Street’s epitaph:

“If the [stock] certificate and the [trading] floor go (because of electronic advances), Wall

83

Steve Fraser, Every Man A Speculator: A History of Wall Street in American Life (New York: Harper

Collins, 2005), 488 84

Eric J. Weiner, What Goes Up: the Uncensored History of Modern Wall Street As Told by the Bankers,

Brokers, CEOs, and Scoundrels Who Made it Happen (New York: Little, Brown and Company 2005), 254. 85

Michael C. Jensen, “Wall Street Slims Down,” NYT, October 14, 1973.

49

Street will have moved a long way toward transforming itself into an impersonal national

slot machine—presumably fairer to the investor but of much less interest as a microcosm

of America.”86

In an address to the City Club of New York, Donald Weeden, head of

Weeden & Co, summarized the problems of the Street:

Now comes the explosion of communications technology plus the computer able to

handle enormous volumes of data and investors and their brokers all over the country are

asking each other why send everything to New York? . . . . Last year my firm paid $1.9

million in stock transfer taxes. Was this for the privilege of employing 400 people in

New York who could just as easily perform their functions across the river in New

Jersey? Those on Wall Street and those in local government had better start putting their

talents to work making the business want to flow to New York and, more importantly,

causing those who work here to want to stay here.87

Weeden’s threat was subtle. He, and men like him, argued that Wall Street could

follow the long tradition of the city’s “runaway shops” in the garment district that moved

to cheaper labor markets decades earlier. Yet the city’s elite, the “power brokers” who

had the technical and financial means and motive to set the city’s agenda, were not yet in

a position to carry out a concerted effort to remake New York in their interests.

A sense of that elite can be gained from the 1973 additions to the board of the

fiscal and tax watchdog organization, the Citizens Budget Commission (CBC). The

newly appointed executives were members of the real estate industry (the Building and

Construction Trade Council of Greater New York, Helmsley-Spear, Rockefeller Center),

commercial banking (Fiduciary Trust Co, Dry Dock Savings Bank), investment baking

(First Boston, Kuhn Loeb & Co), utilities (Consolidated Edison), and professional

86

John Brooks, The Go-Go Years (New York: Weybright and Talley, 1973), 356-357. 87

Donald E Weeden, “Brokerage Firms’ 3 Big Challenges,” NYT, December 16, 1973.

50

services (the consultancy McKinsey & Co, the “white-shoe” law firm of Skadden, Arps,

Slate, Meagher & Flom).88

Each of these groups group had a powerful, but also

conflicting, interest in the future of the city.

Like previous generations of the city’s elite, corporate leaders wanted to preserve

the city’s credit while keeping tax rates at an absolute minimum. Their fears had been

germinating for more than a decade. In 1960, for example the Chamber of Commerce

authored a report entitled “The Coming Crisis in New York City’s Finances.” In that

report the CBC told elected officialdom that it was necessary “to slow down the rate of

expenditure increases in City operations to the end that they might be brought more

nearly in line with prospective increases in taxpaying capacity.”89

These sentiments

persisted. In a statement issued on February 21, 1973, the CBC declared: “If recent rates

of increase continue, New York can ultimately be faced with the same kind of situation

that now plagues Newark—an impossibly high real estate tax rate and a smothering debt

load.”90

In July of that year the CBC noted that the city’s funded debt had grown from

$3.5 billion in 1962 to $5.5 billion in 1972. Of greater concern to the organization’s

members was the Lindsay administration’s practice of using the capital budget, for which

the city could borrow to pay, as a fund for operating expenses that the city had to fund

out of current revenue. In the CBC’s estimation, twenty five percent of the 1972-73

capital budget was used for operating expenses for fiscal 1973-74 the CBC estimated that

88

“10 New Trustees Elected By Citizens Budget Unit,” NYT, July 8, 1973, 32. 89

New York Chamber of Commerce, “The Coming Crisis in New York City’s Finances,” New York

Chamber of Commerce and Industry Records, Columbia University, Box 337, Folder 6. 90

Murray Schumach, “Two Citizens’ Units Assail Mayor at Budget Hearings,” NYT, February 21, 1973.

51

the total would increase to almost a third, $500 million out of $1,560 billion dollars.91

It

was not a comforting picture for those who believed in fiscal restraint and lower tax

levies.

Yet the billions of dollars in investments that the city’s elite had accumulated,

especially in real estate, would be worth precious little if New York, like parts of

Newark, burned in a full-scale race riot. It would not do either if the city slowly

collapsed from inadequate (or broken) infrastructure, a poorly trained workforce, and the

menace of disorganized “street crime” that frightened away business investment and

tourist dollars. The freelance urban-policy technocrat Roger Starr summarized the

situation: “But the street crime—the muggings, the smash-and-grab burglaries from cars,

the breaking-and-entering from the fire escape window, the rapes in the elevators and the

alleyways and on the roofs—these chop up New York’s cosmopolitan heart and mangle

its cultural life.”92

Like a trio of chain-gang fugitives, the city’s space, capital, and

citizenry remained bound to one another.

So, in 1973, the city’s seven major organizations that attempted to coordinate the

business community came up with both prophecies of doom and plans for redemption.93

Yet the complexity of the city’s problems prevented it from wielding the kind of

91

Citizen’s Budget Commission, “New York City’s Debt Problem,” July 1973, 1, Citizens Budget

Commission, The State University of New York at Albany Libraries, M.S. Grenander Department of

Special Collections & Archives, Archives of Public Policy (CBC Papers), Box 1, Folder 14. 92

Roger Starr, “Build Another East Village in the Dakota Badlands,” NYT, September 24, 1972, SM 94. 93

The Times listed these groups as: Chamber of Commerce and Industry, the Citizens Budget Commission,

the citizens Union, the New York City Board of Trade, the Association for a Better New York, the

Metropolitan Retail Merchants Association, and the Real Estate Board of New York, see Max H. Seigel,

“Business Groups Urged to Aid City,” NYT, May 23, 1973, 48.

52

coordinated power that Moses and Tobin had once enjoyed. George Champion, the head

of Chase Manhattan Bank from 1957 to 1969, told the Economic Development Council

of New York, “As far as I know, there is no group which is setting goals and objectives

for the next five to ten years in this city.”94

There were, however, business leaders who wanted to play such a role David

Rockefeller, the younger brother of Governor Nelson Rockefeller and successor to

Champion as the head of Chase, had already attempted to do so on a limited basis. He

had helped “save” Lower Manhattan through the construction of a new headquarters for

Chase, completed in 1961. That same year he told Congress:

All of these matters [relating to the growth of international finance] not only have

important economic implications for the United States but also add to the political

strength and position of leadership of the United States in world affairs. Today New

York City in many ways is the financial center of the world. That is an inevitable

accompaniment of the nation’s position in political and military affairs. We cannot have

one without the other.95

Rockefeller intended to maintain that preeminence. In 1956, as construction of

One Chase Plaza began, Rockefeller founded the Downtown-Lower Manhattan

Association, the organization that had lobbied for the construction of the World Trade

Center.96

He believed in the gentlemanly partnership of business and government. In a

March 23, 1973, editorial in the Times entitled “The Essential Quest for the Middle Way,”

Rockefeller argued that corporate executives should take the lead in encouraging further

94

Ibid. 95

Quoted in Jeffrey Frieden, Banking on the World: The Politics of American International Finance (New

York: Harper and Row, 1987), 77. 96

David Rockefeller, Memoirs (New York: Random House, 2002),for the building of One Chase

Manhattan Plaza, 60-166; D-LMA 387-391.

53

business-government collaboration. “We must do much more to develop cooperative

undertakings that bring the enormously diverse talents of the business community to bear

on the problems of our society,” Rockefeller wrote. “Unless business takes a leadership

role in creating workable solutions, it will only suffer with its environment. It will also

abdicate to government and others much of its potential for a more positive position in

our society.”97

Such sentiments, when stripped of patrician niceties, could also take on a

much more ruthless coloration.

Walter Wriston was the son of a historian, although Walter had little time for the

past except as a strip mine for historical allegories that supported his boundless faith in

advanced technology and free markets. His father had amassed enough clout to serve on

government commissions and publish editorials in the Wall Street Journal, where he

could write in 1960: “I am asserting that those who misrepresent the normal experience

of life, who decry being controversial, who shun risk, are enemies of the American way

of life, whatever the piety of their vocal professions and the patriotic flavor of their

platitudes.” 98

His son shared those sentiments, while steadily accumulating enough

power to make headlines, not simply comment on them.

It was an rather ironic turn for a man who hadn’t even wanted to be a banker.

When he had returned from service in the Second World War Wriston joined First

National City Bank in 1946: “If I were to sit up at night making a list of everything dull,

97

David Rockefeller, “The Essential Quest for the Middle Way,” Op-Ed, NYT, March 23, 1973. 98

Henry M Wriston, “Leadership: Individualists vs. Security,” Op-Ed, WSJ, June 1, 1960.

54

banking would come out on top. . . . It was the last thing I wanted to do.”99

Given the

state of American banking at the time—still crippled by the traumatic shocks of the

Depression—that was a reasonable attitude. George Champion described the attitude of

the old guard in finance and the lessons that they had learned from their experience.

“Banking should be in such an unquestionably strong financial position that they should

be able to tell the government what they’re going to do and not have it vice versa. . . .

Strengthen your capital position. . . . Don’t get in a position where you are going to have

to rely on government to bail you out.”100

Walter Wriston had no such inhibitions; indeed his first major coup was a series

of creative, and lucrative, loans to the then up-and-coming and woefully undercapitalized

shipping magnate Aristotle Onassis. In 1961, he had pioneered the negotiable certificate

of deposit, the CD, enabling the bank to gather capital on a national scale and avoid the

Federal Reserve’s Regulation Q cap on deposit interest rates.101

The power of these

innovations did not go unnoticed, and Wriston became the president of First National

City Bank in 1967 and Citicorp in 1968.

Arguably more than anyone, Wriston understood the rise of the “Eurodollar,”

that is dollars held in bank accounts outside of the United States and thus free from the

controls of the Federal Reserve and able to move to locations where banking regulations

99

Zweig, Wriston, 29. 100

James Grant, Money of the Mind: Borrowing and Lending in America from the Civil War to Michael

Milken (New York: Farrar Straus Giroux, 1992), 331. 101

Zweig, Wriston, 219-220.

55

were “soft touch.”102

It was a “stateless” and loosely regulated currency, totaling

approximately $150 billion dollars by the end of 1973, that perfectly symbolized what

Ron Chernow terms the “Casino Age” of banking, a world of globalized financial

markets that by the late 1960s were awash in capital with the rise of Eurodollars. The

role of bankers was transformed from caretakers, husbanding scarce resources, to that of

a “glad-handing salesmen,” attracting deposits using CD’s sold by their international

subsidiaries, such as Citicorp International Limited, based in London, and then finding

markets for otherwise idle balances. 103

This role of capital’s ambassadors suited Wriston

perfectly. By 1973, Citicorp boasted over $3 billion in revenues, $252 million in net

income, $44 billion in total assets (loans and deposits), and 41,800 employees in 95

countries.104

Wriston could afford to be blunt.

In an April 5, speech before the Regional Plan Association, Wriston threw down

his gauntlet. “Today, it is not an exaggeration to say that the unionized civil service

bureaucracy maintains as firm a control over the city as the political machine once

enjoyed. This bureaucracy, combined with the rising cost of welfare and debt, has sent

the cost of essential city services soaring. Ironically, this system, so wholly unresponsive

to the will of the majority, is supported by the taxes imposed on the majority.”105

He

went on, whether by accident, or likely, by design, to project the sum of all specters

102

Richard F. Janssen, “London Financial Area, Streep In Tradition, Feels Winds of Change,” WSJ,

September 7, 1973. 103

For figures on value of the Eurodollar market see Charles N. Stabler, “Jitters on the Euromarket,” WSJ,

June 28, 1974, 14, also Chernow, The House of Morgan, 486. 104

Citicorp. First National City Corporation Annual Report for 1973 (New York: 1974) 2, 5-6. 105

Walter Wriston, “Dissent of the Majority, Delivered April 5, 1973” reprinted in Vital Speeches of the

Day, June 1973, 483.

56

before the city’s Jewish community. “In the same way that Germany fell apart under the

Weimar Republic, we are falling apart in the city.”106

The racialized consequences of

Wriston’s arguments were transparent. Writing in the Amsterdam News, State Senator

Carl McCall countered in the upcoming mayoral primary, “It is altogether likely that

Black and Puerto Rican voters will indeed ‘bestow the power’ on the next administration.

That being the case, using Mr. Wriston’s own formula, those voters should have the right

to call the shots.”107

Votes, however, were rooted in the Five Boroughs of the city. The

dollars at Walter Wriston’s command were not.

Roger Starr described the dilemma in his “Open Letter to the Next Mayor,”

published that June. Starr noted that yet more aid, state or federal, would not be

forthcoming. The city would have to find a way pay its own way. And that would

require a very different orientation on the part of city government:

The decisions needed to strengthen the city’s economic resources are repugnant to its

people. . . . All proposals you make to favor industrial and commercial developments

reduce the amount of money that might be immediately available for social purposes like

drug programs, health or child care, personal service. All the humanitarian concerns

represented here are far more consistent with the liberal, generous tradition of New York

City governments. You will soon sound to the people like the late and unlamented

Mayor Hague of Jersey City (“Everything for Industry”) instead of Fiorello LaGuardia.108

Starr, however, deliberately avoided the question of how any of this might be

politically feasible given the city’s polarized political climate.

106

Ibid, 484. 107

H. Carl McCall, “The Revolution of the Majority,” Op-Ed, New York Amsterdam News (Amsterdam

News), April 21, 1973. 108

Roger Starr, “Open Letter to the Next Mayor: First Clean the Streets,” NYT, June 3, 1973.

57

For all of his bluster, Wriston’s faith—if not in the city then in the power of his

own ideas and the capital at his command to save it--remained. For years, operating

under a subsidiary appropriately titled “No Name Realty,” the bank had been acquiring a

city block’s worth of land adjacent to the firm’s headquarters at 399 Park Avenue.

Wriston’s sister, Barbara, judged the contest to select the architect who would design the

building that would go on the site.109

On Tuesday, July 24, Wriston formally announced

the construction of a $125 million 54-story tower, suspended over a sidewalk plaza and a

replacement for the soon-to-be-demolished St. Peter’s Lutheran Church. The tower

would sit, serene as a balance sheet, on 10-story steel stilts above the hubbub of the street

below. Topping the Citicorp Center’s million square feet of office space, there would be

“a distinctive pyramid.”110

Executives with lesser egos could run away to suburban

safety—to New Jersey, to Connecticut, to Westchester County, New York--but Wriston

would stay in the city and fight.

“Something Approaching Tradition” The Election of 1973

The struggle of the city’s business leadership to find a cohesive plan of action that

could stem the city’s decline was mirrored by the struggle of the city’s political class to

forge a coalition for the 1973 election. While New York City voted overwhelmingly for

Democrats in national politics, in local elections the Democratic Party harbored deep

divisions between the aging, although still potent “regular” organization and the

“reformers.” The latter railed against the regular ties to labor and business interests, their

109

Philip Zweig, Wriston, 375-76.. 110

“City Bank to Erect A 54-Story Tower at East 53d Street,” NYT, July 22, 1973.

58

willingness to engage in inter-borough favor trading on the Board of Estimates, and the

general corruption of the smoky “clubhouse.” There were also deep ethnic and racial

divisions in the city’s Democratic Party. The “old immigrants,” or in the parlance of the

day “white ethnics,” Jewish, Italian, and Irish voters had grown increasingly concerned

about taxes and crime. The latter fear carried with it a number of meanings. It was an

expression of street-level unease at being mugged, or worse, and resentment about how

escaping those fears circumscribed one’s life. Crime and its rebuttal, the demand for

“law-and-order,” also reflected white racism and fears of integrated housing and schools.

And it tied into anger and fear about the perceived decline in respect for traditional

gender roles, authority, patriotism, and religious piety.111

Meanwhile, the city’s “new immigrants,” largely African Americans and Puerto

Ricans, sought integration into the city’s political power structure and economic life

commensurate with their increasing numbers. These divisions had allowed Lindsay to

win the mayoralty in 1965 and 1969 and they remained a daunting obstacle to any

aspiring Democratic politician.112

In the minutes of a meeting with delegates from DC

37’s local unions on April 24, 1973, Victor Gotbaum reported that the “election picture is

still a morass of confusion. It was recommended that the Council remain neutral in the

race for Mayor, Comptroller and President of the City Council. It is a tragedy to keep our

111

Jonathan Rieder, Canarsie: The Jews and Italians of Brooklyn Against Liberalism Cambridge, MA:

Harvard University Press, 1985), 67-78, 132-141. 112

See also Alan Ware, The Breakdown of Democratic Party Organization, 1940-1980 (Oxford: Clarendon

Press, 1985).

59

political action machinery harnessed, but this is necessary.”113

In 1973, a consensus of

ideology and interest proved very hard to come by.

On February 12, Ed Koch, Democratic Congressman representing the eighteenth

“Silk Stocking” district (Lindsay’s old seat), and a member of the reformist Village

Independent Democrats, put his hat in the ring for the election. He told the city’s voters,

“Overriding all is the paramount problem of crime—crime on our streets, crime in our

schools, crime within out government . . . [crime is] not a right wing or left wing issue . .

. you can be a liberal and still be rational.”114

While Koch’s Congressional record was

quite liberal, his quest for “rationality” shared with Walter Wriston a basic concern that

in city government, the “majority” had lost its capacity to govern. In an editorial printed

in the Times, Koch wrote: “In fact the office of mayor is much weaker today than it was

in 1961 because of the deepening urban crisis which unfortunately reflects badly on the

mayor, the increasing strength of the civil service trade unions; the number of state and

local ‘authorities,’ ‘construction funds,’ and public corporations that have encroached on

vast chunks of city government jurisdiction.” 115

Unable to secure the endorsement of the

party’s liberal wing, Koch withdrew from the race on March 28. “In this mayoral

113

“DC 37 Delegates Meeting Minutes, April 24, 1973,” DC 37 Papers, Tamiment Library, Box 1, Folder

6.. 114

Frank Lynn, “Koch Enters Race for Mayor; Declares Crime Is Main Issue,” NYT, February 13, 1973. 115

Edward I. Koch, “The Muscle of the Mayor,” Op-Ed, NYT, January 22, 1973.

60

season,” Koch explained, “I do not intend to be a lemming running to the sea.”116

That

summer thieves broke into his apartment in Washington D.C.117

If Koch’s brand of “liberalism” hinted at the future of the city’s politics, the

leading figure to succeed Lindsay, Abraham Beame, was a figure straight out of the city’s

not so distant past. Beame came, literally, from the Old World. He was born in 1906 in

London, where his family had decamped after his father, a Socialist agitator against

Czarist rule in Poland, had fled to escape arrest. Ultimately, the family settled on the

Lower East Side. Beame earned the nickname “Spunky” for his willingness to

compensate for his diminutive size, five-foot-two, with his pugnacious use of the rocks,

chains, and fists that settled street fights between neighborhood gangs. But Beame

wanted nothing more than to be out of the neighborhood. Thanks to the University

Settlement House, Commerce High School, and the free tuition provided by City College,

where he graduated in 1928, he left his childhood world behind. He became an

accountant. Moving to Crown Heights, Brooklyn, Beame joined the Depression’s

precarious middle-class, did small-business bookkeeping, and taught high school. In his

free time, he also learned about politics the old-fashioned way—as an election captain for

the Madison Democratic Club, one of the “clubhouses” that comprised the city’s machine

of “regular” Democrats.

116

Maurice Carroll, “Koch Abandons Mayoral Race, Citing Trouble in Raising Funds,” NYT, March 29,

1973. 117

“Koch Home Burglarized As He Talks With Police,” NYT, August 16, 1973.

61

Beame respected what the machine could accomplish and remained loyal to it

throughout his career. He recalled in his retirement that: “When you get discipline you

can get things done better than when you don’t. One of the problems we have in

government, even today, is that everybody’s on their own.”118

His diligence and loyalty

were rewarded with an appointment as Assistant Budget Director in 1946 and as Budget

Director in 1952. The latter position he parlayed into a winning bid for City Controller in

the 1961 election. After losing to Lindsay in the 1965 mayoral contest, he spent four

years in lucrative exile as the vice-president of a small bank, before staging a victorious

comeback bid for the comptrollership in 1969.119

Despite his advancing age, Beame’s

drive had not dissipated, and he remained eager, too eager, for another grab at the “brass

ring” of the city’s political life.

In his second term as comptroller, Beame cemented his reputation as a dutiful,

disciplined, professional administrator. He was a man who acted with a “meticulous

attention to detail” and an “immense, all embracing caution.”120

For all his caution,

though, Beame interpreted the mandate of the Comptroller’s office broadly. He added a

modern management auditing function to correct the problems revealed by fiscal audits

of city agencies and he conducted cost-effectiveness evaluations of the city’s spending.121

The Controller’s office earned praise for stopping payment on inflated bills, defective

equipment, authorizations for work outside of approved contracts, and the “improper

118

“The Reminiscences of Abraham Beame,” Columbia University Oral History Research Office, 13. 119

Linda Greenhouse, “His Honor, the Mayor: Abraham David Beame,” NYT, November 7, 1973. 120

Maurice Carroll, “New Mayor a Courtly Man of Caution,” NYT, November 8, 1973. 121

“New York City’s Comptroller: Second Most Important Job,” Management Accounting, June 1971.

62

expenses,” like parties and booze, of freewheeling politicos. Officials frustrated over

Beame’s haggling to the last decimal point gave him the sobriquet “grandmother.”122

It

made for good press and shrewd politics. A cartoon in the Daily News from the fall of

1970 pictured Lindsay attempting to pry Beame off of a safe titled, “Saving the

Taxpayers $Millions$” with the accompanying caption, “Beame You’re Too Tight!”123

Beame could appeal to good government reformers concerned about efficiency, middle-

class and business interests worried about higher taxes, and white “ethnics” angered by

the Lindsay administration’s spending on the poor—without doing anything that would

alienate minority voters. As one Lindsay official described Beame in mid-1972, “What

he really wants to be is Mayor. Abe would regard being President as a good second

choice. For Abe, the sun rises and sets on city government.”124

Beame also knew to know how to pick a strategic fight—and he did, with the

bond rating agencies. The city’s short-term borrowing had escalated during the Lindsay

administration, to $3.4 billion in 1974. This left municipal finances at the mercy of

fluctuations of short-term interest rates as the bonds matured and had to be refinanced—

again, and again, and again.125

This problem was compounded by Beame’s own reform

efforts in his first term as Comptroller. Rather than investing the majority of the city’s

pension assets in New York’s debt, as had been the previous practice, Beame shifted plan

122

David K. Shepler, “Beame’s Admirers Are Legion but His Expense ‘Nitpicking’ Annoys Many at City

Hall,” NYT, May 7, 1972. 123

Editorial Cartoon, “Beame, You’re Too Tight!,” New York Daily News, October 30, 1970. 124

David K. Shepler, “Beame’s Admirers Are Legion but His Expense ‘Nitpicking’ Annoys Many at City

Hall,” NYT, May 7, 1972. 125

Jeffrey A Kroessler, New York Year By Year: A Chronology of the Great Metropolis (New York: New

York University Press, 2002), 315.

63

assets into blue-chip corporate bonds, stocks, and commercial mortgages. All of these

investments had higher rates of return, which the pension funds could enjoy tax-free. The

city’s “paper” could be resold to individual investors who could enjoy the municipal

bond’s exemptions from federal, state, and local taxes.126

This effort raised pension fund

returns to an all time high, saving an estimated $200 million for taxpayers. Beame’s

ingenuity had also, however, deprived the city of a “captive financing vehicle” for its

debt.127

This change, along with the rise in short-term borrowing, left the municipality

subject not only to the credit markets but also to the rating agencies that governed them.

The major rating agencies, Dun & Bradstreet, Moody’s and Standards and Poor’s,

were the ones that investors relied upon to determine a fair “risk premium,” or “spread”

over ultra-safe U.S. Treasuries, for purchasing bonds of varying credit quality. Some

organizations, like trust funds, used their ratings to set guidelines on whether or not they

could buy certain debts at all. Their power over debt had made them a powerful

influence in the city’s life, as a higher rating meant lower borrowing costs and millions

worth of savings for the city. But the agencies had given the city a BBB rating, just a

notch up from “below-investment grade.” The agencies had their reasons. February 23,

1973, Brenton Harries, President of Standard and Poor’s, told a reporter that “The welfare

problem is bad, yes, but it would only take one stroke of the pen from Washington to take

126

“New York City Pension Funds to Re-offer $2 Billion in City Bonds, Seek Higher Yield,” WSJ, March

7, 1962, “New York City Plans to Put Some Pension Money in Mortgages,” WSJ, March 30, 1962, “New

York City’s $3.8 Billion Pension Funds to Invest Up to 10% in Common Stocks,” WSJ, November 10,

1964. 127

For Beame’s savings estimate see “New York’s Pension Funds Transfer to Black Ink,” WSJ, July 6,

1964.

64

care of it. But pensions are locked into the contracts. Did you ever see a union take back

something in its contract?”128

Beame and other city boosters argued, however, that the escalation of pension

and labor costs were minor when viewed in relation to compared to the city’s wealth of

assets. After all, as a reporter wrote for the Wall Street Journal, “Few, if any, serious

detractors consider it possible that the city ever would default on payment of its bond

interest and principal. All of New York City’s bonds represent a first-lien debt, which

gives bondholders top priority over any other financial commitment, and payments are

secured by ad valorem taxes on real property having a valuation of about $56 billion.”129

In February 1972, Beame wrote to Congress and called the agencies’ ratings “capricious”

and “subjective.” “No private organizations should have so much power to affect the

salability of government bonds,” he said “and, hence, the interest cost to taxpayers—

without some form of Federal governance.”130

Beame’s lobbying of the credit-rating agencies succeeded. In December 1972,

Moody’s upgraded the city to a single-A credit. Buyers were plentiful for a $285.4

million issue on April 12, 1973, and they accepted yields lower than both the Dow Jones

and the Bond Buyer indexes for municipal obligations.131

Again, Beame could play the

expert, “above-the-fray,” public servant.

128

James Ring Adams, “Can Uncle Sam Bail Out New York?,” WSJ, February 23, 1973. 129

“New York City Given Cherished Yule Gift: Single A Bond Rating,” WSJ, December 19, 1972. 130

“Beame Protests Rating of Bonds,” NYT, February 18, 1972. 131

Byron Klapper, “New York City Issue Totaling $285.4 Million Snapped Up by Investors,” WSJ, April

12, 1973.

65

His persona as a colorless technocrat and an honest clubhouse politician, the anti-

Lindsay, became Beame’s key campaign attribute. His persona echoed a comment made

by Robert Moses earlier that year about finding a suitable mayoral candidate: “I don’t

think that charisma is of any importance. At the moment, I’d say anybody who’s pretty

shouldn’t be eligible.”132

Beame attracted money from the “middle-of-the-road

businessmen and unions” and the real estate and construction lobby, all of whome were

looking for a winner.133

In the words of one reporter, Beame was “a decent, hard-

working, stolid type, boring perhaps, but hopefully, efficient.”134

His campaign literature

said as much: “All the pretty speeches and all the marches and all the rallies aren’t going

to do a damn thing to keep your mother from getting mugged. But there’s one thing that

will—cops . . . . Now what does it take to get them? You heard it: money . . . . And one

thing you know about me is I know money.”135

His wife, Mary Beame, portrayed herself

in the same way, as a respectable middle-class New Yorker, “a little bit of a prude” who

was dismayed by the direction that the city had taken in the Lindsay years. “I see no

need for these sex pictures. People call them art, but that’s just a sham,” Mary told a

reporter. “This laissez-faire is the worst thing to hit the country. I wonder if the

pendulum will ever swing back. Look what its done to 42d Street, and the theater

district. I can see where the legitimate theater is really suffering. I know my type of

132

Maurice Carroll, “Moses’ Advice for a Better New York: Don’t Let Anyone ‘Pretty’ Be Mayor,” NYT,

January 26, 1973. 133

Tom Buckley, “Beame Relies on Experience to Win Race,” NYT, April 23, 1973. 134

Jane Rosen, “Golden Boy Has Lost His Lustre,” The Guardian (UK), December 31, 1973. 135

Norman C. Miller, “New Yorkers, Feeling Helpless and Hopeless, Yawn About Primary,” WSJ, May 25,

1973.

66

friends are afraid to go to Midtown.”136

As a couple, they had built the sort of decent life

that the settlement-house workers had encouraged them to aspire to. The Beames’ world-

view was not of utopia, but of the city as something worth keeping intact for the next

generation. Beyond that, Beame had no grand vision for New York.

Neither, however, did his competitors in the Democratic Party’s primary, and

there were competitors aplenty for the nomination. All supported a program similar to

Beame’s: more police, less racial tension, less unspecified “waste” in government, and a

pledge to keep taxes down and reduce middle class flight.137

The differences between the

candidates were largely matters of personality, programmatic nuances, and ethnic appeal.

Herman Badillo, a Congressman from the Bronx, sought to build a bridge between his

core constituency, African-American and Puerto Rican voters, and the white middle

class.138

Congressman Mario Biaggi, a former police officer who represented a heavily

Italian district in the north Bronx, ran on a rhetorically sharp “law-and-order” campaign

that pledged to “end the climate of fear that permeates this town.”139

Assemblyman

Albert Blumenthal, from the West Side, was seen as the “true liberal,” a label that won

him no favors from voters who were not dedicated reformers. In the Democratic primary

on June 4, Beame won with thirty-four percent of the vote, a total that fell below the forty

percent threshold he needed to avoid a runoff with Badillo, who took second place. 140

136

Marcia Chambers, “City’s New First Lady Sees Herself as a ‘Bit of a Prude,’ ” NYT, November 9, 1973. 137

Chris McNickle, To Be Mayor of New York: Ethnic Politics in the City (New York: Columbia

University Press, 1993), 249. 138

Ibid, 244 139

Ibid, 248 140

Ibid, 248.

67

Then the primary took on vicious racial overtones—as the Beame camp shifted

right to capture former Biaggi supporters. Beame loyalists in the Bronx distributed fliers

of a burnt-out block, captioned, “This is the Bronx Herman Badillo helped build. Don’t

let him do this to New York.” Another advertisement in The Jewish Press, for which

Beame disclaimed responsibility, said simply, “Vote as if your life depends on it, because

it does.” For his part, Badillo called Beame a “vicious little man” in a televised

debate.141

The summer dragged on. The literary critic Alfred Kazin described the season in

his journal on June 19th

. “But my God, in New York, in this rainy, soggy June, half the

people I see seem to me distended, mad, sloppy, and eccentric, and self-indulged to the

point of physical incoherence. . . . At the corner of Times Square I hear a sickly looking

man cry out I DON’T HAVE TO APOLOGIZE TO ANYONE? HEAR? NOT TO

ANYONE?”142

In the June 26th

runoff, Beame handily defeated Badillo.

For all intents and purposes, the Democratic Primary had been the general

election. Beame ran a well funded and organized operation with the doggedness of a

former precinct captain. Behind the scenes, he carefully bound up the wounds from the

primary fight.143

The accumulated frustration of eight years out of power and the

prospect of municipal appointments, however, provided a strong incentive for party unity.

141

Ibid, 250-252. 142

Alfred Kazin, Alfred Kazin’s Journals, ed Alfred Cook (New Haven, CT: Yale University Press, 2011),

421. 143

Chris McNickle, To Be Mayor of New York, 253-255

68

In the words of Percy Sutton, “blacks will share the power in ways that they never had

before.”144

Sensing victory, Beame took no chances. The state of the Republican campaign

was best summarized on election night when the party’s candidate, State Senator John

Marchi, fumed, “New York City Republicans are not subsidiary to the upstate party” and

then condemned the “Rockefeller machine” that had given him only token support145

Columnist Pete Hamill wrote in the New York Post, “This has been the most boring,

tedious, wearisome, monotonous, spiritless, stale, musty, dreary, banal, flat, prosaic,

insipid, pedestrian, blank, moth-eaten, tiresome and dull elections in memory.”146

On Election Day, November 6, 1973, the city’s firefighters went on strike for the

first time in the department’s 108-year history. The front page of the New York Times

featured civilian volunteers wielding hoses and breaking windows to fight a blaze in

Jamaica, Queens. The head of the Uniformed Firefighters Association, Richard J Vizzini,

was unrepentant at having called the walkout. Indeed, he blamed the mayor for any

mayhem that might result. “It’s a pathetic day in life to see the way this administration is

gambling with the safety of every citizen of the city. . . . No matter what happens to the

people of this city, it falls on the shoulders of John V. Lindsay and his administration.”147

After five-and-and-half tense hours, the city and the union agreed to binding arbitration.

144

Charlayne Hunter, “Mrs. Chisholm and Basil Paterson Support Beame’s Candidacy,” NYT, October 12,

1973. 145

Frank Lynn, “A Landslide Here,” NYT, November 7, 1973. 146

Peter Strafford, “Bored New Yorkers Pick Another Mayor,” The Times (London), November 7, 1973. 147

Fred Ferretti, “City Firemen Go on Strike for 5 ½ Hours Before Agreeing to Arbitration on Pact,” NYT,

November 7, 1973.

69

The firefighters were not the only union drawing a hard line. Employees at the city’s

private, non-profit hospitals and nursing homes, the 30,000 members of Local 1199 of the

Drug and Hospital Workers Union were also on strike in defiance of a court order.148

Meanwhile, Marchi volunteers telephoned likely voters with an appeal that was as honest

as it was depressing. “Apathy is high this year. Your vote means even more than usual.

It will take less votes to win.”149

The sad spectacle lent a grain of truth to actor Zero

Mostel’s “advice” for the next mayor: “(1) Don’t take the oath, (2) Get in touch with your

lawyer, (3) Wear a mask, (4) Buy a home in California.”150

Beame won handily, as

expected, with close to sixty percent of the vote, along with the rest of the top of the

Democratic Ticket with Paul O’Dwyer as City Council President and Harrison J. Goldin

as Comptroller.151

The Times local columnist John Corry breathed a sigh of relief.

“Under Mr. Beame, the raunchy jokes, wide ties and boutique haircuts will disappear

from City Hall . . . and be replaced by something else. It will be something like

tradition.”152

What tradition actually meant in 1973 was another question.

The appropriate background music for election’s aftermath could easily have been

Long Islander Billy Joel’s album Piano Man. Released on November 7, 1973, the

melancholic lyrics of its eponymous single might have been about New York’s voters

rather than the near-do-well patrons of a Los Angeles bar crying out into the smoky dark.

148

“Issues in Hospital Strike,” NYT, November 7, 1973. 149

“Lethargic Votes Creates a ‘Weird’ Pattern,” NYT, November 7, 1973. 150

Israel Shenker, “For the City’s Next Mayor, Words of Advice, Wisdom and Warning,” NYT, November

6, 1973. 151

Frank Lynn, “Beame Expected to Lead A Sweep,” NYT, November 4, 1973 and Frank Lynn, “A

Landslide Here,” NYT, November 7, 1973. 152

John Corry, “About New York: The Way the Wind Is Blowing,” NYT, November 7, 1973.

70

The patrons ask the young singer; “Son can you play me a memory?/I’m not really sure

how it goes/But it’s sad and it’s sweet and I knew it complete/When I wore a younger

man’s clothes.”153

“Out of the Closets and Into the Streets”: Rights in an Age of Risk

The corridors of capital and the campaign trail were not the only place where

power could be contested. Four years after the Stonewall uprising, the New York Times

still called them “homosexuals,” but they marched on June 24, 1973, under the banner of

“Gay is Proud” and “Love Has No Sex.” The marchers, estimated by a reporter at

between 9,000 and 13,000, went along on Seventh Avenue chanting “out of the closet

and into the streets.”154

The year began with a major victory for gay New Yorkers, but it

ended in frustration and defeat, as “sexual orientation” remained excluded from the city’s

Omnibus Human Rights Act. The story of that struggle captures the liminal space of

personal identity, and the rights contained therein, at the eclipse of High Modernism.

Gay activists challenged a city that celebrated social pluralism and tolerance, but in

practice clenched to the status quo.

On January 12, 1973 the State Court of Appeals, New York’s highest court,

unanimously overturned a 1971 decision by the State Supreme Court that had permitted

the Secretary of State to deny the Gay Activist Alliance (GAA) a certificate of

incorporation. Incorporation would have provided both corporate immunity to the GAAs

153

For album information see Stephen Thomas Erwin “Review of Piano Man,”

http://www.allmusic.com/album/piano-man-mw0002012463. Accessed December 15, 2012, Billy Joel,

Piano Man, Columbia Records, 1973. 154

John Darnton, “Homosexuals March Down 7th

Avenue,” NYT, June 25, 1973.

71

officers, and, official recognition from the state.155

In 1971, this did not sit well with

Justice T. Paul Kane: “While the court has no personal experience upon which to rely, it

would seem that in order to be a homosexual the prohibited act must at some time have

been committed or at least presently contemplated.”156

By 1973, however, legal attitudes

had changed.

Much of this change had to do with the struggle by activists to achieve public

recognition and break the cycle of legal repression and self-marginalization that had

ghettoized the community. On February 16, 1973, six members of the Gay Activist

Alliance were arrested in the offices of ABC in protest of an upcoming episode of

Marcus Welby, M.D. in which TV’s good doctor declared a homosexual patient “sick”

and advised him to seek psychiatric help. Ronald Gold from the Alliance called the

episode “medically unsound, filled with quackery, and defaming to homosexuals, and it

violates ABC’s own standards for dealing with minorities.157

Another complimentary tactic was the simple but dangerous act of publically

“coming out” as gay. In October, Dr. Howard J. Brown, who had served as the Lindsay

administration’s first Health Services Administrator, came out to the press. He had

resigned his post in 1967 because of fears that he would be “outed” by a Washington

gossip columnist. His remarks capture the well-justified fears not only of gay male

155

Alfred E Clark, “Court, Overruling State, Gives Gay Alliance Right to Incorporate,” NYT, January 13,

1973. 156

“Court Upholds Bar On Incorporation of Homosexual Unit,” NYT, May 22, 1971. 157

Albin Krebs, “ ‘Welby’ Is Scored By Gay Activists,” NYT, February 17, 1973.

72

professionals, but also of the enduring power that heterosexual, masculine, norms

retained, even in the wake of the “rights revolution.” Dr. Brown told the Times:

In my own case, until recently I would have assumed that following my public

appearance as a homosexual, that the only proper next step would be suicide. . . .

Somehow you have to come to grips with being a queer, a faggot . . .[the fear of losing]

your job and reputation pervades everything you do. Can you be seen out with other

males in restaurants, theaters? Can you openly live with another male? If you cook, can

you admit it? I happen to like cooking, but it is only in the last year that I would admit

it.158

That was the larger moral point of the Gay Rights movement—that accepting,

indeed embracing, the freedom of the individual to be different, in matters as small as

cooking and as large as love. As Arnie Kantrowitz editorialized, “Freeing homosexuals

from discrimination and inequality is a step toward freeing each citizen to define his or

her own emotional identity and to devise emotional relationships accordingly. The right

to self-definition is a foundation of a truly free society.”159

It was a plea for the

recognition of the personal, what might be called “vernacular values,” in society’s

architecture.

On December 15,1973, the drive for the acceptance of difference gained an

unexpected endorsement from the American Psychiatric Association. After years of

debate, the APA declared that “by itself, homosexuality does not meet the criteria for

being a psychiatric disorder,” ending almost a century of same-sex relationships being

defined as “sexual deviation.” The APA, however, was careful to qualify its statement by

158

Marcia Chambers, “Ex City Official Says He’s Homosexual,” NYT, October 1973. 159

Arnie Kantrowitz, “We Are Already Your Children,” Op-Ed, NYT, September 21,1973.

73

adding, “We’re not saying that homosexuality is either ‘normal’ or ‘abnormal.’ ”160

It

was nonetheless a welcome shift by the psychological community. Only a year earlier

GAA members had picketed the meeting of Association for the Advancement of

Behavioral Therapy. The demonstrators chanted, “Aversion therapy is Clockwork

Orange!” and advertised a “cure” for heterosexuality to conventioneers and passersby.161

Public protest and coming out were not ends in-and-of themselves. They were

means towards both social dignity and legal protection. And that struggle proved

difficult indeed. In 1973, it remained perfectly legal for employers, landlords, bar

owners, indeed anyone else offering a “public accommodation” for that matter--to

discriminate against gay New Yorkers.162

So too could the Police and Fire Departments,

and the public schools, none of which hired openly gay or lesbian New Yorkers.163

On April 27th

the General Welfare Committee refused to send the anti-

discrimination bill to the City Council. Twenty members of the GAA went from City

Hall Park to the Brooklyn Bridge, where they lay down and blocked traffic.164

On April

30, ten members of the Gay Activists Alliance protested the defeat of the bill in the

chambers of the City Council. With blowing tin whistles the group cried out for

“justice,” alternating with cries of “bigots,” addressed to the council members. The cops

160

Richard D. Lyons, “Psychiatrists, in a Shift, Declare Homosexuality No Mental Illness,” NYT,

December 16, 1973. 161

“Therapy Scored By Homosexuals,” NYT, October 9, 1972. 162

John Darnton, “A Rights Bills for Homosexuals Rejected Again City Council,” NYT, December 21,

1973. 163

“City Again Rejects a Rights Bill for Homosexuals,” NYT, December 23, 1973. 164

Edward Ranzal, “City Council Rejects Homosexual Bill,” NYT, April 28, 1973.

74

then hauled them away.165

On December 20, a bill that would have inserted “sexual

orientation” into the list of protected classes in the city’s Omnibus Human Rights Act

was voted down, by a margin of 9-4 by the General Welfare Committee. It was the fourth

time in the past three years that the bill had been defeated. ‘

“Insanity Is A Problem Of Our Era”: The Risky World of the Vulnerable

Writing in her diary on September 24, 1972, Dorothy Day described the men and

women who had arrived seeking shelter from the Catholic Workers whom she “led”—as

much as a liturgically traditional Catholic anarchist-pacifist could. “Insanity is a problem

of our era . . . . One can call it many names, alienation, withdrawal, depression, nervous

breakdown—we have them all, together with the troubles of the past decade.”166

The

poorest and most vulnerable New Yorkers, the mentally ill, the homeless, the teenage

runaways and throwaways, were already bleeding on the cutting edge of a risky,

fragmenting society.

The movement towards what would become known as “deinstitutionalization”

had begun, like so many high-modern artifices, with good intentions. By the mid-1960s,

the expense, estimated in New York State alone at $400 to $500 million per year and the

inhumanity of “warehousing” the mentally ill in psychiatric hospitals had come under

intense and well-deserved scrutiny.167

A revolution in psychotropic medication promised

safe, cheap, and quick “cures” for otherwise untreatable mental illness. “We had no

165

Edward Ranzal, “10 Gay Activists Are Seized in City Hall,” NYT, May 1, 1973. 166

Dorothy Day, The Duty of Delight: The Diaries of Dorothy Day, ed Robert Ellsberg (Milwaukee, WI:

Marquette University Press, 2008), 513, 167

Richard D. Lyons, “How Release of Mental Patients Began,” NYT, October 30, 1984.

75

alternatives to the use of drugs for schizophrenia and depression,” reminisced Dr. Francis

J Braceland, an early advocate of deinstitutionalization. “Before the introduction of

drugs like Thorazine we never had drugs that worked.”168

In 1964, New York State held

85,484 people in its mental hospitals. By 1971 that number had declined to 57,625, and

the average in-patient hospitalization had declined from three months to a month-and-a-

half. The pharmacopeia, however, had been unfairly asked to fill a vacuum of social

policy. Only sixteen of the planned 150 “community care centers” for the support of

mentally ill had been completed by 1972.169

Even in the early 1970s, it was clear that

results of deinstitutionalization on the cheap were as ugly as they had been predictable. In

the words of the Manhattan State Relatives Group, “To assert the noble principle of

‘community treatment’ without making adequate provision for proper housing, follow-up

care and treatment, rehabilitation and job training is immoral and malicious mockery of

these helpless and ill people.”170

The newly released patients entered a world where the organized dehumanization

of the institution was replaced by the disorganized indifference of the Bowery and the

city’s Single Room Occupancy (SRO) hotels—the municipal bureaucracies term for

flophouses. The SROs did provide roofs, but they were not pretty places. City workers

reported cases of “venereal disease, tuberculosis, sickle cell anemia, hepatitis, and

168

Ibid 169

David A. Andelman, “Discharged Mental Patients Create Problems in State,” NYT, February 13, 1972. 170

Christopher S Wren, “28% of State’s Mental Patients Return Within 6 Months After Being Released,”

NYT, July 12, 1973.

76

ordinary malnutrition . . .random violence . . . [and] cirrhosis.”171

It was a world

estimated at the time to consist of around 12,000 souls, people who lived in what an

observant reporter called “an ugly world in dire need of help. Men in filthy rags and in

drunken stupors lie in alleys or stagger along the dirty streets, begging money from

passersby.”172

Expected to manage their own care, former patients became stuck in “the

revolving door syndrome.” Stabilized by medication, patients were released from state

hospitals into the grim land of the SROs where, in the absence of effective follow-up,

they stopped “complying” with their drug regimes. Eventually, many were re-

institutionalized, pharmacologically stabilized, and then released to the streets and to

their airless cubicles once more.173

Given these circumstances, it is unsurprising that many New Yorkers resisted

having unmediated schizophrenics and the like for next-door-neighbors, or street-corner

passersby for that matter. Frankly they reeked, not only of their own unwashed bodies

but also of liberalism’s failure to maintain the public order required for the city’s street

life to take place. One block association activist on the West Side complained, “They

[activists] want every hotel for the poor or senior citizens, and they stress the need for the

city to take over everything. Our association objects, because this keeps eroding the tax

171

John Corry,“At Single-Room Hotel, City Aides Offer Helping Hand,” NYT, May 19, 1973. 172

George Moneyhun, “Hope for ‘Down-and-Outers,” CSM, August 15, 1973. 173

David A Andelman, “Law Gives Mental Patients Rights, but Worries Others,” NYT, January 16, 1973.

77

base and it means higher taxes for other property. It’s the squeezing out of the middle

class.”174

The deinstitutionalized shared the night world with some 20,000 teen-age

runaways—refugees from generational turmoil and parents who couldn’t understand—or

didn’t want to understand—their own children. “A lot of kids from out of town think the

East Village is still a haven offering peace, love and the freedom to do one’s own thing,”

remarked a social worker surveying the wreckage. “But in reality it’s a hell of dirty

squalor, rip-offs and general dog-eat-dog existence.”175

Still they came; there was

nowhere else for them to go.

“Modernism is Finished”: The Ascent of Punk

In 1973, a punk—a young low-life—was still an insulting synonym for the

participants in the disorganized crime that terrified New Yorkers in the parks, on the

subways, and in the streets.176

Hulan Jack, former Harlem Assemblyman, used the term

for the kids who had held a knife to his throat and a bludgeon to his ribs and taken

everything that he was carrying, as he stood on the doorstep of home. “I started to offer

resistance,” Jack recalled, “until I remembered a man living on Seventh Avenue who was

accosted by some punks and stabbed 17 times. He died a few days later. So my better

174

Max H. Siegel, “West Side Split on How to Stem Evils of Single-Room-Occupancy Dwellings,” NYT,

January 2, 1973. 175

Nathaniel Sheppard Jr. “With 20,000 Runaways in City, Police Are Confident That Chances For A Mass

Tragedy Are Slight,” NYT, August 16, 1973. 176

Irwin A. Levy, “Letter to the Editor,” NYT, January 30, 1973.

78

judgment told me to let them do what they want.”177

That is what punks did, whatever

they wanted.

Punks could traverse the burned-out zones of the city’s ghettos. The Times film

critic Vincent Canby called the protagonist of Martin Scorsese’s Mean Streets “a punk

whose instincts are fatally decent.”178

Punks could comfortably walk among the

prostitutes, pimps, dealers, and johns who crossed paths amidst the “massage parlors,”

the “adult movies houses,” and the drug-dealing “juice bars” that surrounded Times

Square.179

They lived in a world that blended the socially marginal, the unsavory, and the

outright criminal. Outside a déclassé nightclub in the West Village, a 25-year-old drag

queen described the scene as “hustlers, pot heads, junkies, dope dealers—whatever you

want is here. Old ladies should stay at home if they don’t like it.”180

The punk was, in

short, both a wicked and a tragic figure who was born into, lived with, and died in, a

world of distilled urban anomie. It was appropriate enough, then, that this insult would

be re-appropriated by the cultural figures that had begun arising out of the ashes of

modernism, the culture that arose in parallel to the political, economic, and technological

structures of high modernism.

The modernists had always sought to combine new types of science, such as

psychoanalysis, the acceleration of transportation and communication, and the liberation

177

Steven R. Weisman, “4 Rob Hulan Jack at Knifepoint in Harlem,” NYT, January 28, 1973,. 178

Vincent Canby, “Take a Walk Down ‘Mean Streets,’ ” NYT, October 14, 1973. 179

Edward Ranzal, “Mayor Says Times Sq. Cleanup Makes ‘Measurable’ Progress, NYT, February 1, 1973. 180

“Outsiders Disrupt Life in the ‘Village,’” NYT, August 12, 1973, 1.

79

and alienation produced by life in an urban-industrial society.181

New York City had

been a center, arguably the center, for the American take on these developments. Like a

magnet for the creatively disenfranchised, the city drew together the urban and the rural,

immigrant and native in the 1900s and 1910s. Then it fused black and white American

idioms in the 1920s. The scene had lurched towards the Left in the 1930s and then

incorporating the great wave of expatriates from Fascist Europe in the 1940s.182

If the

city tolerated anything, it was the intellectually marginal and unconventional, especially

if the products of such unconventionality could be processed and sold by the city’s

cultural industries. The city combined the speculative experimentation of cultural

discovery and the buttoned down apparatus of cultural production—sometimes in the

same place, such as in Andy Warhol’s aptly named Factory.

Yet by the early 1960s modernism had become a cultural straightjacket. It was no

longer the voice of defiance, but the established cannon of the status quo, with David

Rockefeller sitting on the board of the Museum of Modern Art. As sociologist Daniel

Bell wrote in 1971, “At this point. . . the singular fact is that as a creative cultural force—

creative in aesthetic form or content—modernism is finished.”183

But what would come

next? More to the point, it seemed impossible to find a mode of cultural expression that

represented a distinct alternative to the constraints of high-modern society. As Lewis

181

Stephen Kern, The Culture of Time and Space 1880-1918. (Cambridge, MA: Harvard University Press,

1983, 2003). 182

Christine Stansell, American Moderns: Bohemian New York and the Creation of a New City (New York:

Metropolitan Books, Henry Holt & Co., 2000), Ann Douglas, Terrible Honesty: Mongrel Manhattan in the

1920s ,New York: Farrar, Straus, and Giroux, 1995), Michael Denning, The Cultural Front: The Laboring

of American Culture in the Twentieth Century (New York: Verso, 1997). 183

Daniel Bell, The Cultural Contradictions of Capitalism ,New York: Basic Books, 1976), 145

80

Mumford noted in The Myth of the Machine Volume II, “In all its modes, then, from

sculpted junk to junkie fantasies, from the ear-shattering thump of rock music to the

cagey emptiness of accidental noises trapped in a concert hall . . . anti-art draws its

financial and its technological resources from the very agencies it professedly defies.”184

While it is necessary to acknowledge the importance of corporate power in

absorbing and commercializing the once avant-garde, this process can also happen in

reverse. The tools of high modernism could also became powerful creative resources for

the angry, the marginalized, and the just plain bored. If the proliferation of cheap guns,

the infamous “Saturday Night Specials,” gave the criminal punk tools to wreak havoc

with, the same forces gave the artistically-inclined unprecedented access to Super-8

cameras, recording equipment and studio space in de-industrialized manufacturing lofts

that were as cheap to rent as they were uncomfortable to live in.185

It was punk.

One could watch this aesthetic unfolding in Scorsese’s Mean Streets, which made

its debut in the summer of 1973. Scorsese, then 30 years old, had grown up in

Manhattan’s Little Italy and had absorbed the neighborhood—its Catholicism (he had

attended a junior seminary before being expelled), its extended families, its violence, and

its prejudices. He remembered one particularly searing experience while taking a walk in

the neighborhood at the age of five: “They were standing around a man who had fallen

and his head was bleeding. My brother took a look at him, and then he turned to me and

184

Mumford, The Myth of the Machine: Volume II, 366-367. 185

“Loft Living,” NYT, September 30, 1973.

81

said, ‘Oh, he’s only a Jew.’ And that is one of my earliest memories.”186

Both of his

parents had worked in the garment district. He had always been enthralled with film,

which he studied at New York University. Like Beame, he left the “neighborhood,” but

psychically it still grounded him and his early work.187

He had a countercultural

sensibility, declaring, “Mean Streets shows that organized crime is similar to big

government. They’re both machines.” But Scorsese was above all a connoisseur of

film.188

One critic scorned Mean Streets for its self-referential quality a “potpourri of

quotations from other films, a flash movie that earnestly seeks but never sustains an

individual flavor. Reminiscences from other hours at the movies keep intruding . . . .

Following his mod instincts, Scorsese uses a flash, elliptical style as a defense against

content . . . [with] its fractured, spliced, deliberately non-climactic narrative method.”189

This problem of making art in an age already hyper-saturated with images was one that

the new cultural would struggle with again and again.

One could hear it in music. On Tuesday, January 30, 1973, The New York Dolls

escaped the confines of the Village. “The band is attired with enough jewelry, high heels,

make-up, feathers, swastikas and leather to satisfy a whole closetful of fantasies. . . .

They have managed to restore an essential ingredient of rock: outrageousness,” wrote the

186

Guy Flatley, “He Has Often Walked ‘Mean Streets,” NYT, December 16, 1973, 169. 187

This biographical sketch is a composite of McCandlish Phillips, “From Little Italy to Big Time

Movies,” NYT, October 18, 1973 and Guy Flatley, “He Has Often Walked ‘Mean Streets,” NYT, December

16, 1973. 188

Guy Flatley, “He Has Often Walked ‘Mean Streets,” NYT, December 16, 1973. 189

Foster Hirsch, “Why Feel Sorry For These Hoods?,” NYT, December 30, 1973, 65.

82

Times critic.190

When they arrived in LA, the Los Angeles Times critic Robert Hilburn

described the Dolls as “a kind of punk call to arms” and “a colorful and controversial

quintet who combine street punk ambisexual image and sassy Rolling Stones-influenced

music.”191

The most satisfying quality of punk was the sub-culture’s accessibility—not

simply its rhetorical embrace of do-it-yourself or DIY—but the availability of the tools to

make one’s mark, sometimes literally, on the impersonal city. It could be as easy as

opening a can of spray paint and hearing that metallic click-click-click. And, with a

disregard for the law, not to mention the aesthetic sensibilities of one’s fellow citizens, a

tag and a street number—Co-Co 144, Snake 131, Stay High 149, Bug 170—along with

accompanying embellishments, could begin traveling the length and breath of the city’s

subways. As Co-Co 144 described the feeling, “I saw my friends doing it and it was an

adventure. Going into the subway yards [to write graffiti] was exciting, like entering a

haunted house. It was eerie and dark, so you’d get scared. We wanted to put a little fame

in our lives.”192

Destruction had not per se bred creation, but the tools and will to create

had been scattered with the shredding of the modernist blueprint, left to settle where they

would, like seeds in the wind, or shards of glass on a street corner.

190

John Rockwell, “Dolls ‘Revive’ Rock in an Uptown Debut,” NYT, February 3, 1973. 191

Robert Hilburn, “At the Whisky: New York Dolls Attract Rock Crowd,” LAT, August 31, 1973 and

“Rock ‘n’ Rolls: Hot Off the Sidewalks of New York,” LAT, October 21, 1973. 192

Roget Ricklefs, “Co-Co 144’s Underground Art School,” WSJ, April 26, 1973.

83

The proto-punks, like the bankers, the beggars, the union bosses, and the

politicians, were making their way into a world of broken rules and norms. The old

certainties had slipped away at first in bits and pieces and then, it seemed, all at once.

Power Outages: “The Politics of Scarcity”

The gasoline shortages began in April. No one knew exactly why, but there they

were, service stations without gasoline.193

On May 10th, Amoco stations began rationing

gas sales in the city to ten gallons per fill-up. It was the first time since the end of World

War II that sales had been limited in the city.194

Worries began to mount about the ability

of the city to secure supplies of heating and fuel oil through the winter months.195

That

summer, the oil companies, the Nixon White House, Congress, and the regulators blamed

each other for the dearth of post-war America’s birthright to cheap gas. Then on October

6th

, 1973, the Egyptians crossed the Suez Canal and the Syrians stormed the Golan

Heights in an attempt to avenge their losses in the Six-Day War. On October 17, the oil

embargo began.196

The lights began going off all over New York. The “necklaces” of decorative

bulbs on the city’s bridges were turned off in early November, while the thermostats in

public buildings, on the commuter rail trains, and on the subway, were turned down.197

New York State Controller Arthur Levitt ditched his five-mile per gallon Cadillac for a

193

“A Growing Shortage of Gasoline in the U.S. Threatens Vacationers and Independent Service Station

Owners,” NYT, April 17, 1973. 194

David Bird, “11 Amoco Stations Ration ‘Gas’ Here,” NYT, May 11, 1973. 195

Edward Cowan, “Officials Say Heating Oil Shortage Could Be Severe,” NYT, May 21, 1973. 196

Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New York: Free Press, 1991,

1992), 588-92; 606-609. 197

“City Dimming Lights on Bridges in Effort To Save Electricity,” NYT, November 11, 1973.

84

thrifty ten-mile per gallon Buick Electra.198

Cops, unable to fuel all of their patrol cars,

returned to walking the beat.199

Mayor Lindsay chose not to follow Fiorello LaGuardia’s

example and order the lights off of the Broadway marquees and the riot of billboards in

Times Square. But the advertisers who battled for tourist dollars—Coca-Cola, Canadian

Club, Sony, and more—still switched off their signs. The theater owners dimmed the

lights and turned down the temperature in their halls. “We are counting on body heat” to

warm the crowd, remarked one movie theater manager.200

On Christmas Day exactly two

of the city’s gas stations were open.201

The iconic structure of post-war corporate architecture, the “glass box” office

tower, no longer spoke of New York’s exuberant display of money and power but of the

city’s vulnerability to events beyond its borders. In one architects words, “One of the

premises of that kind of building was that we have unlimited resources to build and

unlimited energy to operate the buildings. Neither of these is true today.”202

Responding

to complaints about the World Trade Center’s nighttime illumination amidst the calls for

conservation, electricians began removing 34,000 fluorescent lighting tubes from the

towers. The cleaning crews were trained to only leave the lights off on three-quarters of

each floor. The building’s operations manager quipped: “There are times when I wish we

198

“Officials Forsake Limousines In Face of Fuel Crisis,” NYT, November 22, 1973. 199

Michael T Kaufman, “Out of Horsepower, Police Use Leg Power,” NYT, December 31, 1973. 200

John Gruen, “The Show Must Go On, But (Brrr) Will It?,” NYT, December 23, 1973. 201

“Shortage of Gasoline Keeps Many Motorists At Home for Christmas,” WSJ, December 26, 1973. 202

Paul Goldberger, “Energy Crisis May Doom Era of Glass Towers,” NYT, December 6, 1973.

85

had black drapes—on all 87,200 windows.203

The lights of the towers that had shown

such brilliance, had, almost overnight, become anachronisms from a bygone era of

abundance.

The somber hues of incipient austerity also began filtering into the city’s finances.

On December 15, Standard & Poor’s raised the city’s bond rating to “A” from “BBB”

and described the city as demonstrating “an amazing resiliency to withstand budget

difficulties.”204

The Times called the upgrade a “welcome counterweight to the

pessimists who wrongly see New York City in a state of decline.”205

But on December

16, Beame’s budget advisors informed him that there would be a $1.3 billion dollar

budget shortfall, the largest in the city’s history, for the fiscal year 1974-1975. All of the

city budget’s devils—wage increases for municipal employees, pension costs, and

interest on the city’s growing debt—had joined in with its structural economic problems.

Higher energy prices would compound the city’s long-term fiscal issues of job migration,

middle-class flight, and rising welfare costs. No one, it seemed, knew exactly where the

extra money might come from—more aid from the State of New York, more aid from the

federal government, higher taxes, spending cuts—were all possibilities.206

The money

though had always come through. And like gas at the pumps, its was assumed that it

would come again.

203

Laurie Johnson, “World Trade Center Removing One-Right of Those Light Bulbs,” NYT, November 28,

1973. 204

John H. Allen,“City Bond Rating Upgraded Again,” NYT, December 15, 1973. 205

Editorial, “The ‘A’ Rating,,” NYT, December 20, 1973. 206

Glenn Fowler, “$1.3 Billion Budget Deficit Foreseen by Beame’s Staff,” NYT, December 17, 1973.

86

Finances were not the only pressure that the new administration faced. On

December 28, David Dinkins, who would have become the city’s first African-American

Deputy Mayor—and the highest appointed black official in the city’s history—withdrew

himself from consideration for the post. A month earlier, when the appointment was

announced, Basil Patterson, Dinkins’ law partner and vice chairman of the Democratic

National Committee, had hailed the nomination as the “most significant thing I have seen

in black politics in this town where so many different groups railed together to work for a

common cause and got what they demanded.”207

Dinkins had to admit, however, that he

had failed to pay federal, state, or city income taxes for the past four years. “I can only

say, that I have done it, as have many others. I don’t say I should be absolved because I

admit it. . . . I always thought of this a thing that could always be done tomorrow. I wish

it had been so.”208

His time had not yet arrived.

Such were the shadows on the city at the end of 1973. On December 31st, the

Editorial Page of the Wall Street Journal greeted its readers with the observation that “Of

all the developments of 1973, the one that may have the most lasting importance . . .

might be called, for lack of a better phrase, the politics of scarcity.”209

On the last day of his mayoralty John Lindsay ate tuna fish on toast with an ever-

formal Abraham Beame, who refused to pose for a playful picture from behind the

mayor’s desk. Lindsay vowed to “keep completely out of Abe’s hair for a time.” That

207

Charlayne Hunter, “Blacks Call Post for Dinkins a Milestone,” NYT, November 29, 1973. 208

Murray Schumach, “Dinkins Pulls Out As Aide to Beame; Failed to Pay Tax,” NYT, December 29,

1973. 209

“The Politics of Scarcity,” Editorial, WSJ, December 31, 1973.

87

evening, events became more festive. His staff gathered on the ground floor of City Hall

and drank eggnog indiscreetly spiked with Hennessey cognac. In an echo of the soaking

he had gleefully accepted in the Met’s locker room after they had won the 1969 World

Series, Lindsay doused the MVPs of the two City Hall softball teams with champagne.

And then, the once golden boy, the “matinee idol mayor,” left the city’s stage for his suite

at the Plaza.210

That evening, in a six-room $375 per month second-floor apartment in Belle

Harbor Queens, a block away from the ocean, Abraham D. Beame took the oath of office

before his family and a handful of reports. Now the one-hundred-and-fourth Mayor of

New York, he told reporters, “Every Mayor does it the day before. If you didn’t do it,

you wouldn’t have a Mayor between midnight and noon.”211

210

John Darnton, “Lindsay at a Farewell Party,” NYT, January 1, 1974. 211

Maurice Carroll, “Beame Is Sworn In as Mayor at a Ceremony at Home,” NYT, January 1, 1974.

88

Chapter Two: The City at Risk: 1974-1976

High Wires

In the early morning hours of Wednesday, August 7, 1974, trucks fanned out

across the city with the day’s news. None of it was good. The headline on the Times told

New Yorkers that “NIXON TELLS CABINET HE’LL STAY AND LET LEGAL

PROCESS DECIDE; SUPPORT IN CONGRESS VANISHING.”1 The Street had

cheered the previous days rumors of Nixon’s impending resignation and had tacked on a

gain of 13.38 points to close at 773.78, as the index climbed from nearly its lowest level

in four years. “The Administration has been weak and ineffective,” the chairman of

Paine, Webber, Jackson & Curtis reflected. “Inflation and other problems demand

immediate attention. It’s in the best interest of the country for Mr. Nixon to resign.” An

anonymous securities analyst put it less delicately: with a Gerald Ford as President, he

said, ”People would get a good night’s sleep for a change.”2 Meanwhile, ordinary savers,

some five to six thousand of them, had lined up at the citadel of the Federal Reserve Bank

of New York to buy Treasury notes. The nine percent yield that the crowd had emptied

their savings accounts to chase was the highest rate of interest that the U.S. Government

1 R.W. Apple Jr., “Nixon Tells Cabinet He’ll Stay and Let Legal Process Decide; Support in Congress

Vanishing,” NYT, August 7, 1974. 2 Vartanig G. Vartan, “Rumors on Nixon Decision Send Stock Prices Soaring,” NYT, August 7, 1974.

89

had ever paid on securities with a maturity of over a year. It far surpassed the five and a

quarter percent they had been earning in passbook savings accounts at their thrifts. As he

waited in line a retired city employee mused, “I’ve learned more about bonds from this

safari than I ever knew before.”3

That summer morning, though, the World Trade Center stood secure from the

gyrations of markets and politics and bathed in the cloudy blue-dawn light of a mild

summer’s morning.4 At 7:15 AM, Philippe Petit, a kind of Harry Houdini for the age of

Jonathan Livingston Seagull, took to the skies of Lower Manhattan. Later Petit

remarked, “What makes me different from other wire-walkers is that they—maybe

because they were born in the circus—try to sell the act. They think they have to show

it’s dangerous. They fake slips. I don’t. I think the courage of a high-walker is beautiful

if he can hide it.”5 He was a man out of his time as much as he was in it—pushing it

forward, step by step. When asked about his reasons for the stunt, Petit replied with his

practiced nonchalance “If I see three oranges I have to juggle. And If I see two towers I

have to walk.”6 So he did.

And the newspapers loved him. The editorial page of the Wall Street Journal

gushed, “Philippe’s motives were unusual, but gloriously human . . . .This expression of

the virtuoso spirit deserves our applause and we can be proud that it was in America that

3 John H. Allan, “Investors Queue Up to Buy U.S. Notes With Peak 8% Rate,” NYT, August 7, 1974.

4 “Weather,” NYT, August 7, 1974.

5 Donald G. McNeil Jr, “High-Wire Walker Finds New Challenges to Span,” NYT, August 13, 1979.

6 “Just Because They Were There,” NYT, August 11, 1974.

90

Mr. Petit raised his art to such heights.7 For the Journal, Petit’s “virtuoso spirit” was part

and parcel of what it sought as the appropriate anecdote to the period’s “doom saying,”

popularized by work such as The Limits to Growth (1972). It was just such a materialist

spirit that the Journal was seeking to revive. In October 30, the paper’s editorial page

railed against such declinist thinking in favor of free-market boundlessness. ”It is

important not to build public policy around momentary dogma. Especially when dogma

rarely makes allowances for new discoveries, new production techniques, substitute

materials, or the sort of entrepreneurial risk-taking that has already listed a large part of

the masses from wretchedness and despair [emphasis added].”8

Indeed, Manhattan’s District Attorney, Richard H. Kuh agreed to drop the litany

of charges against Petit in exchange for performing in Central Park. Petit transformed

this into a high-wire walk over Belvedere Lake. It was all in good fun, except for the

inconvenient fact that Petit could not swim. “The water is only six feet deep,” a Parks

Department employee shrugged, “but if he falls in, he’d be killed by all the broken glass

at the bottom.”9 This may have been malarkey, but the park certainly had seen better

days. Like an SRO that had once been a respectable hotel, there were still memories of a

time when Central Park’s grass had been not been worn down to dirt, its benches, lamps,

and shrubbery unmolested by vandals, its remaining greenery not littered with

uncollected garbage, its paths safer than the contemporary condition where, due to crime-

7 Editorial, “The Artist,” WSJ, August 9, 1974.

8 Editorial, “Gloom and Doom,” WSJ, October 30, 1974.

9 Richard Cromelin, “Pettit Works Without a Net,” LAT, November 13, 1974.

91

for-profit and racialized fear, a place where at dusk, “no-one in his right mind would

stroll alone.”10

Thankfully, Petit did not test the safety of the lake bottom.

There is a haunting shadow to Petit’s caper. At the beginning of his planning he

had interviewed structural engineers about the general feasibility of the walk. He recalls

that they told him: “The towers have been designed to sway, and it’s not your tiny cable

that will prevent them from doing so. A violent draft or a sudden change of temperature

will force the entire structural steel skeleton alternately to expand and contract . . . The

tension in the wire-rope will go instantly from three to three thousand tons. The whole

thing will explode, and you with it.”11

Petit’s cable would then become a lethal whip. He

went ahead anyway. Indeed, disaster was barely averted after his arrest as the assembled

security personal and PA employees prepared to cut the tensed wire. Shouting to make

himself heard, Petit explained, “”If you cut a wire rope under tension, or if it breaks by

overloading, you’ll get a giant whiplash: some of the roof will be cut in half and the

explosion will hurl large pieces of steel into the void, defacing the building and killing

quite a few people in the streets.”12

This could have happened during the walk itself.

Petit was more than willing to die in his the attempt. But he was also willing to kill

innocent by-standards. The assumption of risk does not require consent. Those with

power, whether obtained by statue or in Petite’s case by daring and guile, can choose

10

Jane Rosen, “Parkland,” The Guardian (UK), April 15, 1974. 11

Phillippe Petit, To Reach the Clouds: My High Wire Walk Between the Twin Towers (New York: North

Point Press, 2002), 49. 12

Ibid, 208.

92

what risks they want to assume. Those without such means can only face the

consequences.

The same day, a different kind of brinksmanship was taking place in the

Municipal Building. Within the forty-story Beaux-Arts monument to bureaucracy,

Abraham Beame’s successor as Comptroller, Harrison J. Goldin, unsealed the bids on

$151.3 million worth of the city’s bond-anticipation notes. The BANs, as they were

known in the trade, were a type of short-term financing used to bridge the gap between

the start of a construction project and the issuance of long-term municipal debt. It must

have been an unpleasant moment. Less than a month earlier, on July 17, the city had

accepted an 8.586 percent rate on $800 million of revenue-anticipation notes, the highest

rate in its history. Given that the cash-hungry city could “not be in a position to reject the

bids,” it had to accept that, as Goldin put it, “This is the ball park in which we had to

borrow today.”13

Opening the envelope, the Comptroller knew that it could have been

worse. The city accepted rates of 7.64 percent on $141-million worth of debt and 7.85

percent on $10.3 million of urban renewal notes. It was a record for short-term housing

notes. Goldin called the rates reflective of “the continuing hardships caused by Federal

monetary policy.”14

13

Maurice Carroll, “Interest on New City Loan is 8.586%, Highest Ever,” NYT, July 18, 1974. 14

Edward Ranzal, “City Sells $151-Million in Notes for Housing at Highest Interest,” NYT, August 8,

1974.

93

The same day, in Washington, Mayor Beame had the ear of the Senate

Subcommittee on Financial Markets as it held hearings on “The Growing Threat of a

Domestic Financial Crisis.” In his prepared statement, Beame told the Committee:

To show the incredible upsurge in such costs, let me point out that in the first seven

months of last year we incurred short-term debt which has cost our taxpayers $55 million

. . . in the first seven months of this year, our short-term debt will cost of taxpayers $170

million . . . .We find that interest costs on bonds sold last year totaled $400 million,

which this year those costs totaled $590 million, and increase of 48 percent.15

Coverage of the hearings focused on Beame’s modest, technocratic policy

proposals. In Beame’s closing remarks, though, one senses something more than mere

bookkeeping. He spoke in the plain terms of his generation, with its faith that the state

remained the ultimate buffer, a safety net, against otherwise unmanageable risks:

There are economic forces at work in the world and in the nation today which are not

really understood, but their effects on the daily lives of our citizens are quite profound

and somewhat frightening. We look to the Federal government to use its tools of

economic policy in such a way that our citizens do not suffer from economic

dislocation.16

But what if there were no such direction to be had?

The January 24, 1974, issue of the New York Review of Books contained an

example of such thinking from left-wing economist Robert Heilbroner. The “explosion

of street crime, race riots, bombings, bizarre airplane hijackings, shocking assassinations,

government intrigue at the highest levels,” Heilbroner argued, “had brought home with

15

United States Congress, Senate, Subcommittee on Financial Markets, Committee on Finance, Ninety-

Third Congress, Second Session, The Growing Threat of a Domestic Financial Crisis (Washington, D.C.:

GPO, 1974), 21. 16

Ibid, 22.

94

terrible impact the recognition of a barbarism hidden behind the amenities of life.”17

It

was a “civilizational malaise,” he insisted, that “reflects the inability of a civilization

directed to material improvement to satisfy the human spirit.”18

And these fears were not

fringe speculations. In the summer of 1975, the Trilateral Commission, the organization

of “wise men” from Europe, the United States, and Japan, released a report “The

Governability of Democracies.” Its conclusions were grim. With the end of the post-war

boom and the growth of superpower détente, the conditions that “gave coherence to

public purposes and imposed a set of priorities for ordering government policies . . . have

lost their salience.”19

What remained, the Commission termed “anomic democracy, in

which democratic politics becomes more an arena for the assertion of conflicting interests

than a process for building of common purpose.”20

In a sense, then, the distance between 1350 feet over concrete and 80-feet over

water, between the “extraordinary” and the “ordinary,” had converged somewhere over

Manhattan that summer. The time had come to take risks. With the onset of a full-

fledged fiscal crisis in 1975, the city’s old political and economic certainties, already

badly shaken, collapsed like the tower blocks of Pruitt-Igoe. By 1976, the daring

ruthlessness demonstrated by Petit’s walk on the wire had become virtues in a public life

and a political discourse ground down by austerity. This shift, unplanned and ad hoc,

imposed not just a cost in public services, but in the basic wellness of the body politic. As

17

Robert L. Heilbroner, “The Human Prospect,” New York Review of Books (NYRB), January 24, 1975. 18

Ibid. 19

Quoted in “Are Democracies Governable?” WSJ, August 1, 1975. 20

Ibid.

95

Michael Harrington wrote in Dissent in September 1974, “Right now . . . the dominant

mood is one of scrambling to make the best of a bad lot. This corrodes what solidarity

does exist; it privatizes social struggles and it makes people sad. It also creates the basis

for a similar disintegration in our political life.”21

That is what happens when

government fails. It almost happened in New York.

But against the formidable odds of the fiscal crisis, New York City did not fall

into irretrievable anarchy. The city crumpled but was not crushed; the wire of political,

economic and social life was tensed by the exercise of raw power, but did not snap.

Confrontation between labor and capital gave way, grudgingly, to the preservation of

mutual self-interest. By 1976 the city’s business, labor, and political leadership had

begun to chart a new course that they hoped would restructure the city and save it from

what those in power saw as its accumulated ills. This dramatic search for “coherence to

public purpose” played out in the public eye, but with only occasional public input.

“Governability” became detached from democracy. The elite mounted the civic high

wire for death or glory. What happened to those below them lay beneath their aquiline

kin.

“Death Wish” 1974

Abraham Beame had not planned on being a mayor in “wartime.” Indeed his

inauguration on New Years Day, 1974, outside of Gracie Mansion was deliberate in its

inconspicuousness. In his speech, Beame reaffirmed his basic commitment to stability:

21

Michael Harrington, “A Collective Sadness,” Dissent, September 1974, 490.

96

“We intend to make our administration a model of honest government; we intend to be

open in our dealings; we intend to honor our promises and give the people a real voice in

their own destiny. This is the least that the citizens of New York City should expect of

their government.”22

His early actions as mayor reflected his caution, and perhaps a sense that there

was nothing really wrong with the city that couldn’t be solved with decent management.

He pledged “to marshal all of the municipal and private sources at our command in an

all-out attempt to reduce crime and related problems” in Times Square “because of its

role as a symbol of New York.”23

He struck the right note—the overwhelming majority

of New Yorkers, of all ages, boroughs, and races, described “crime” as the city’s number

one problem, followed by “drugs,” “inflation,” and “transportation” (an item that

reflected a desire to see the maintenance of the 35 cent subway fare).24

So intense was the

fear of crime that Vincent Canby, reviewing the revenge-nasty Death Wish, told the

readers of the “paper of record,” “If you allow your wits to take flight, it’s difficult not to

respond with the kind of lunatic cheers that rocked the Loew’s Astor Plaza when I was

there the other evening. At one point a man behind me shouted with delight: ‘That’ll

teach the mother’s!”25

Despite these pressing concerns, Beame did not ignore the city’s economic

problems. He put together a 16-member Council of Economic and Business Advisers

22

Murray Schumach, “Beame Inaugurated, Vows Integrity and Efficiency.” NYT, January 2, 1974,. 23

Robert E. Tomasson, “Beame Promises Times Sq Cleanup,” NYT, January 18, 1974. 24

Maurice Carroll, “After Crime, Big Issues Are Prices and Fares,” NYT, January 17, 1974,. 25

Vincent Canby, “‘Death Wish’ Exploits Fear Irresponsibly,” NYT, August 4, 1974.

97

that included Walter Wriston and George Champion. “We’ve got the best economic,

entertainment and financial structure of any city in the world,” Beame said, “We’ve got

to sell it.”26

There was confidence that such selling would be reasonably simple to

accomplish. As Arnold W. Sametz, a professor of finance at NYU’s Graduate School of

Business told the Council on Economic Education, “In terms of all the elite services

required by multinational corporations, there just is no second city in America—indeed,

in the world—to compete with New York . . . the companies that have to deal with these

matters must come to New York.”27

That year, the city’s real estate was assessed for

taxation purposes at a record sum of $40.1 billion.28

Summing up Beame’s first seven

months, August Heckscher wrote in the Christian Science Monitor:

What distinguishes the Beame administration in New York is the degree to which it

evades problems and slows down the course of government. The careful man,

bookkeeper by trade and standpatter by nature, has evidently banked upon the public’s

readiness to move slowly, or not to move at all, after the headlong precipitancy of Mr.

Lindsay’s leadership. The surprising this is, the approach seems to have pleased a large

part of the public. Mr. Beame has kept a major brewery in Brooklyn, maintained a

menaced 35-cent fare, and slipped through a potentially hazardous budget crisis. But

apart from these actions he has enjoyed doing nothing—or at least seeing to do nothing

when he was perhaps at his busiest.29

The international financial system, however, was not cooperating with Beame’s

plans to avoid unsettling the city. In May 1974 Franklin National Bank, the twelth

largest in the United States, announced that it had underreported losses in foreign

exchange trading, leading to “virtual run” on the bank. The federal government stepped

26

John Darnton, “Beame Appoints 16 to Help Him Retain Businesses in City,” NYT, January 22, 1974. 27

Michael Stern, “City Called Lure for World Trade,” NYT, April 18, 1974. 28

Edward Ranzal, “Property Valued at $40 Billion Here,” NYT, February 5, 1974. 29

August Heckscher, “Beame in My Own Eye,” Op-Ed, CSM, July 30, 1974.

98

in, declared Franklin National Bank insolvent, and arranged for the bank’s sale to new

investors. In June 1974, the failure of a small German private bank, Bankhaus I.D.

Herstatt, brought the international inter-bank payment system to a near standstill.30

There was a social shakiness about the city as well. On May 22, 1974, Alfred

Kazin wrote in his diary of “A world coming apart. The great big dissolving center—

New York can’t be governed . . . Meanwhile, the uprush of women. . . The sense of

battle in the air:. . . One has this notion of oneself as a fixed identity, but action speaks

louder than criticism.”31

In April, the City Council once again considered a bill to ban discrimination on

the basis of sexual orientation. Meade Esposito, the leader of the Brooklyn Democratic

contingent, who had previously stayed quiet on the issue, gave the legislation his

unqualified backing. “I’m for it all the way,” he said. “I want to give one half million

people their liberty back.”32

On April 19, the bill made it out of the Welfare Committee.

As it gained traction, the Catholic Church decided that it was necessary to speak against it

with the considerable power of its institutional voice. The New York Archdiocese’s

official newspaper, the Catholic News, titled its front-page editorial against the bill, “A

Menace to Family Life,” and inveighed against its passage, writing:

There will be no effective way to decline to welcome into two-family dwellings

homosexual ‘couples’ nor to decline to employ homosexuals in positions of sensitive

personal influence . . . on the staffs of organizations that provide services to children and

30

Martin Mayer, The Bankers, (New York: Weybright and Talley 1974), 115-116. 31

Kazin, Journals, 427. 32

Edward Ranzal, “Homosexual Bill Is Reconsidered,” NYT, April 18, 1974.

99

young boys and girls . . . . [The bill] will also afford unrestricted opportunities to

propagandize deviant forms of sexuality.”33

In case the message was insufficiently clear, many priests read the editorial

verbatim during masses on Sunday, April 28.34

The Diocese of Brooklyn mailed a map

to Council members showing the number of churches in their districts and let them draw

their own conclusions. The opposition from the Archdiocese catalyzed a broad, popular

reaction against the bill not only from Holy Name Societies but also from the American

Legion and various civic organizations. It added to the private pressure that Jewish

Council members were already facing from Orthodox rabbis. “The mail doesn’t show it,

but when I walk down the streets of my district, I found that 80 percent of the people are

against it, emotionally against it,” one Brooklyn councilman told the Times. “And they

are the kind of people I generally consider myself to be representative of—the

churchgoers, homeowners, Civil-Service workers—the more stable element.”35

The

uniformed services, the police and firefighters, also voiced their strident opposition.

Deputy Fire Chief David McCormack, the president of the Uniformed Fire Officers

Association, told the press, “This is a case of reverse discrimination, of social, moral and

legal acceptance to a deviant life-style which discriminates against the overwhelming

majority of people who do not subscribe to a deviant life-style.”36

An announcement in

The UFOA News on April 23th declared that the bill “would enable all types of ‘gays’

33

George Dugan, “Archdiocese Asks City Council to Defeat Bill on Homosexuals,” NYT, April 28, 1974. 34

Carol Kramer, “Gay Rights Bill Appears Doomed,” Chicago Tribune, May 5, 1974. 35

John Darnton, “Furor Clouds Vote Today On Homosexual Rights Bill,” NYT, May 23, 1974. 36

“Edward Ranzal, “Drive by Foes Imperils Homosexual Bill,” April 30, 1974.

100

and sex perverts to engage in employment as firefighters, teachers, and policemen.”37

On

May 23rd

, the bill was defeated, 22-19 by the City Council. After the defeat of the bill a

group of Gay Activist Alliance members marched on St. Patrick’s Cathedral.38

That fall, on October 15, the headquarters of the Gay Activist Alliance, a former

fire station in SoHo, was broken into and thieves looted $4,000 of electronics equipment.

The burglar (or burglars) then became arsonist, careless (or brazen) enough to leave “an

empty wood-alcohol bottle, three uncapped and half-full cans of charcoal-lighter fluid

and a book of matches fitted with a cigarette ‘fuse’ that had failed to burn completely.”

They lit the headquarters of the GAA on fire in six different places.39

The fire

accelerated the decline of an increasingly factionalized organization whose members

began to see their future in other groups or outside of politics all together. In 1974, an

attempted picket of ABC Studios by the GAA attracted eight demonstrators.40

“All

across the country, there are signs that the gay movement is beginning to fizzle out,”

GAA founder Arthur Evans remarked later, after he had moved to San Francisco.

“Average gays are bored by demonstrations and rhetoric. When I recently visited New

York, an old movement friend told me, you couldn’t pay people to take a leaflet on

Christopher Street.”41

Freed from police harassment, a new generation of bars, with

names like the Mineshaft and the Toilet, became famous (and notorious) for hosting the

37

“Homosexuals and the City,” NYT, May 5, 1974, E6. 38

Maurice Carroll, “Council Defeats Homosexual Bill By 22-To-19 Vote,” NYT, May 24, 1974, 69. 39

Laurie Johnson, “Arson Destroys Gay Activist Site,” NYT, October 16, 1974. 40

Eisenbach, Gay Power, 265. 41

Quoted in Eisenbach, Gay Power, 263.

101

kind of uninhibited casual sex that like-minded straight New Yorkers had been enjoying

for over a decade.42

And the city’s financial condition continued to deteriorate.

“Welcome to Fear City”--1975

The idea that the largest city in the United States could default on its debts had

historic precedents. Indeed the history of New York City has been defined by cycles of

overspending, fiscal crisis, austerity, and reform.43

While the city had never entered

bankruptcy, it had defaulted on its obligations in 1856, 1871, 1907, 1914, and from 1932

to 1933.44

In 1877, New York’s elite, rebelling at the cost of funding public debt and

“public charity,” had proposed (and nearly established) a Board of Finance that would

have controlled all of the city’s public expenditures and taxation. Conveniently, the

franchise for this board would have been limited to those who paid taxes on property

worth over $5,000 or $250 per annum in rent.45

In 1932-33, control over the city’s

finances had passed into the hands of its creditor banks, which had refused to extend new

loans until newly elected mayor Fiorello LaGuardia had slashed the salaries of city

employees and raised taxes to pay for Depression-era relief.46

What had changed four

decades later was the nature of the crisis, which extended in varying degrees of intensity

from 1975 to 1978. This time there was a collision not simply of priorities in taxation,

42

Ibid, 264. 43

Martin Shefter, Political Crisis, Fiscal Crisis: The Collapse and Revival of New York City (New York:

Basic Books, 1985), 3-29. 44

Ibid,xii. 45

Sven Beckert, The Monied Metropolis, 215-224; Edwin G. Burrows and Mike Wallace, Gotham: A

History of New York City to 1898 (New York: Oxford University Press, 1999), 1032-1033. 46

Shefter, Political Crisis, Fiscal Crisis, 64-66.

102

borrowing, and spending, but of fault-lines in the nature of race, class, and power that

defined the “urban crisis” in American cities.

In terms of the city’s budget, the most important difference was the power of the

municipal unions. These organizations had a long history in New York City, often

operating as “professional” or “benevolent” organizations; for example the Patrolmen’s

Benevolent Association (PBA) had been created in 1894.47

Only after Mayor Robert

Wagner, Jr, signed his Executive Order 49 in 1958, however, did municipal unionism

gain both a firm legal foundation and the right to organize most of the city’s workforce.

Republican Mayor John Lindsay, elected in 1965 by a coalition of liberal reformers as an

anecdote to the remnant of Tammany Hall’s Democratic Party “clubhouse,” found

himself unable to manage the demands of the city’s workforce for higher pay. After a

transit worker strike in 1966 and a sanitation workers strike in 1968 the Lindsay

administration adopted a policy of “avoiding walkouts at any cost.”48

Between 1961 and

1975 expenditures on pension’s, wages, and fringe benefits (the city’s largest expense)

increased by 300 percent. At the same time, the city’s expenditures on public welfare

and hospitals, driven by inflation and a perceived need to “buy” racial peace during the

long hot summers of urban disorder, increased by almost 830 percent.49

Overall, the

city’s workforce grew by 90,000 between 1961 and 1975 while its budgeted expenditures

increased from $2.7 billion to $12.3 billion, a roughly 250 percent increase in city

47

Mark Maier, City Unions: Managing Discontent in New York City (New Brunswick: Rutgers University

Press, 1987), 19. 48

Lee Dembart, “Their Crises Have Just Begin,” NYT, July 27, 1975. 49

Martin Shefter, Political Crisis, Fiscal Crisis, 116.

103

expenditures when measured in constant dollars.50

This increase in outlays was met by

increased federal aid, higher taxes, and by a growing volume of short-term borrowing

(often disguised as long-term capital expenditures with “creative accounting”) that by

1974 had reached $3.4 billion.51

The need to constantly “roll over” the city’s debt,

replacing one short-term bond series with another, placed it at the fickle mercies of the

credit market and especially the large commercial banks that underwrote the city’s

securities.

It was against this backdrop of a widening municipal budget deficit and financial

market turmoil that on February 26, 1975, the Urban Development Corporation (UDC),

an agency of the State of New York, defaulted on $104.5 million of notes. Established in

1969 to fulfill the housing program of Republican governor Nelson Rockefeller, the UDC

had benefited from the issuance of $1.1 billion in “moral obligation bonds” designed by

New York bond lawyer (and future Watergate conspirator) John Mitchell. When the

UDC’s developments went bankrupt due to fixed rents and spiraling inflation, the state,

under Democratic Governor Hugh Carey, found that the extent of its “moral obligations”

were limited.52

Chastened, the syndicate of banks that marketed New York City’s

billions in short term debt found that there was not “sufficient likelihood of repayment”

50

Charles Brecher and Raymond Horton, “The Public Sector” in Dual City: Restructuring New York, ed

John Mollenkopf and Manuel Castells (New York: The Russell Sage Foundation, 1991), 106. 51

Cannato, The Ungovernable City, 548-551. 52

Rohatyn, Dealings, 111. For more on the UDC see Richard Plunz, A History of Housing in New York

City (New York: Columbia University Press, 1990) 292-94.

104

to market the city’s May offering.53

So began the “fiscal crisis” saga of bad credit, tough

choices, and hard bargaining.

To keep the city afloat, the State of New York formed series of agencies to fund

municipal operations and, over the long term, restructure the city’s finances. The first of

these agencies, the Municipal Assistance Corporation (“Big” MAC) was established on

June 10, 1975 to enable the State of New York to issue long-term debt on the city’s

behalf. By the end of the summer, however, it was clear that MAC could not gain

enough confidence from investors to sustain the city’s borrowing. So, on September 9,

the state established the Emergency Financial Control Board (EFCB) with the statutory

power to control all of the city’s borrowing and force municipal administrators to plan a

balanced budget for fiscal year 1978.54

Given the precarious status of New York State’s

finances, the ability of the MAC and the EFCB to manage the crisis effectively ultimately

depended on the willingness of the federal government to backstop the city’s borrowing.

At first the Ford administration refused; the city avoided default only because municipal

workers’ pension funds invested $750 million in city and MAC bonds. After harsh words

that triggered the infamous “Ford to City: Drop Dead” headline in the New York Post, the

Ford administration relented and MAC was able to borrow $2.3 billion from the federal

government through the Seasonal Finance Act of 1975.55

53

Rohatyn, Dealings, 115. 54

Robert W. Bailey, The Crisis Regime: The MAC, the EFCB and the Impact of the New York City

Financial Crisis (Albany, NY: State University of New York Press, 1984), 23-38. 55

Freeman, Working-Class New York, 267-70.

105

The resolution of this stage of the financial crisis by bargaining between bankers

and union leaders, rather than through creditor-imposed austerity or mass industrial

action, was not a preordained outcome. At the beginning of the crisis, in early 1975, a

committee of the city’s creditor banks, acting through the City Comptroller’s Technical

Debt Management Committee, pressed the city for austerity measures in order to

continue underwriting city debt. Municipal unionists, led by Victor Gotbaum, President

of American Federation of State County and Municipal Employees (AFSCME) District

Council 37, countered with protests against the city government and the bankers, whom

they blamed for the city’s inability to obtain financing. These clashes created the context

for the subsequent reconstruction of the city’s political economic order and ultimately the

culture of civic life.

Victor Gotbaum was arguably the most powerful, sophisticated, and left-wing of

the city’s union leaders. He was a contemporary—in age if not in background—of both

Abraham Beame and Walter Wriston. Gotbaum had been born in 1921 into Brooklyn’s

Jewish working-class and had organized his first successful “strike” at a small cardboard

factory (managed by his father) in order to protest a racist pay differential. While his

background was blue-collar, Gotbaum’s outlook, intellectually and politically, extended

well beyond the outer boroughs. Like Ed Koch, service in the Army during World War II

had been the key to upward mobility. Gotbaum had used the GI Bill to earn an M.A. in

International Affairs from Columbia, and had even served in the State Department as a

106

labor educator in Turkey.56

After returning to the United States, Gotbaum had held a

series of organizing positions with AFSCME before becoming president of DC 37 in

1965. He cut a maverick figure in the increasingly sclerotic world of post-war labor

politics. Longhaired, voluble, and iconoclastic, Gotbaum had grown DC 37 to 125,000

members by 1975.57

During the crisis, the public employee unions conducted a three-front campaign to

protect their newly won bargaining power vis-à-vis the city. One front targeted the

Beame administration to prevent it from reopening union members’ contracts. Gotbaum

told the press: “There’s now a feeling that the only ones being asked to sacrifice are the

unions. As for talk of a wage freeze, no labor leader can ask people-some making only

$8,000 to $9,000 a year-to give up an increase they have coming.”58

A second strategy was to find someone else, either a different union or an

unrepresented population, to bear the costs of city cutbacks. For example, Ken

McFeeley, president of the PBA, blamed the fiscal crisis on “the endless flow of tax

dollars to welfare thieves. The truth is the city is being stolen blind-and every police

officer knows it.”59

The third part of the campaign targeted the city’s bankers, who labor leaders

argued had caused the crisis by cutting off the flow of credit. If only bond sales would

56

Fred Ferretti, “The Buck Stops With Gotbaum,” New York Times, June 4, 1978. See also Lee Dembart,

“Fiery Yet Quiet Chief,” July 12, 1975. 57

Fred Ferretti, “The Buck Stops With Gotbaum,” New York Times, June 4, 1978. 58

Damon Stetson, “Municipal Unions Warn They Won’t Yield Gains,” New York Times, May 15, 1975. 59

Edward Ranzal, “3,000-More City Workers Expected to Be Laid Off, Including 400 in Uniform,” NYT,

December 11, 1974.

107

resume, the unions argued, the crisis would end. As the president of the Teamster Union

Local 237, Barry Feinstein, stated, “The banks could hold some of the paper. They could

pitch in and hold some 6 percent or 5 percent paper. They have an investment in the city.

Let them take a piece of the action.”60

Given the size, visibility, and large consumer

business of Citibank, it made a logical target for the wrath of the unions in their strategy

of pressuring the banks.

On June 4, 10,000 city employees massed in front of Citibank’s Wall Street

operation center. In organizing the rally Gotbaum had called Citibank the city’s “number

one enemy” that had “composed” the tune of the bankers “chorus” calling for austerity.

He personally, and one assumes deliberately, insulted Wriston as “venal.” 61

In a paid

editorial published in the Daily News on May 24, 1975 he insisted, “No one is against

profits. But while First National [City] has enjoyed boom growth, it has never offered in

any way to help the city. . . . When does First National put some its money where its

mouth is? When will First National do something for New York City without getting top

dollar for its efforts?”62

At the rally, Gotbaum called on the bankers “to give New York

City the same kind of cash and credit help that have been given to the Franklin National

Bank, Lockheed, Penn Central, etc.”63

Shortly thereafter the unions withdrew $15

million from Citibank.64

60

Damon Stetson, “Municipal Unions Warn They Won’t Yield Gains,” NYT, May 15, 1975. 61

Damon Stetson, “Union Chiefs Call Citibank The City’s ‘No. 1 Enemy,” NYT, May 21, 1975. 62

Victor Gotbaum,” The Rally Against First National City Bank,” May 24, 1975, prinited in the Daily

News, copy in DC 37 Papers, Tamiment Library, Box 45, Folder 16. 63

Damon Stetson, “Union Chiefs Call Citibank The City’s ‘No. 1 Enemy,” NYT, May 21, 1975. 64

“Unions Withdraw 15-Million at Banks,” NYT, June 1, 1975.

108

Finally, there was the threat of municipal collapse. During the rally union leaders

proclaimed that in the event of municipal cutbacks “We’ll be living in rubble and ruin.”

A series of speakers added to what the Times described as “apocalyptic descriptions” of

the city’s future. They raised the threat that “hundreds of thousands of tons of garbage”

would accumulate in the streets, public hospitals would become a “mechanism for

moving people to the morgue,” and crime would rise to “disastrous levels.” 65

These predictions were not idle fear mongering. Brenton Harrison, president of

Standard and Poor’s, outlined the following scenario for municipal default: “The city

would first default on its short-term notes and make maximum efforts to conserve cash to

meet payments of interest on its long term bonds.” Then, Harrison believed, the city

would skip municipal payrolls and slash basic services. The results would be disaster.

“Just imagine what would happen when you get a city where the quality of life

deteriorates so badly. You’d get civil unrest. There’d be job actions, and strikes, You’d

risk an explosion.”66

That was the threat, although Gotbaum later admitted that a certain

amount of rhetorical posturing took place during the negotiations. “You can’t just say

things are tough and roll over,” he said, “so you go to the [negotiating] table, but you

know there’s very little you can get out of the cupboard.”67

In the summer of 1975 the

municipal unions also took a series of informal industrial actions designed it seemed to

demonstrate the credibility of their threats to make the city unlivable.

65

John Darnton, “Civil Service Rally Assails Bank’s Role in City Crisis,” NYT, June 5, 1975. 66

Donald Kirk, “Are Bonds Like Dominoes?,” Chicago Tribune, October 19, 1975. 67

A.H. Raskin, “Public Employee Unions Are No Longer Riding High,” NYT, December 21, 1975.

109

These protests took a variety of forms, legal and illegal, profound and petty.

Shortly after the Citibank rally, the public safety unions heighten their rhetorical

offensive by printing one million copies of a pamphlet titled, “Welcome to Fear City-A

Survival Guide for Visitors to the City of New York.” Intended for distribution by off-

duty members at airports and bus terminals, the pamphlet featured a Grim Reaper-style

visage on the cover. Its introduction asked potential visitors to “stay away from New

York City if you possibly can.” It elaborated with “tips” for tourists such as “stay off the

streets after 6 PM,” “avoid buildings that are not completely fireproof”” and “never ride

the subway for any reason.”68

Not all cops found warnings like “Remain in Manhattan.

Police and fire protection in other areas of the city is grossly inadequate and will become

more inadequate” an effective bargaining strategy.69

But the pamphlet certainly made an

impression.

On July 1, the city’s sanitation workers raised their own stink by walking off the

job in a wildcat strike.70

As one shop steward told the press, “We’re not the most learned

people in the world. If we were, we wouldn’t be on this job. But just because we pick up

garbage doesn’t mean we are garbage.”71

This wildcat strike led to the accumulation of

68

Glenn Fowler, “Union ‘Guide’ to ‘Fear City’ is Banned by a Court Order,” New York Times, June 13,

1975 and “City Officers Win Right to Go Ahead with ‘Fear’ Drive,” June 17, 1975. 69

“Welcome to Fear City: A Survival Guide for Visitors to the City of New York,” AMFL, Jack Bigel

Papers. Jimmy Hargrove, president of the Guardians Association, a group of African-Americans in law

enforcement told the Amsterdam news that “The Fear City campaign recently launched by the Patrolmen’s

Benevolent Association and the United Fire Association is the most asinine in the history of those unions.”

See Simon Anekwe, “Black Cops Lash PBA’s ‘Fear Campaign,’ Amsterdam News, June 25, 1975. 70

The sanitation workers said the strike had been spontaneous, the city alleged that the union’s leadership

had initiated the strike. At issue was the ability of New York to invoke penalties for municipal strikes

under the state’s Taylor Law. 71

Lee Dembart, “DeLury Insists Control is Lost,” New York Times, July 2, 1975.

110

over 50,000 tons of putrid, rotting garbage in the city’s streets.72

The Beame

administration was reduced to instructing New Yorkers to “organize a neighborhood self-

help cleanup to find ways and means of disposing of the awesome backlog of uncollected

garbage.”73

On a less putrid note, the unions protested Beame’s termination of the pre-air

conditioning policy of “summer hours.” Gotbaum stated: “Emotionally, my members

want it [summer hours]. Rationally and logically it’s hard to defend. But we cannot

allow the Mayor to unilaterally take away our right.”74

The protests were effective in

modifying the policies of City Hall. On July 7, 1975 the Beam administration announced

that it had “rehired” 2,600 employees.75

By the autumn, however, it had become clear that the municipal unions had

reached the limits of possible escalation. There was talk of unleashing labor’s ultimate

weapon—a general strike. “In my view I’m in favor of a general strike in this city at this

time,” said the Teamsters Barry Feinstein. “We have given our blood. The unions are

bleeding to death.”76

For a moment, it seemed as though the city might descend into

class warfare in the streets. Then the city’s unions pulled back from the brink.77

There

were two factors behind this decision. First, the crisis had reopened historic divisions

72

David Bird, “Citywide Garbage Pickup to Be Completed Tonight,” NYT, July 5, 1975. 73

“Press Release, Friday, August 1, 1975,” Beame Papers, LaGuardia and Wagner Archives, Box 070012,

Folder 12. 74

Lee Dembart, “Fiery Yet Quiet Chief,” NYT, July 12, 1975. 75

Fred Ferretti, “Beame Restores 2,600 More Jobs; Asks Pay Freeze,” NYT, July 8, 1975. 76

Fred Ferretti, “City Unions Weigh a General Strike,” NYT, October 9, 1975. 77

John Darnton, “Unions, After Aiding City Financially, Try to Avert U.S. Contract Intervention,” NYT,

November 16, 1975.

111

within union ranks, especially between the clerical workers represented by AFSCME and

the uniformed services (fire, police, and the sanitation workers). Unlike the

representatives of the “frontline” services, Gotbaum knew that his members were more

vulnerable to layoffs and had less leverage in an industrial action. As a spokesman for

the PBA stated, “Going in, everybody would have given lip service to the idea that labor

ought to stand together. But when the situation became a crunch it became clear that

everybody was going to have to fight for his life.78

The second major reason was the fear

that in the event of default the federal government would unilaterally abrogate the

union’s contracts.79

Inside, DC 37, the issue of a general strike had been debate since late in 1974. At

the delegates meeting on November 26, 1974, “V.P. Knight, Local 371, moved that if any

member of DC 37 is laid off who has permanent Civil Service status, an emergency

meeting of the Delegates is to be called to discuss the possibility of a City-wide Strike.”

The motion was seconded, debated, and tabled.80

At the July 3, 1975 meeting Gotbaum

himself moved, “Should the City unilaterally rescind our raises, a city- wide strike will be

recommended. There will be no further erosion of our contract.”81

There was rank and

file pressure for action. In June fliers were posted declaring, “Stop the Ax with a

GENERAL STRIKE!”

78

Lee Dembart, “City’s Fiscal Ills Create Municipal-Union Split,” New York Times, July 21, 1975. 79

Ronald Smothers, “U.S. Board on City Opposed by Labor,” New York Times, November, 11, 1975. 80

“DC 37 Delegates Meeting Minutes, November 26, 1974,” DC 37 Collection, Tamiment Library, Box 1,

Folder 7. 81

“DC 37 Special Delegates Meeting Minutes, July 3, 1975,” DC 37 Collection, Tamiment Library, Box 1,

Folder 7.

112

Our elected officials, ‘friends of labor’ make great speeches lamenting the problems of

the city, but on top of all their tears they sharpen the blade and cut, cut, cut! ‘Our’ union

leaders are great when it comes to making speeches about how bad the banks are but

when a strike is needed they either can’t be found or they take the side of the bosses. WE

CAN ONLY RELY ON THE UNITY OF THE RANK AND FILE WORKERS TO

ORGANIZE AND WAGE A SENERAL STRIKE TO STOP LAYOFF AND CUT

BACKS [emphasis in original].82

But the prospects for the union in default—both the short-term of empty pay

packets and the long-term potential for the unilateral abrogation of union contracts—

appeared much worse than anything that could be gained by industrial action.83

On

October 28, 1975, Gotbaum told members that in default “a Federal judges takes over

assets and decides how it is to be distributed. Default means 30 to 40 thousand layoffs.

A strike solves nothing. If default comes and we have no place to go, we can talk about

strike, not before.”84

As long as the union could escape existential damage, its ultimate

weapon remained sheathed.

Avoiding a general strike also enabled DC 37 to exercise what power it retained

to protect its members against those who lacked institutionalized representation. The

union, for instance, encouraged the use of funds from the Comprehensive Employment

and Training Act (CETA), a federal program designed to provide jobs for the urban poor,

to save the jobs of DC 37 members. “We are trying to avoid a situation, where layoffs

are forced because of the City’s fiscal situation and Washington gives money to hire

long-term unemployed individuals,” Gotbaum told DC 37 members on February 25.

82

“Stop the Axe With a GENERAL STRIKE!” Flyer, June 1975, Tamiment Library, New York City

Central Labor Council (NYCCL Papers), Box 46, Folder 12. 83

“Special Meeting Notice, July 25, 1975,” DC 37, Tamiment Library, Box 1, Folder 7. 84

“DC 37 Delegate Meeting Minutes, October 28, 1975,” DC 37, Tamiment Library, Box 1, Folder 7.

113

“Priorities must be established.”85

On June 19, Gotbaum “diagrammed what can be done

to salvage as many of our members as possible under CETA.”86

On June 25, he told the

union’s delegates, “CETA can ease our burden with monies that can protect the people

we represent. If a regular worker is laid off, he has the right to “bump” a CETA worker

for the position. By adjusting CETA to our needs and with affirmative action in Albany,

we can save all Civil Service jobs threatened by layoff.”87

These efforts were successful.

On February 24, 1976, Gotbaum reported, “Many of our laid off workers are being

reinstated under CETA Titles II and X, as we expected.”88

They also engendered fierce

resentments in the city’s ghettos where the poor saw what had been billed as a “poverty

program” was instead subsidizing comparatively well-off civil servants. State Senator

Carl McCall voiced complaints from his constituents in Harlem, saying, “It’s ironic and

revealing that the same union leaders fighting a wage freeze are perfectly willing to steal

jobs from the poor and leave minorities completely out in the cold.”89

Gotbaum made no

apologies, calling McCall’s comment’s a “cheap shot . . . .he [McCall] knew that city

workers laid off in these low-paying jobs are themselves mainly poor and minorities; he

knew that no union could stand by and see its members laid off and replaced by other

workers.”90

85

“DC 37 Delegates Meeting Minutes, February 25, 1975,” DC 37, Tamiment Library, Box 1, Folder 7. 86

“DC 37 Special Delegates Meeting Minutes, June 19, 1975,” DC 37, Tamiment Library, Box 1, Folder 7. 87

“DC 37 Delegates Meeting Minutes, June 25, 1975,” DC 37, Tamiment Library, Box 1, Folder 7. 88

DC 37 Delegates Meeting Minutes, February 24, 1976,” DC 37, Tamiment Library, Box 1, Folder 8. 89

Jewel Bellush and Bernard Bellush, Union Power and New York, 394 90

Ibid.

114

Gotbaum was not the only one searching for advantage during the fiscal crisis.

During the budget negotiations, Walter Wriston was blunt in his criticism of both the city

and the state, telling Governor Carey, “I have a suggestion for you, pay your debts.” 91

Ultimately, however, Wriston refused to lead the campaign for the federal loan

guarantees. The task fell to David Rockefeller, head of Chase Manhattan, and a man who

prided himself on his sense of “corporate responsibility.”92

This was fitting. Born in

1915, Rockefeller had been Wriston’s longtime rival for the bragging rights of

controlling the largest and most profitable bank in the city. While equally committed to

the “free-market” and international expansion of Chase Manhattan, Rockefeller had

learned from familial experience that finance and politics were inseparable. Rockefeller

accepted the responsibility of his family’s customary noblesse oblige.93

David’s brother

Nelson was also Vice-President of the United States. So David Rockefeller sent a public

request for aid to the federal government through one of Chase’s division presidents.94

Later Wriston stated, “I was passive. I lay in the weeds . . . because philosophically I

couldn’t support it [federal aid] But I didn’t go down and rattle the cans and say you

shouldn’t do it.”95

Instead Wriston, along with David Rockefeller and Elmore Patterson

of Morgan Guaranty, made a joint statement to Congress:

What is particularly disturbing in a quantitative sense is the possibility of a

markedly adverse psychological reaction in the consumer and business sectors of the

91

Philip Zweig, Wriston, 484. 92

Rockefeller, Memoirs, 379. 93

For economic principles see Rockefeller, Memoirs, 91-92; for summary of banking career at Chase, 380-

382; for the familial sense of social responsibility, 20-21. 94

Martin Tolchin, “Chase Bank Urges Temporary Help for City From U.S.,” NYT, September 28, 1975. 95

David Rockefeller, Memoirs, 506.

115

economy. Were that to happen an enormous down-pull on general economic activity

would be exerted. In the realm of State and local government matters there clearly would

be a distinct possibility of an intensification of the adversity that has already been

experienced for a wide range of borrows . . . with the extreme danger that some

government units, in addition to New York City, New York State, and New York State

agencies would be unable to borrow on any terms at all.96

Taxes mattered. The stability of the credit markets mattered more.

The confrontations in the summer of 1975 taught both the bankers and the

municipal union leaders that they were locked into a classic “prisoner’s dilemma.” As

Donald Kummerfeld, the Budget Director of New York City, put it, “It’s in the interest of

each player to bluff—to threaten to play his ultimate card, even though he’s not going to.

In the end, all four parties [the city government, the municipal unions, the state and

federal governments, and Kummerfeld might have added, the banks] have to cooperate or

New York City will go into bankruptcy and decline rapidly in a hopeless downward

spiral.”97

All of the power brokers had the power to unilaterally wreck the others plans,

but only through cooperation could they achieve a better result than the self-destructive

status quo. Thus, as the crisis shifted from an immediate lack of liquidity to a longer

term restructuring of city finances, the terms of debate moved as well, from finding

sources of liquidity towards making long-term changes in New York City’s political

economy.

Beame, for his part, favored more federal assistance:

96

United States Congress, Senate, Committee on Banking, Housing And Urban Affairs, Ninety-Fourth

Congress, First Session, New York City Financial Crisis (Washington, D.C.: GPO), 644. 97

Neal R Peirce, “Municipal Poker: Who’s Bluffing in New York City?” The Washington Post, April 8,

1976.

116

On a long-term basis, we need the implementation of full employment in this country.

We need an easier money policy and lower interest rates. We need counter-cyclical

revenue sharing for local governments in times of recession. We need aggressive Federal

housing programs to stimulate employment and rebuild our country. We need a massive

federal public works program. And we need the Federal government’s assumption of all

local welfare and Medicaid costs, on order to relieve local governments and local

taxpayers of a burden which rightfully belongs to the federal government.98

None of these proposals were outside of the mainstream of American liberalism in

the mid-1970s, although from the perspective of 2013, they look like the ghosts of a

different era. After the difficult fight to pass the Seasonal Financing Act, however, it was

clear that the city could not expect more assistance in the near future. Ultimately, New

York would have to create its own solutions—and write a new set of rules for how to

manage its troubled economy.

“Perhaps it’s Time to Tear Up the Rulebook” —1976

On February 6, 1976, The New York Times published an editorial by the

investment banker Felix Rohatyn who struck the tone of an exhausted field commander

attempting to rally dispirited soldiers for an indeterminate slog. “New York City,”

Rohatyn declared, “is entering a state of siege in a war for survival for its life and soul.”99

Reflecting on the “campaign” thus far he told Times readers, “We have finished six

months of trying to avoid a catastrophe, both financial and social. Against very long

odds we have bought some time. We have won a battle; the war goes on.” 100

Rohatyn

floated a long list of possible solutions from privatizing the Department of Sanitation to

98

“Testimony of Mayor Abraham D. Beame Before the Joint Economic Committee of Congress, Monday,

November 10, 1975,” Abraham Beame Papers, The LaGuardia and Wagner Archives, Box 070022, Folder

03. 99

Felix G. Rohatyn, “A ‘Turning Point’ For the City,” Op-Ed, NYT, February 6, 1976. 100

Ibid.

117

legalized gambling to “coming to grips with rent control” to a federally funded “Marshall

Plan” for older cities. Rohatyn concluded his dispatch with the pronouncement “New

York City is reaching a turning point. It is unique in what it is and what it stands for. It

will never be the same. What it will be like in a decade depends upon its own actions as

well as the actions of others.”101

The old frameworks about how best to manage the city

were as broken as its finances. As far as Rohatyn was concerned, any policy—left, right,

or center—that could plausibly lift the city out of its hole was worth considering. In

other words, it was time to take the kinds of risks that just two years earlier would have

seemed unimaginable.

It was not that there was a lack of ideas about how to secure the city’s future—the

problem was that most of them had either already been tried or were, it appeared,

unfeasible given New York’s limited political-economic options. This difficulty

reflected a larger intellectual deficit in American economics and public policy. In March

of 1975 Peter Drucker wrote, “We need a theory that goes beyond the Keynesian

apotheosis of national government as all-powerful and all wise, and which presents

national economies as part of the bigger world economy.”102

Or as Myron E. Sharpe, the

editor and publisher of the liberal economics journal Challenge put it in May of 1975,

“Keynesian economics has held the stage for quite a few years, but we have a new set of

problems now that it doesn’t seem to cope with. But there aren’t a lot of original, new

101

Ibid. 102

Peter F. Drucker, “Aftermath of a Go-Go Decade,” Op-Ed, WSJ, March 25, 1975.

118

ideas floating around.”103

Phrased differently, what ideas were out there—centralized

economic planning, indexing all financial transactions to inflation, and/or encouraging

“capital investment”—all demanded a serious, and polarizing, departure from the post-

war status quo. As Walter Wriston put it, “If proponents of centralized planning came

out bluntly and said they were building an economic police state, their cause would never

get off the ground.”104

The lack of ideas was clear in July 1975 when the Times had sampled the ideas of

the nation’s public luminaries in economics and urban policy to find solutions to the

fiscal crisis. Most of them said what one would have expected them to say. The aging

lion of liberal Keynesianism, John Kenneth Galbraith, decried the “fiscal funkholes“ that

allowed suburbanites to avoid paying “their share” of taxes. Robert C. Wood called for

“massive infusions of national and state money.” Milton Friedman told the city to

“tighten its belt, pay off its debt, live within its means and become an honest city again,”

a viewpoint he shared with Herbert Stein. Nathan Glazer advocated a “serious

confrontation with the trade unions . . . There are presumably hundred of thousands of

people ready to do jobs that city employees are doing—for one-half to two-third the

salary.”105

“Thus it is obvious to everyone who looks objectively at New York’s plight

that what the city’s poor need, far above all else, is jobs, jobs, and more jobs,” Irving

Kristol said in December 1975. “Unfortunately, achieving this purpose means, in the

103

Quoted in James P Gannon, “The Idea Shortage: Perplexed Economists Hunt for Ways to Cure U.S.

Economy’s Woes,” WSJ, May 9, 1975, 1. 104

Ibid. 105

Israel Shenker, “18 Urban Experts Advise, Castigate and Console the City on Its Problems,” NYT, July

30, 1975.

119

short term, offering encouragement to the non-poor—i.e., to businessmen and business

firms. Such a policy is utterly repugnant to those who have an inflamed sense of political

compassion.”106

New York’s suffering, it seemed, could support a number of different

economic agendas.

So too the city’s fate could be used not only for economic arguments but for

political and cultural ones as well. Conservatives relished the opportunity to dance on the

grave of the Great Society. Writing in the Wall Street Journal, Kristol crowed, “But when

the money runs out, a sense of realism tends to sink in—as one can observe even in New

York City today.”107

Moreover, Kristol argued that the result of austerity would be “the

welfare state [being] removed from the center stage of democratic politics so that we can

devote our energies to more serious things. A nation whose politics revolves around such

issues as day care centers or school lunches or the ‘proper’ cost of false teeth is a nation

whose politics is squalid, mean-spirited, debasing.”108

One is left to wonder about the

debasements that the City of New York endured to educate Mr. Kristol, tuition-free, at

City College. A Manhattan-minded classicist, J.L. Johnson, mused on the aesthetics of

decline: “When will we realize that what is lost is lost—however beautiful it was—and

was it dead is dead? ‘Life With Father’ and ‘The Sidewalks of New York’ will not live

again, no matter how much federal money is funneled into their ill-kept grave.”109

The

liberal city had been mugged by fiscal reality.

106

Irving Kristol, “New York Is a State of Mind,” Op-Ed, WSJ, December 10, 1975. 107

Irving Kristol, “Reforming the Welfare State,” Op-Ed, WSJ, October 25, 1976. 108

Ibid. 109

J.L. Jonsson, “To Hell With the Cities! Let ‘Em Die!” LAT, January 7, 1977.

120

Liberals echoed this disenchantment with the powerful bureaucratic state of mid-

century New York. “In retrospect it now seems clear that what the city needed during the

past twenty years were not new office towers and highways, or even urban renewal and

slum clearance programs” wrote Jacob Epstein in the New York Review of Books “What

the city needed instead were commitments to its difficult present and to what could be

preserved from its vital past.”110

Even the liberal literary critic Susan Sontag remarked,

“But all contemporary defenders of civilization must be aware—though I don’t think it

helps to say it often—that this civilization, already so far overtaken by barbarism is at an

end, and nothing we do will put it back together again.”111

Yet the crisis also presented openings for innovation. Certainly the discrediting

of the steel and glass skyscraper and the “towers in the park” of Pruitt-Igoe had already

led to the rethinking of what architectural design and urban planning meant. In a June

1976 column, Ada Louise Huxtable defended Robert Venturi and others who were

defining the movement that came to be known as “post-modern” architecture:”

But now things are being reordered radically today: the history of the modern movement

and the theories and principles upon which the contemporary practice of architecture

rests. The nostalgia, the revivalism, the symbolism, the arcane and arbitrary uses of the

past, the canonization of the recent and the ordinary bespeak a cultural sophistication

rather than a cultural copout. These references are being employed carefully and

creatively, with immense calculation and rigorous intellect for a cool and challenging

art.112

This tide of intellectual confusion and creation washed upon the fast eroding

shore of the failing status quo. What exactly was left in New York City to preserve? As

110

Jacob Epstein, “The Last Days of New York,” The New York Review of Books, February 19, 1976. 111

Susan Sontag, “Notes on Art, Sex and Politics,” NYT, February 8, 1976. 112

Ada Louise Huxtable, “The Gospel According to Giedion and Gropius Is Under Attack,” NYT, June 27,

1976.

121

1976 progressed, what austerity meant in practice became all too clear; it meant less of

everything in the fat and muscle of city government. It meant nearly twenty percent

fewer public employees. It meant increasing the average age of a public school teacher

from twenty-eight in 1973 to forty-one in 1976, increasing the student to teacher ratio

from one to twenty to one per twenty-five, and the ratio of guidance counselors to

students to one to one thousand. Everyone from hallway and lunchroom aides to

security guards suffered from lay-offs, while programs ranging from adult education to

sports shrank or disappeared. In the words of one Superintendent, “There are no teachers

for anything but the classroom.”113

The state-of-the-art Neighborhood Family Care

Center at 145 Street and Amsterdam Avenue, finished in 1973, sat closed because there

was no money to operate it.114

Not only health and education, but also the city’s most basic functions—“law and

order” and public transportation—suffered as well from the cutbacks in the city’s budget.

Police arrests were projected to reach 367,000 in 1976, a 34 percent drop from the

553,200 in 1974-75. “They’re focusing on quality arrests now,” said Frank McCardle

who assisted John Zuccotti on Police and Fire Department issues. “The drop-off is

reflected in a change in the kind of arrests. Most of it is attributed to the public morals

area and disorderly conduct arrests. There are no mass sweeps anymore in prostitution

cases.”115

The PBA, for its part, claimed, “There is no longer any street-level

113

Fred Ferretti, “Financial Crisis Crippling New York’s Public Schools,” NYT, December 12, 1976. 114

“Coalition Decries Cutbacks Made in Health-Care Services for the Poor in New York City,” NYT,

December 20, 1976. 115

Steven R. Weisman, “Indications of Deterioration About in New York Crisis,” NYT, December 5, 1976.

122

enforcement of our narcotics laws and every dealer and pusher knows it.”116

Riders

jumped the turnstiles and walked through the exit gates to avoid the 50-cent subway fare

to ride in cars that in the words of one reporter, “resembled coaches in a madman’s circus

train.” As a 25-year subway motorman said: “Graffiti, don’t ask me to explain graffiti.

We have lots of high-paid professors who can explain it. They call it self-expression.

They call it folk art. I call it vandalism.” The system still worked well enough to carry

3.7 to 4 million passengers per day, but only just.117

The same could be said for the rest

of the city’s infrastructure—physical and social.

This erosion in the quality of public life merged with the continuation of capital

flight as firms with the means moved or threatened to move from the city. Corporate

headquarters, with their jobs, rents, and associated prestige, continued to leave the city.

When the year began 90 members of the Fortune 500 were headquartered in the city. By

the end of the year the number had fallen to 84. Two, General Signal and Pittston,

completed their moves to Connecticut, and four more—General Host, Texasgulf, and

Union Carbide, and Texaco—announced plans to move.118

As Union Carbide stated

when announcing its decision to relocate its headquarters to suburban Danbury,

Connecticut, along with 3,500 employees: “The long-term quality of life needs of our

headquarters employees were the overriding factor in arriving at this conclusion.”119

Perhaps even more worrying was the continued threat that the securities industry would

116

Joyce Egginton, “We’ll Turn Manhattan Into an Isle of Doom,” The Observer (UK), March 14, 1976. 117

Charles T Powers, “N.Y. Subway Still Keeps City Moving,” LAT, March 26, 1976. 118

Michael Sterne, “Standard Brands Decides to Keep Its Headquarters in New York City,” NYT,

December 16, 1976. 119

Michael Sterne, “Union Carbide, 3,500 on Staff, to Quit City,” New York Times, March 20, 1976.

123

decamp. That same month, Paul Kolton, chairman of the American Stock Exchange,

disclosed that New Jersey and Connecticut had made proposals for the exchange to move

and that: “The board of governors has been apprised of these proposals [to move],” he

said “and believes that the Amex should examine various alternatives with the long-range

objective of maintaining the most efficient and competitive market place for the investing

public, listed companies, and member firms.”120

The exodus was not limited to the corporate elite. Small-time landlords, perhaps

the most important business group in terms of holding together the fabric of the city’s

neighborhoods, continued to surrender their properties en masse. No one knew exactly

how many apartments were being abandoned in the city each year: figures of 21,000,

36,000, even 50,000 were suggested.121

Some of the buildings were 19th

century

tenements, structures well past their move-out date. Others had died premature deaths

from landlord neglect and “strippers” who ripped out whatever could be sold for scrap in

empty apartments. In the words of David Krakow of the Housing and Development

administration, “They were built in the 1920s and were good buildings, large buildings.

If they were standing in Paris or London or Moscow [instead of the Bronx], they would

be considered luxury apartment buildings.”122

In the summer of 1976, the officers at the

41st Precinct, “Ft. Apache,” changed the name of their police station to “The Little House

on the Prairie.” Most of the buildings in the neighborhood had burned down and there

120

“Amex to Update Floor, Tells of Offers to Move,” LAT, March 25, 1976. 121

Joseph P. Fried, “Housing Abandonment Spreads In Bronx and Parts of Brooklyn,” NYT, April 12,

1976. 122

Ibid.

124

was that much less to police. Crime had moved on, north in the Bronx, to the 44th

Precinct, which the officers had taken to calling the “Jungle Habitat.”123

These spaces, the burnt out zones, offered an appealing foundation to the city’s

technocrats for building a municipal recovery. After leaving his position as head of the

Housing and Development Administration, Roger Starr wrote: “I have the very strong

impression that although my phrase ‘Planned Shrinkage’ will run a poor second to

‘Benign Neglect’ in the Unappreciated Phrases Derby, it will remain the most prominent

label in the file of my government service.”124

He was right. Starr first mentioned the

idea in February 1976 with the proposed “thinning out” police, fire, and subway services

in declining neighborhoods—after offering residents “inducements” to leave. The land

would then be left open “until new land uses present themselves.”125

It was Moses

without the concrete. After his remarks generated a storm of controversy, Starr attempted

to use the heat to justify the position he had taken.

I am incidentally, a continuing advocate of economic growth; the urban problem to which

I was trying to turn people’s attention was that we are not only not growing in New York

City: we are actually shrinking in economic capacity, employment, and municipal wealth,

in both the public and private sectors . . . .many groups in municipal life understand that

economic shrinkage dooms their hopes of a life better furnished with the goods and

services which they see enjoyed by those around them.126

To put it in blunt terms, Starr was telling readers that without growth the ghetto

would revolt. Starr was not the only one to look to what would become known as the

123

John J Goldman,“ ‘Big Apple’ Keeps Magic Despite Bruises,” LAT, July 11, 1976, A10. 124

Roger Starr, “Refusal to Face Facts a Peril to City,” NYT, October 3, 1976, 225. 125

Joseph P. Fried, “City’s Housing Administrator Proposes Planned Shrinkage of Some Slums,” NYT,

February 3, 1976, 35. 126

Roger Starr, “Refusal to Face Facts a Peril to City,” Op-Ed, NYT, October 3, 1976.

125

“supply side” of economics. The Temporary Commission on City Finances

recommended that the city cut taxes to retain, indeed to grow, manufacturing

employment. Its chairman, former State Supreme Court Justice Owen McGivern, sold

the supply-side: “What the commission is recommending is that the city make a

profitable investment in its future by giving up some of today’s revenue to dramatically

increase tomorrow’s employment and revenues.”127

Felix Rohatyn presented a similar

solution to the problem of “redeveloping” blighted areas: “Take a 30-block area, clear it,

blacktop it, and develop and industrial park with the whole package of tax, employment,

financing incentives already in place.”128

This package of rhetoric and plans was

designed to illuminate the basic problems facing the city, so it did, like a signal flare

tossed onto a puddle of gasoline.

It is hard to see how the resulting controversy could have been avoided, given the

justified feelings of neglect in the city’s poor minority neighborhoods. Frederick Samuel,

an African-American city councilman from Manhattan ripped into the proposal, calling it

“genocidal, racist, inhuman and irresponsible.” Instead of “promoting, rehabilitating and

saving these neighborhoods from decline,” Samuel charged that Starr “would leave them

to die in their own prime and accelerate their death.”129

“I hope Mr. Rohatyn’s statement

was made out of ignorance and that he simply hasn’t done his homework yet,” said U.S.

Representative and former mayoral candidate, Herman Badillo, “I would hate to think

127

Michael Sterne, “Cut Business Taxes New York City Urged,” NYT, December 13, 1976, 128

Francis X. Clines, “Blighted Areas’ Use Is Urged by Rohatyn,” NYT, March 16, 1976. 129

“Minority Caucus Bids Starr Quit,” NYT, March 5, 1976.

126

that he was using the subterfuge of economic development to implement Mr. Starr’s

inhuman proposals for New York.”130

Representative Charles Rangel, the Harlem

Democrat who had won Adam Clayton Powell’s old seat, remarked, “We cannot get

away from the fact that if the cities were not inhabited by people of color, the planners

would have the ingenious creativity to think of other approaches to the problem.”131

While Beame did not publically repudiate Starr’s remarks, John Zuccotti, now

First Deputy Mayor, made sure to reassure New Yorkers, especially those of color, that

Starr’s speculations were not a statement of official policy. “We are not prepared to give

up, nor to say directly or by implication that any of our neighborhoods are expendable,”

he insisted. “Even our poorest communities, devastated as they may be, contain areas,

institutions and people around which they may be rebuilt.”132

Politically, planned

shrinkage proved impossible to defend in public. As the director of the Pratt Institute

Center for Community and Environmental Development declared, “Until Administrator

Starr, proponent of the genocidal program of shrinkage, is removed from office the city

will be unable to make any progress with these problems.”133

In July, Starr announced

his resignation, although the furor over planned shrinkage appears to have contributed

less to his move than the fact that there were no municipal funds for new housing

construction.134

A reporter remarked that:

130

Thomas A Johnson, “Rohatyn Scored by Congressmen,” NYT, March 17, 1976. 131

Thomas A Johnson, “Rohatyn Scored by Congressmen,” NYT, March 17, 1976, 18. 132

Glenn Fowler, “Starr’s ‘Shrinkage’ Plan for City Slums is Denounced,” NYT, February 11, 1976, 49. 133

Ibid. 134

Joseph P. Fried, “Starr Resigning as Chief of New York City Housing,” NYT, July 9, 1976 and

127

Gone it seems are the days when they could depend on developing a constituency

in the diverse world of housing production—builders, contractors, specialized

professionals, community activists, nonprofit groups, among many others. . . .Mr. Starr,

on the other hand, has had sympathizers rather than constituents.”135

The old machine, the Moses-era networks of “getting things done,” had nothing

to do, and therefore no political order to coalesce around.

The triage applied by officialdom to austerity, however, resulted in the same, or

worse, policy outcomes than the ones proposed by Starr. What the city experienced was

unplanned shrinkage of impoverished areas as austerity catalyzed the abandonment

cycle, and planned (or at least incentivized) growth in wealthier quarters that might

generate tax revenue and all-important “confidence” in the city. As Donald Kummerfeld

described it, “We’ve got to convince business and the middle class that there is hope for

New York, that we’re not going to continue to burden them with disproportionate taxes,

disproportionate costs. If we can’t convince them of that, it’s hopeless.”136

What this

entailed was plain to see. “The Mayor has decided to make cuts in areas where people are

not well organized or politically important,” said State Senator Israel Ruiz of the Bronx.

“We will have to start our old tactic of going down to City Hall and the Mayor’s house to

protest.”137

A community action worker in Williamsburg remarked, accurately enough,

that federal planners had come through to prepare the city for “for something better.” But

135

Alan S. Oser, “Starr’s Exit From Beame Administration Marks The End of a Hectic Era,” NYT,

September 16, 1976. 136

Neal R Peirce, “Municipal Poker: Who’s Bluffing in New York City?” Washington Post, April 8, 1976. 137

“Coalition Decries Cutbacks Made in Health-Care Services for the Poor in New York City,” NYT,

December 20, 1976.

128

“ ‘Something better’ means high-rise luxury apartment houses, industrial expansion and

things like that.”138

There was no single decision to focus the city’s redevelopment efforts on creating

an economic recovery based on speculation, of which gentrification was the one most

visible aspect. Instead, seemingly small decisions for specific and well-connected groups

began meshing with one another into a coherent whole. Such was the case of one of

New York City’s most prestigious elite institutions, the Museum of Modern Art. Faced a

budget shortfall, MoMA decided to make a speculative bet on a real-estate market

revival. By selling real-estate and air rights that the museum owned to a private

developer, who would build a 40-story condominium tower, and then by passing state

legislation that would allow the rents to go tax-free to the museum, MoMA hoped to

eliminate its $1 million per year operating deficit and build a new addition that could

display more of the museum’s collection. As Richard Weinstein, former director of the

Mayor’s Office of Lower Manhattan Development explained it, “We are in the culture

business, not the real-estate business. But we had in our air space a sleeping unused

asset, and we have to take advantage of it if we are going to stay in the culture business at

all.”139

The Times art critic Hilton Kramer wrote, “What is at stake in this unexpected

construction gamble is the very future of what is universally acknowledged to be the

greatest institution of its kind in the world.”140

Mayor Beame was all for the plan: “It is

138

Robert Shogan, “Apathy Prevails for N.Y. Primary,” LAT, April 4, 1976. 139

Paul Goldberger, “Beame Backs Plan for Modern’s Tower,” NYT, February 13, 1976, 17. 140

Hilton Kramer, “Art: Modern’s Tower May Add Pictures at an Exhibition,” NYT, February 17, 1976.

129

important to note that the museum is trying to come to terms with its own difficult

financial problems without asking the city for cash payments. At this point in our

history, that’s a relief!”141

The editorial board of the New York Times agreed. “In sum,

this is a carefully considered solution that not only offers the city construction and jobs

but that has valuable implications for other faltering cultural institutions. It is the kind of

positive planning that addresses New York’s specific problems.”142

Opposition to the plan came from both aesthetes worried about the unseemly

merger of art and commerce and the even more unseemly decision to give a tax break for

a condominium tower designed to attract the petro-dollar rich. Writing in Artforum,

Suzanne Stephens described the transaction as akin to “an aging belle convinced that she

must soon cash in on what nature or circumstances bestowed upon her, the Modern has

taken to flirting with rich, dangerous men—private developers.”143

A Bronx Democratic-

Liberal Assemblyman, Oliver Koppell, “We can’t build palaces of gold when we can’t

feed our children, finish building new schools and keep hospitals open. . . .This is fine

legislation for a wealthy city, but I want all of you to try to go home and tell your

constituents how they can pay the increase in their real estate taxes when you are robbing

the city of new ones.”144

While the bill was initially defeated in the State Assembly,

pressure from the Metropolitan’s board, which included David Rockefeller, ultimately

prevailed. “I don’t mistrust the Mayor or Mr. [Mark A] Siegel [the bill’s sponsor], but

141

“A New Wing for the Museum of Modern Art,” Washington Post, February 17, 1976. 142

Editorial, “A Rescue Device,” NYT, February 16, 1976. 143

Quoted in Paul Goldberger, “Issue and Debate: Modern Museum’s Plan for Apartments,” NYT, August

17, 1976. 144

Ronald Smothers, “Measure to Let Museum Build Apartments Loses,” NYT, June 29, 1976.

130

it’s the people around city government, the real estate industry, the building trades and

others,” said Manhattan Democratic Assemblyman Alexander Grannis. “It’s so much

money involved and coming at the end of the session when all the deals are being made it

just smells even more.”145

If this trickle-down logic could be applied to spur non-profit development, it

could also be used to support outright speculation for private, and perhaps public, gains.

By the end of 1976, major construction activity in the city had reached a near standstill.

There were only 30 projects under construction. Only two of those new buildings were

budgeted at over $100 million dollars: the new Port Authority Bus Terminal and the

Citicorp building. The only big bright spot was the prospect of $1.5 billion dollars to

replace the West Side Highway with a new interstate, the “Westway.”146

There was also a potential $100 million project on the horizon from a 29-year old

real estate developer, Donald Trump. His father, Frederick had built a considerable, if

unglamorous, property empire of 22,000 apartments for middle- income families in the

outer boroughs—an enterprise based on government subsidies through FHA and VA

loans. His son wanted, well, more. The Commodore Hotel was a decrepit property,

operating at a loss, and owned by the bankrupt Penn Central Railroad. The railroad in

turn owed $10.3 million to the city in tax arrears that stretched back to June 1970. But

the hotel occupied prime Midtown real estate and the city was willing to see if Trump

could turn it around. He would pay only a pittance in real estate taxes on the hotel, but

145

Ronald Smothers, “Assembly Reverses Vote and Approves Plan for Museum,” NYT, June 30, 1976. 146

Edward Ranzal, “Survey on Buildings in New York City Termed ‘Positive.’” NYT, December 29, 1976.

131

the city would share in the hotel’s profits: 10 percent of the first $500,000, 12.5 percent

of the next $1 million and 15% on all additional profits—up to what the property would

pay in taxes under normal circumstances. As City Club Chairman Joel W. Harnett

observed, “Perhaps it’s time to tear up the rulebook.”147

There remained some limits on the city’s search for revenue. A rumor in

November that the city was going to legalize prostitution gained enough currency Mayor

Beame had to publicly squelch it.148

The deputy clerk of Storrey County Nevada home of

the Mustang Ranch bordello, thought that would have been “pretty damn smart” on the

city’s part. “It’s a good source of revenue here,” he said “They’ve got prostitution going

on anyway there in New York. They might as well make some money on it.”149

Instead

“quality of life” had become linked with recovery from the fiscal crisis. In an April 29

rally against prostitution, Beame warned, “The flesh peddlers on our streets sap the

economic vitality of our city.”150

Except that there weren’t enough police to arrest the

“flesh peddlers” or the johns. Even Sidney Baumgarten, assistant to Mayor Beame and

chairman of the Midtown Committee, told the press that the concurrent campaign against

pornographic theaters, which at least had fixed addresses, was an “expensive, frustrating

and fruitless venture.”151

147

Carter B Horsley, “Commodore Plan Is Key to the City’s Tax Aid Strategy,” NYT, March 28, 1976. 148

“Legal Prostitution Barred As N.Y. Financial Solution,” LAT, November 17, 1976. 149

Ibid. 150

“N.Y. Rally Protests Pimp-Hooker Plague,” LAT, April 29, 1976. 151

William Claiborne, “Once Again, It’s N.Y. vs. Times Square Vice,” Washington Post, November 23,

1975.

132

More serious proposals for legalizing up to twenty-six casinos in the city were

floated by Democrat Stanley Steingut, the State Assembly Speaker, although a study he

sponsored suggested that they would only generated 610 spin-off jobs.152

Felix Rohatyn

also mused about the possibility of allowing gambling on the West Side. He told a

reporter, “Maybe we should have a separate task force for the crazy ideas. Get some

long-haired college grads and scientists for the far-out stuff.”153

Not that New Yorkers

would have necessarily minded casinos in their midst. In August, the City Council voted

to allow religious organizations and charities to legally hold “Las Vegas Nights” of low-

stakes gambling. Peter Vallone, the Queens Democrat who sponsored the bill, implored

his colleagues to support its passage. “Although the state enabling legislation is vague

and restricts the City Council from amendments at this time,” he said, “it would at least

allow our churches, synagogues and legitimate charities to operate and survive upon our

passage of this legislation and subsequent ratification by the people in the November

referendum.”154

On Tuesday, November 2, voters in the city overwhelmingly approved

Proposition 1 legalizing “Las Vegas Nights.”155

That same day, New Jersey voters

legalized full-fledged casinos in a desperate search for something to replace the empty

convention halls of Atlantic City.156

They also provided a new, legal, outlet for those

interested in tempting fate, in some sense filling an existential hole in their lives. A

152

“Benefit of Casinos to New York City Foreseen as Small,” NYT, May 29, 1976. 153

Francis X. Clines, “Blighted Areas’ Use Is Urged by Rohatyn,” NYT, March 16, 1976. 154

Edward Ranzal, “Council Unit Debates ‘Las Vegas Nights’” NYT, August 27, 1976. 155

Edith Evans Asbury, “ ‘Las Vegas Nights’ In New York Could See Light of Day on February 1,” NYT,

November 4, 1976. 156

Alvin Maurer, “The Vote Adds Up to 21, and Atlantic City Will Get Casinos,” NYT, November 7,

1976.

133

laboratory technician in New Jersey described this pursuit of fortune. “From first-time

starters to Las Vegas charters, the word is action. Man, if you’re in action, if you’ve got

something going for you, your day has meaning, vibrancy. You could be on the verge of

a big score.”157

Race relations were dismal. Early on the evening of September 8th

, a gang of

thirty to forty white hoodlums, armed with pipes, baseball bats, and knives, entered

Washington Square Park, the heart of Greenwich Village. They went on a rampage,

reportedly in retaliation for an earlier black-on-white beating, assaulting any African-

American they could find and sending at least a dozen park-goers the hospital.158

In

Beame’s old neighborhood of Crown Heights, Brooklyn, a hearing in December over

political redistricting dissolved into charges and counter-charges of racism and Fascism

between African-American residents and the area’s growing number of Hasidic Jews.159

The relationship between the city and the municipal unions also remained dismal,

especially in its relations with the uniformed services. On September 28, in response to a

deadlock over new work schedules (which added ten days of work each year to their

contract) and a six percent salary deferral, off-duty police violated a court order against

“blocking of traffic and disruptiveness anywhere,” outside the Ali-Norton championship

fight at Yankee Stadium. They also refused to act against a mob of gatecrashers that

assaulted patrons outside of the stadium. Their on-duty colleagues disobeyed orders to

157

Martin A. Schnitzer, “Numbers and Action: Day of a Roving Bettor,” NYT, December 26, 1976. 158

“Gang of Whites Attacks Blacks in New York City,” Washington Post, September 9, 1976. 159

Glenn Fowler, “Hasidim and Blacks Are Disputing New Community Lines in Brooklyn,” NYT,

December 23, 1976.

134

arrest the strikers.160

After officers were subsequently disciplined, they picketed the

home of the Police Commissioner. More mayhem ensued. As two reporters from the

Los Angeles Times described the scene: “The off-duty policemen disrupted the quiet

Queens neighborhood where the commissioner’s modest green and white frame home is

situated. When ordered to disperse, a small group ripped off a deputy chief inspector’s

shoulder stars, snatched his hat and walkie-talkie and threw them under a car.”161

Victor

Gotbaum could only look on in disgust at the degeneration of relations between the PBA

and the City. “Police situation should not be a source of satisfaction for anyone,” he told

DC 37 delegates on October 26. “The demonstrations have nothing to do with the merits

of the case but designed to get rid of frustrations . . . . Police are rocking and rolling until

they get new leadership. Unfortunately, responsible leadership is not on the horizon.”162

One woman reflected the cynicism and despair that had overtaken the city. “Cops?

They’re just like you and me,” she said. “They only care about No.1. Our mistake is that

we ever expected more from them than we got.”163

For all the turmoil of that summer, there were some rays of light as the Beame

administration did its best to show off the city and attract tourist dollars by playing host

to series of national events. It was a chance to move from “Fear City” to a tourist, and

business friendly “Big Apple,” a campaign that had been begun by the Association for a

160

Pranay Gupte, “Police Flout Writ By Blocking Traffic At Ali-Norton Fight,” NYT, September 29, 1976. 161

Charles T. Powers and John J Goldman, “N.Y. Policemen Carry Labor Dispute to Commissioner’s

Home, Maul Officer,” LAT, September 30, 1976. 162

“DC 37 Delegates Meeting Minutes, October 26, 1976,” DC 37, Tamiment Library, Box 1, Folder 8. 163

David C. Berliner, “ ‘New York’s Finest Battling Alienation, Drop in Morale,” The Washington Post,

October 25, 1976.

135

Better New York in 1972.”164

On July 4rd

, 1976 in honor of the Bicentennial, 225

sailings ship, including 16 massive “Tall Ships” from around the world visited the city

during Operation Sail and then sailed on up the Hudson, accompanied by almost 10,000

pleasure boats. Six million New Yorkers watched the barks and schooners. Given the

complexity of the event, it led Richard Shepard, of the Times to remark, “The miracle

was that everything went off pretty much on schedule; the disasters so many had feared

did not take place.165

Finally something had gone right. Only July 9, Queen Elizabeth II

visited the city, as a debt collector, to pick up 279 peppercorns—the rent due by Trinity

Church—at a rate of one peppercorn per year, under its charter from King William III,

granted in 1697. Mayor Beame granted Her Majesty honorary citizenship, while she paid

tribute to “preeminently a city of enterprise.” She even made a visit to Bloomingdales.166

On the heels of the Queen came the Democrats. Even the Wall Street Journal

took a break from its drumbeat of criticism of the city’s government and the municipal

labor unions. Addressing the arriving delegates for the Democratic National Convention,

a July 9 editorial proclaimed “Welcome to New York” and heralded the ”constant

surprises of urban life” which the city offered to an “incomparable degree” along with the

city’s role as the “financial, communications, and cultural hub.” “These assets,” the

Journal continued, “provide the base for New York’s future. They can of course be

frittered away . . . especially by taxes that destroy or drive away the financial and

164

Miriam Greenberg, Branding New York: How a City in Crisis was Sold to the World (New York:

Routledge, 2008), 115-119, 206-207. 165

Richard F Shepard, “Panoply of Sails,” NYT, July 5, 1976. 166

Linda Charlton, “Queen Warmly Received On New York City Tour,” NYT, July 10, 1976 and Lucinda

Franks “A Spot of Hectic Browsing for the Queen,” NYT, July 10, 1976.

136

communications industries and wealthy citizens. But this lesson gradually seems to be

sinking in, which is why the current financial crisis is bullish for the longer-run future of

New York.”167

After the Convention, Roger Ricklefs, wrote in the Journal that “there

was no chaos, no rioting, and only minimal mugging. . . .As we have seen this month, all

a New Yorker need to do is make sure his visitor escapes alive and he will probably go

home feeling the trip was much better than he ever dreamt possible.”168

The bar was set

low, but at least the city cleared it.

The Democratic Convention brought more than free-spending conventioneers,

although they were welcome. It also gave Jimmy Carter the nomination. Eager to win

the state’s Democratic primary, Carter’s campaign had declared its support not only for

the bailout but also for continued aid to the city. In May 1976, Carter told an audience

that including Mayor Beame:

Our federal system of government can only work if our states and local communities are

strong and healthy. There will never be any newspaper headline, however, in any

community as long as I am President telling it to ‘Drop Dead.’ I pledge to you and your

colleagues in government an administration committed to the social and economic

revitalization of the cities and towns of this nation.169

In a pre-convention rally outside the Americana Hotel, Carter repeated his

claims, telling the crowd, “I guarantee you that if I go to the White House, I’ll never tell

the people of the greatest city on earth to drop dead.”170

On Wednesday, October 27th,

the biggest crowds of Carter’s campaign greeted him as rode in an open-topped car along

167

Editorial, “Welcome to New York,” WSJ, July 9, 1976. 168

Roger Ricklefs, “Sinful Old Gotham Through the Years,” WSJ, July 23, 1976. 169

John J Goldman, “Carter Pledges Aid, Wins Beame Backing,” LAT, May 27, 1976. 170

Kenneth Reich, “Carter Pledges Effort to Meet Urban Needs,” LAT, July 11, 1976, 1.

137

Fifth Avenue to a rally hosted by the ILGWU in the garment district. His biggest

applause line reiterated his previous commitments. “In spite of what the President said,

[New York City] is not about to drop dead. It has a great life, now and in the future.”171

On December 28, now President-elect Carter told reporters, “Bankruptcy is not a viable

alternative for New York City and we have eliminated that as a possibility for the

future.”172

After the election, Gotbaum told DC 37’s Executive Board, “There is no

concern at this time about Carter producing and a genuine effort to help is expected. We

feel that if a program to help N.Y. is presented to Congress, it will be passed.”173

Happier days might be here again.

There were reasons for hope, even for Mayor Beame. “It may sound corny, but I

like challenges and there have been plenty of them every day,” he said. “Obviously the

biggest challenge was to come into the harbor safely. I think we’ve met that challenge.

As I’ve said, I think we’ve turned the corner and seen the light at the end of the

tunnel.”174

The Times, however, had little confidence in His Honor. “After more than 40

years in city government, the noblest gift the Mayor could offer the city to which he is

clearly devoted is to step aside for the younger, fresher leadership that is needed to cope

with the enormous challenges that lie ahead,” the paper stated at year’s end.175

171

Robert Shogan, “Carter Rally in N.Y. Almost Like Old Times for Democrats,” LAT, October 28, 1976. 172

Ibid. 173

“DC 37 Delegates Meeting Minutes, November 23, 1976,” DC 37, Tamiment Library, Box 1, Folder 8. 174

Steven R Weisman, “Beame Points to Fiscal ‘Results’ Says He Is Unsure About ’77 Race,” NYT,

December 28, 1976. 175

Editorial, “In Urban America,” NYT, December 29, 1976, 24.

138

The greatest of these challenges lay in finding a cohesive program amidst the

experiments, expedients, and make-dos that could give the city’s business and political

leadership an agenda for action; that much derided notion of a plan, not just for averting

default or balancing the budget, but remedying the perceived structural economic

problems that had led to the fiscal crisis in the first place. It would entail measures that

went far beyond branding. Distrusting Beame’s leadership, a group of business and

private-sector labor leader’s had begun meeting under the aegis of David Rockefeller and

head of the New York City Central Labor Council Harry Van Arsdale as the

Business/Labor Working Group (BLWG). The business leaders at the head of the

organization represented banks, insurance companies, and large corporate headquarters

firms. Their labor counterparts were from the building trades and the garment industry:

the ILGWU and the Amalgamated Clothing Workers. In its simplest terms, what

followed was what historian Joshua Freeman terms a “corporatist gloss to an agenda of

government aid to business . . . a particularly crass example of how, in the fiscal crisis

atmosphere, private interests attempted to grab public resources in the name of

efficiency.”176

That it was—along with being a venue for special interest pleading, such

as the Retail Working Group’s request for a “separate shop-lifting court.”177

But the

deliberations of the BLWG and the documents that it created in that process went beyond

a “pure and simple” call for corporate welfare. They provided a sketch for a very

176

Freedman, Working Class New York, 278. 177

“Report of the Retail Working Group,”1, September 15, 1976, New York City Central Labor Council

(NYCCLC) Papers, Tamiment Library, Box 64, Folder 1.

139

different type of city not only economically, but also politically and culturally. It would

be a city based not on reasserting social stability, but on taking risks that could save the

city or push it over the edge.

The report of the Printing Industries Working Group illustrates the problem of

relatively small firms in shaping the economic future of the city. For all of its technical

acumen, the industry had limited power to shape the choices of its customers, the

“advertising agencies, public relations firms, [and] stock brokerages,” as to whether they

would stay in the city or move elsewhere. The latter firms had to stay in New York to

keep the presses humming. Not surprisingly, then, the group’s report lashed out with a

stream of invective against everyone that the group’s members believed had weakened

the city’s quality of life. “What remains [in New York City] is dirty, unkempt and

unsafe,” the report read. “Our parks are overgrown with weeds. While the quality of

education steadily declines, our teachers strike for more pay, higher benefits and less

work. Our police force appears shabby and undisciplined.”178

Drawing a frankly racist

ire were welfare recipients: The “people,” the report wrote, “[who] come here not to

improve themselves and contribute to the city, but to live on the welfare roles and exploit

the city in every way possible.”179

The solution the printers proposed was

straightforward: “Reduction of welfare eligibility to only those who are physically

handicapped or aged. It should be made known that every physically capable person

178

“Report of the Printing Industries Working Group,” 2-3, September 22, 1976, NYCCLC Papers,

Tamiment Library, Box 64, Folder 1

179

Ibid

140

must be required to work.” The resulting savings could then be used to “launch massive

programs to clean up the city, clean and revitalize the parks, clean and modernize the

subways, [and] revitalize the police force.”180

The Printing Industries Working Group

offered no statistics to show whether even the most draconian restrictions on public

assistance could pay for all of the improved civic amenities that it desired.

The Finance Sector of the Business/Labor Working Group, meanwhile, could

provide a far more detailed plan for municipal “improvements” that offered not only the

prospect of stabilizing the city but of generating a new round of economic growth. It

even managed to clothe its designs in a high-mindedness that the printers could not bear

to muster:

For the sake of the citizens of New York City, especially the low income groups having

limited geographic mobility, the public and private sectors must act to preserve the City’s

role as the capital of capitalism and jobs linked to it. No package of welfare benefits is a

substitute for the opportunity of upward mobility offered by a local high-employment

economy.181

As would seem natural when seen from a banker’s perspective, the expansion of

financial services could create these conditions for growth. After all, the industry already

wielded considerable power to shape the city’s destiny. The “finance sector is uniquely

positioned to both influence and be influenced in turn by factors affecting other major

parts of the City economy,” the business group said, “The financial institutions are a

necessary link in the chain for manufacturing or for housing production, or, for that

180

Ibid 181

“Report of the Finance Sector of the Business/Labor Working Group,” October 22, 1976, NYCCLC

Papers, Tamiment Library, Box 64, Folder 1.

141

matter, for many of the larger scale infrastructure projects of the City, whether public or

private.”182

A report prepared for the Finance Sector Working Group identified 727,000 jobs

attributed to the industry out of a total of 2,703,800 private sector positions. Roughly

422,000 of those positions were directly in finance, insurance and real estate (FIRE). The

study also included 58,400 manufacturing headquarters jobs, 181,500 positions in

business services, and 65,000 in “other dependent activities” that the study argued were

depended upon the strength of the FIRE sector.183

If anything was working in New

York’s economy, this was it. Or as the report put it, “It is impossible to imagine New

York as a viable metropolis without the comparative advantage which it derives from its

leadership position in the world of finance.”184

The “synergy” between finance and the

headquarters sector were both operational and cultural. As described by the Corporate

Headquarters Working Group, the city’s “unique cultural and intellectual pursuits” along

with its “cosmopolitan nature” enhanced its attractiveness to international employees

while the “competitive pace” of New York led to enhanced productivity through the

“cross-fertilization of ideas and approaches to business problems.”185

The city’s competitive advantages in finance were substantial. “Among the 300

largest banks in the nation New York accounts for 31% of all deposits,” the group

182

Report of the Finance Sector of the Business/Labor Working Group,” 15, October 22, 1976, NYCCLC

Papers, Tamiment Library, Box 64, Folder 1 183

Eli Ginzberg, Robert Cohen, and Charles Brecher, “The Economic Importance of the Financial

Community to New York City,” July 23, 1976, 2-a, NYCCLC Papers, Tamiment Library, Box 64, Folder 1 184

Ibid, 1. 185

Report of the Corporate Headquarters Working Group,” 12, 14, November 29, 1976, NYCCLC Papers,

Tamiment Library, Box 64, Folder 1

142

reported. “No other city even approaches New York’s share and the second ranking city

of San Francisco has only 13%. . . .Unless New York fritters away this lead it is difficult

to see how any other city in the U.S. can become a serious challenger.”186

Unlike an

industrial-led redevelopment plan, which would have to overcome the city’s inherent

disadvantages, finance had a substantial head start. Such a position also fit with the

technologically deterministic argument that the United States was shifting to a “post-

industrial” economy that left cities at an irrevocable disadvantage. As Wolfgang Von

Eckardt wrote in The Washington Post in July 1976, “Manufacturing has become all but

impossible in the old urban centers. . . even if land costs and taxes were lower . . . No one

can reverse the historic change of cities from manufacturing and trading centers to

managerial, cultural and service centers. That is, essentially, what the urban crisis is all

about. ‘Crisis,’ in Greek means change.”187

Retaining financial leadership would,

however, could not be left to the play of market forces. The Finance Sector Working

Group argued that it would require the active assistance of government to reshape the

marketplace for capital with “the public sector” increasing “the economic development

consciousness of its regulatory bodies.”188

In practice what the report argued was that bankers’ needs should have priority in

shaping the public agenda. The agenda that the report argued for usurped the apparently

186

Eli Ginzberg, Robert Cohen, and Charles Brecher, “The Economic Importance of the Financial

Community to New York City,” 4, July 23, 1976,NYCCLC Papers, Tamiment Library, Box 64, Folder 1 187

Wolf Von Eckardt, “Jimmy Carter’s Prescription for Urban Ills,” Op-Ed, The Washington Post, July 14,

1976. 188

Report of the Finance Sector of the Business/Labor Working Group,” 12, October 22, 1976, NYCCLC

Papers, Tamiment Library, Box 64, Folder 1.

143

antiquated notion that the “public interest” came first. “If usury ceilings and other public

sector constraints on the supply of loanable funds were removed,” the report argued

“creditors would finance a higher level of construction activity and jobs in New York

State.”189

Going further than simple deregulation, existing public authorities, such as the

Urban Development Corporation (UDC), could be put to use furthering the private sector:

“While the focus on the U.D.C.’s problems has been on residential and large scale land

development problems, these are being resolved. There is relatively little familiarity with

the substantial powers available to U.D.C. for commercial development.”190

These

arguments echoed those of the Manufacturing Working Group which made a case for “ . .

. a substantially expanded industrial development effort by government utilizing the

zoning powers and economic resources necessary to acquire, vacate and clear abandoned

property, to modify street layouts, to general upgrade its environment . . . .”191

For

bankers, as for the developers and manufacturers, only government had the scale and

scope of powers required to promote private sector development.

Left unstated in the Finance Sector Working group’s report was the industry’s oft-

repeated threats to leave the city. That point was already well established and continued

to be reiterated by key figures in the business. As I.W. Burnham II, the Chairman of the

Securities Industries Association, and head of the investment bank Drexel Burnham, told

an SIA meeting in the spring of 1976, “Communications are so good in comparison with

189

Ibid, 13. 190

“Report of the Finance Sector of the Business/Labor Working Group,” 21, October 22, 1976, NYCCLC

Papers, Tamiment Library, Box 64, Folder 1. 191

“Report of the Manufacturing Working Group,” 23, October 15, 1976, NYCCLC Papers, Tamiment

Library, Box 64, Folder 1

144

what we knew a few years ago that being on the scene is no longer necessary.”192

Instead, the report and its supporting documents emphasized the bright future promised

by increased “economic development consciousness.” As the supplemental study

concluded, “With London vulnerable because of the weakness of the British economy

and the pound, New York is strategically situated to become the dominant financial

center of the world.”193

Interestingly enough, Jane Jacobs shared some of the deregulators agenda. “I

don’t know that New York can recover now,” Jacobs wrote in 1975. “A city can’t let its

skills, manufacturing plants and suppliers plants wither away and then not suffer the

consequences. New York stopped being creative a long time ago. The notion that the

city could live on financial and white collar services was nonsense.”194

Jacobs

recommended deregulation. The city should “take the lid off transportation” and allow

anyone that could prove he or she was a “safe driver” to “run any kind of transportation

they want, any place they want, any time they want.” “Out of that—in 10 years,” Jacobs

argued, “would grow some exportable types of transportation. There are still lots of very

clever people in New York.”195

What Jacobs missed in this assessment was the

possibility that financial and real estate markets themselves could grow, not simply by

providing more services such as brokering orders and balancing books, but by creating

192

William Gruber, “The Big Apple Needs a Tax Haven Orchard,” Chicago Tribune, March 18, 1976, C11. 193

Eli Ginzberg, Robert Cohen, and Charles Brecher, “The Economic Importance of the Financial

Community to New York City,” 5, July 23, 1976, NYCCLC Papers, Tamiment Library, Box 64, Folder 1. 194

Israel Shenker, “18 Urban Experts Advise, Castigate and Console the City on Its Problems,” NYT, July

30, 1975. 195

Ibid.

145

new services that could virtually “recycle” otherwise “useless” capital, especially if the

decision was made to “take the [regulatory] lid off.”

Consider just one case from mid-September 1975, when the dutifully named

California Federal Savings & Loan (which was the nation’s fourth-largest thrift) sold $50

million in bonds at 9.13 percent interest. What made the offering unique was that the

bonds were not backed by the thrift’s capital but by a pool of FHA-insured and VA-

guaranteed mortgages. It was the first time that a pool of mortgages was sold to the

public as a bond, with a fixed maturity date and rate of interest rather than as “pass-

through” security (which could mature early, if borrowers took advantage of a drop in

interest rates and refinanced). Standard and Poor’s, declaring that there was “sound

intrinsic value backing these bonds,” rated them as triple-A securities. After selling the

bonds, California Federal took the proceeds from the sale of low-yielding mortgages and

wrote new loans at higher interest rates and collect a steady-stream of fees from

originating and servicing those mortgages. Investors could earn a full percentage point

above Treasuries for taking, what on paper, appeared to be the same amount of risk. The

Federal Home Loan Bank encouraged the move since it assured that there was another

source of funding for its members beyond the inflation-defeated passbook savings

accounts that had sent savers scurrying to the New York Fed as Philip Petit prepared to

walk on the high the wire. Loeb, Rhoades & Co, along with the other underwriters, the

lawyers, and S&P, all collected fees for making the sale possible. Those fees paid not

only for partners bonuses but also for the wages of the secretaries, cleaners, messengers,

146

printers, data-entry clerks, and so many others who oiled the human machinery of the

deal.196

Capital created, jobs generated ex nihilo. It was the export industry the city was

searching for.

There was a serious difficulty with the bankers’ plan for the city, however,

namely where to begin? As the Financial Sector report admitted:

“The problem [of economic development], of course, is a circular one. It is difficult to

hold, much less to attract more employment to New York City until some inroads are

made on the intangible reasons for people’s resistance to locate and employ or be

employed here. At the same time, there will be adequate resources to make those inroads

only as both the tax base and the necessary motivation are expanded by more jobs.”197

For all of the despair surrounding the apparent failures of American-style

Keynesianism, it was still necessary to find resources that could “prime the pump” of

development. But there was no “free money” in New York City. Finding it would

inevitably entail political conflict in a raucously divided city operating under the ongoing

the ratchet of austerity. While the final report of the Business Labor/ Working Group

was not released until early 1977, the sector reports provided the genesis for a plan that

fused together existing elements of New York’s stabs at economic recovery and a return

to fiscal solvency. Ever the organization man, Mayor Beame set about putting these

preliminary proposals into action.

On December 20th

, 1976 Beame grandly announced that that “New York City

means business” and promised an ambitious round of tax abatements and what a reporter

196

Peter B. Roche, “Big S&L Sells Mortgage-Backed Bonds In Successful Test of New Credit Source,”

WSJ, September 29, 1975, 17. 197

Report of the Finance Sector of the Business/Labor Working Group,” 19, October 22, 1976, NYCCLC

Papers, Tamiment Library, Box 64, Folder 1

147

described as “red-tape-cutting services.” The numbers were modest when placed in the

context of the city’s $12.3 billion expense budget: roughly $25 million in the first year

for eliminating the sales tax on machinery and reducing the commercial rent tax, plus a

$2.3 million increase in spending for a new Office of Economic Development. But the

philosophical shift behind these expenditures, presented to the press in a 59-page

brochure was substantial. “Rarely recognized as such, economic development is as much

an urban life-support system as police and fire protection, medical care and education.

Indeed, it pays for all of them.”198

Threatening this “life support system” were

“pyramiding and duplicating taxes, enacted to support an unparalleled municipal service

system” that could “tip the balance away from the city” in attracting new employment. 199

While the editorial page for the Times labeled the plan a “potpourri of mostly old ideas,”

the paper agreed with the report’s basic premise and suggested that “the city will have to

move further, faster in reducing its punitively high rate of business taxation—and that

will necessarily require new cutbacks in nonessential services and a more determined

effort to reduce excessive municipal employee fringe benefits.”200

The proposals might

have been old, but the plan behind them and the philosophy that underpinned them,

marked the beginning of a profound shift in the governing ideology of New York City.

On the evening of December 31st, 1976, the revelers gathered in Times Square.

The New Yorkers among them had watched their city fall from the graces of the credit

198

Michael Sterne, “A Plan to Revitalize New York’s Economy Is Offered by Beame,” NYT, December 21,

1976. 199

Ibid. 200

Editorial, “Plan for New York’s Recovery,” NYT, December 24, 1976.

148

market, from years of subtle, structural, shifts that had pulled the ground from beneath

their feet. And they had absorbed the shock of a mean, hard fall. As the crowd chanted,

the ball dropped, and the city welcomed 1977. They were also welcoming the rise of a

very different city.

149

Chapter Three: The Triumph of Risk, 1977-1981

A Window on the World to Come

On the evening of July 13, 1977, six hundred New Yorkers and tourists, all with

confidence in the soundness of their wallets, checkbooks and credit cards, took to the

skies. Or, more precisely, they boarded elevators that whisked them up to the 107th

floor

of One World Trade Center, where the Port Authority had turned its planned private

dining room into a public restaurant, Windows on the World. It would be a night long

remembered, and not just for views, the food, drink, and the checks.

The Port Authority had been forced to open the doors after word had leaked to the

press that $6 million dollars in quasi-public funds were being spent on the space. Making

haute lemonade from a public relations disaster, the PA decided to open the restaurant to

the public for dinner (one could buy a “membership” for lunch).1 In a fitting gesture, the

design of Windows on the World repudiated the monotonous modernism of the WTC.

The Times architecture critic Paul Goldberger described the aesthetic: “Instead of seeking

refuge in any historical style, the architect for the project, Warren Platner, has taken

elements of modern design and loosened them, manipulated them, contorted them into a

1Darton, Divided We Stand, 154.

150

style that can only be called sensuous modernism.”2 So there was a gallery of mirrors in

the entrance, soft pastels colorings, magenta velour covers on the stair rails, fabric

covered walls, pink Norwegian marble bathrooms, and “lots of brass.” And there was the

view too, of course, “like seeing the city from an airplane frozen in space.” On the décor,

Goldberger offered this backhanded compliment, “The design clearly triumphs Minoru

Yamasaki’s ghastly design of the trade center buildings themselves . . . . [But] Mr.

Platner’s problem, in the end, is that he just doesn’t seem to have been sure where to stop,

and thus everything got fussed up a lot more than it had it.”3 In his last column as

restaurant critic for the New York Times, John Canaday listed his personal favorites (in

alphabetical order) and thus was able to conclude with this tribute:

From now on, whenever we get to wondering whether or not New York is worth the

struggle, or begin to doubt that it is the most fantastically wonderful city in the world

since ancient Rome, all we have to do is go look out over it from Windows on the World

to feel that surely no city, ever, has offered really serious competition.4

The restaurant was not cheap. The price fixe dinner was $16.50, a la carte the

entrees were $8.95 to $15.50, nor was it particularly good for its price—the Times gave it

one star. But it was booked six to eight weeks in advance for the weekend.5 But the food

mattered less than the location, a perfect place to sit, quite literally “above it all.” It was

also fragile. Like the tower that housed it, Windows on the World depended on an

2Ibid.

3Ibid.

4 John Canaday, “The Last Word in Restaurants from Canaday,” NYT, August 6, 1976.

5 Mimi Sheraton, “Restaurants: The Two Faces of Windows in the World,” NYT, January 28, 1977.

151

enormously complex technological system to keep operating. Those system, each tightly

coupled to the other, were vulnerable.

One only had to look at what happened beginning at 9:27 PM, on the sultry night

of Wednesday, July 13, 1977. That evening a combination of human error and

mechanical failures shut down Con Ed’s grid. The blackout plunged New York City and

the diners at Windows of the World into darkness. For the 600 patrons out for an

evening’s entertainment, the sights were unusually spectacular. “It was amazing,” said

one guest. “We were looking out at the most spectacular view in the world—New York

at night—when suddenly it disappeared.”6 There were inconveniences, of course. The

ventilation system shutdown and the room got hot and smoky. The pumps no longer had

power and the rest rooms went without water. But there were still wine and food to keep

the atmosphere convivial. Some diners even broke into song until a restored service

elevator began ferrying the guests, and then the staff slowly to the ground.7 Privilege

had its privileges.

Most of the city that the diners watched disappear was growing poorer, and the

hearts of New Yorkers were getting harder. It was a city where crowds of poor kids had

lined-up for summer jobs paid for by the federal government’s Comprehensive

Employment and Training Act (CETA)—3,000 kids at 3 A.M in Morrisania, the South

Bronx, to try and apply for 2,138 openings, 4,000 waited in Hunts Point for 2,525 spots.

6 “New Outlook at Windows on the World,” NYT, July 15, 1977, 13.

7 Ibid.

152

All for $2.30 an hour, for up to 24 hours a week, for seven weeks.8 In that city, all hell

quickly broke loose. Within minutes of the blackout, people began to take what they

could get and destroy what they could not. A rampage of looting and arson broke out

across the city.

By the time Consolidated Edison had restored power the next day, the worst fears

of New Yorkers had been realized in a series of grim statistics: 1,037 fires set, 1,616

stores looted, $135-150 million dollars of property damage and 3,776 arrests made by an

overwhelmed police force. The 1977 blackout resulted in more destruction than the

city’s riots of 1965 and 1968 combined.9

After the blackout, black and white tempers cooked off in the heat, as sharp as the

shards of glass that merchants swept up in-between calls to their bankers and insurance

companies. The owner of a liquor store on the Lower East Side described the looters as

“animals” while cleaning up. “The stuff I had in the window wasn't even real booze—it

was colored water.”10

All the work that had gone into hosting Op-Sail and the

Democratic Convention the previous summer, selling the city to the world—and to

itself—drained into a public relations gutter. In a nationwide New York Times/CBS

News poll, thirty four percent of the respondents rated the city as at least a “good” place

to visit, while eighty four percent of respondents called it either a “fair” or a “poor” place

8 Peter Kihss, “20,000 Youngsters Apply for Summer Jobs,” NYT, April 7, 1977.

9Jonathan Mahler, Ladies and Gentlemen, The Bronx is Burning: 1977, Baseball, Politics, and the Battle

for the Soul of a City (New York: Farrar, Straus, and Giroux, 2005) 219-219; Robert Curvin and Bruce

Porter, Blackout Looting! New York City, July 13, 1977 (New York: Gardner Press, 1979), xiii. 10

Anna Quindlen, “The City on a Morning Without Any Electricity: Odd Mixture of Unrealism and

Business as Usual,” NYT, July 15, 1977.

153

to live. One Florida banker told the pollsters, “It’s another big black eye for New York.

I suspect more taxpayers might leave. . . . The big question is, can Con Ed operate and is

New York manageable?”11

To the banker’s question, the city’s economic leadership had already been

working on an answer—yes, if they would be given the power to shape it as they saw fit.

Rather than spurring a call for a renewed offensive on poverty, the blackout mayhem

(seen through the lens of Public Interest-style neo-conservatism) lent credence to the

belief that government programming was a dead end to remedying society’s ills. The

state would not disappear, but it would change from being a manager to a catalyst for

enabling the efficacy of private enterprise to flourish. That August, Felix Rohatyn

editorialized in the Times, “Government alone cannot solve these [social] problems since

its management of programs is mostly inept. The private sector alone cannot do it since

the financing requirements and risks are beyond its means. A partnership between

Government finance and private sector management might work. We have little to lose

by trying.”12

Or as one academic put it, “What you have got going for you in the

Northeast is desperation.”13

The reworking of New York’s political economy required not just new policies

but a new culture that embraced an ethos of risk-taking. Under the aegis of saving the

city from a long stay in fiscal purgatory, this culture of risk entailed a 180-degree

11

Michael Sterne, “Nationwide Poll Finds 6% Think New York Is a Good Place to Live,” NYT, July 29,

1977. 12

Felix G. Rohatyn, “Indeed, ‘The Moral Equivalent of War,’” Op-Ed, NYT, August 21, 197. 13

Agis Salpukas, “Revitalizing the Northeast,” NYT, March 5, 1977.

154

reorientation of the city’s priorities. The use of technocratic state power to order the city

and the marketplace would now actively promote a profitable kind of disorder. From the

beginning, plans for New York’s economic recovery were premised on the city’s role as a

hub not simply of an anodyne “service economy” but of a city with a fiscal and

regulatory regime that would attract billions of dollars in speculative capital from the

global economy. The salvation of New York City, so the city’s elite hoped, would come

by hosting an epic, endless “Las Vegas night,” and keeping the players in town to spend

their winnings.

Creating this regime meant not only encouraging risk-taking in the economic

marketplace but also in the political one. Given that the city’s ability to borrow was now

not only legally but also practically circumscribed, the creation of these “incentives”

would have to come at the expense of others—especially the poor and the otherwise

politically powerless. The ideal of a city that served its citizens, whether out of charity or

as self-interested “riot insurance,” became one in which the city served its taxpayers, with

an emphasis on the ability to pay. The powerbrokers who promoted this vision,

financiers, corporate managers, state and local government officials and much of the

city’s organized labor leadership, understood from the beginning the social costs that

their vision would entail. They accepted an increased risk of public filth, disorder,

unmitigated poverty, and confrontational bare-knuckle politics, exemplified by the first

term of Edward I. Koch, elected mayor in 1977. In their minds these risks seemed well-

worth running, not simply for pecuniary reasons, but because they believed that they

155

were genuinely necessary for the future of the city. Equally important, those who led

would have choices about what kind of risks they would take. The vast majority of New

Yorkers, meanwhile entered like refugees into the land of risk and grew to learn its

language, culture, and customs as a matter of survival, regardless of personal desires and

biases.

Economically the city wedded itself to a redeveloped economy based on

speculation that accepted polarizing extremes of wealth and poverty as necessary

conditions for renewed expansion. In order to create the capital demanded by this shift,

the city took an additional risk, that of social disintegration, as growing human needs

were allowed to break the old levy of “municipal socialism.” The deluge that followed

reshaped the texture of daily life and created the culture of risk. By 1981, this culture

had swept New York City. Triumphant, it did not stop on the banks of the Hudson but

began rolling onward on into every corner of America.

The Supply Side, New York Style

On March 3rd

, 1977, President Carter’s newly appointed Secretary of the

Treasury, the former head of Bendix Corporation, W. Michael Blumenthal, gave his first

speech outside of the halls of Congress. Appropriately enough, he traveled to New York

for a luncheon group of 150 business leaders gathered inside the Waldorf-Astoria hotel.

He was there to promote the administration’s fiscal and economic policy, telling the

assembled guests that the President “firmly believes in the need for a vigorous attack on

inflation and he sees this need as just as important as the attack on unemployment,”

156

words that injected some bounce into an otherwise lifeless day on Wall Street.14

To make

this plan a reality, the administration proposed a “new” strategy—increased investment in

capital goods by the private sector to boost productivity. It accepted an argument,

originally proposed by the head of the New York Stock exchange, that the country

suffered from a “capital shortage” and that tax incentives would be required to spur

additional investment to remove inflationary bottlenecks from the American economy.15

Blumenthal told the assembled executives, “We are not providing the tools of production

as fast as the growth of workers to use them.” He called for an increased investment tax

credit and pledged that the Carter administration would be “re-examining the impact of

tax and regulatory structures on investment and on the financial system to remove all

inhibitions to the investment we all want to see.”16

The speech was interrupted several

times with applause.

The members of New York City’s Business/Labor Working Group had already

come to the same conclusion. On, January 28, 1977, twenty-five business and labor

leaders led by David Rockefeller and Harry Van Arsdale announced the release of the

group’s “Summary Report” that consolidated into a unified plan for action the findings of

the earlier sector task forces that were prepared over the summer and fall of 1976.

Pleased with his civic virtue, David Rockefeller told a press conference, “Our ancestors

would be somewhat amazed, to say the least, at the prospect of a lifelong labor leader and

14

Vartanig G. Vartan, “Stocks Advance on Assurances From Carter to ‘Lick’ Inflation,” NYT, Mach 4,

1977. 15

Robert D. Hershey Jr. “Washington & Business: Ways to Bridge the Capital Gap,” NYT, March 3, 1977. 16

Paul Lewis, “Blumenthal to Seek ‘Counsel’ of Business,” NYT, March 4, 1977.

157

a lifelong capitalist joining together in common cause at a union headquarters.”17

That

being said, the report was an indictment against the status quo and a push for the

reassertion of private power. There was no subtlety about its message, in its list of

recommendations it stated bluntly: “New York’s private sector economic and investment

climate has been neglected in relation to the basic role it plays in the City. Concerns of

this area demand the highest level, apolitical attention.”18

That “high level apolitical attention” should, the report argued, be turned towards

the supply side. “Public tax policy must recognize that a lesser share of something is

better than all of nothing, and that it is the tax base with which we must be increasingly

concerned.”19

And that corporate “tax base” was in danger of leaving town to enter the

ethereal realm of globalized capital. The city had to change its policies in order to retain

its economic base. Thus the very first policy recommendation was to reduce the stock

transfer tax on sales to the public. The Business/Labor Working group argued that,

“Given changing technology and the creation of a national securities market, any extra

cost will place New York in a rapidly less competitive position.”20

It made a similar

statement supported the case of “parity in bank taxation.” “New York bank’s worldwide

activities are often treated as captives of the City, open to endless taxation without

forcing relocation or loss of market share. Changing markets and technology no longer

17

Michael Sterne, “Economic Recovery Plan Offered,” NYT, January 29, 1977. 18

Underlining in the original document. “Summary Report of the Business/Labor Working Group,” 39.

NYCCL Papers, Tamiment, Box 64, Folder 1 19

Ibid, 8. 20

Ibid, 9.

158

make this true, but taxation of banks at an uncompetitive rate continues.”21

That

philosophical acceptance of capital mobility extended to the treatment of individual

taxpayers:

In taxation, the natural tendency seems too find often to find the nearest available goose,

squeeze it for what its worth and then go on to the next subject. We would urge that

future tax policy should take greater account of broader goals such as the encouragement

of employment, as well as energy conservation or housing rehabilitation22

Quoting from a report from the Real Estate Research Corporation, the reporter

writers argued, “ ‘City governments cannot effectively redistribute incomes from the

‘have’ to the ‘have nots’ within their boundaries over the long-run, because too many of

the ‘haves’ will gradually move out of the city.’ Nowhere is this truer than in New

York.”23

Therefore, the report continued, “Public and private policies and actions should

increasingly focus on maintaining and attracting middle-income families.”24

High taxes,

the report continued eroded “not only the general job base, but also the middle and upper

middle income residential and professional base necessary to the City’s future.”25

There was only so much financial “pie,” and to give to one group would mean

taking from another—at least in the short run. As John S. Dyson, New York State

Commissioner of Commerce, put it, “Keynes does not apply at the state and local level.

We must operate on a balanced budget or run into crippling debt. We do not have the

tools that are available to the national government. We cannot print money. Whether our

21

Ibid, 10. 22

Ibid, 12. 23

Ibid, 25. 24

Ibid, 23. 25

Summary Report of the Business/Labor Working Group,” 11, NYCCL Papers, Tamiment, Box 64,

Folder 1.

159

program is trickle down or trickle up is largely irrelevant. We have to live within our

means.”26

It was a very different kind of rhetoric from than that of an expanding pie,

with proportionately larger slices for everyone, that underpinned not only Albany and

New York City but the United States as a whole after the Second World War. “The

politics of community is based on the idea that everyone is a member to whom

responsibilities are owed,” Richard Barnet wrote in the Times in the spring of 1978. “The

politics of austerity is a process for deciding who shall live.”27

Making decisions at this level of city government required, it seemed the

curtailment of municipal democracy with its “log-rolling” and clamorous interest groups.

“New York’s diversity is one of its greatest strengths,” the Summary Report stated in its

second point, “but those most concerned with jobs feel that too often short term or highly

localized or vocalized special interests have been allowed to destroy efforts for the

general and basic public well-being—such as proceeding with the construction of

Westway or implementing a viable alternative to rent control.”28

It concluded by stating,

“Communities within the City should influence their own destinies, but also recognize

that each part of the City depends on the health of the whole. Self-interest must be

increasingly moderated to the common good.” 29

In other words the immobile, poor

people of color would have to accept the sacrifice of their own interests in order to

26

A.H. Raskin, “Both Parties Now Court Big Business,” Op-Ed, NYT, January 23, 1977. 27

Richard J. Barnet, “No Room in the Lifeboats,” NYT, April 16, 1978. 28

“Summary Report of the Business/Labor Working Group On Jobs and Economic Regeneration in New

York City, January 28, 1977,” NYCCL Papers, Tamiment, Box 64, Folder 1. 29

“Summary Report of the Business/Labor Working Group,” 39, NYCCL Papers, Tamiment, Box 64,

Folder 1.

160

protect and indeed promote those people and institutions with mobility, the city’s affluent

professionals and the for whom corporations they worked. How exactly this political

process would happen, the report did not say.

The members of the Temporary Commission on City Finances struck a similar

note with the release of their final report, The City in Transition: Prospects and Policies

For New York in June 1977. If the Business/Labor Working Group’s proposals were a

quick sketch, the Temporary Commission laid out a case for the long term, structural shift

in the city’s economy and politics in a numbing 300-plus pages of charts, tables, and

social science euphemisms. Like their counterparts, the Temporary Commission blamed

the city’s problems on welfare recipients and the public employees. In language only a

wonk could love, it described the problem:

Taxes were raised beyond the point of economic rationality and helped drive out mobile

businesses and individuals; debt was issued beyond the capacity of the market to absorb it

at competitive rates and, ultimately to absorb it at all; a salaries and benefits were

negotiated beyond the capacity to fiancé the increases except by reducing the work force,

cutting essential public services, and worsening the quality of life in New York City.30

The results were predictable:

A significant portion of the tax burdens that affect business activities located in the center

of the city are generated by expenditure requirements for public services for the

residential populations of the outer boroughs. What the command center firms located in

Manhattan receive from the rest of the city in exchange for their tax burdens and whether

these benefits have been declining are critical questions.31

30

Temporary Commission on City Finances. The City in Transition: Prospects and Policies for New York.

(New York: 1977), 90. 31

Ibid, 39.

161

To remedy the problem, the Commission called for a “development strategy” a

phrase that seemingly echoed Walter Rostow and America’s adventure of technocratic

madness in Vietnam. This was posited against municipal bankruptcy or the “decremental

option” of muddling through (and hoping for more federal assistance). It was also a call

for the resetting of the city’s priorities towards its financial core. “The basic idea of the

developmental strategy is that slack or uncommitted resources must be acquired and then

invested by the City of New York in ways that promote the competitiveness of the local

private and public economies.”32

Those resources would then be “invested” “to promote

long-term developmental needs rather than short term maintenance needs.” In particular

they should be used for “tax cuts, debt reduction, and improvement of the city’s

infrastructure or physical plant.”33

In other words, while the Commission’s quasi social-

scientific methodology and language echoed that of classic high modernism, its goals

were those of the supply side and the reinvigorating power of lassie-faire.

It is important to observe that the Temporary Commission made a deliberate

choice of emphasis in its plans for the city’s recovery. The report explicitly rejected

another Moses-style campaign of employment through the expansion of public works.

“New York City does not need a new airport, a mass transit system, large numbers of

new office buildings, new railways, streets, roads, and highways . . . .Further construction

may be required for economic development, such as a convention center . . . .But what is

32

Ibid, 1-2. 33

Ibid, 2.

162

most needed is the maintenance of what exists.” 34

The city was to encourage “growth

sectors,” such as “banking, specialized corporate services, and the communications

industry,” that were the “dynamic components of the city’s economy that must be

encouraged if the city is to reach a new economic equilibrium in the future.”35

In a 1978

speech, Raymond D. Horton, the Temporary Commission’s staff director (1975-77)

explained the overarching philosophy behind the committee’s recommendations:

If our general failures of public intervention in are specific redevelopment projects over

the last decade or so tell us anything, it is to avoid the presumption of superior

intelligence that plagues us as planner . . . I hope, for example, that we do not squelch the

potentially dynamic character of people and enterprise that I suspect will be found in the

south Bronx by intervening to the point where the local public sector attempts to

‘manage’ economic development.36

Given the previous failures of “planning,” the best solution, Horton argued, lay in using

municipal power to leverage private sector investment:

We [planners] have crude, but I would guess in the long run more efficient tools, in the

form of tax reduction, investment in the maintenance of our existing infrastructure, and

maintaining an adequate supply of public services. I tend to believe that when

investment becomes profitable in New York City and when the mixture of taxes and

services becomes more favorable to individuals, that the City’s socioeconomic base will

improve.37

The City in Transition, therefore, was fostering a shift in values from the public

good to private interests, as much as it was a set of policy recommendations for

revitalizing the city’s economy and controlling public spending. The Commission sought

34

Ibid, 107 35

Ibid, 104 36

Raymond D. Horton, “Planning Perspectives and Assumptions for New York City’s Economy,” Address

to the conference Challenges of the Changing Economy of New York City, April 19, 1978, Tamiment

Library, Bellush Papers, Folder: Fiscal Crisis—Reading’s and Sources. 37

Ibid.

163

to “engage the City of New York in policies and practices that are rational in an

economic sense,” although, the report went on to note that such polices “may not be

rational in a political sense.”38

The city should, indeed needed to favor the classes with

money over the masses with votes. As the report itself concluded:

Before public priorities and public benefits and costs can be reordered, public values have

to change. In the final analysis, the local governmental process came to place a much

higher value on short-term goals than long-term goals because this was consistent with

the political values of most New Yorkers.39

This call for a shift in “public priorities” had already been underway for decades

from the coordinating bodies of the city’s business elite. In 1975 and 1976 its language

had entered the political mainstream in an ad hoc fashion as business, political, and labor

leaders sought to protect their positions as the city lurched from crisis to crisis. That had

become their “public” priority. The shift towards “long term goals” also provided a

convenient pretext for the continued neglect of the poor, whose material and social

conditions had continued to deteriorate.

In October 1977, John R. Bunting, the banker and newly elected chairman of the

National Urban Coalition, told the assembled delegates after his election that “the civic

disturbances of 10 years ago, while born in the despair and poverty of the ghetto dwellers

of that period also revealed the pervasive feeling that ‘it could get better if only everyone

understood how bad it was.’ Now the ugly crime, the grotesque graffiti and the pathetic

38

Temporary Commission on City Finances, The City in Transition, 137. 39

Ibid, 216.

164

idleness reflect dreams abandoned.”40

While Bunting summoned the ghosts of the Great

Society and called for a renewed focus on aiding the poor, a cynic could take his message

in another direction. Because poor people of color were perceived by New York’s white

elites as too despairing and disorganized to organize, or riot, it would be safe to continue,

indeed accelerate, the unofficially planned shrinkage of the city’s poorest neighborhoods.

What remained was to translate the recommendations of the consensus of groups

such as the Business/Labor Working Group and the Temporary Commission on City

Finances into practice. An excellent example of this can be seen in the efforts to retain

the American Stock Exchange (Amex). By the mid-1970s the old “curb” market,

traditionally home to speculative firms shunned by the NYSE, had creatively developed a

lucrative market in a new type of derivative security called the stock option. A derivative

is a financial product whose prices is linked to the prices of something else. Rather than

trading the shares themselves, investors could trade the right to buy (“call”) or sell

(“put”) a quantity of stock at a fixed price and time. In 1975, when options trading was

introduced at the Amex about 3.5 million changed hands; by 1977, the number had

climbed to a little over 10 million and was on its way to 34 million options traded in

1981.41

The exchange needed more space for this burgeoning business.

40

“New Urban Coalition Chiefs Says Poor Worse Off that 10 Years Ago,” Amsterdam News, October 8,

1977. 41

Trading in call options on the Amex began in 1975 and trading in put options began in 1977. The totals

are for the combined options volume. See table and accompanying description in Stuart Bruchey,

Modernization of the American Stock Exchange 1971-1989 (New York: Garland Publishing, 1991), 207.

See also Leonard Sloane, “Amex and Chicago Board Accelerate Options Race,” NYT, March 7, 1977.

165

The exchange could remain in Lower Manhattan, but if it was going to rebuild its

physical plant from the “ground up,” why not move to Connecticut or New Jersey?

Connecticut offered several acres of land, gratis, in Stamford, while New Jersey offered a

“very attractive site” on the Jersey City waterfront.42

By May of 1977 the value of New

Jersey’s offer had climbed to $63 million for a state-financed 33-story skyscraper

complete with a helipad, a boat landing, and a location at the Exchange Place PATH

station, which offered direct transportation to Lower Manhattan.43

This was not an idle

threat. By September of 1977, thirty brokerage firms had moved across the Hudson, two

to Hoboken, and twenty eight to Jersey City, right across the Hudson from Wall Street,

but without an unincorporated business tax, city business income tax, stock transfer tax,

or commercial occupancy tax.44

While the Amex itself, at 500 employees and $40

million in annual revenue, was a small firm, to lose the trading floor at 86 Trinity Place

would put a seal of institutional legitimacy on the rise of a capital market disconnected

from New York City.45

That development could do to New York’s financial sector what

the container port and official mismanagement had done to the city’s waterfront—leave it

to obsolescence and rot.

This time, and for this industry, the City and the State of New York did not take

any chances. In the spring of 1977, in response to the out-of-state offers, Mayor Beame

offered tax exemptions, the “elimination of red tape,” and joint city-state financing of a

42

“New York Offers Tax Concessions If Amex Will Agree to Stay in City,” NYT, May 21, 1977. 43

Robert J. Cole, “Jersey’s Pledge for Amex Now at $63 Million,” NYT, May 26, 1977. 44

“Two More City Brokerage Firms Join in Exodus to New Jersey,” NYT, September 9, 1977. 45

Leonard Sloane, “Wall Street Could Be Anywhere, U.S.A.” NYT, February 5, 1978.

166

new Amex headquarters (subject to eventual repayment by the exchange), although he

did not provide any specific numbers on their value.46

Governor Carey, for his part,

promised a rebate of Wall Street’s favorite bugaboo, the stock-transfer-tax. After his

election as mayor, Ed Koch brought his own personal brand of charisma to the task. He

made his first appearance before the city’s business community as mayor on the floor of

the Amex, ringing a ceremonial gong to start the trading day, describing it as “a signal to

the world that the Amex and the city both mean business.”47

He also brought on his first

Deputy Mayor for Economic Policy and Development, the former Lehman brothers

investment banker Peter J. Solomon. New York’s investment community: banks, pension

funds, and CEOs joined together to lobby Amex head Arthur Levitt Jr (who was also the

son of New York State’s former comptroller) to keep the exchange in town.48

The

exchange was finally swayed, and agreed to stay, in November 1978 when the city and

state offered a firm commitment of $40 million dollar’s in the form of a new headquarters

in Battery Park City, built by the Urban Development Corporation and leased to the

Amex. That building was never constructed. The Amex, citing rising construction costs

and an unwillingness to provide the $13.8 million in security required for the building,

opted instead, in October of 1980, to renovate and expand its existing space.49

But it set a

precedent. After the initial financing agreement was reached, Levitt told a reporter, “I

46

James P Sterba, “How New York Almost Lost the Amex,” NYT, November 27, 1978., 47

Leonard Sloane, “Amex Opens ’78 With New Chief And Mayor—but Old Site Issue,” NYT, January 4,

1978. 48

James P Sterba, “How New York Almost Lost the Amex,” NYT, November 27, 1978. 49

Stuart Bruchey, Modernization of the American Stock Exchange 1971-1989 (New York: Garland

Publishing, 1991), 92-93.

167

think New York is being creative in redressing some of the onerous pressures that have

built up over the years in the form of taxation and regulation. They are helping the whole

financial industry, not just the exchange.”50

Levitt, of course, had his own self-interest to protect, along with those of the

member firms he represented. But the fight to keep the Amex was the tip of a much more

comprehensive drive to encourage the growth of financial services, specifically those of a

speculative nature that had been deliberately stifled by city, state, and federal regulation.

The Business/Labor Working Group had noted favorably in its report the “current

activities in the City’s insurance sector” where a “committee made up of representatives

of the property and casualty insurance industry, but also representatives of both New

York City and New York State, has been separately studying both the taxation and

regulatory problem peculiar to this industry.”51

One aspect of this program was the drive

to create a regulatory framework to enable New York to create a marketplace for the

insuring unique risks, like an injury to a movie star’s legs. Insuring against such losses

fell outside the business lines conducted by the city’s giant insurers such as Metropolitan

Life. Donald Kramer, one of the promoters of this plan, told the Times in May of 1977,

“It’s like the London taxi. London taxis in New York would be a great thing. A Lloyd’s

in New York is just like a London taxi in New York—it makes all of the good sense, but

it’s not gonna happen. The people in power just don’t want it to happen, so they prevent

50

James P Sterba, “How New York Almost Lost the Amex,” NYT, November 27, 1978. 51

“Summary Report of the Business/Labor Working Group,” 12, NYCCL Papers, Tamiment, Box 64,

Folder 1.

168

it with rules and regulations.”52

Kramer’s remarks, however, proved less than prescient.

“They” very much were interested in creating a new operating framework for the city’s

capital markets.

Indeed, the City and the State of New York ultimately sought to go even further

and create not just one of the institutions of the City of London, but to co-opt its key

regulatory framework—the ability of banks to manage “offshore” money according to a

different set of rules than those that applied to British deposits and lending. This

framework had made London a hub for the global market in Eurodollar lending—albeit

one where the largest New York banks served as major players through their foreign

subsidiaries. It would be easier if the banks could conduct such lending “at home.” The

same logic that applied to the fight over the Amex was thus simultaneously taken to the

banking system writ-large. Even the Chairman of the Federal Bank of New York, Paul

Volcker, had warned in April 1976 of “premature senility and a loss of leadership in New

York” as its financial service sector employment had slipped.53

As Citicorp explained to

its shareholders in 1978, “Clearly, year by year, Citicorp is facing stronger competition in

the increasingly complex global marketplace. We welcome this competition, as it is good

for our society, but we are increasingly handicapped in competing by our own U.S. laws

and regulations, which grow in number and complexity every day.”54

New York would,

according to this logic, have to adapt to marketplace, and its appetite for risk, if it wanted

52

Rita Palmer, “The Birth of ‘Lloyd’s’ of New York,” NYT, May 13, 1977. 53

Henry Scott-Stokes, “Big Banks Propose A Free Trade Zone to Help New York,” NYT, November 22,

1977. 54

Citicorp, Citicorp Annual Report and Form 10-K 1978, (New York: 1979), 6.

169

to keep the high end of finance, and the taxes, jobs, and the promise of more jobs that

went with it.

In November 1977, the New York Clearing House Association, acting through the

New York State Bankers Association, submitted a preliminary plan for what would come

to be known as International Banking Facilities (IBFs) to the State Banking Department.

G.A. Costanzo, Citibank’s vice-chairman, optimistically predicted that the plan would

create 50,000 jobs. There was also a not-so veiled threat. The Clearing House noted in

its proposal that the city’s tax burden on its member’s activities was sixty-two percent,

compared with fifty-two percent in London, and ten-percent in Singapore.55

In addition

to state action, the plan would also require action from the Federal Reserve Board, so that

banks would not have to hold reserves against foreign deposits. In 1978 the state

legislature passed, and Governor Carey signed the changes in state law requested by the

Clearing House Banks. The Carter administration also lent its support to the measure.

Robert Carswell, Deputy Secretary of the Treasury told the press, “As far as we’re

concerned, we don’t see any real negatives to the proposal. We are generally positive

about the expansion of international banking activity in the United States, and not just in

New York City.”56

On March 15, 1979, Henry C. Wallich, one of the Federal Reserve Board’s

governors, weighed in on the issues: “Since Government regulation initially helped drive

55

Henry Scott-Stokes, “Big Banks Propose A Free Trade Zone to Help New York,” NYT, November 22,

1977. 56

Steven R. Weisman, “Carter Backs Carey Plan to Allow International Banking Zone in City,” NYT,

December 24, 1978, 1.

170

capital to the Eurodollar market, I see no reason why regulation should not be able to

reverse the process and lure some of it back to the United States.”57

Literal “casino

capitalism” had resuscitated Atlantic City. It could also save New York—and maybe

America for that matter. Now only the Fed, acting as a whole, would need to have the

final say.

A Coalition of Risk-Takers

The desire to drive development through supply-side policies, to take risks in the

name of growth, was not limited to members of New York’s financial elite. To

implement an agenda that would ultimately affect all of the City’s residents required the

intellectual and institutional buy-in from those whose views were, on paper at least,

committed to a different agenda. Carol Bellamy, the State Senator from Manhattan and a

liberal Democrat, told a committee meeting, “We must develop a favorable business

climate, initiate a broad-based system of tax reform and develop modern merchandising

techniques to sell New York City.” Her only difference from the financiers was one of

emphasis, “But we must also pursue an imaginative job development program designed

to alleviate the unemployment crisis,” she added.58

How this process played out can be

seen in the activities of D.C. 37 leader Victor Gotbaum.

It was not as if Gotbaum had abandoned his belief in the public good, even in the

importance of public services—which, after all, were provided by the members of D.C.

57

Judith Miller, “New York Trade Zone Supported,” NYT, March 16, 1979. 58

“Testimony by Senator Carol Bellamy Before the New York State Senate Committee on Labor, February

11, 1977,” UFT Papers, Tamiment, Box 207, Folder 10.

171

37. In an April 7, 1976 speech to the New York City Council on Economic Education, he

told the audience, “In terms of social responsibility, what is the major responsibility?

What is the major difficulty? It is basically the community, our traditions, and the

citizens of New York. And you know what? I am proud of this.”59

But Gotbaum’s

thinking about the means to achieve these goals had been shifting. In a December of

1976, Gotbaum’s editorial in the New York Times described the human costs of austerity,

to both union members and social service recipients as being of secondary importance to

the larger question of how the city’s economy could restructure itself in the face of higher

taxes and energy costs than its Sunbelt competitors. Gotbaum asked the paper’s readers,

“Who in the city has developed a program to attract businesses, build housing, develop

equitable distribution of Federal funds, do something? . . . . The true bankruptcy in New

York has been in leadership, political and otherwise.”60

Gotbaum saw it as his job as to

make that “something” happen. As he later told a reporter, “I’m not being a statesman

now, I’m being a pragmatist. We have to make sure that cities function. We have to get

involved. I don’t think we can just curse management. The man and woman out there

don’t sense they’re getting a buck’s worth of service for a buck. We’ve got to help turn it

around.”61

Without willing and deep-pocketed partners, however, there was little that

any union, even one with the political clout of D.C. 37, could accomplishment.

59

Victor Gotbaum, “Fiscal Responsibility and Social Responsibility,” April 7, 1977, Box 20, Folder “VG

Speeches and Articles,” Bellush Papers, Tamiment Library. 60

Victor Gotbaum and Edward Handman, “Municipal Unions and the Fiscal Crisis,” Op-Ed, NYT,

December 27, 1976. 61

Michael Oreskes, “To Victor Belongs the Spoils,” Daily News, June 22, 1980.

172

In early 1977 Gotbaum saw little chance for more municipal assistance coming

directly through political bargaining. Looking at Albany, he bemoaned “the

incompetence prevalent in State government. No one reaches the governor unless he

needs you.” 62

Washington too, in Gotbaum’s mind, could do no better, even after the

1976 election. From Gotbaum’s perspective, an “Analysis of the Carter administration

thus far, indicates he is pure politics at this time and hasn’t taken the bull by the horns. . .

. The political machinations going on in Washington tries to give everyone a piece of the

action, but does not really project programs.”63

The only alternative would be to sit-

down with the bankers and try to hammer out some kind of deal. The result was the

creation of the Municipal Union/Financial Leaders Group (MUFLG, pronounced,

appropriately, “Muffle”).

The precipitating event for the formation of MUFLG was the decision by the New

York State Court of Appeals in November 1976 that the 1975 debt moratorium, during

which the city had suspended principal (but not interest payments on its bonds), was

unconstitutional.64

To make the roughly $1 billion in required principal payments on the

deferred debt, the city needed to enlist the aid of the federal government.65

The unions

were unwilling to buy more MAC bonds and the bankers wanted tighter financial

62

“DC 37 Executive Board Meeting Minutes, January 12, 1977,” DC 37 Papers, Tamiment Library, Box 1,

Folder 25. 63

“DC 37 Executive Board Meeting Minutes, August 10, 1977,” DC 37 Papers, Tamiment Library, Box 1,

Folder 25 64

“New York City Debt Moratorium is Upset By State’s High Court But Payment Now is Not Ordered,”

NYT, November 20, 1976. 65

“‘The Feds’ Seem City’s Only Hope for $1 Billion,” NYT, November 28, 1976.

173

controls before they would support more lending.66

As in the summer and fall of 1975,

neither side was willing to budge from their positions.67

At the February 9, 1977

meeting of the D.C. 37 Executive Board, Gotbaum described the problem: “Our [D.C.

37] position of a stretch-out principle for handling the debt moratorium and proposed

budget deficit was acceptable to most affected parties. However the banks came up with

proposals of their own which appeared to have originated in the Middle Ages. As a

result, we were at an impasse.”68

That was a polite way of framing the issue.

The initiative for the formation of MUFLG came in March 1977 when Walter

Wriston agreed to meet with Jack Bigel, a former union leader who had made a small

fortune providing financial consulting to municipal workers’ pension funds.69

Bigel

brought the leaders of the six major municipal unions on board while Wriston enlisted the

support of five major banks that underwrote city debt, in addition to the support of

Citibank staff.70

Investment banker Felix Rohatyn joined the group in a continuation of

his role as an intermediary between the bankers and the unions. As Gotbaum described

66

Steven Weisman, “Bankers and heads of City Unions Meet,” New York Times, January 29, 1977. 67

Steven Weisman, “Once More to a ‘Fabled’ Brink,” NYT, March 2, 1977. 68

“DC 37 Executive Board Meeting Minutes, February 9, 1977,” DC 37 Papers, Tamiment Library, Box 1,

Folder 25. 69

For a former trade union leftist, Bigel had a savvy business sense that sometimes led him into difficult

situations, such as serving as both an ombudsman for a union health insurance plan while also selling

malpractice insurance to the doctors serving that plan. See “Health Plan’s Ombudsman Sells Insurance to

Medical Groups,” NYT, December 8, 1974. 70

James Adams, “The Muffle Men,” Empire, April 1979, 20. The other bankers were Alfred Brittain III

(chairman, Bankers Trust), John McGillicuddy (president of Manufacturers Hanover Trust), Lewis T

Preston (president, Morgan Guaranty Trust), David Rockefeller (chairman, Chase Manhattan), Donald

Platten (chairman, Chemical Bank). The union members were Barry Feinstein (president Local 237,

municipal workers, International Brotherhood of Teamsters), Victor Gotbaum (DC 37, AFSCME), John

Law (president, Local 100 Transportation Workers), Harold Melnick (president Sergeants Benevolent

Association), Albert Shanker (president United Federation of Teachers), Richard Vizzini (president

Uniformed Firefighters Association), George Champion (former president of Chase Manhattan) and Felix

Rohatyn (Managing Director, Lazard Frères).

174

it, “I for one was suspicious [of Rohatyn], but when I told him I was sure the banks

would screw labor before this was all over, he showed me succinctly and exactly what the

banks stood to lose in power, prestige, and money.”71

When asked about his participation

in the group, Wriston asked the rhetorical question: “If you want a nice neat financial

solution, you restructure the debt, you cancel union contracts and all those good things.

But what happens to the social structure of the city?”72

Thus MUFLG served a twofold

purpose. The group’s immediate goal was to try to present a united front for the city’s

unions and bankers in order to secure loan-guarantees from the federal government for

MAC bonds to finance the city after the Seasonal Financing Act had expired. Over the

long term MUFLG took on a much more ambitious agenda—remaking the political

economy of New York City.

The program that MUFLG suggested in its 1977 meetings for reviving New

York’s economy was straightforward: generate growth through lower taxes, less

regulation, and selective public investment. There was some discussion about why the

city was in a state of crisis, as the minutes for one meeting noted: “The large proportion

of the city’s population [is] on welfare addicted to drugs and having no legal status in the

United States.” 73

This explanation that avoided blaming either the bankers or union

members for New York’s fiscal woes. At an early meeting “general agreement” was

made by MUFLG members that “a program should be developed that would combine a

71

Peter Hellman, The Wizard of Lazard,” NYT, March 21, 1976. 72

Quoted in James Ring Adams, “The Muffle Men,” Empire, April 1979, 22. 73

“MUFLG Minutes, July 21, 1977,” Walter Wriston Papers, Tufts University, Box 33, Folder 3.

175

reduction of the local drain of resources to welfare with a real reduction of taxes in New

York City and possibly also a reduction in the City’s debt.”74

Most of the early MUFLG

discussions centered on finding common ground for joint economic development

proposals. They included joint support for the Westway freeway expansion, a new

convention center, and the build-out of Battery Park City.75

The committee members

also agreed that they should lobby for lower city taxes, the creation of an “international

banking zone,” and the repeal of New York State’s usury laws.76

In short, the MUFLG

ratified the consensus established by the Business/Labor Working Group and the

Temporary Commission agreed that the resources of the city would be shifted from

welfare to development projects that could enhance the city’s tax base, and thus advance

the common interests of its creditors. As Rohatyn described this approach to municipal

development: “A convention center is by itself not an answer, legalized casino gambling

by itself is not an answer, the 1984 Olympics by themselves are not an answer. But they

may be part of a strategy.”77

Gotbaum expressed his agreement with the MUFLG assessment of the political-

economic landscape. The city would need to grow, otherwise there would be very little

for the union’s members—just paychecks that failed to keep up with inflation (thanks to

the very low cost-of-living adjustments that the union had accepted as part of the bailout),

74

“MUFLG Minutes, April 26, 1977, ” Walter Wriston Papers, Tufts University, Box 33, Folder 3. 75

James Ring Adams, “The Muffle Men,” Empire, April 1979, 21. 76

“MUFLG Minutes November 25, 1977,” and “MUFLG Minutes, May 18, 1978,” MUFLG, File, Walter

Wriston Papers, Tufts University, Box 33, Folder 3. 77

David Bird, “New York, With Close Eye on Atlantic City, Is Enticed by Casino’s Wheel of Fortune,”

NYT, May 2, 1977.

176

more attrition, and fewer supplies for D.C. 37 members to do their jobs properly. In an

interview in September 1977 with the Times, Gotbaum sounded remarkably like Rohatyn,

who joined him at the roundtable. He told the reporter:

Our priorities ought to go into the service area. I’d like to see the industry we

have stabilized but this nonsense of moving the South Bronx into an industrial complex is

just that. It’s nonsense. We seem to turn our back on our real assets—a financial empire,

we’re a tourist empire, an office-commercial empire and that’s what we ought to plan for

instead of sweating out how do we make ourselves an industrial complex.78

Gotbaum’s rhetoric played into the crisis mentality of the Business/Labor

Working Group and the Temporary Commission on City Finances. “The city’s burning,”

Gotbaum warned the Times. “We’ve got to start moving fast. To me the big thing is

movement. And therefore I’d like to look at what is immediately do-able. That’s why to

me the Convention Center is so damned important and once we start building it you’ll be

making way for 16,000 jobs.”79

In an important sense, Gotbaum’s strategy between 1977 and 1979 was a

continuation of his drive to preserve the union’s collective bargaining rights and maintain

at least some agency for DC 37. Concession from the bankers during the MUFLG

process, such as their decision to support the agency shop, provided tangible benefits for

its members. But, the prospect of being permanently exiled from the decision-making

process had led Gotbaum to foreclose on the all-or-nothing risk of a general strike during

the summer of 1975. So it led him now to cooperate with the financiers in reshaping the

city. “We would cooperate because that was the only way that we could get some

78

“A Discussion of the Mayors’ Problems by Three Who Know,” NYT, September 25, 1977. 79

“Ibid.

177

measure of control as to what was really going to happen,” said DC 37’s research and

negotiations director Alan Viani. “Had we taken a very hard line, bankruptcy would have

given control to somebody to else.”80

A labor lawyer observing Gotbaum’s participation

in the process stressed that “Vic is the same man . . . .No question, he maintained his

integrity throughout. No doubt, he had grown a great deal and stayed honest.”81

He also

added thought that “He [Gotbaum] was able to see, up close, real power at work and

learned quickly how far labor could press its demands.”82

For Gotbaum, it was better to

act with capital rather than risk alienating public opinion with industrial action, or to trust

that the political process could produce (and pay for) a better alternative than an economy

based on risk.

Much in the same way that DC 37 accepted an economy based on risk, so too did

the candidates of the 1977 mayoral election. Beame’s political star, never especially

bright, had vanished in the post-blackout recriminations. In the Democratic primary

debate, Beame could only lamely defend his record by stretching the truth. “Now despite

the prophets of doom, I saved this city from bankruptcy by working together with the

union, the business people, the financial people, the civic community,” he insisted. “And

I did it without any confrontation, without any crippling strikes, without disorder, without

tensions.”83

It may have been a better to ask which of the city’s unions had not gone on

strike or engaged in other “job actions” during Beame’s tenure. For all of his

80

Quoted in Maier, City Unions, 189. 81

Jewel Bellush and Bernard Bellush, Union Power and New York, 415 82

Ibid. 83

“Excerpts from the Debate Among Democrats Seeking the Nomination for Mayor,” NYT, September 2,

1977, 20.

178

determination to see through a mess partly of his own making, the consensus-driven

“clubhouse” system that Beame had been groomed himself to govern under had been

swept away.84

By 1977, almost all of the candidates in the Democratic Party’s primary election

supported the basic premise of the crisis-period austerity regime: accelerated

development (with subsidies if necessary), tax reform, and lower spending. Even former

socialist Bella Abzug used the slogan “Bella Means Business” for her campaign.85

She

declared her intention to create a public-private New York City Economic Development

Corporation to “build on the considerable strengths of our city’s economy” including

“communications, movie and television production, tourism, advertising, finance and

banking, foreign trade, culture and art.”86

Only Herman Badillo proposed a more

traditional public-sector led recovery program, namely to “tear down the World-War II-

like rubble that fills our slums and replace it with three-story low-rent housing.” Badillo

left unsaid where the city would find the money to pay for this.87

Ultimately the key

differences between Edward Koch and his main rival, Mario Cuomo, for a spot on the

Democratic ticket, came down to specific development projects (such as the Westway

freeway expansion), attitudes on social issues (especially the death penalty, which Koch

enthusiastically embraced and Cuomo opposed), and the usual electoral skullduggery and

84

Steven R. Weisman, “Beame Played by the Old Rules, But Fiscal Crisis Changed Them,” NYT,

September 8, 1977, 1. 85

Soffer, Ed Koch, 126. 86

Bella S. Abzug, “Looking Ahead,” Op-Ed, NYT, August 15, 1977. 87

Herman Badillo, “A Coalition for the City,” Op-Ed, NYT, August 16, 1977.

179

sleaze (such as the notorious informal slogan “Vote for Cuomo, not the homo,” a

reference to Koch’s life-long bachelor status).88

What Koch offered that the other candidates did not was not only a pragmatic sort

of liberalism that could unite Manhattan reformers and outer-borough white ethnics, and

an attitude that relished the risks of municipal governance. In an editorial published in

the Times on August 22, 1977, Koch decried a “politics of consensus” that made “short-

sighted, destructive attempts to steer a middle course between strongly differing groups. .

. .If New York City is to survive, it must elect a Mayor who will risk his personal

popularity to govern this city along the course of necessity—not convenience. That is

what I propose to do.”89

A month later he told an interviewer: “I’m not for confrontation;

but the people of this city do want to know that somebody is in charge who’s willing to

say that the cops and firemen never have a right to strike. The Mayor of this city cannot

live under the threat of extortion by strike.”90

On October 5, President Carter made an unannounced visit to the South Bronx.

The crowds were polite, but also sparse and skeptical. “It’s nice the President has come

here to see for himself, but someone has to tell him that people here need help. We need

jobs,” said one resident. “Otherwise the Bronx is going to go down.”91

That year the city

estimated that it had 10,000-abandoned buildings within its borders. In November 1977,

Samuel Roberts, the director of demolition for the city’s now ironically named

88

Jonathan Soffer, Ed Koch, 121-144. 89

Edward I Koch, “Risking Popularity,” Op-Ed, NYT, August 22, 1977. 90

John B. Oakes, “‘An Ordinary Guy,’” NYT, September 17, 1977. 91

Lee Dembart, “Carter Takes ‘Sobering’ Trip to South Bronx,” NYT, October 6, 1977.

180

Department of Housing Preservation and Development, made a sadder but more realistic

proposal for the South Bronx. He recommended testing the use of dynamite to quickly,

and cheaply, clear burnt-out buildings: “We have whole areas that look like they were

bombed out in the war. This is just going to be another explosion to exemplify the

condition, to show what is happening in the Bronx. It’s gotten to the point now that we

have whole blocks that require demolition. We are trying to reduce the costs. These

buildings are very hazardous.”92

In this climate, the plan to save Charlotte Street and by extension the rest of the

South Bronx ultimately went nowhere. A little over a year later a plan to rebuild the

neighborhood was voted down 7-4 by the Board of Estimates. Comptroller Golden

summarized the Board’s thinking: “We need housing on Charlotte Street and elsewhere,

but not standing alone in a desolate area caused by an economic exodus.”93

One resident

summarized the disappointment. “Hell, he just about promised everybody, McArthur and

‘I shall return!’ –that’s the picture I conjured. Now, there is no Santa Claus. I really

thought I’d be seeing trees again, and people.”94

The city had run the risk of collapse in

the South Bronx, paid the price in the summer of 1977, and found it affordable. The

neighborhood’s residents did not. But their choice in the matter was distinctively limited

in comparison with the American Stock Exchange. No one was offering them free land

and tax breaks to build new homes in Stamford.

92

John J. Goldman, “N.Y. to Blow up Some Slum Buildings,” LAT, November 30, 1977. 93

Glenn Fowler, “South Bronx Plan Voted Down 7 to 4 By Estimate Board,” NYT, February 9, 1979. 94

Francis X. Clines, “About New York: A Dream Joins the Rubble on Charlotte Street,” NYT, February 10,

1979.

181

Taking Risks, Taking Manhattan, 1978-1981

On October 28, 1979 a crowd of 2,000 antinuclear demonstrators gathered in the

rain in the plaza of the World Trade Center. Daniel Ellsberg addressed the crowds.

“We’re going to Wall Street tomorrow to protest against human beings whose business it

is to be merchants of genocide, whether they know it or not,” said Ellsberg. He then lit

on fire a dividend check from Rockwell International.95

The next day, October 29, was

the 50th

anniversary of Black Tuesday, the second half of the Crash of 1929. In a bit of

“reverse English,” someone threw confetti at the sounding of the day’s opening bell and a

cheer erupted on the floor.

Meanwhile, outside the New York Stock Exchange, those involved in the Wall

Street Action against companies involved in the nuclear power and weapons complex

gathered in protest. The atmosphere had elements of a carnival about it—clowns on stilts

and a Dixieland band juxtaposed with the suits. But for all of the theatrics, the protesters

were very much in earnest. Thankfully, for the sake of all parties involved, Deputy Chief

Michael V.J. Willis, who coordinated police operations, kept control over his officers and

their batons. Protestors who refused to move when placed under arrest were instead

lifted onto stretchers. “Ninety percent of the kids didn’t cooperate with their arrests,”

Willis told reporters, “but there wasn’t a nasty one in the bunch.”96

Grace Hedemann, the

action’s press coordinator, explained that it was “an effort to show people who think they

95

Tony Schwartz, “Nuclear Foes Rally in a Prelude to Wall Street Protest,” NYT, October 29, 1979. 96

Tony Schwartz, “Antinuclear Rally on Wall Street Bring 1,045 Arrests,” NYT, October 30, 1979, A1.

182

have no control over multinational companies that they can do something.”97

The vice-

president of the Exchange did not find the spectacle amusing or terribly relevant: “We’re

a marketplace. This is not the proper forum for that debate. We only de-list companies

or trading reasons.”98

It was the largest mass arrest since the blackout. The prices of

shares, however, barely moved that day; the protest, it appeared, harmed no capital. It

may have been non-violent to a fault.

Yet the streets outside the NYSE were a fitting location for a demonstration given

that story of nuclear power and the protest movement it spawned was ultimately a story

about the nature of risk in society. As Dr. Paul Slovic, organizer of a survey on the issue

in 1980, told a reporter, “Almost all risk assessment is based on judgments that may or

may not be accurate. Who really knows what the risks of nuclear energy are? Because

we don’t absolutely know, we fear it.”99

After the reactor meltdown at Three Mile Island,

the risks of nuclear power, which the industry had never quite fully explained, were well

known enough to spur tens thousands of citizens to protest. Daniel Ellsberg and his

fellow demonstrators were not marching to stop the torrent of loans that Citibank, Chase

Manhattan and others were extending to Brazil, Mexico, and much of the rest of the

“Third World” (or “Newly Industrializing Countries” as the bankers described them) in

anticipation of rapid economic growth and perpetually rising commodity prices.100

Risk

lies in the eye of the beholders. And, by the late 1970s, the risks of austerity, political

97

Ibid. 98

James L. Rowe Jr. “Anti-Nuclear Rally Fails to Faze Stocks,” The Washington Post, October 30, 1979. 99

Malcom W. Browne, “In Human Equation, Risk Perceived Is Risk Endured,” NYT, March 30, 1980. 100

For a summary of what became the “Third World Debt Crisis,” see Frieden, Banking on the World, 123-

168.

183

polarization and service degradation were well known to all New Yorkers. By 1981, the

risks of speculative redevelopment, building a city that would encourage risk-taking,

were also as plain as the panhandlers of Manhattan. But like a half-finished reactor

dome, this embrace of risk as a solution to society’s problems had acquired a momentum,

an internal logic of its own, that made the culture it created much easier to embrace than

to stop.

One can see this process, in microcosm, in the city’s recovery of an industry that

many believed had left the city for good: big-budget filmmaking and television

production. In 1977, according to the Mayor’s Office, twenty-six feature films and

sixteen made-for-television movies were made in the city. By 1979, that number had

grown to fifty-nine features and sixteen television films—for a total expenditure of $400

million dollars. The city simplified its permitting system, reducing the number required

for street shooting from twenty-six to one. The Motion Picture Mechanics, for their part,

were willing to work for time-and-a-half at night rather than double time. And unlike in

Hollywood, California, New York City provided free fire and police protection for

location filming.101

By 1980, direct film and television industry spending totaled $650

million dollars, with the city providing everything from warehouses and garages to the

municipal piers in order to accommodate the number of requests for studio space.102

One

wonders what the residents of Charlotte Street thought of the City’s solicitude. But

101

Stephen Grover, “The Astoria Studio Is Taking Spotlight For Film Production,” WSJ, February 29,

1980. 102

Clarke Taylor, “N.Y. Increases Share of Film Pie,” LAT, January 28, 1981.

184

making movies created very tangible jobs and tax revenue. Sending the police to chase

miscreants did not.

The revival of New York’s film and television industry provided an example for

the larger campaign by both public and private interests to repurpose existing municipal

infrastructure to attract global capital. While suburban flight continued, a new generation

of international wealth was already making its home in the city. This was a most

welcome development to Felix Rohatyn, who told a reporter, “We ought to change the

sign on the Statue of Liberty to make it read: ‘This time Around Send Us Your Rich.’ ”103

And the “big money” came. “The rest of the world woke up to the fact that New York

was a cheap buy,” recalled one real estate broker, “There were tax advantages for

foreigners. Dollars were cheap.”104

And the city was a good place to have money. The

same “petrodollars” whose departure had helped prompt the “fiscal crisis” were now

returning in search of a safe haven. “New York has been discovered by the world,” said a

real-estate agent from Sotheby’s, “It’s one of the last bastions where you don’t have to

apologize for being wealthy. It’s the only aristocracy we have.”105

Global capital not

only drove the real estate sector but it also enabled the reconstruction of the city financial

services sector—indeed the two were intimately related. The number of foreign banks

with operations in the city grew from 50 in 1972 to 225 in 1979, growth that encouraged

103

John J Goldman, “World’s Rich Seek Have in New York,” LAT, May 22, 1977. 104

Ann Hughey, “Office-Space Crunch Puts Squeeze on Renters in Manhattan,” WSJ, April 3, 1981. 105

Ann Hughey, “Real Estate Values Explode in Manhattan Resulting in Multimillion-Dollar Homes,”

WSJ, March 2, 1981, 19.

185

a new round of commercial real estate construction.106

This expansion was certainly

welcomed by the city. In the words of Ed Koch, greeting traders at the opening of the

New York Futures Exchange in August 1980, “I don’t know how you make money here,

but I hope you make a lot of it.”107

And they did.

The influx of capital also encouraged the city to expand upon its use of subsidizes

and tax credit to encourage real-estate development through the use of city tax

abatements and public benefit corporations. The most famous of these programs was

known as J-51, a law originally enacted in 1955 to encourage the upgrading of “old law”

tenements. As revised and expanded by the Beame administration in December 1975, J-

51 allowed the owners of large commercial properties—a hotel, an industrial loft, and old

office building—to convert the building into a residence and then write off the

investment against city real estate taxes. In some circumstances a buildings owners could

avoid paying any real estate taxes for nine years. As a further sweetener, landlords could

rent the new units for as much as they liked, with only future increases subject to the

city’s rent control law.108

The Koch administration extended the program in 1979,

officially to “upgrade basically sound housing before it deteriorates.”109

But the main

beneficiaries of the law’s revisions were not the poor, or even the beleaguered middle-

class, but young professionals. Most of the J-51 financed redevelopment in Manhattan

106

James Carberry, “Big Apple Boom,” WSJ, April 6, 1979. 107

Roger Lowenstein, “Big Board NYFE Trades $358.1 Million of Treasury Futures in a Rousing Start,”

WSJ, August 8, 1980. 108

Charles Kaiser, “’J-51’ a Way to Save Failing Properties,” NYT, February 1, 1976. 109

Anna Quindlen, “Koch Signs Bill to Aid Rebuilding: Tax Abatements Vary,” NYT, November 15, 1979.

186

was below 96th

Street.110

One study estimated that three-quarters of the residents of the

newly converted buildings were college graduates, that they were thirteen years younger

than the city’s average renter, and, most importantly, they made twice the city’s medium

income.111

For its part, that old stand-by, the Urban Development Corporation, whose

financial engineering had precipitated that 1975 fiscal crisis, also made a comeback as a

catalyst of for-profit real estate development. Because of its exemption from local real

estate taxes, the corporation could buy property, for example the rundown St. Georges

Hotel in Brooklyn, and then lease it back to developers, enabling them to make much

lower “payments in lieu of taxes” rather than at the full city rate.112

The class that had

first been known as “urban gentry” and later gained the sobriquet of “yuppies,” was a

class engineered through tax and real estate development policy.

Real-estate agents branded these new “neighborhoods” such as SoHo, Tribeca,

and the Lower East Side to attract the gentrifying dollars of young professionals for

whom proximity to Gucci and Studio 54 weighed more heavily than a decent public

school. The city could create a life for the people that Henry Kaufman, chief economist

at Salmon Brothers, wanted to attract to his firm. “We are looking for people who don’t

look at the endeavor as a 9-to-5 business. For some of us, it’s a 24-hour business.”113

In

1979, observing the scene, Roger Starr described the scene as “gentrification rather than

110

Ronald Smothers, “Tax Relief Plan Is Said to Benefit Luxury Housing,” NYT, December 1, 1980. 111

Alan S Oser, High Income Manhattanites Filling Converted Buildings, NYT, March 1, 1978. 112

Joseph P. Fried, “Goodbye Slum Razing; Hello, Grand Hyatt,” NYT, July 15, 1979. 113

Tim Carrington, “The Day Can Be Tense At Salomon Brothers, But the Money Rolls In,” WSJ, June 5,

1981.

187

bourgeoisification. We are skipping a whole group of middle-class business people. The

people who are moving in are professionals: young lawyers, architects, doctors, people in

the investment community. Blue- collar workers are moving out because they have less

social distance from the poor, whereas the professional person has eminent social

distance. He’s willing to put up with a reduced physical distance as it were.”114

It was a

city where, if you weren’t too picky about the neighborhood, one could still buy a

brownstone with 5,000 square feet worth of period details for $25,000 compared with

$55,000 for 1,200 square feet in the suburbs. And there of course was the city’s enduring

cachet. “Making it in Milwaukee just isn’t the same,” as a placement officer at Harvard

Law described it.115

The young professionals in the gentrifying neighborhoods were the residents that

the city wanted to attract and that the financial service industry wanted to keep. The

billions of dollars in global capital could hop-skip-and jump through the telephone and

terminal, but human capital, of a very specific kind, could not be assembled so readily.

The bankers wanted a place that they, and their own, could call home. As Walter

Wriston put it:

The real thing is the talent pool here [in New York]. This city assures a constant

supply of very highly motivated men and women, and that is what makes a market place.

It sounds conceited of for the community and probably is, but you can get done in this

town the most intricate, complex financial transactions in the world, because somewhere

here there is a man or woman who knows how to do it.116

114

Blake Fleetwood, “The New Elite and an Urban Renaissance,” NYT, January 14, 1979. 115

Ibid. 116

Karen W. Arenson, “New York’s New Financial Markets,” NYT, November 16, 1980.

188

This was fully in keeping with Deputy Mayor for Economic Development Peter J.

Solomon’s plan articulated at the beginning of the Koch administration to “harp on the

advantages” of New York’s City’s “economic model” with its “a massive population,

superb communications, [and] a stimulating environment.”117

Finance and gentrification

developed, to use a favorite phrase of corporate finance, “synergistically” with one

another, glued together by an appetite for personal and professional risk. The city knew

that an important part of the gentrification process, the conversion of lofts that were

zoned as industrial space into residences, was taking place outside of legal channels. But

it let the transformation proceed. As Herbert J Sturz, chairman of the City Planning

Commission, put it, “We are clearly sympathetic with not forcing out industry against

strong market forces and there is a reluctance to over-regulation. We will be looking at

the capacity to put industry together with sites in the other boroughs and at relocation

benefits.”118

This ethos of risk took place in parallel to the popularization of the academic

notions of “supply-side” economics as an alternative to Keynesian-demand

management.119

It was not simply a different means of managing the economy, but a

reconceptualization of American capitalism in rebellion against the one conceptualized

by Peter Drucker and John Kenneth Galbraith. The new system would not be, as Michael

Harrington predicted, the “Disney World” triumph of “one of the most powerful desires

117

Pranay Gupte, “Deputy Mayor For Economics: Peter Jay Solomon,” NYT, May 9, 1978. 118

Carter B. Horsley, “In Planning, Focus in Put on Boroughs,” NYT, April 6, 1980. 119

Robert M. Collins, More: The Politics of Economic Growth in Postwar America (Oxford: Oxford

University Press, 2000), 166-213.

189

of the late Seventies: that it is possible to reach apolitical, anti-intellectual, corporate, and

technocratic solutions to the problems of society.”120

Technocracy, at least in its large-

scale corporate form, would disappear in favor of the risk-taking by individual

entrepreneurs. As Walter Wriston put it in speech to the Economics Club of Chicago on

October 25, 1979, “ Let those who seek a perpetual safe harbor continue to do so. Let

them renounce risk for themselves, if they choose. What no one has a right to do is

renounce it for all the rest of us, or to pursue the chimerical goal of a risk-free society for

some by eliminating the rewards of risk for everyone.”121

On July 20, 1980, the once-radical Jerry Rubin wrote in the Times, “As a financial

planner, I can effectively change that reality by discovering promising independent

companies and finding the financing for the socially aware risk takers who will become

tomorrow’s titans. The challenge for American capitalism in the 80’s is to bring the

entrepreneurial spirit back to America.”122

It is telling that Rubin took a position with

John Muir & Company, where, within six months, he was promoted to director of

business development at the brokerage. It proved a convivial environment. “I’ve really

been an entrepreneur all my life,” Rubin mused. “Many people say I’ve been an excellent

promoter. I think a promoter is essentially a communicator.”123

One might add that John

Muir had made its rather dubious reputation on selling small-capitalization initial public

120

Michael Harrington, “To the Disney Station,” Harper’s, January 1979, 36. 121

Walter B Wriston, “Risk and Other Four-Letter Words,” Vital Speeches of the Day, 46:5, December 15,

1979, 160. 122

Jerry Rubin, “Guess Who’s Coming to Wall Street,” Op-Ed, NYT, July 30, 1980. 123

“Jerry Rubin to Direct Development at Muir,” NYT, January 15, 1981.

190

offerings.124

Michael Harrington too recognized the shift. He wrote in The Next

America, published in the fall of 1981, “The next America is at hand, inevitable and

indeterminate. The last America, a coherence inherited from the 1930s is going, going,

almost gone.”125

The world of high finance felt the same pull towards risk. And they saw this as

benefitting not just themselves, but the City of New York as a whole. Donald Regan, the

Chairman of Merrill Lynch and soon-to-be Secretary of the Treasury in the Reagan

administration, gave his outlook in November 1980: “Seven or eight years ago there

were questions about the survival of the city, and a lot of other industries left. [However]

the big banks stayed, the New York Stock Exchange stayed, Wall Street stayed. And

having them all here created a critical mass for financial transactions. We’re still the

trend setters here.”126

And the trend was towards taking more risk.

One place for risky business was in insurance. The New York Insurance

Exchange had gone into business in March 1980—if not precisely off to a flying start.

Once again, the advantages of physical proximity played an important role in linking

mobile capital (a third of the exchange’s members was from outside the United States)

with underwritten business that could put it to work. As one insurance broker put it,

“Time is an important element, and we can accomplish in a few hours what might take a

124

Leslie Wayne, “End of an Era at John Muir,” NYT, August 12, 1981. 125

Quoted in Arthur Weinberg, “Harrington: Hopeful Signs For America,” Book Review, Chicago

Tribune, October 11, 1981. 126

Karen W. Arenson, “New York’s New Financial Markets,” NYT, November 16, 1980.

191

week to accomplish by going to different buildings.”127

By 1982, while business

remained soft, with roughly $75 million in premiums written in 1981 (compared with $4

billion at Lloyds) the exchange had put together sixty foreign syndicate members from

twenty-one different countries.128

The plan for the creation of International Banking Facilities, not just in New York

but also across the country, continued to move forward. In a June 2, 1980, address to the

New York State Bankers Association, Anthony M. Solomon, Paul Volcker’s successor as

president of the New York Fed, not only declared his supported the creation of the IBFs,

but went further: “To the extent monetary policy or supervisory requirements do not

require restrictive measures, I believe that the issues likely to arise in the future should be

resolved on the side of less, rather than more, regulation.”129

On November 19, 1980, the

Fed put forward a plan for public comment, and on June 9, 1981, unanimously approved

rules that would allow the accounts to be free from federally imposed reserve

requirements, ceilings on interest rates, and paying deposit insurance premiums on the

funds. They could even pay interest on demand deposits (i.e. the corporate equivalent of

a checking account)—a product that they, at the time, could not extend to their American

clients. Bankers could begin opening these accounts on December 3, 1981.130

After the

initial public comment period began, a spokesperson for Chase Manhattan crowed, “It is

a great example of regulators constructively working with bankers to the benefit of

127

“A Market For Insurance,” NYT, November 16, 1980. 128

Phillip Wiggins, “Talking Business,” NYT, September 14, 1982. 129

Isadore Barmash, “Solon Urges Bank Trade Zone,” NYT, June 3, 1980. 130

Clyde H. Farnsworth, “Free Banking Zones Authorized As Lure to Foreign Business,” NYT, June 10,

1981; Robert A Bennett, “America’s Debut in Offshore Banking,” NYT, November 22, 1981.

192

industry, their customers, the City of New York, and most of all to job hunters.”131

On

December 2, 1981, Governor Carey hailed the decision: “We expect that these

international banking facilities will further enhance New York’s position as the financial

capital of the world,” said the governor. ”They will provide jobs for New Yorkers and

will result in more effective management control by banks.”132

And the future of this “banker’s metropolis” looked even brighter. Walter

Wriston’s optimism gushed forth in Citicorp Reports 1981, “Archaic laws and

regulations that have kept banks from bringing to the market valuable new services are

finally yielding to contemporary reality . . . both the public and private sectors seem

finally to have recognized the inevitably of progress. . . . The present is finally bursting

from the grip of history. “133

It would be a risky future, of course. The investment bank

First Boston described these risks Municipal Assistance Corporation. “For investors, the

market’s volatility implies additional risk on three levels; the credit risk, inherent in the

issuer and security; the market risk, reflecting a given market’s level relative to other

markets and to economic conditions; and now volatility risk, the greater chance of much

larger changes in prices.”134

“Imagination,” as First Boston termed it, could profitably

manage these risk with “major innovation” from the toolbox of new financial products:

“zero-coupon bonds,” “non-recourse project financing,” the use of “master notes in short-

131

Clyde H. Farnsworth, “Free Trade Zones In Banking Backed By Federal Reserve,” NYT, November 20,

1980.. 132

Robert A Bennett, “A Free-Trade Zone for Banks Opening In New York Today,” NYT, December 3,

1981. 133

Citicorp, Citicorp Reports 1981 (New York: 1982), 6-7. 134

The First Boston Corporation, First Boston Annual Report 1981 (New York: 1982), 8.

193

term finance” and, for government finance “tax exempt commercial paper.”135

As banker

at Morgan Stanley explained the drive for new securities, “You try to invent the atomic

bomb yourself. Second, your try to respond quickly to anything that you see in the

marketplace. We’re not so proud that we don’t try to pick up the ball and run with it.”136

Living on the edge could prove a profitable proposition, if one were a casino and not the

punter.

Lost in this rhetoric of markets and growth was the seemingly antiquated notion

of “one man, one vote” democracy. In 1980 Governor Carey called a special session of

the legislature to successfully remove the state’s usury cap to try to stem the movement

of credit-card related jobs to South Dakota and other less-regulated jurisdictions. When

asked about why the governor had not called a similar session to improve welfare

payments that had not been increased, even for inflation, Michael J DelGiudice, the

governor’s director of policy management, gave what by now was a familiar answer.

“Your ability to provide human services when you have business and people leaving is

diminished. When you’re struggling for your economic life as we were in the 1970s, it’s

hard to get people to understand the need to deal with human needs.”137

Capital’s needs

were now superior in precedent, the sin qua non for supporting human needs. That

summer, as Ed Koch tried to rebuild his bridges to the city’s minorities, he declared:

I am a leader—was, am and continue to be a leader—for protecting the poorest of

the poor. The way you protect the poor is to make sure you keep the middle class in

135

Ibid, 9. 136

Michael Blumstein, “Creating New Financial Products,” NYT, August 8, 1982. 137

Richard J. Meislin, “Come Dance With Me, N.Y. Asks Business,” NYT, November 23, 1980.

194

town. That’s what some people don’t want to hear about. They want me to use the

outmoded rhetoric of the 1930’s, some of them. That’s what they want me to do and I

won’t do it.138

In a time of austerity, the mobile dollar had a higher claim to representation than

the immobile voter.

A City, A Nation, At Risk

In August of 1980 Ronald Reagan, on the presidential campaign trail, visited New

York City. Reagan made a stop in the South Bronx for the benefit of the television

cameras. Neighborhood residents booed and heckled. The candidate shouted back, “I’m

trying to tell you that I know now there is no program or promise that a President can

make, that the federal government can then come in and wave a wand. . . . It can’t be

done overnight but it can be done. . . . I can’t do a damned thing for you if I don’t get

elected.”139

A speech to the National Urban League on the same trip received a more

decorous reception as the candidate linked urban problems with his overall economic

program: “In order for an urban revitalization program to be successful we must have a

consistent and effective national economic policy. We must restrain the growth in federal

spending and cut income tax rates. We must eliminate or modify unnecessary

regulations. And we must preserve the value of the dollar through sensible monetary

policies.”140

Reagan proposed an “urban homesteading program” to enable city residents

to buy abandoned government property, deregulated “enterprise zones” for

138

Joyce Purnick, “Koch Is Seeking Better Relations With Minorities,” NYT, June 12, 1980. 139

William Endicott, “Reagan Tells Urban League His Plans to Revivify Cities,” LAT, August 6, 1980. 140

Ibid.

195

manufacturing firms to relocate to impoverished areas, and a “youth differential” in the

minimum wage.141

One could dismiss Reagan’s speech as his standard boilerplate,

served to black voters to convince white moderates that he was not simply a telegenic

Barry Goldwater. But, what Reagan was advocating in New York City was, in large

measure, what had already been done in Gotham.

So it is less surprising than it might appear to look at the guest list for a party

given by the high society doyennes, Brooke Astor, for President-elect Ronald Reagan in

December 1980. So Paul Volcker, David Rockefeller, Walter Wriston, and Felix

Rohatyn were invited to sup on five courses with Victor Gotbaum, and National Urban

League president Vernon Jordan.142

And so they, along with reporters, publishers, yet

more financiers, and the fashion designers Bill Blass and Oscar de la Renta, sat down for

three different wines, spaghetti al fungi, smoked turkey, a spinach salad, fresh oranges,

Cointreau, cake, and cookies. There was amiable conversation, no “serious” politics, and

Astor gave a brief toast to the Reagan. “America is in a sad state,” she said, “but we can

put our shoulders to the wheel and accept that challenge,” she said. “Big oaks from little

acorns grow.” To which the President-elect replied, “And it isn’t true that the paint is

still wet on my New York button. I propose a toast to New York City.” The “hear,

hears” resounded from the audience.143

141

Ibid. 142

Joyce Purnick, “Who’s Invited to the Party Mrs. Astor’s Giving Reagan,” NYT, December 6, 1980. 143

John Duka, “The Elite Welcome Reagan, Who Offers Toast to the City,” NYT, December 10, 1980.

196

The contours of this world, the landscape created by the embrace of risk, were

already clear to the architects who had created it. The Municipal Assistance Corporation

said as much in1980. Unlike the organizations earlier reports--staid, corporate

documents--this one featured a lavish spread of graphics and text. There were pictures of

economic progress: new construction sites, the glittering marquee for the musical 42nd

Street, a midday crowd outside Macy’s, the hubbub of the floor of the New York

Commodities Exchange, and, buried in the middle of the report, the World Trade Center

with, somewhat remarkably, a working pier in the foreground.

There were other pictures in the document too. There were two shots of

abandoned tenements, one with a boarded-up store on the first floor, both buildings

covered in graffiti, and another one of a vacant lot strewed with rubble. For all of the

optimism that the document radiated about the recovery of New York City, it was far

more pessimistic about the future of urban America. Gentrification and the growth of the

service economy, by themselves, would not solve urban problems. “But as in New York,

the reclamation of deteriorating neighborhoods by middle-class professionals does not

appear to have significant spillover effects on the larger geographic economies of the

cities,” the report concluded.144

Indeed it had exacerbated the divergent worlds of

America’s urbanites. The report echoed the Kerner Commission, telling readers it saw

the emergence of “two urban societies, close in geographic proximity, but far apart in

144

Municipal Assistance Corporation, Municipal Assistance Corporation for the City of New York Annual

Report 1980 (New York: 1981), 14.

197

terms of material well-being, employment opportunity and political power.”145

Yet it

made its case for more assistance not in humanitarian terms, but in the language of the

urban supply-side and decentered capital now applied writ-large:

To disregard the immense investments in private productive capacity and public facilities

in the major industrial centers is, in effect, to discard them, carrying the notion of a

‘throw-away’ society to its logical but dangerous extreme, particularly in light of the

country’s deteriorating position in world markets, relative to Western Europe and Japan.

This nation, as well as its constituent states, must compete for economic survival.146

The stories of what had happened to the City’s public life were there for all to see,

hear, and yes, smell. Alfred Kazin wrote in his diary on August 20, 1979, “What bothers

me in New York. . . . It is the shuffling old man in the supermarket whom even other old

men turn away. . . . It is the reminder of rejection, of being nobody. . . . So it is the black

playing saxophones in the torrid Calcutta subway—the drawn, taught, unspeaking

faces—everyone on guard.”147

Municipal services continued to deteriorate. As an

anonymous Parks Department employee confessed, “They’re asking us to bail out the

ocean with a spoon. What’s the point of trying? The whole system is shot to hell.

There’s no workers, no equipment. It’s a disgrace.”148

In-school crime had increased

150%, according to the Board of Education’s understated figures. Michael Tennenbaum,

a teacher at Jefferson High in Brooklyn said, “We often compare ourselves to the doctors

in M*A*S*H—we are trying to do a job under impossible conditions that become part of

145

Ibid, 14. 146

Ibid, 18. 147

Kazin, Journals, 473. 148

Anna Quindlen, “New York City Park System Stands As a Tattered Remnant of Its Past,” NYT, October

13, 1980,.

198

the job.” Or as another teacher at the same school put it, “It’s just a microcosm of what is

going on in this entire city.”149

There were potholes aplenty in the streets and “graffiti on graffiti,” in the

subways, as well as burnt-out lights, delays, fires, derailments, and crime. Affluent

women a step below the limousine set left their furs and jewelry at home. Private-school

kids dressed themselves in ragged military-surplus mufti over their blazers to avoid

unwanted attention, and their parents put “muggers money” in their pockets if they did

not.150

The search for “uncommitted resources” with its implicit promise to sacrifice

specific groups to save the rest of the city had become a program that sacrificed the

welfare of everyone (each according to their means) in the interest of the capital that built

skyscrapers, wrote insurance policies, and traded in stocks and bonds.

But the logic of the supply-side development strategy, the logic of risk, was such

that the solution to these problems lay in encouraging further speculation. In December

1981, Stanley M. Friedman, the Bronx Democratic leader, told a neighborhood

conference: “People can and should speculate in the Bronx, not to make windfall profits,

but to help build something while being allowed to make some money. There is oil out

there in those streets in the form of cheap, vacant land.”151

Just that month, the City had

announced the first two tenants for the Bathgate Industrial Park in the Bronx, which Koch

described as “first speculative industrial construction financed by the city.” In December

149

Joyce Purnick, “Rise in Crime Against Teachers Is Termed a Chilling Fact of Life,” NYT, December 15,

1980. 150

Joyce Egginton, “Who Loves New York?” The Observer (UK), May 24, 1981. 151

Ronald Smothers, “In the Bronx, Leaders Plan for Rebirth,” NYT, December 6, 1981.

199

1979, after the plan for new housing at Charlotte Street was turned down, Koch, Goldin,

and Carol Bellamy (now City Council President) convinced the city’s Public

Development Corporation to begin putting up buildings on a parcel of city owned land

without any potential tenants to fill them. But the offer of a twenty-year lease, with an

initial rent at roughly two-thirds of comparable private space, had found a pair of takers,

with 200 jobs between them.152

There is a telling note of comparison here. The city’s elite had placed themselves

in the same position as its lowliest citizens, the heroin addicts making their way through

the same burnt-out landscape, described by Hubert Shelby Jr in Requiem For a Dream

(1978):

The deserted buildings that stretched for miles and made the city look like a battleground

of WWII, that gave it the pathetic and devastated look that froze on the faces of the

people that inhabited them, were spotted with tiny fires as shivering bodies tried to keep

warm and survive long enough to get some dope, one way or another, and make it

through one more day so they could start the same routine again.153

The embrace of risk, the editorial board of the Wall Street Journal crowed in early

1981, was the reason for the revival of New York’s economy. And the trends in the

numbers were good. The city ran a budget surplus of $334 million for the 1981 fiscal

year. Retail sales had increased seventeen percent, foreign tourism by twenty two

percent, attendance at Broadway shows, twenty percent. Unemployment remained high,

at 7.7 percent, although the gap in unemployment rates between the city and the nation as

152

Ronald Smothers, “South Bronx Industrial Park Begins to Take Shape,” NYT, December 18, 1981. 153

Hubert Selby Jr., Requiem For a Dream (Playboy Press: Chicago, 1978), 189.

200

a whole had actually shrunk during the recession.154

On March 24, 1981 the city

successfully returned to the municipal bond market without the benefit of debt

guarantees.155

The Journal declared, “bBt as of now, the city and state have made a

strong comeback. They’ve done it on the supply side. We congratulate them and offer

their example to those would do the same for the nation.”156

Koch was not adverse to this

doctrine’s appeals to the business community or his own brand of “liberalism with

sanity.” In a March 1981 interview he told the Wall Street Journal:

What is important, and I think that it fits in with the supply-side theory is that

what has changed in New York is direction. We had experienced from 1965 to 1975 a

period in which tax rates were doubling and even tripling from real estate taxes to

personal income taxes to corporate income taxes, and that direction has changed. Almost

across the board the city and state have been for the last five years reducing tax levels,

and on the margin we think that has contributed significantly to economic activity.157

But the “Supply Side Saves New York” argument, as the Wall Street Journal

titled the interview with Koch, was not the only explanation for the city’s apparent

revitalization. In the March 5, 1981 issue of the New York Review of Books, Felix

Rohatyn, attributed New York’s turn around to then-fashionable notion of a government-

led “industrial policy” for troubled sectors of the economy. “In New York City, we

proved something could be done,” Rohatyn wrote. “Everyone paid a price: workers with

frozen wages and fewer jobs; banks by providing more and cheaper credit, students, by

paying tuition. The riding public was charged higher fares, note-holders had to accept a

154

John J. Goldman, Linda Grant, “N.Y. Moving Out of Fiscal Wilderness,” LAT, February 20, 1981. 155

Clyde Haberman, “City Acts on Own to Sell Bond Issue of $75 Million,” NYT, March 24, 1981. 156

Editorial, “The Supply Side Saves New York,” WSJ, February 23, 1981. 157

James Ring Adams and Thomas J. Bray, “An Interview With Mayor Edward Koch,” March 10, 1981.

201

temporary moratorium on repayment. But today the city, with an equally activist mayor,

is thriving economically and has a balanced budget.”158

There is an element of truth in both narratives. The city’s elite had used the

quasi-corporatist “business, labor, government” framework suggested by industrial policy

for bargaining among themselves to find the “slack resources” to generate additional

investment. On the whole, however, these investments were not targeted at revitalizing

wrecked neighborhoods or even rebuilding the city’s declining industrial base. Instead,

money and power were channeled, quite deliberately, into the promotion of the riskiest

aspects of New York’s economy—Wall Street speculation, real estate, tourism—with the

hope that the fruits of such growth might “trickle-down” to the marginalized of the

metropolis. Rohatyn believed in 1981 that this path was a dead end. In the same NYRB

article he told the magazine’s readers, “We [Americans] cannot become a nation of short-

order cooks and saleswomen, Xerox machine operators and messenger boys.”159

But

maybe New Yorkers could live that way—at least for a little while.

Certainly the culture of risk appeared to be working for Ed Koch. On November

3, 1981, he won reelection as mayor, with endorsement of both the cities Democratic and

Republican Parties. He won every Assembly District in the city and over three quarters

of the popular vote.160

“We won the fight to save New York,” Koch told his supporters

in his victory speech. “We will win the fight to save our cities throughout the nation.”161

158

Felix G. Rohatyn, “Reconstructing America,” NYRB, March 5, 1981. 159

Ibid. 160

Frank Lynn, “Mayor Takes 75%,” NYT, November 4, 1981. 161

“Excerpts From the Text of Koch Victory Speech,” NYT, November 4, 1981.

202

By then, the coalition of risk had consolidated itself not just politically but

institutionally. The initiative came from David Rockefeller, a man already familiar with

such work from the Downtown Lower Manhattan Partnership and his family’s

philanthropic activities.162

Officially created in 1980 The New York City Partnership

linked major businesses leaders with the Chamber of Commerce and Industry, whose

once commanding influence had waned as large firms had begun bargaining directly with

the city and state governments. When he announced the Partnership’s formation,

Rockefeller stated, “Labor speaks for what’s good for labor, conservationists speak for

their interests, but business has not had an organization that can speak for business as a

whole. ”163

Walter Wriston was an early advocate for the creation of the Partnership, and

a founding member, arguing, “This is the only town in American that doesn’t have an

establishment. . . . In Pittsburgh you can get 20 guys in a room and build the Golden

Triangle [redevelopment project]. In New York you can’t get 20 guys to fix a parking

ticket.”164

In addition to CEOs, the Partnership also included non-profit groups, such as

100 Black Men and the National Puerto Rican Forum. 165

The partnership existed to promote business interests, but interpreted its mandate

more broadly than conventional activities such as lobbying Congress. It sought to control

162

Rockefeller, Memoirs, 387-89. 163

Walter Waggoner, “Business Lobby Group for city is Organized by David Rockefeller,” NYT, June 11,

1980. 164

Edward Schumacher, “Top New York Executives Plan Coalition to Exert More Influence,” NYT,

December 19, 1979. 165

Walter Waggoner, “Business Lobby Group for city is Organized by David Rockefeller,” NYT, June 11,

1980. In his autobiography David Rockefeller states that he intended for unions to participate in the

partnership, but that they declined his offer, Memoirs, 401.

203

the risks its members had helped create.166

In the wake of the Miami riot in 1980, New

York’s elite looked at the city’s burnt-out out neighborhoods with rising alarm. That

summer Koch told the press, “obviously when you have unemployment at the high rate

we currently have—namely thirty eight percent of black and Hispanic youth are

unemployed. . . you have the possibility of unrest, and understandably so.”167

Even

before the Reagan administration cuts to CETA, a program that funded summer jobs in

poor neighborhoods, there were 106,000 applicants for the program’s 54,000 jobs in the

city. 168

There was the option of community relations via truncheon, a strategy that Koch

was comfortable endorsing. “Any time a riot occurs, generally a tiny fraction of the

population of a particular area seeks to impose its will on the vast majority,” said the

mayor. “We will protect that vast majority.”169

But there were limits. Maurice

Greenberg president of insurance giant American International Group and head of the

Partnership’s taskforce on “public safety,” told a reporter that the Partnership was “quite

aware that there is no more money to spend for police. We have to examine what else

could be done by private enterprise.”170

Accordingly, the Partnership created a well-

166

For an example of one such early lobbying trip, “Business Team Goes Prospecting In Washington on

Behalf of City,” New York Times, June 5, 1981. 167

Sheila Rule, “City’s Poor Blacks Say that Their Hopes Have Dried Up,” NYT, July 30, 1980. 168

Ibid. 169

Ibid. 170

Edith Asbury, “Civic Group Acting to Fight Crime and Joblessness,” NYT, January 4, 1981; In a later

editorial campaigning against cutbacks in CETA the Times made the “riot insurance” argument explicit, “to

allow growing numbers of idle, alienated teenagers to roam the streets is dangerous,” Editorial, “Summer

Job Delusions,” NYT, June 1, 1982.

204

publicized “Summer Jobs for Youth” campaign, and managed to secure commitments

from its members for over 8,000 jobs in the summer of 1981.171

And there was too a coarsening of the civic attitudes, even a cheapening of human

life. The falling dollar that encouraged the purchased of Park Avenue office buildings

and Upper East Side condominiums also brought garment work back to New York.

Unfortunately its home was in the sharp, often Mafia-connected end of the rag trade. The

number of sweatshops increased from an estimated 200 in the early 1970s to 3,000 by

1980, employing 50,000 people, often undocumented immigrants, making $15 a day.172

The New York State Labor Department’s staff of 300 in 1976, charged with monitoring

violations 400,000 business, had been cut down to 172 inspectors by 1981.173

By the early 1980s, the city’s real estate market provided a clear signal about the

effects that this transition would have on the poor. In 1975, the city had 290 cheap

single-room occupancy hotels (SROs), by 1979 the number had declined to 185. By

1981, it had fallen still further, thanks to J-51 tax subsidies, to 120. This decline reduced

the number of available rooms from 50,000 to 14,000.174

“What is happening to the

people in the S.R.O.’s—and will increasingly happen to tenants in other buildings as the

supply of low- and middle-income housing continues to shrink—is purely and imply

organized mugging,” Sydney H. Schanberg wrote in the Times. “There is a crime wave.

171

Leslie Bennetts, “Summer Job Outlook for Youth in New York Area Called ‘Tough,’” NYT, April 18,

198 and Peter Kihss, “Companies Pledging Summer Jobs for Disadvantaged Youths in City,” NYT, April

28, 1981. 172

Linda Blandford, “American Diary” The Guardian (UK), July 17, 1981. 173

David Wysoki, “Sweatshops Stage Comeback Among Aliens in New York,” LAT, September 6, 1981. 174

Michael Goodwin, S.R.O. Hotel: Rare Species, NYT, November 20, 1981.

205

And this one is not being conducted by an underclass of sociopathic youths from the

ghettos.”175

In the winter of 1981, the city began the top-secret preparation of shelters for the

city’s estimated 10,000 to 36,000 homeless men and women. The city promised twenty-

four hour notice to neighborhoods of establishing emergency shelters; any longer notice

city officials believed would ignite community resistance and litigation—as it already

had. There was no place for the mentally ill in the asylums, there was no longer a place

for the poor in the gentrified former SROs, and no place, it seemed, for anyone who

might bring the taint of madness, criminality, or just plain reeking poverty into

neighborhoods that were organized to say no.176

In February 1981, a young Robert Reich, writing in The New Republic, argued,

without the promise of prosperity, liberalism’s argument to the majority has become a

paean to the status quo.” 177

Yet, Reich also feared that “A society that simultaneously

offers both the prospect of substantial wealth and the threat of severe poverty surely will

inspire great feats of personal daring, dazzling entrepreneurialism, and cutthroat

ambition. But just as surely it may reduce the capacity of its members to work together

toward a common good.”178

As Reich was writing, one of the city’s most basic “common goods,” the

protection of public health, was facing the ultimate test. In January 1981, Dr. Donna

175

Sydney H. Schanberg, “Trashing Old People (3),” Op-Ed, NYT, December 5, 1981. 176

David Bird, “Help Is Urged for 36,000 Homeless in City’s Streets,” March 8, 1981; Editorial, “The

Secret War Over the Homeless,” NYT, December 7, 1981. 177

Robert Reich, “The Liberal Promise of Prosperity,” New Republic, February 21, 20. 178

“Robert Reich, “The Liberal Promise of Prosperity,” New Republic, February 21, 1981, 23.

206

Mildvan, a medical researcher at Beth Israel Medical Center sat down for a lunch with a

colleague in private practice. They compared notes on clusters patients stricken with

unusual symptoms. “All of a sudden, we knew [that there was a possible epidemic],”

Mildvan recalled, “All those lymphadenopathy patients were part of this. The shingles

epidemic we were seeing must be part of this. And this must be part of it and that must

be part of it. Part and parcel of our understanding was that it was a lot bigger than what it

looked like. It was getting more and more terrifying.”179

That terror was only beginning.

In January 1982, as the nation endured a sharp recession, Reagan made a well-

publicized visit to the Partnership, including meeting with beneficiaries of the summer

jobs program.180

In a speech heralding its efforts as a model for the nation as a whole he

said :

When New York was in trouble, groups which had quarreled for years joined together to

fight for the greater good of saving the city. Labor, business, government, voluntary

associations all pitched in. Out of that spirit of shared sacrifice was born this unique

group, your New York City Partnership. . . . In your beliefs, your efforts, and your

accomplishments, you are setting the course to progress and freedom that our nation must

follow.181

Reagan continued:

Only when the human spirit is allowed to invent and create, only when individuals are

given a personal stake in deciding their destiny, in benefiting from their own risks, only

then can society remain alive, prosperous, progressive, and free.182

So had gone the city, and so too would go the nation.

179

Gina Kolata, “AIDS After 10 Years,” NYT, June 3, 1991. 180

Frank Lynn, ”Reagan Talks to City Youths About Jobs,” January 15, 1982. 181

“Excerpts From Address by Reagan on Role of Private Groups,” NYT, January 15, 1982; Howell Raines,

“Reagan Appeals to Civic Groups to Aid the Poor,” NYT, January 15, 1982. 182

Ronald Reagan, “Remarks at the New York City Partnership Luncheon in New York,” January 14,

1982. The American Presidency Project (On-Line).

207

Chapter Four: The Contagion of Risk, 1982-1987

Catalysts

In December 1980, Keith Haring, a twenty-two year old from Kutztown,

Pennsylvania, a pasty, skinny, bespectacled dropout from the School of Visual Arts, an

employee of the Mudd Club, an experimental music venue, discovered black paper. Not

just any black paper, but the paper panels that covered unused advertising space on New

York City’s subway platforms. “The first time I saw a black panel in Times Square

station,” he recalled in 1982, “it was like it was there for me. I immediately went

upstairs, got some chalk, came back down and did a drawing.”1 He was fascinated by

graffiti: the murals on bombed subway cars by elite crews like the Fabulous Five, the

cryptic sayings of SAMO, the tag of Jean-Michel Basquiat which had been appearing all

over the East Village. Haring had already tried his hand at stenciling, spray-painting

cardboard cutouts of the phrase “CLONES GO HOME,” as a warning to gentrified West

Villagers trying to enjoy the East Village’s punk-infused nightlife. He had photocopied

fliers with rearranged letters from the New York Post to create politically charged

headlines like REAGAN SLAIN BY HERO COP and POPE KILLED FOR FREED

1 Gary Langer, “Subway Art Is for Love—and Money,” LAT, November 12, 1983.

208

HOSTAGE to paste-up on lampposts.2 But in his heart Haring not only wanted to be

seen but to draw—and have his drawings seen. “The streets and subways were the fastest

way to get to people . . . .When I started it was hard to get through that [gallery] channel.

A lot of red tape. . . . It was easier to cut it out, go directly to the audience.”3 So he did.

The chalk was the medium and his message grew up alongside it. To be taken

seriously as a “writer” of graffiti he needed a tag. One was of his dog. Another was a

baby. He put them together and began conjuring up what he remembered as “these

images, which little by little turned into an entire vocabulary. Human, flying saucers,

energy from mythical sources, power conflicts between people, glowing rods, which are

like any kid of weapon. . . .Simple images that could be read by anybody.”4 Chalking on

platforms was safer than going into the tunnels or the subway yards. But it was still

illegal and still risky. Haring was arrested several times. He racked up forty tickets for

defacing property. “Based on letters from riders there is a ubiquitous contempt for

graffiti,” said an MTA spokesperson. “It falls in the category of mental abuse, a

nuisance—even beyond.”5 But Haring’s scenes connected with his underground

audience. Despite the fragility of his medium, no one was erasing or painting over his

work. So he kept going. “That was what made me keep doing it, when I realized the

2 John Gruen, Keith Haring (New York: Prentice Hall, 1991), 64.

3 Paula Span, “Subways to Museums: Graffiti’s Scrawl of Success” The Washington Post, December 30,

1985. 4 Ibid.

5 “”New York Subway Graffiti Finds Way Into Galleries,” LAT, July 17, 1981.

209

number of people who were looking. After the first month or two it became more of a

responsibility than a hobby. One thing led to another—it just sort of grew by itself.”6

In five years, Haring’s images would be on everything from coloring books to T-

shirts to the leather-jacket of eighties pop icon Madonna. In less than nine years, he

would be dead from a virus that hadn’t even been named when he made his first mark on

that first piece of black paper. But Haring was not the only man living on the edge.

In the summer of 1983, thirty-seven year old Michael Milken, from Encino

California, a graduate of UC-Berkeley and the Wharton School of Business, ordered the

relocation of approximately 120 people to an office building on the corner of Wilshire

Boulevard and Rodeo Drive in Los Angeles. All of them were employees of the New

York based investment bank Drexel Burnham Lambert, in its high-yield and convertible

bond department that Milken ran. Two mergers created the firm. The first, in 1973, had

combined Drexel Firestone, a gone-to-seed Philadelphia firm that had once been linked to

the House of Morgan, and the upstart broker Burnham &Co. The second, in 1976, had

brought in the capital of Lambert Brussels, a subsidiary of Groupe Bruxelles Lambert, a

major Belgian holding company.7 Milken established a niche in the firm by making a

market for bonds rated below investment grade--double-B+ on the Standard & Poor’s

scale. At first he had simply traded what was known derisively in the business as

“Chinese paper” or “fallen angels,” the left-over remnants of conglomerates built in the

6 Gary Langer, “Subway Art Is for Love—and Money,” LAT, November 12, 1983.

7Connie Bruck, Predator’s Ball, 52-53; “Drexel Burnham Says It Completed Purchase of Lambert

Brussels,” WSJ, October 4, 1976.

210

1960s. Milken tried to rechristen the securities as “high-yield debt,” a name that

emphasized their generous interest payments.8 A diverse portfolio of these high yield

bonds, he argued, based on an uncritical reading of W. Braddock Hickman’s treatise

Bond Quality and Investor Experience (1958), provided more than ample compensation

for their substantial risks.9 The doubters, and there were many, called them “junk

bonds,” a name that he could not shake off of them.

Milken was an empire builder as well. Rather than only trade these bonds he

begin issuing them as well to budding entrepreneurs like Steven Winn, who used

Milken’s financing to expand his Golden Nugget Casino operations from Las Vegas to

Atlantic City.10

With a deep enough debt market, Milken believed that he could advance

capitalism’s pawns, ambitious businessmen with bold plans but little capital, into kings

who with the capital provided by junk bonds, could control entire industries.

In exchange for the profits that he was bringing in, Drexel Burnham gave him

almost limitless autonomy to make his own rules. The Beverly Hills office handled its

own compliance with government mandated record keeping and insider trading laws.

Milken controlled not only the office bonus pool but also access to a secret set of limited

partnerships that he managed.11

In return for the promise of wealth, Milked expected,

8 Bruck, Predator’s Ball, 27, 34.

9 W. Braddock Hickman, Corporate Bond Quality and Investor Experience (Princeton, NJ: Princeton

University Press, 1958); for problems with the use of the Hickman study see Martin S Fridson, “Fraine’s

Neglected Findings: Was Hickman Wrong?” Financial Analysts Journal, 50:5 (September-October 1994),

43-53. 10

“Golden Nugget Hits $65 Million Jackpot for Casino Financing,” WSJ, June 29, 1979, and “Golden

Nugget Hopes Nov. 1 Casino Opening Will Silence Doubters,” WSJ, February 13, 1980. 11

Stewart, Den of Thieves, 58-63, 127-128.

211

and inspired, dedication. In the words of one Beverly Hills trader, “We get up at 4 a.m.

and we don’t go out to lunch, we don’t take personal calls, we don’t tell jokes, don’t talk

about the ball game. No one in America works as hard as we do.”12

That was the mythos

of Beverly Hills. There was no decoration except for some Olympic posters—the desks

on the trading floor were arranged in a large X-shape, with Milken in the center, facing a

digital clock with the times of Los Angeles, New York, Chicago, and London. Journalist

Connie Bruck found Milken’s casual attitude towards his own authority “more suggestive

of a leftist leader of the sixties than of a financier of the eighties.”13

At each desk there

was a computer terminal wired into a proprietary database that grew to include 3,000

securities, 1,000 institutional investors, and financial data on over 500 junk-issuing

companies.14

It was real power. Yet to heap scorn or praise on him for what happened

next, however, is to overstate his significance. Smart as he was, rich as he would

become, lengthy as his list of securities law violations would be, Milken could never have

acted without the great investment and commercial banks back in New York. Beverly

Hills was simply one large cog in the machinery of a deregulated financial system. It was

a system that was organizing itself to take on risks of increasing scale and complexity.

And that system was poised to not only enrich its owners, but also to transform

America’s corporations and the myriad of livelihoods that depended on them, whether

they wanted to be transformed or not.

12

Thomas B Rosenstiel, “Drexel’s Bond Traders Like Their Daily Grind,” LAT, March 11, 1984. 13

Connie Bruck, Predator’s Ball, 85 14

Anise C Wallace, “Drexel’s ‘Junk Bond’ Files Are Purchased by Salomon, NYT, April 10, 1990.

212

On January 4, 1982, the writer Larry Kramer and six others met to establish the

Gay Men’s Health Crisis (GMHC). As Rodger McFarlane, the director of the GMHC

said, “AIDS pointed up the inequitable status of gays. We were forced to take care of

ourselves because we learned that if you have certain diseases, certain life styles, you

can’t expect the same services as other parts of society.”15

Larry Kramer told the Times,

“Can’t something be done? The rest of the city, my straight friends, goes on with life as

usual and I’m in the middle of an epidemic. We’re dying. Why is this happening? Is it

because we loved each other too much or not enough? I just don’t know.”16

The crisis of high modernism had left an economic and cultural vacancy, in the

City of New York and the United States. To fill the economic void, by 1981, both city

and national leaders had decided to build an economy built on various forms of financial

speculation. From stocks and bonds to real estate, doing deals, taking (and giving) the

risks of the market on a grand scale, escalated nationally and globally, in a process of

competitive deregulation, a search for that always-illusive “edge.” In New York the

austerity imposed by the fiscal crisis and the subsequent decision by business, political,

and labor leaders to mobilize New York City’s “uncommitted resources” on capital’s

behalf had also created zones of abandonment filled by crime, disorder, and squalor but

also by remarkable acts of creation and resistance.

In the East Village, landlord abandonment created space to take the risks that had

built generations of the cultural avant-garde. And those acts of defiance to aesthetic

15

Maureen Dowd, “For Victims of AIDS, Support in a Lonely Siege,” NYT, December 5, 1983, B1. 16

Ibid.

213

sensibilities, when set in the flow of capital, became lucrative in ways that would have

seemed unimaginable to the artists of even generation earlier. The same weaknesses in

civic life that created a space for art, however, also magnified the threat of AIDS—a

plague that would have tested even the most functional of cities—which New York in

the1980s was not. People with AIDS were forced to create a new sense of community,

isolated and under fire, to protect themselves from the multitude of social risks that

surrounded the disease and to find something, anything, that could stave off its progress.

To do so, however, New Yorkers with AIDS and their allies saw no other option but to

accept terrifying risks, literally putting their bodies on the line, to try to save their lives.

Together these acts merged together to create not only a culture of risk but to disseminate

that culture, whether by the creativity of Keith Haring, the coercion of the hostile

takeover, or the rage of ACT-UP.

By 1987, the contrasts of the city, between “the bag ladies and the Gucci bags, if

you will,” in the words of a tourist from Amherst, Massachusetts, were stark reminders

that a city based on risk had failed to live up to the admittedly meager promises made by

its proponents a decade earlier during the fiscal crisis..17

Despite the wealth it created

and the pictures it painted, New York had become a multiplicity of cities—separate,

unequal, and vulnerable when finally, in October 1987, the roulette wheel hit red instead

of black.

17

Jane Gross, “A First Look at Homeless Is Raw Sight for Tourists,” NYT, November 9, 1987.

214

Capital’s City

The “Great Inflation” of the 1970s had been bad for almost everyone from

motorists to meat buyers. It had been very good, however, for the art market. Collectors

still bought for the usual reasons: as an expression of good taste, as a demonstration of

wealth, even because they liked looking at the paintings and antiques they had

accumulated. “A good art collection can do wonders for you socially,” said New York

doyenne Joanne Winship. “The most boring people can give the most boring parties, but

people will go to them if their houses are filled with beautiful things.”18

But art had also

begun attracting the “smart money,” eager for capital gains, not just the old.19

Research

from Salmon Brothers indicated that between 1968 and 1978, everything from Chinese

ceramics to diamonds, had outperformed the S&P 500 index of large industrial stocks,

which had returned a miserly 2.8 percent.20

As a partner at the firm put it, “If this trend is

sustained, it may mean we are running the risk of immobilizing a substantial portion of

the world’s wealth in someone’s stamp collection.”21

In 1979, Citibank, willing to try

anything, partnered with Sotheby Parke Bernet “to go beyond conventional investment

techniques and instruments offered to our customers” and advise the clients of its private

bank on art investments.22

Never mind that from an economic standpoint it made little

sense to “invest” in objects that produced nothing but social cachet.

18

Stephen Birmingham, “The Auction Crowd,” NYT, March 6, 1977. 19

Joseph Collins, “British Pension Fund Buys Art,” NYT, February 12, 1978. 20

H.J. Maidenberg, “Investibles: Even A Bank Is Buying Art,” NYT, May 13, 1979. 21

Ibid. 22

Rita Reif, “Sotheby Citibank Explain Pact,” NYT, September 22, 1979.

215

It was this type of inflation-driven thinking that Federal Reserve Board Chairman

Paul Volcker, appointed by Carter in August of 1979, sought to quash—decisively. He

did so through a sharp and sustained hike in interest rates that began in October 1979,

that triggered a deep recession, whose effects would linger until the middle of the

eighties. “What we’re aiming for is a situation in which people can proceed about their

business without worrying about what prices are going to do over the next year, two

years, three years, 10 years, and can take it for granted that they’re going to be more or

les stable,” Volcker explained.23

For the equity markets, the turning point came on

Friday, August 13, 1982 when interest rates on 30-year Treasuries began at long last to

decline. This signaled an easing of credit and better economic growth.24

What remained,

once investors stopped fearing inflation and recession, was to find instruments that could

close this “value gap” between the depressed prices of stocks and the underlying value of

the assets (like land, factories, brand-names, and intellectual property) that America’s

publicly traded corporations controlled. Many of those assets had increased in value as

inflation drove up their replacement cost. As the Salomon Brother study showed,

however, stock prices, unlike those of the Old Masters, had not increased as fast as the

inflation rate. When investors lost their fear that inflation would increase business costs

faster than firms’ ability to raise their prices corporate assets became much more

23

Andrew Tobias, “A Talk With Paul Volcker,” NYT, September 19, 1982. 24

For a discussion of the anti-inflation campaign, as see largely from Volker’s perspective, William L.

Silber, Volcker: The Triumph of Persistence (New York: Bloomsbury Press: 2012, 2013), 190-230. For a

glimpse of the human toll these policies inflicted: lost jobs, foreclosed farms, bankrupt businesses, and the

personal tragedies, including suicide, contained therein, William Greider, Secrets of the Temple: How the

Federal Reserve Runs the Country (New York: Simon and Schuster, 1987), 450-464.

216

valuable. Closing the gap between asset prices and stock prices became the basis for the

bull market of the 1980s.25

The pool of capital available to invest in these assets and close the “value gap”

had grown between the late 1970s and early 1980s. In early 1979, the Department of

Labor declared that for pension trustees subject to Employee Retirement Income Security

Act (ERISA), the “relative riskiness of a specific investment or investment course of

action does not render such investment or investment course of action either per se

prudent or per se imprudent.”26

Pension trustees were now free to invest in potentially

riskier, and more profitable, securities than their traditional fare of government-issued

bonds and blue-chip stocks. A better-publicized example of these deregulatory changes,

which allowed more financial institutions to make a wider range of investments, was the

Depository Institutions Deregulation Act of 1980 and the Garn-St. Germain Depository

Institutions Act of 1982. By allowing savings and loans to pay competitive interest rates

and engage in non-mortgage lending and investing bankers and regulators hoped that the

ailing thrifts could grow their way back to fiscal health after the drubbing that their

mortgage portfolios had taken in the 1970s. T”o hundreds of savings institutions, growth

is the only answer,” Paul Willax the president of Buffalo’s Empire of America Savings

Bank told The American Banker. “They simply do not have enough net worth left to ride

out the amortization of their underwater assets and wait for the day when their standing

25

Charles R. Geisst, Wall Street: A History From Its Beginnings to the Fall of Enron (New York: Oxford

University Press, 1997, 2004), 338. 26

Donald Moffitt, “Your Money Maters: New Pension-Fund Regulation Makes it Easier for Trustees to

Risk ‘Alternative’ Investments,” WSJ, September 10, 1979.

217

portfolios can routinely produce operating profits. They desperately need immediate,

additional contributions to earnings to offset - and perhaps overcome - the drag of their

old portfolios.”27

Combined with the Federal Home Loan Bank Board’s reduction of

minimum capital requirements from five percent in 1980 to three percent in 1982,

deregulation allowed S&Ls to increase their lending into new, and riskier investments,

like junk bonds. This allowed aggressive thrifts to bolster the stock market.28

While savings and loan deregulation touched every community in America,

another rule change reshaped investment banking by injecting a new element of

competition that pushed Wall Street to embrace riskier deals. Since the 1930s syndicates

of investment banks, organized around large firms like Morgan Stanley had issued

corporate bonds. These relationships between bond issuers and underwriters offered the

issuer an implicit promise of access to capital when needed. In exchange, issuers were

expected to use their major underwriter’s services in future debt sales. By the late 1970s,

some large corporations, such as Texaco, had begun selling their bonds directly to

institutional investors. After the enactment of SEC Rule 415 in March 1982, “well-

known issuers” could file a “shelf registration,” good for two years, allowing firms to

issue their securities when they, not their bankers, saw fit. This flexibility let corporate

America bid investment banks against each other and choose the one that offered the

27

Paul A. Willax, “Thrifts’ New Order Brings Fresh Challenges to an Old Industry,” The American Banker,

December 19, 1984. 28

For a summary of regulatory changes see Jonathan Barron Baskin and Paul J. Miranti, Jr., A History of

Corporate Finance (New York: Cambridge University Press, 1997), 267. Minimum capital requirements

refer to the ratio of safe, liquid, assets, like cash and Treasuries, which can be used to absorb loan losses

relative to a bank’s total portfolio of outstanding credits. Lower minimum capital requirements enable

banks to make more loans, taking on additional risk, for potentially higher profits.

218

lower interest rates and underwriting fees on a particular debt or equity offering.

Investment bankers derisively referred to the practice as “buying deals.” 29

And the

industry knew what the implications of deregulation would be. Laszlo Birinyi, a

brokerage industry analyst later reflected, “You don’t have the subsidies of the fee

structure, which allowed the weak sisters to maintain positions just because they were

members of the club [of an underwriting syndicate].”30

Only securities firms with strong

capital positions would be in a position to “buy” deals—that is to accept the lower profit

margins on deals. This encouraged investment banks to merge, find outside investors,

like Drexel had done, or take themselves public. Between 1975 and 1984, the security’s

industry’s capital increased from $3.4 billion to $16.8 billion.31

More capital let

underwriters do more and bigger deals at lower margins, to make the same amount of

money. More capital also let firms take bigger, and thus riskier, positions in the

marketplace.

The result was a different kind of finance. Making this new system work,

however, required a presumption that in this new marketplace, one based on short-term

deals rather than on long-term relationships, would persist. Commercial bankers were

especially fond of making this argument as they sought to enter fields that had been

closed to them by regulators, such as underwriting securities and insurance policies. As

Walter Wriston told the American Council of Life Insurance in 1983:

29

Chernow, The House of Morgan, 623-626, 661-662. 30

Leslie Wayne, “Is Wall Street Ready for Mayday 2,” NYT, April 28, 1985. 31

Ibid.

219

Arguments against more banks owning more insurance companies place nearly all their

weight on one element: speculation. The speculation runs that if banks were permitted

certain freedoms, they might use them unfairly; they might take over the world, they

might cause hives. . . .The protection against this risk is two-fold. One is that most people

in all these fields still cling to honesty, ethics, and principles. The other protection lies in

our ability to pass laws and hire policemen to control those who are tempted to rise above

their principles.32

In the traditional world of investment and commercial banking these assumptions

were enforced not only by the SEC and banking regulators but also by the marketplace

itself. A firm that allowed a client to become deliberately overleveraged and risk

bankruptcy, that traded on inside information about its client’s stock, or helped a hostile

investor to acquire a client, risked destroying a relationship that was often decades.

“Almost all business starts with a relationship. We don’t find people doing business with

people they don’t know,” said S. Parker Gilbert, president of Morgan Stanley, describing

a system that was about to disappear ”The elements of trust and confidence are with us,

and will always be with us.”33

In the deregulated world of negotiated commission the

emphasis shifted from long-term relationships to individual deals. Now the price of each

transaction was what counted. This saved clients money but it also gave bankers a

powerful incentive to look out for themselves.

As this new architecture of finance developed so did the tools of the trade. Some

of the changes—cheaper computing power, easier-to-use software, better

telecommunications infrastructure, faster transaction times—were the continuation of

32

Walter Wriston “Consumers Should Decide Who Sells What Where,” The American Banker, February

15, 1984. 33

Michael Blumstein, “Morgan Stanley Fights for No.1,” NYT, April 1, 1984.

220

trends from the early 1960s.34

It was the use to which these systems were put to that

made the difference. By the mid-1980s, the deregulated thrifts, eager to sell off

underperforming residential mortgages and invest the proceeds in the new fields they

could enter had sold pools of old mortgages to Ginnie Mae, Fannie Mae and Freddie

Mac. These federal agencies, in turn, had packaged those “old portfolios” into mortgage-

backed securities that attracted institutional investors looking for higher returns than

Treasuries offered. The level of risk for buyers of these securities appeared to be the

comparable due to the explicit guarantees of Fannie and Freddie (and thus the implicit

guarantee of the U.S. Treasury) on the underlying mortgages. That is investors could

earn a higher return for the same amount of risk.35

And mortgage-backed securities could

be made even more attractive by creating collateralized mortgage obligations (CMOs),

introduced by Freddie Mac in 1983. CMOs pooled the interest of the original loans into a

single security, and then divided into different “tranches” that could be sold for different

terms and different interest rates. “It’s an E.T. market—Everything Trades,” said the

Urban Institute’s John Tuccillo. “It’s a market where all mortgages can be packaged for

sale to a wide variety of institutions, which can engage in mortgage trading as they now

trade bonds or equities.”36

By early 1984 mortgage backed securities represented $253 billion or fourteen

percent, of the national mortgage market. Instead of depending on the deposit base of

34

See for example Desmond Smith, “The Wiring of Wall Street,” NYT October 23, 1983. 35

Ann Monroe, “Once Avoided, Mortgages Become A Big Business for Securities Firms,” WSJ, May 4,

1984. 36

Christopher Conte and Timothy D. Schellhardt, “Big Secondary Market in Mortgages Smooths Flow of

Housing Funds,” WSJ, July 11, 1983.

221

local banks, homebuyers could now tap into a national market for mortgage credit.

Banks and thrifts in areas with a surplus of savings, like Florida with its large population

of older retirees, could now invest those deposits through the mortgage backed securities

market, into areas like fast-growing California, where the demand for new mortgages

exceeded the available supply of savings. “Mortgage money will never again be

unavailable or rationed in this country; it will always be possible to get money for a

home—if you are willing to pay a price,” said Richard Pratt, the former chairman of the

Federal Home Loan Bank Board, who had become the head of Merrill Lynch’s mortgage

operations.37

With a national marketplace for mortgages, interest rates converged.

Homebuyers no longer paid a two percent interest rate premium because they were

buying a property in capital-hungry California instead of savings-rich Florida. 38

It was an

impressive case for the virtues of financial engineering and a deregulated investment

marketplace. As Lewis Ranieri, who had pioneered the development of the MBS market

at Salmon Brothers, said in 1984, “It had a real social and economic benefit. We really

did lower the cost of a mortgage. You can’t help but feel good about that kind of

thing.”39

And it was good for Salomon as well, with Ranieri’s department netting the

firm roughly $166 million in profits 1983. 40

He had good reason to be optimistic about

37

Eric N Berg, “Trading Home Loans Like Bonds Draws Billions In New Funds,” NYT, January 22, 1984. 38

Ibid. 39

Sandras Salmans, “Getting Rich By Enriching the Mortgage Pot,” NYT, November 7, 1984. 40

Ibid.

222

the future: “What we’ve seen so far, is juvenile and simplistic compared to what we’re

going to see.”41

Ranieri was right.

Washington agreed with Ranieri. The Secondary Mortgage Enhancement Act

expanded the mortgage-backed securities market in late 1984 by allowing state-regulated

pension funds and insurance companies to invest in privately issued mortgage-backed

securities—ones that lacked federal guarantees—and removing the limits on bank and

thrift investing in the MBS market.42

Over the next year, the volume of new issues

increased from $13.3 billion to $24.7 billion.43

This process took on a name of its own—

“securitization.” This description of the process for creating new kinds of tradable

securities out of previously unmarketable assets quickly entered the mainstream of the

financial lexicon.44

As the technology of the securitization market developed, the pursuit of profits

encouraged its application in much riskier endeavors than bundling together

“conforming” residential mortgages guaranteed by the federal government.45

In

December 1984, Ranieri, privately placed a $204.8 million CMO backed by commercial

41

Ann Monroe, “Once Avoided Mortgages Become a Big Business for Securities Firms,” WSJ, May 4,

1984. 42

Bruce Ingersoll, “Senate Votes to Expand Private Sector’s Activity in Mortgage-Securities Market,”

WSJ, September 27, 1984; Catherine Collins, “Law May Help to Improve Flow of Mortgage Funds,”

Chicago Tribune, October 27, 1984. 43

Ann Monroe, “Mortgage-Backed Issue Volume Surges,” WSJ, January 2 1986. 44

The Oxford English Dictionary lists “securitize” as first used in 1981 and “securitization” as first used in

1982. The first mention in the New York Times appears to be in, “Talking Business With Gutfreund of

Salomon Brothers,” NYT, January 3, 1984. 45

A conforming mortgage is a loan that meets the underwriting criteria to qualify for being insured and

resold by a national agency such as Fannie Mae.

223

mortgages re-sold from the portfolio of Penn Mutual Life Insurance.46

By the summer of

1985, the use of the CMO-structure to “securitize” corporate and banking assets other

than mortgages had begun in earnest. M. William Benedetto, the director of investment

banking at Dean Witter Reynolds, called the growth of securitization “the hot new game

in creative finance. The mind boggles at the number of things you can do.”47

Anything

with a “payment stream,” it appeared, could be securitized. Capital that had been tied up

on a balance sheet—such as an automaker’s loan to financing a the sale of a new car—

could now be sold moved into the marketplace as an investment grade security.48

The

loans did not even have to be for anything other than making more loans. In early 1987,

Bank of America took 837,000 Visa credit card accounts and transformed them into $400

million worth of AAA rated debt in the first public sale of credit card debt.49

Any debt

would do. By 1988, the New York Times reported, there had been public sales of at least

$27.7 billion worth of asset backed securities, with even more sold on the private market.

The new bonds covered everything from equipment leases, credit card receivables and

department store installment sales to mobile homes, raw land, and loans taken out on life

insurances policies. And the investment bankers were busy working on yet more new

securities, including ones backed by home equity loans.50

Seen in the context of a burgeoning debt market, the growth of the high-yield debt

securities was unexceptional. Junk bonds were already a form of securitization. Harvard

46

Joanne Lipman, “Penn Mutual Uses Commercial Loans to Back CMO Issue,” WSJ, December 5, 1984. 47

Fred R Bleakley, ‘Hot New Game in Financing,” NYT, June 4, 1985. 48

Leonard Sloane, “Your Money: New Securities Tied to Assets,” NYT, July 20, 1985. 49

Bill Sing, “B of A Offering credit Card-Backed Debt,” LAT, February 26, 1987. 50

Michael Quint, “Market Place: ‘Securitization’ Finds New Uses,” NYT, August 12, 1988.

224

Business School Professor Michael Jensen characterized high-yield debt in 1987 as

“commercial loans that can be resold in secondary markets. They are further evidence of

the securitization that has converted formerly illiquid financial claims such as mortgages

into marketable claims.”51

Rather than taking the risk of tying-up capital in a traditional

loan or private equity investment in fledgling or highly leveraged concern, investors

could purchase a piece of the transaction and receive a steady stream of fixed-rate

payments, barring bankruptcy. Investors could also resell junk bonds, unlike whole

loans, on the secondary market that Milken had pioneered. The market that he had built

was based on insurance company and deregulated savings and loans executives who were

willing to break with the staid practices of their respective industries: Saul Steinberg

(Reliance Group), Fred Carr (First Executive Life Insurance), Carl Lindner (American

Financial Corporation), and Belzberg Brothers (First National Corporation). This was in

keeping with the ethos of Frederick Joseph, the CEO of Drexel Burnham after 1985.

Like Milken, Joseph maintained a self-styled preference for “empire-builders.” “It takes

a different kind of guy to build something and a different kind of guy to be his investment

banker,” Joseph reflected. “Our business is not a social event, it is a business event. . .

.We give people psychological leeway, a lot of authority, the opportunity to do something

interesting and creative.”52

51

Michael C Jensen, “The Free Cash Flow Theory of Takeovers: A Financial Perspective on Mergers and

Acquisitions and the Economy,” “The Merger Boom", Proceedings of a Conference sponsored by Federal

Reserve Bank of Boston, October 1987, 133. 52

Linda Grant, “Drexel Burnham Finds Self in Heady Company,” LAT, March 11, 1984.

225

The most “interesting and creative” use of junk bonds was their role in staking a

generation of “corporate raiders.” These were men outside of the traditional Fortune 500

corporate power structure who were hungry for a shot at “the big money.” The raider’s

tactic, the hostile takeover, had been well developed by the early 1980s. In 1974, the

patricians at Morgan Stanley had pioneered the use of the technique by major firms when

they devised a strategy for nickel-mining giant Inco to buy the battery-maker ESB despite

the objections of the latter’s management.53

Since then, large firms had become adept at

waging bidding wars for control of each other. In 1976, the value of the ten largest

mergers was $4.972 billion. By 1982 the value of the ten largest mergers had swelled to

$26.621 billion. This included a number of major deals involving hostile bidders: U.S.

Steel’s purchase of Marathon Oil, Occidental Petroleum’s purchase of Cities Service, and

Allied Corporation’s takeover of Bendix. By 1984, the deals had grown even larger, to

$44,623 billion.54

What junk bonds could do was to give individuals like T. Boone

Pickens, Carl Icahn, and, Ronald Pearlman, rather than larger firms the chance to offer

disaffected shareholders a premium to the market price of their stock, and thus to threaten

the managers of America’s largest businesses with the loss of their jobs. Most corporate

raiding attempts failed—between 1980 and 1984 raiders only completed eight mergers

out of eighty “attacks.” But the raiders, increasingly backed by Drexel’s ability to raise

funds in the junk-bond market, could serve as a powerful catalyst for changes in both

53

For the Inco-ESB saga and the development of the hostile takeover, see Jeff Madrick, Taking America:

How We Got from the First Hostile Takeover to Megamergers, Corporate Raiding, and Scandal (New

York: Bantam, 1987), 6-47. 54

Barrie A Wigmore, Securities Market in the 1980s: The New Regime, 1979-1984 (New York: Oxford

University Press, 1997), 362-364.

226

who controlled major corporations and the business strategies that corporate leaders

pursued.

For example, in 1984 T. Boone Pickens, backed by Milken, pushed Gulf Oil onto

the auction block, or “in play” as the term was known, as speculators like arbitrageur

Ivan Boesky purchased blocks of Gulf’s stock in anticipation of a higher bid and quick

profits. Faced with this pressure, Gulf’s management sold the company to Chevron.

Chevron proceeded to “restructure” Gulf’ and integrate its operations into the larger firm.

So Gulf’s Pittsburgh headquarters and research and development lab were closed down,

its “marginally profitable” operations were sold off, and the ranks of now “surplus” Gulf

managers and workers were fired. The threat of corporate raiding encouraged the

executives of firms that were not “in-play” to take these steps as well in order to boost the

company’s profits and share price before “their” firm became the next “undervalued”

target. Or a firm could borrow money and become a predator of its own. The raiders

also encouraged managers to think about borrowing money tp buy “their” companies for

“themselves.”55

Most managers lacked the capital to execute this last option on their own. They

needed outside investors, such as Kohlberg, Kravis and Ross, to connect them with the

debt markets to buy the firm’s stock and remove the company from the public market; in

other words to execute a leveraged buy-out (or LBO). It was a different way to think

55

Jeff Madrick, Taking America 194-195; Daniel Hertzberg, Takeover Targets Find Loading Up in Debt

Can Fend Off Raiders,” WSJ, September 10, 1985; Peter Behr and David A. Vise, ”Big Firms Launch New

Cutbacks,” Washington Post, September 21, 1986.

227

about big business with the manager acting as an owner of the firm rather than as an

employee of the board of directors who was expected to balance the needs of a diverse

group of constituencies: not only of stock holders, but also workers, government

regulators, and the communities where the firm did its business. Contemporaries argued,

however, that the “owner-manager” model was a better business model given the

troubled state of many Fortune 500 firms in the late 1970s and early 1980s. American

executives had lost market share to foreign competitors, argued Lewis Young, editor-in

chief of Business Week in 1981, because they had been “building corporate hierarchies

and bureaucracies that are every bit as lethargic, obstructive and nonproductive as those

in government about which business people complain so bitterly.”56

Looking back at the early 1980s, Jerome Kohlberg of KKR laid blame for

American business’ failings on a lack of effective shareholder oversight. “The chief

executive chose his own board. They had airplanes and hunting lodges and everything

else. They should’ve cut these things out and given it to the shareholders in the form of a

higher stock price.”57

With their own equity on the line, corporate managers would,

private equity firms argued, cut such perks and the bureaucratized lassitude that they

implied. American business would be free from the influence of stockholders and other

“stakeholders,” and would finally be able to live up to Milton Friedman’s famous dictum

56

Mark Green, “The Problem With Business, Says Business, Is Business,” Washington Post, May 10,

1981. 57

Weiner, What Goes Up, 211.

228

from 1970 that the “social responsibility of business is to increase its profits” while

conforming to “the basic rules of society.”58

The leveraged buyout firms, as described by Theodore J. Forstmann, the general

partner of Forstmann Little, one of the earliest of such companies, were “a hybrid

business—not a corporation, not a holding company. Things are not hooked together [at

Forstmann Little] through any structure . . . . Part of the conglomerate strategy in the 60’s

was to build an imposing empire. Our goal is that, at certain points, companies will be

taken public, sold, recapitalized or whatever.”59

Leveraged buy-out firms could and did

grow companies, assuring them of capital and freeing them to make long-term

investments without the pressure to meet quarterly earnings. The faster route to a

profitable exit, however, was to find an already profitable or asset rich company and

shrink it. Operating under the “discipline of debt” the bought-out firm would generally

sell divisions, lay off workers, slash capital spending, and cut research and development

to generate additional cash flow that could service, and eventually repay, the junk bonds

issued to buy the company. What mattered was that the businesses’ available cash added

up to quarterly debt payments.60

It was risky, given the amount of borrowed money

involved, but that would not stop the financiers from playing. Arnold X. Moskowitz, an

economist at Dean Witter, likened it to a roulette wheel. “The buyout game won’t stop

58

Milton Friedman, “The Social Responsibility of Business Is To Increase Its Profits, NYT, September 13,

1970. 59

Daniel F. Cuff, “Stables of Diverse Companies,” NYT, August 5, 1985. 60

For a discussion of the corporate strategies pursued by one of the largest buyout firms, George Anders,

Merchants of Debt: KKR and the Mortgaging of American Business (New York: Basic Books, 1992), 285-

293.

229

on its own accord. People will keep putting their money on a number and when they hit

the jackpot they will do it again. As long as there are people with money, the wheel will

keep spinning.”61

And there was a great deal of money to be made on that spinning wheel. The

Revlon takeover fight in 1985, the second time a Drexel-backed raider successfuly

executed a hostile take-over using junk bonds, generated at least $100 million in fees for

the lawyers and investment bankers who had represented the various parties.62

The list

read like a Who’s Who of New York finance: Drexel Burnham received $60 million;

Moran Stanley $30 million; Lazard Frères $11 million; Goldman and Sachs, $3 million;

Chemical Bank, with $4.3 million in fees. The payments to the lawyers at the city’s

“white shoe” firms, such as Wachtell Lipton, and Skadden Arps, added up to an

additional $7-$10 million.63

Now this was the “export industry” that the city had been

looking for.

Ed Koch understood what was at stake for the city in Wall Street’s continued

success. When, on April 26 1983, he decided not to support a re-imposition of the stock

transfer tax, he told reporters, “Given the increases in revenue and sate aid, it now seems

an inappropriate time to levy this tax with its risk of retarding the growth of an industry

vital to this city’s future.”64

The city also aggressively used tax incentives to retain the

61

Leslie Wayne, “Buyouts Altering Face of Corporate America,” NYT, November 23, 1985. 62

For the Revlon deal, Bruck, Predator’s Ball, 193-240, the first successful Drexel junk bond hostile deal

was Coastal Corporation’s takeover of American Natural Resources, in April 1985. 63

Daniel Hertzberg, “Advice in Revlon Brawl Wasn’t Cheap—Fees in Takeover Fight Will Establish

Record,” WSJ, November 8, 1985. 64

“Wall Street Wins In Effort to Scotch Stock Transfer Tax,” WSJ, April 27,1983.

230

operations of Wall Street firms. After a deal to retain the transaction back-office

functions of Irving Trust, a real-estate industry executive explained the problem. “These

actions aren’t a long-range solution. You can’t do this for everybody. That brings you to

a ticklish moral and legal question: How can you do this for some firms and not

others?”65

Certainly the City of New York could not give every type of business this

treatment. But Wall Street was a special case for the city.

On March 28, 1985, President Reagan rang the opening bell on the New York

Stock Exchange. The president and his audience were in a celebratory mood. Before he

opened the trading day, Reagan remarked:

I think we've seen some healthy results [from the administration’s economic

policy] on this trading floor. Those tax cuts helped reenergize the stock market, with the

volume of shares traded hitting record highs and more Americans than ever before

participating in the market. An enormous rush of new equity issues, venture capital, and

new investment became the driving force behind an economic expansion as strong as any

we'd seen in more than 20 years. . . . Our economy will be free to expand to its full

potential, driving the bears back into permanent hibernation. That’s our economic

program for the next 4 years. We’re going to turn the bull looses.

The brokers on the floor proceeded to cheer: “Ronnie! Ronnie! Ronnie”!66

Meanwhile, just to the west of the New York Stock Exchange, a permanent

monument to the optimism of the “free” market eighties was taking shape. The

construction of the World Trade Center had moved enough earth for ninety-two acres of

landfill in the Hudson River. Originally the plan for Battery Park City called for its

65

Robert Guenther, “New York Tries to Keep Hold of Financial-Service Industry,” WSJ, December 21,

1983. 66

Ronald Reagan, “Remarks to Brokers and Staff of the New York Stock Exchange in New York, New

York,” March 28, 1985. The American Presidency Project (On-Line).

231

development by a State of New York sponsored public benefit corporation to provide

housing for 55,000 New Yorkers “of all income levels” in a “complete community,

designed by sociologists and city planners as well as architects and engineers.”67

In other

words, it would be a high modernist urban-renewal project at its finest. Or worst. “The

state’s plan was a bargain-basement version of the Albany Mall with office towers at

either end, the World Trade Center in the middle and a banal series of apartment slabs

marching up the aisle in between,” recalled an anonymous city official.68

The fiscal crisis

had halted the project.

Speculation saved the day, in the form of the intrepid investors of Olympia &

York Properties (O&Y). In 1977, just as the city’s real estate market was beginning to

turn, the Canadian firm had purchased eight major office buildings in New York from the

Uris family for $330 million, structures whose value was estimated at $1 billion by

1980.69

Spurred on by this coup, the Reichmann brothers, who controlled O&Y, offered

the Battery Park City Authority a plan to build the project in five years and guarantee the

BPCA the highest rents and other payments. The result was the World Financial Center:

a set of four towers, designed in a restrained post-modern style by Cesar Pelli, with 6

million square feet of office space, whose major tenants—American Express, Merrill

Lynch, Oppenheimer & Company and Wall Street Journal publisher Dow Jones—

67

Advertisement, “Will You Be Living Here in 1974, WSJ, June 6, 1969. 68

Roberta Brandes Gratz, “Faulty Blueprint: Battery Park City Still can’t Get Off the Ground,” Barron’s,

June 25, 1979, 4. 69

Susan Goldenberg, “A Reichmann Touch in Real Estate,” NYT, August 17, 1980.

232

represented the elite of the city’s financial community.70

In the summer of 1985 the

buildings were ninety percent leased. The luxury condos that would make up the rest of

Battery Park City were also under construction. The original plan for a community of

“all income levels” had been dropped. “It’s finally taking away any provision for

subsidized housing, not that we didn’t want to have subsidized housing, but with very

limited units, which was not the case when Battery Park City was first planned,”

remembered Robert F. Wager Jr. “We wanted them [the public housing units] to go to

Harlem or central Brooklyn or the South Bronx, places of greater need.”71

So the

Battery Park City Authority engaged in a bit of creative finance of its own issuing $400

million in bonds, backed by the project’s rents to, build and renovate low-income housing

elsewhere in the city. At the project’s dedication on October 17,1985, Mayor Koch

called the complex, “a part of the city that will be recognized as the new Wall Street—

Wall Street II. . . . We continue to build here and to make sure we continue to be the

financial center of the world.”72

The World Financial Center would be layered in security ranging from key cards,

intercoms, and closed-circuit camera to exotic “ultrasonic motion detectors and sound-

activated acoustical controls.”73

The city that capital had built in steel, glass, and marble

defined a new geographic center in Lower Manhattan for otherwise amorphous capital. It

was also a controlled island, off-limits to the disorderly city on its doorsteps.

70

David L.A. Gordon, Battery Park City: Politics and Planning on the New York Waterfront (Amsterdam:

Gordon and Breach, 1997), 77-79. 71

“The Reminiscence of Robert F. Wagner Jr,” Columbia University History Research Office, 63. 72

Martin Gottlieb, “Battery Project Reflects Changing City Priorities,” NYT, October 18, 1985. 73

William G. Blair, “For Financial Center, a Moat of Electronic Security,” NYT, April 20, 1986.

233

City of Art

Two miles east of the NYSE, the Lower East Side, or in Spanglish, Loisaida, still

bore the marks of the neighborhood of strugglers, strivers, and the Bowery down-and-out,

where Dorothy Day had made her home a half-century earlier. The 1980 census

estimated that 155,000 people lived there, thirty-seven percent of them Hispanic, thirty

percent white, twenty-two percent Asian, nine percent African American—an unusually

integrated community drawn together because rents were cheap.74

While generations of

immigrants had built-up its blocks, arson and abandonment had left swaths of it in dire

straits by the early 1980s, a “grimy hodgepodge of bodegas, dope depots, Eastern

European churches, dusty head shops and a lot of burned-out, empty buildings.”75

Street

vendors spread out wares of every description: incense, knives, vintage LPs, old

pornographic magazine, clothes, shoes, cigarettes, and “antiques” of unknown

provenance. It was the “closest thing to a real bazaar west of Fez or north of Oaxaca,” as

one travel writer put it.76

A writer from the libertarian Cato Institute took pains to defend

peddlers as “small businessmen out to make a living in a time of high unemployment”

when they were faced with a Koch administration crackdown in 1983.77

The ultimate

neighborhood market was not, however, for the leftovers and discards of old

consumption, waiting for recycling into new fashions. It was for retailing fresh imports

of narcotics.

74

Victoria Irwin, “Lower East Side: Cultural Stew in N.Y. Melting Pot,” CSM, September 20, 1984. 75

Ann-Byrd Platt, “The Art Scene Moves to the East Village,” WSJ, May 2, 1984. 76

Rob Schultheis, “New York: The Soul of the City in a Walk On the Wild Side, the Lower East Side,”

Washington Post, February 12, 1984. 77

David Boaz, “Junking Jobs: The War on Sidewalk Sales,” Op-Ed, WSJ, April 2, 1984.

234

The low-level peddlers worked the streets, half-whispering “Smoke?” and “Loose

joints?” to passersby. The real business was done indoors as pure heroin and cocaine

were cut with cheap additives and branded with names ranging from “The Wiz,” to

“Toilet,” “ “Executive,” to “Mr. Poison,” and sold. The city put the take at $180 million

a year. Close to Wall Street, it was convenient neighborhood for well-heeled white

addicts who would have stuck-out waiting for a score in Harlem. The drug traffic was

inescapable. “It’s like a street market, like an outdoor vegetable or fruit market,” said

Rev John Kennington, assistant pastor at Most Holy Redeemer Church. “Early in the

morning you see the people coming over from Wall Street in their Lincolns. People

shoot up in cars [and] people shoot up on doorsteps.”78

Foreign television crews came to

film the spectacle of anxious addicts standing in ragged lines on the sidewalk. So too did

Police Commissioner Benjamin Ward, who passed by the neighborhood every day as he

commuted to 1 Police Plaza:

As I would go through the Lower East Side I would see lines with over 100 people, lined

up, to purchase drugs. I asked my drivers about it, and they said ‘You didn’t see the

worst of it. Get off Delancey Street, and you’ll see worse than that up around Avenue A,

up around Tompkins Square Park.’ So, I went out on tours to look at that, and not only

were the lines longer up there but actually systems, with runners and controllers of these

lines, like you were going to a supermarket someplace. 79

Sometimes a marketplace can be too accessible. Beginning on January 19, 1984,

“Operation Pressure Point” hammered the neighborhood with police. Seven weeks in,

one addict described the results. “This place is like a hell. The cops made it that way.

78

Bob Drogin, “Getting High on the Lower East Side,” LAT, January 8, 1984. 79

“The Reminiscences of Benjamin Ward,” Columbia University Oral History Research Office, 109.

235

They used to give a foot. Now they don’t give an inch. People are tense here. Out to

kill. Imagine the worst kind of place you can imagine. That’s what this is.” 80

Despite

the arrests made and the publicity generated by the clampdown, little changed. Over a

year later the Times warned potential real-estate buyers that “quality-of-life” problems—

the open-air drug deals, epidemic graffiti, climbing burglary rates, and piles of

uncollected trash—still “abounded.”81

But what made the Lower East Side a tough neighborhood to live in also made it a

very good one for making and selling art. In the summer of 1981, the art-film actress

Patti Astor and her partner Bill Stelling opened the Fun Gallery to sell what was still

called the “graffiti art” of Keith Haring, Jean-Michel Basquiat, and Futura 2000 among

others. The same mixture of geography and diversity that made the neighborhood a

destination for users also made it attractive for collectors interested in both new art and

new experiences, such as sitting in the Fun Gallery’s backyard listening to hip-hop

blasting on big radios balanced on the shoulders of the neighborhood kids.82

The rawness

of Loisaida created space for creativity. “One of the great blessings of the area is that all

kinds of people live here,” reflected Corrine Jennings, who managed the Kenkeleba

collective art space, “The co-existence has produced some marvelous people and ideas,

and I wouldn’t want a plastic SoHo, where the richness of the community is

compromised by a commercialism.”83

The galleries provided a cultural alternative to the

80

Craig Wolff, “Drug Arrests Mounting On the Lower East Side,” NYT, March 5, 1984. 81

Richard D. Lyons, “If You’re Thinking of Living In: The East Village,” NYT, October 6, 1985. 82

Jay Gorney, “The East Village, Latest Lure for the Art World,” Washington Post, February 12, 1984. 83

Grace Glueck, “A Gallery Scene That Pioneers In New Territories,” NYT, June 26, 1983.

236

neighborhood, or at least a distraction from the slow-motion terrors of the drug trade.

Dean Savard, who had founded the storefront gallery Civilian Warfare mused: “The

name seems to fit the area. But actually, the street is full of families with small children,

who are horrified by the drug scene. They like us because we bring a little bit of

legitimate business to the neighborhood.”84

Just as New York had taken the lead in “creative finance” so too had the city

continued its reputation as the nation’s center for art. The city boasted 434 museums and

galleries in 1982 compared with 100 in Chicago and 65 in Los Angeles. “The patrons

and the audience are here,” observed Arnold Glimcher, director of the Pace Gallery.

“Not only is the greatest collecting populace in New York, but corporate patronage is

based here. Exhibitions also bring collectors—even international collectors—to New

York.”85

The city was also an intensely competitive marketplace for art. The statistics

were stark. Times reporter Michael Brenson estimated that there were 40,000 to 90,000

artists in New York, of which 6,000 could be shown each year at the city’s 400 galleries,

and only about twenty of those shows would meet with “dramatic critical and financial

success.”86

As the steady advance of gentrification into the neighborhood increased rents

for studio space, the lives of the city’s artists grew more precarious, just as the rewards

expanded for those who had captured the attention of the marketplace. “I used to think

84

Ibid. 85

Michael Benson, “New York, New York: City’s Position Secure As Focus of Art World,” NYT, February

28, 1983, A1. 86

Michael Brenson, “Artists Grapple With New Realities,” NYT, May 15, 1983.

237

you could come here and keep going without being that successful,” said painter David

Reed. “You could fit between the cracks, be illegal and get along. Now there is no

middle ground. Either you make it big or you can’t do it.”87

The art the Lower East Side

produced filled an important niche in that consumer marketplace, an entry-level position

for new collectors, with a chance to find a future diamond amidst the dross. “People in

the 1980’s play art the way they play horses,” remarked critic John Russell. “They also

play art the way they play the stock market, at no matter what level. Art in recent years

has been judged by whether or not it ‘performs.’”88

Yet just four years after the beginning of the “downtown” gallery scene, its very

success was threatening to undercut the revived bohemia on the Lower East Side. The

artists had created a “lifestyle” hip enough, and a space safe (and white) enough, for a

wave of gentrification. “There are bohemians who live here who are only pretending to

be bohemians,” said Alfred Marston, chairman of Community Board 3, one of the city

government’s volunteer neighborhood advisory groups, in 1985. “Actually, many of

them are the most straight-laced of people who work days in the financial district and

want to shed that prim, professional image at night and on weekends.”89

The

performance artist and actress Ann Magnuson called the neighborhood’s new arrivals

“fungus on a piece of soggy white Wonder Bread.”90

Or as a neighborhood mural by

Arnie Charnick said: “A PLEA! THE ARTIST WOULD LOVE TO REMAIN IN THIS

87

Ibid. 88

John Russell, “Galleries Are the Seedbeds of Tomorrow’s Art,” NYT, January 22, 1984. 89

Richard D. Lyons, “If You’re Thinking of Living In: The East Village,” NYT, October 6, 1985. 90

Maureen Dowd, “Youth. Art. Hype. A Different Bohemia,” NYT, November 17, 1985.

238

NEIGHBORHOOD AND DESPERATELY NEEDS A LARGE LIVING/WORKING

SPACE! CAN I STAY???”91

Even on the Bowery, the chronic alcoholics, the bars that had kept them going,

and the flophouses that had sheltered them were fading away. The four day-labor

agencies, which had once supplied dishwashers to restaurants and egg-pickers to the

henhouses of the region’s truck farms, had folded up shop by 1986. So too had 9,000

SRO beds and any number of bars.92

“Eight, ten years down the road, there won’t be a

drug problem,” a tired beat cop had remarked in the days before Operation Pressure

Point. “The area’s going to gentrify. It’s Manhattan.”93

Pushed by a wave of capital,

that street corner prophecy was coming true.

Contagions, 1986-1987

In 1985, Ed Koch won re-election for a third term, winning seventy-eight percent

of the popular vote. Backed by Wall Street and the major real estate developers, Koch

had outraised his opponent, Carol Bellamy, by $7 million to $1 million.94

In his own way

Koch had succeeded in replacing the old “urban-development repertory company,”

Times reporter Sam Roberts described as consisting of “the Rockefeller family; Robert

Moses; labor’s Van Arsdale; Tammany’s Carmine DeSapio, and Francis Cardinal

91

Rob Schultheis, “New York: The Soul of the City in a Walk On the Wild Side, the Lower East Side,”

February 12, 1984. 92

Barbara Basler, “With Skid Row Fading, Change Sweeps the Bowery,” NYT, July 29, 1986. 93

Bob Drogin, “Getting High on the Lower East Side,” LAT, January 8, 1984. 94

Margot Hornblower, “Private Prosperity, Public Corruption,” Washington Post, August 26, 1987.

239

Spellman.”95

Koch’s inaugural address expressed a spirit of triumph. “I think we have

earned the right to face the next four years, not as defenders of a damaged city but as

defending champions.”96

Koch bragged, “New York today is what has always been: it’s

the world’s No.1 arena for genius, it’s the battleground of new ideas. New York is the

city where the future comes to rehearse, where the best come to get better.”97

Wall

Street agreed. The President of UBS Securities claimed that fall: “Just look at the sheer

size of it. It is a huge market and a free market and a dynamic market. This doesn’t exist

quite the same anywhere else. . . . There is something more important. That is the

elasticity of it. When you want to act, you can act. You just do it.”98

Robert E. Linton,

chairman of Drexel Burnham Lambert, agreed. “To create active, broad markets you

have to remember first that you need risk takers as well as the capital. Up to now, you

have not had those two together in any depth in any one place except the United

States.”99

There were good reasons for a sense of civic optimism by Manhattan’s elite. The

city had achieved one of the major objectives of the economic development strategies of

the late 1970s: the city’s ability to city finance its operations without depending on steady

increases in outside assistance. Indeed, federal aid as a percentage of the city’s budget

had declined from 20.2 percent in 1979 to 13.8 percent in fiscal year 1986. While

Albany had provided a modest increase in its contribution to the city, moving from 20.4

95

Sam Roberts, “Who Runs N.Y.?” NYT, April 28, 1985. 96

“Text of the Address Delivered by Mayor Koch at His Third Inauguration,” NYT, January 2, 1986. 97

Ibid 98

James Sterngold, “New Rivals Aside, Wall St. Still Calls the Tune,” NYT October 9, 1986. 99

Ibid.

240

to 22.3 percent in the same period, the main source of revenue growth had been from

internal sources. Between fiscal 1979 and fiscal 1986 the city’s tax revenues had grown

by eighty nine percent. The city’s budget and payroll had grown as well; while its budget

had posted surpluses for five years. That January, more New Yorkers, 3.047 million of

them, had jobs, than at any point since 1971. The unemployment rate stood at a little

over 7.0 percent—a terrible number by historical standards of “full employment”—but

roughly comparable to the national level of 6.6 percent.100

It was a compelling argument

for what the culture of risk could accomplish, especially when measured against the bitter

days of the fiscal crisis.

The benefits of this economic improvement had not, however, been distributed

equally. As had been implied in the policy discussions of the late 1970s, the decision to

favor the growth of the city’s highest paying jobs had led to higher levels of income

inequality—an increase of about one-third between 1977 and 1986. The top ten percent

of wage earners went from earning fifteen times the wages of the city’s bottom ten

percent to twenty times their wages.101

The number of New Yorkers living in poverty

increased from seventeen percent in 1977 to twenty five percent in 1985 while public

assistance as a percentage of the city’s budget declined by three percent.102

New York’s

Community Service Society for 1984 reported: “While New York remains a city of gold

for those at the top of the economic ladder, it has become a city of despair for many

100

Joyce Purnick, “The City Has Managed to Fend for Itself,” NYT, January 12, 1986; Robert O. Boorstin,

“New York City’s Jobless Rate 0.2% Over December Figure,” NYT, February 8, 1986; Robert D. Hershey

Jr. “Unemployment Rate Drops to 6.6% as More Get Work,” NYT, February 8, 1986. 101

Freedman, Working Class New York, 294. 102

Moody, From Welfare State to Real Estate, 73.

241

elderly, for the homeless, for women and children barely subsisting on public welfare.”103

It was to those New Yorkers that David Dinkins directed his attention in his inaugural

address as the 24th

Manhattan Borough President, promising to voice the concern of

“those neighborhoods that have been neglected—Harlem, El Barrio and the Lower East

Side.”104

The ascent of inequality, however, did little to dissuade the rest of the world from

following New York’s lead. Indeed, it was the strength of the New York’s securities

markets had pushed a wave of global deregulation as nations sought to retain, or gain, the

profits from managing the world’s capital. As Charles N. Villiers, director of Britain’s

National Westminster Bank, testified before the U.S. Senate in 1986:

What is emerging is a tripartite type global securities market. And London had to act

quickly to retain and attract business that otherwise would have moved to other centers.

It has a number of historical advantages and it needed to exploit them to counteract the

advantages of Tokyo and New York and, to a less extent, the other European centers.

And one of these advantages is of course the fact that banks and securities businesses are

not legally separated as in New York and Tokyo.105

In other words, London would compete with the best tool that it had—less

regulation. This logic applied not only to the historic rivalry between New York and

London, but also to the entire world of finance. This competition for the loosest rules,

and the most profitable marketplace created a cycle of increased risk taking. As John G.

Heimann, Carter’s Comptroller of the Currency, told an interviewer in 1987 “One of the

problems this creates is the lowest common denominator effect. Which markets will

103

Melvin Maddocks, “The Poor-Invisible and Otherwise,” CSM, January 30, 1985. 104

Carlyle C. Douglas, “Dinkins Takes Post as Leader of Manhattan,” NYT, January 2, 1986. 105

United States Congress, Senate, Committee On Banking, Housing, and Urban Affairs, Ninety-Ninth

Congress, Second Session, The Internationalization of Capital Markets (Washington, D.C.: GPO, 1986), 87

242

create standards, which are sufficiently low to drag in the business for economic reasons.

You create regulatory arbitrage [i.e. that firms move their operations to locations with the

weakest rules].”106

Much as interstate deregulation had provided the commercial banks with a

rationale for loosening New York State’s banking laws and lowering New York City’s

taxes a decade earlier—least they move operations to North Dakota, Delaware, or New

Jersey—globalized deregulation provided a welcome reason to lobby for the national

lifting of Glass-Steagall. As Chase Manhattan told its shareholders in the bank’s 1986

Annual Report:

Advances in technology have created opportunities on a global scale, and financial

services innovators have flourished in filling them. The realm of the possible is limited

only by technological capabilities and human imagination. America’s commercial

bankers, however, do business in a different world. Ours is the realm not of the possible,

but of the permissible. Our limits are defined by a set of dusty statutes passed by

Congress half a century ago.107

In December 1986 the banks had their wish granted, at least as far as New York

State was concerned. The State Banking Department agreed to allow banks chartered by

the state to underwrite bonds, commercial paper, and mortgage backed securities. The

ruling did not cause a dramatic change, because each of these banks was the subsidiary of

a national holding company, still under the much more conservative guidelines of the

Federal Reserve. The decision did, however, provide the commercial banks with a

powerful new tool for regulatory arbitrage at the federal level. Bankers could now

106

George Melloan, “Carter’s Comptroller Frets Over Globalization,” WSJ, September 8, 1987. 107

Chase Manhattan Corporation, The Chase Manhattan Corporation 1986 Annual Report (New York:

1987), 6.

243

threaten to dismantle their bank holding companies, withdraw from the Federal Reserve

System, and operate instead under New York State’s more permissive regulatory

standards.108

The Wall Street Journal applauded the decision, “Albany’s deregulation

will probably force the Fed into deregulating more quickly than it intended. Nationally

chartered banks and banks of other states will consider switching to New York. This

competition for the best system is the genius of federalism, where each state is a

laboratory to test new ideas.”109

Already Bankers Trust and J.P. Morgan were lobbying

Delaware for a similar relaxation of its restrictions.110

There was more deregulation to come. On June 2, 1987, the Reagan

Administration appointed Alan Greenspan as the Chairman of the Federal Reserve Board.

In many respects Greenspan had a thoroughly conventional career as an economist in

politics: a PhD from New York University, and thirty-two years as an economic

consultant. He had been the Chairman of the Council of Economic Advisors in the Ford

administration and he had a long history of providing economic advice to Republican

politicians.111

His philosophical background, however, was, unconventional. If the

supply-side ideologues had a heroine, it was the mid-century libertarian prophetess Ayn

Rand. As Greenspan, who had been one of her young followers, described it, “What she

108

Philip L. Zweig, “New York Rules State-Chartered Banks Can Form Units to Underwrite Securities,”

WSJ, December 31, 1986. For a related legal matter, namely the right of New York State-chartered banks

to underwrite securities in their own name, rather than through subsidiaries, Eric N. Berg, “State Banks in

Bid for Powers: Underwriting Rights Sought,” NYT, January 20, 1987. 109

Editorial, “Shattering Glass-Steagall,” WSJ, January 2, 1987. 110

David Clark Scott, “U.S. Bankers see ’87 Go-Ahead for Expanding Financial Services,” CSM, January

13, 1987. 111

Robert D. Hershey Jr. “Markets Surprised,” NYT, June 3, 1987.

244

did—through long discussions and lots of arguments into the night—was to make me

think why capitalism is not only efficient and practical, but also moral.”112

And the

affection was mutual. “Alan is my disciple philosophically,” said Rand, “but his career

as an economic analyst is his own achievement. He is an advocate of fully-laissez-faire

capitalism—but neither he nor I expect it overnight.”113

In other words, Greenspan was a

true believer in the culture of risk.

Unlike Paul Volcker, Greenspan believed adamantly that American banks needed

to be not only larger but also that the last remaining prohibitions on commercial banks

underwriting stocks and bonds needed to be set aside. As Greenspan, sounding much like

Walter Wriston, put it, “developments in computer and communications technology have

reduced the economic role of commercial banks and enhanced the function of investment

banks.”114

The former institutions, Greenspan argued, could use their position in the

securities marketplace to better manage risk. His fellow financial regulators—the

Comptroller of the Currency, the chairman of the FDIC, and the U.S. Treasury—shared

his viewpoint. Deregulation was a matter of international competitiveness. “We are

seeing that capital has become a major competitive tool in banking, ”said Treasury Under

Secretary George D. Gould that summer, and “without it [American] banks will have a

very hard time competing in the international area.”115

Once this process of deregulation

112

Maureen Down, “Where ‘Atlas Shrugged’ Is Still Read—Forthrightly,” NYT, September 13, 1987,

Jennifer Burns Goddess of the Market: Ayn Rand and the American Right (New York: Oxford University

Press, 2009). 113

Nathaniel C. Nash, “A Laissez-Faire Pragmatist: Alan Greenspan,” NYT, June 3, 1987. 114

Nathaniel C. Nash, “Let Banks Enter Securities Field, Greenspan Says,” NYT, November 19, 1987. 115

Nathaniel C. Nash, “Treasury Now Favors Creation of Huge Banks,” NYT, June 7, 1987.

245

was completed, bankers would, ultimately, gain the power not simply to direct capital but

to shape very nature of the marketplace itself.

It is fitting, then, that Morgan Stanley, with its dynastic ties back to the last

American banking imperium, would provide a demonstration of this power in the spring

of 1987. It would happen under the banner of an anachronistic British phrase, “merchant

banking,” that had begun circulating on Wall Street in 1984. Rather than acting as an

agent for others and collecting the standard one percent fee on the transaction, an

investment bank could choose to accept more risk and become a principal investing the

firm’s own capital, in a deal such as an LBO. As Arthur J Nagle, managing director in

charge of the leveraged buyout group at First Boston, put it, “we have so much expertise

at evaluating and structuring deals that we said, why not take the next step and bet on our

own advice.”116

By 1989, a group of forty people at Morgan Stanley managed a $2

billion dollar pool of capital from the firm and institutional investors had become the part

owner of forty companies. 117

Investing in an LBO created the opportunity for an investment bank to profit from

both capital gains and from a multitude of fees. First, the bank would use its own capital

to complete a deal by offering a bridge loan to the firm that planned to go private—for

which the bank would collect a “commitment fee,” plus interest on the loan, and equity

ownership stake in the newly private company. To refinance the bridge loan, the bank

would then collect “advisory and underwriting fees” for refinancing the bridge loan

116

James Sterngold, “Wall St. Buys Into the Action,” NYT, June 19, 1986. 117

Sarah Bartlett, “Morgan’s Battle With Success,” NYT, May 18, 1989.

246

through a sale of junk bonds. Further fees came from offering other investment banking

services to the company while it was part of the bank’s portfolio. And finally, if all had

gone well, the bank could sell its equity stake when the private firm was either sold to

another company or made a public offering. 118

These deals were also ripe with conflicts

between the interest of the bank in generating short-term profits through fees and the

long-term health of the company in question.

These problems were well understood on Wall Street from the beginning. In

1984, Felix Rohatyn, wearing his hat as an investment banker, described the dilemma of

merchant banking. “It’s a potential conflict. Having an investment in a company which

you are advising can lead to awkward situations, such as whether or not to dilute

ownership by raising new equity.” There were also risks to investment banks if they tied

down their capital in long-term lending and equity ownership. “We want our capital [at

Lazard] to be exceedingly liquid,” Rohatyn continued, “considering the vagaries of our

industry.”119

At Salmon Brothers, a latecomer to leveraged buyouts and merchant

banking, the company’s CEO, John Gutfreund, described the firm’s quandary, “I don’t

have the comfort that we have the personnel or the skills to do merchant banking. I

should add that I’m not sure anyone else does either.”120

Yet Gutfreund understood that

by passing up these deals, the profits involved would accrue to rival firms, leaving the

capital base of Salmon Brothers overmatched. Along with the problem of conflicted

118

For a discussion of this fee-structure see James Sterngold, “Deep-Pocketed Deal Makers,” NYT, April

14, 1987. 119

Fred R. Bleakley, “Wall St.’s Merchant Bankers,” NYT, November 19, 1984. 120

James Sterngold, “Can Salomon Brothers Learn to Love Junk Bonds,” NYT, November 16, 1986.

247

interests, illiquidity, a lack of managerial expertise, there was also a moral dimension to

entering merchant banking. As another member of Salmon Brothers said, “We are not

just in the business of pushing companies around. There is the ultimate issue of whether

we in the financial community should be moving into the area of speculative

capitalism.”121

But Wall Street had already chosen its path. By 1987, the ultimately

complementary powers of investment and commercial banks, leveraged buyout operators,

and corporate raiders had created a whirlwind of capital that disseminated the culture of

risk as a matter of routine. If freedom was the carrot of risk, capital markets were a very

big stick.

One deal illustrates the dynamics of how financial risk taking could reshape the

economy of the United States as a whole. When 1987 began, Burlington Industries, the

largest textile manufacturer in the United States, was a troubled company trying to right

itself in the midst of an industry scorched by overcapacity and overseas competition.

While the company was headquartered in Greensboro, North Carolina, its leadership had

gradually shifted to New York City where the company’s CEO, Frank S. Greenberg,

lived.122

Burlington employed 43,000 people and had revenues of $2.778 billion. Its net

earning of $56 million, although a significant increase from $12.5 million the year before,

was a slender percentage of its sales. As befitted a company trying to improve its

profitability, managers had made capital expenditures of $125 million and they had been

gradually paying down Burlington’s long-term debt. The company had also taken

121

Ibid. 122

“A Takeover Bid Tests Burlington’s Chairman,” NYT, May 5, 1987, D2.

248

incremental steps to manage its inherently cyclical business, such as developing

specialized woven and industrial fabrics through a research and development program.

Burlington had been spending heavily on a program of new machinery, which was

winding down at the end of that 1986. The company’s managers had also laying-off (or

divesting businesses that employed) 26,000 employees. It was not a business run by

bleeding hearts. Since 1983, however, Burlington’s year-end stock price had declined

from forty-two to thirty-five dollars per share.123

And therein lay an opportunity to buy

new textile machinery for the price of an old model. Except for the small problem that

loading a company in a cyclical industry with debt is a bad idea.

But a bad idea could still make for a good deal. On April 8th, 1987, the firm’s

stock surged after it was announced that corporate raider Asher Edelman and Dominion

Textiles, a Canadian manufacturer, had jointly amassed a 4.9 percent stake in the

company. By Friday, April 24, the Edelman/Dominion group controlled 7.6 percent of

Burlington’s stock and secured Shearson Lehman Brothers to provide financing for a bid.

Edelman wrote to management offering to purchase the company for $1.51 billion.

While Edelman proposed a “friendly” deal, the proposal to Burlington made it clear that

if the offer was rejected, the takeover would become hostile. He wrote, "In the event you

don't agree to a negotiated transaction, we will consider other options available to us,

123

Burlington Industries, Burlington Industries 1986 Annual Report (Greensboro, NC: 1987), discussion of

management strategy, 1-3, 8, 12; automation program 18; financial and employment statistics 30-31;

inflation adjusted stock-price estimates, 28.

249

including, but not limited to, an offer made directly to your shareholders."124

The

company was now “in play.”

Much acrimony, including litigation, followed in a month long contest between

the two organizations. While Burlington publically fought to remain independent, the

company’s management was also shopping the firm to LBO outfits, including KKR and

the buyout unit of Merrill Lynch. But Morgan Stanley made the highest bid $2.07

billion, almost fifty percent more than the its largest buyout to date.125

Large commercial

banks, including Bankers Trust, Chemical Bank and Well Fargo, committed $1.5 billion

for a line of credit for the deal and arranged to syndicate another $350 million in

financing. Morgan Staley and its partners would provide $861 million in “bridge

financing” and equity in the new firm.126

After additional litigation, seventy eight

percent of the shares were tendered for the buyout in June. The deal was formally

completed in September for $2.16 billion dollars.127

Dominion made $15.2 million after-

tax profit from selling its stake to the buyout group, which included Burlington’s

managers.128

Alan E. Goldberg, the thirty-two-year-old “architect” of the transaction,

reflected on what had taken place. “We let the economics of the deal guide our thinking.

There is no emotion there at all. The only thing we thought was unique about the

124

Laurie P. Cohen and Alan Freeman, “Proposal Is Made for Burlington Industries Inc.,” WSJ, April 27,

1987. 125

“Burlington Industries Agrees to Buyout Led by Morgan Stanley for $2.07 Billion,” WSJ, May 21,

1987. 126

“Edelman, Dominion Sue to Bar Burlington Industries Buyout,” WSJ, June 1, 1987. 127

“”Morgan Stanley Gets 78% of Burlington Shares Under Offer,” WSJ, June 25, 1987, and “Morgan

Stanley-Led Group Buys Burlington Industries,” WSJ, September 4, 1987. 128

“Dominion Textile Sells Stake,” WSJ, October 22, 1987.

250

transaction was the fact we were able to put together a money-good deal so quickly in the

face of an unfriendly tender offer.”129

Maybe it was easier to focus on the mechanics of

the deal, because it was already clear that the human costs were going to be very ugly.

To repay the debt incurred from the LBO, Burlington had to cut costs and sell

assets. The company would be “sliced and diced in every direction,” according to one

observer.130

And it was. Even before the consummation of the transaction that June, the

company laid off 525 employees at its Greensboro headquarters and announced the

closure of its research and development center in Jamestown, N.C.131

In August, the

company announced that the number of layoffs had increased to 935 jobs. The firm

would seek to sell $900 million in assets over the next two years and cut capital

expenditures to $50 million a year. The divestitures were necessary because, as part of a

new junk bond offering, the newly renamed Burlington Holdings told potential investors

its cash flow from operations alone would be insufficient to meet $900 million in debt

repayments between 1988 and 1989.132

In October, the Precision Fabrics, Glass Fabrics,

and Industrial Fabrics divisions went on the block.133

In November, the company’s

Erwin N.C. denim plant, its largest and most modern mill, was sold, ironically, to

Dominion Textile for $205 million.134

In December, the company sold Burlington

129

Daniel F Cuff, “Morgan Stanley’s Man Behind Burlington Deal,” NYT, June 26, 1987. 130

Linda Williams and Laurie P. Cohen, “Buyout of Burlington Industries May Force Firm to Become

Much Smaller,” WSJ, May 22, 1987. 131

Reuters, “Burlington Cuts 525 Jobs,” NYT, July 21, 1987. 132

“Sale of Assets By Burlington,” NYT, August 15, 1987. 133

“Burlington Plans to Sell 3 Divisions,” NYT, October 9, 1987. 134

Peter Waldman and Alan Freeman, “Burlington Industries’ Denim Plant Sale Catapults Old Rival to

Near Top of Field,” WSJ, November 9, 1987.

251

Blended Fabrics and Burlington Prints to another leveraged buyout group led by Citicorp

Venture Capital and the division’s management.135

For its part, Morgan Stanley had collected $87 million in advising fees in the first

fifty days of owning the company.136

And there was more to come. The firm collected

$22 million in additional advisory fees for Burlington’s divestitures from 1987 to 1989.

In the latter year there was also a “special dividend” to Morgan Staley, of $56 million,

financed by the sale of additional junk bonds, along with $9 million in underwriting fees

for arranging the sale of the bonds. By 1990 the company had collected approximately

$176 million in fees and dividends from Burlington. This had been done on with an

initial equity investment of $46 million dollars from Morgan Stanley. The junk bond

offerings and bank loans in 1987 had paid off the short terms loan that the bank had made

to purchase the company.137

After that, Morgan’s only risk was to its pride, not to the

investment bank’s capital.

Times columnist Michael Weinstein wrote in 1990: “Junk bond sales are, as the

philosopher Robert Nozick said in another context, capitalist acts between consenting

adults, no more, no less. Some players win, others lose, but they all know the risks.”138

There is a ring of truth in this remark, when one examines the buying and selling of junk

bonds and other, even more complicated financial instruments, as an end whose purpose

135

The Associated Press, “Burlington Industries Plans to Sell 2 Units,” NYT, December 25, 1987. 136

George Anders, “Morgan Staley Found A Gold Mine of Fees By Buying Burlington,” WSJ, December

14, 1990. 137

Ibid 138

Michael M Weinstein, “The Editorial Notebook: Junk Bonds, Consenting Adults,” NYT, February 15,

1990.

252

was profit. Yet Wall Street had historically justified its role in the American economy as

a means to accomplish larger social goods, thus creating a moral and legal distinction

between investing in securities and a crapshoot.139

From that perspective the picture

looks much gloomier. Morgan Stanley, Burlington Industries senior management, Asher

Edelman and the bankers, lawyers, and investors who had catalyzed thedeal , took

consensual, controlled, and limited risks in exchange for the prospect of lucrative

rewards. The workers, their families, and their communities as a whole, in Greensboro,

Jamestown, Erwin, and the other textile towns swept into the gamesmanship of global

capital had no consent about whether or not they would “play.” For those communities it

was all risk and no reward. Yet the power that New York’s capital markets wielded

meant that they now had to live in the culture of risk as much as the residents of Park

Avenue or the South Bronx.

Yet what Morgan Stanley did at Burlington Industries lacked one crucial step that

limited the power that the investment bank could wield. The bonds that Burlington

issued to “cash-out” Morgan Stanley’s investment were still low-rated junk bonds. And

that had limited the number of potential investors, largely keeping them out of the deep

pools of capital such as pension funds, endowments, and trusts, that were constrained by

statute, regulation, or old-fashioned fear from buying high-risk bonds. But Michael

Milken, inventive and tireless as always, had been working on a solution to that problem.

139

Debates about the distinctions between “investment,” “speculation,” and “gambling” have been a long

and recurring feature in American life, see Steve Fraser, Every Man A Speculator: A History of Wall Street

in American Life (New York: Harper Collins, 2005), 55-60, 138-39, 251-252.

253

In September 1987, he issued a $100 million offering of asset-backed securities from

Imperial Savings & Loan Association that blended a portfolio of investment quality

bonds with junk bonds. The issue received a triple-A rating, the same as a U.S. Treasury

obligation, from both Moody’s and Standard & Poor’s.

The scale of the sale was small, but its design was a triumph of financial

engineering. Using its in-house credit models, Moody’s determined that the performance

of the security would match those of a triple-A credit, even though not all of the bonds

were investment grade.140

This was the key difference between the Imperial Savings

transaction and earlier securitization transactions that used collateralized mortgage

obligations and asset-backed securities. In previous securities issues, the credit quality of

the CMO was the same as the loans that had been pooled together to create it. In this

deal, the credit quality of the resulting pool became better than the securities that had

been mixed together to create it. M. Douglas Watson Jr, the “director of structured

transactions” at Moody’s, helped develop the new product in response to inquiries from

thrifts eager to reduce their junk bond exposure. At the time, Watson was unsure if such

securitizations would evolve beyond a niche product. “The deals are complex, they’re

difficult to put together, they need high levels of protection, and there’s a cost element,”

he said.141

Now a larger number of investors could now buy riskier debt, once it had

140

Ann Monroe, “Agencies Will Broaden Triple-A Rating,” WSJ, September 8, 1987. 141

Leslie Gifford, “Moody’s Unveils Aaa Rating criteria For Securities Backed by Corporates,” The Bond

Buyer, September 11, 1987.

254

been “safely” packaged into asset-backed securities. This made it easier for borrowers to

make even risky loans, knowing that they could be resold, at a profit, to someone else.

There was a chilly irony to this frenzied deal making. In Atlas Shrugged (1957),

Rand herself has very harsh words for the kind of transactional capitalism, with its shades

of cronyism and self-dealing that had thrived with the triumph of risk:

These were the men who made deals. . . . These were a new biological species, the hit-

and-run businessmen, who did not stay in any line of business longer than the span of one

deal, who had no payroll to meet, no overhead to carry, no real estate to own, no

equipment to build, whose only asset and solve investment consisted of an item known as

“friendship.” These were the men whom official speeches described as the “progressive

businessmen of our dynamic age,” but whom people called the “pull peddlers.”142

To “save” capitalism, a good many self-proclaimed champions of the free market

had become the monsters that they had once presumably set out to slay.

There were even scattered second thoughts among the elite who had created and

benefited from this way of life. In the summer of 1986 Bob Howitt, a money manager,

wrote in an essay for the Wall Street Journal about his commute from New Jersey to New

York. “You cannot distinguish the human litter from the litter created by humans.

Another escalator, thank God, and you can join the line of escapees. Soon you will be in

your car going to the warm womb of your home. You try not to think, try not to look.

You try not to cry.”143

The writer Lesley Hazleton, a self-described member of the

“urban gentry” with a newly renovated condominium in the East Village, wrote in the

Times, “I don’t have children. If I did, I wouldn’t live on Tompkins Square. I wouldn’t

142

Ayn Rand, Atlas Shrugged, Thirty Fifth Anniversary Edition (New York: Dutton, 1957, 1992) 913. 143

Bob Howitt, “Life (Such as It Is) In the Big City,” Op-Ed, WSJ, July 16, 1986.

255

want my children to watch the shuffling hopelessness, to know that squalor is accepted as

normal.”144

For those with means, however, there was escape. Jerry W. Kolb, vice

chairman of Deloitte, Haskins & Sells, the nation’s sixth largest accounting firm

described why his firm, was relocating to Fairfield County, Connecticut:

You walk out of Grand Central Station. On the south side of the street, you thread your

way through garbage pickers. On the north side, you deal with the panhandlers. If

there’s water on the street, the cabs will do their best to spray it on your carefully pressed

suit. You don’t have to be a creative genius to ask the question: Why are we here?145

And Deloitte was not the only firm grabbing an exit visa from Manhattan. J.C.

Penney and Mobil Corp announced their departures to Dallas, Texas, and Fairfax,

Virginia, respectively, adding three million square feet of office space to an already

softening real estate market.146

The salaries that Wall Street could afford to pay had

created jobs, but they had also driven up the cost of housing and other amenities. That

meant an escalating cost for corporations hiring middle managers and other functionaries.

Indirectly, Wall Street’s insistence on “shareholders’ rights” had made it much harder to

justify an expensive head office in the city for a business whose main operations lay

elsewhere.147

Growing investment banks, however, appeared ready to fill these

vacancies. “Manhattan has once again emerged as the capital of a vast manufacturing

empire,” reflected Times reporter Albert Scardino. “Now, however, rather than

144

Lesley Hazleton, “About the Homeless Men on My Doorstep,” NYT, October 3, 1987. 145

Margot Hornblower, “In the Shadow of the Boom,” Washington Post, August 24, 1987; David Clark

Scott, “Big Apple Polishes Image to Fight Corporate Exodus,” CSM, June 22, 1987. 146

Frank Sommerfield, “Breaking Up Is Hard on Us: Defections Spell Big Trouble for N.Y.’s Real Estate

Market,” Crain’s New York Business (CNYB), May 4, 1987. 147

Dennis Kneale, “Mobil Plans to Forsake New York City In Favor of Virginia’s Green Pastures,” WSJ,

April 27, 1987 and “Penney Will Go to Dallas, Officials in New York Say,” WSJ, April 29, 1987.

256

manufacturing goods, New York manufactures debt.”148

Not everyone was as optimistic

about these developments. “The loss of diversity spells vulnerability,” remarked Samuel

Ehrenhalt, the regional chief of the U.S. Bureau of Labor Statistics. “New York City lost

one out of four manufacturing jobs—three times the national rate—during the 1980s. It

has based its growth on putting more and more eggs in fewer baskets.”149

And now one

of those baskets, corporate headquarters jobs, was shrinking. As Seymour B Durst, a

major real-estate developer, told a reporter in May 1987, “We’ve made New York City a

one-industry town, pretty much. If that [financial service sector] should ever slow down,

it could be like Houston.”150

And the premonitions of such a “slow down” were

gathering in strength.

In January 1987 John Kenneth Galbraith wrote in The Atlantic Monthly about the

boom, “This development (the mergers and their resulting debt), to be adequately but not

unduly blunt, will eventually be regarded as no less insane than the utility and railroad

pyramiding and the investment-trust explosion of the 1920s.”151

On August 13, 1987, the

bull market celebrated its fifth birthday. The advance had carried to index to a

cumulative gain of 244 percent.152

Since August 1982, the value of American stocks had

increased by $1.8 trillion. Corporate debt had climbed by $700 billion.153

That same

148

Albert Scardino, “Departures Aside, the Business of Manufacturing Dept. Keeps the City Economy

Strong,” NYT, May 3, 1987. 149

Margot Hornblower, “In the Shadow of the Boom,” Washington Post, August 24, 1987. 150

Roger Lowenstein, “Corporate Exits Threatening Big Apple’s Realty Boom,” WSJ, May 19, 1987. 151

John Kenneth Galbraith, “The 1929 Parallel,” Atlantic Monthly, January, 1987. Available On-Line:

http://www.theatlantic.com/magazine/archive/1987/01/the-1929-parallel/304903. Accessed June 14, 2012. 152

Vartanig G. Vartan, “A Happy Birthday for the Bull,” NYT, August 13, 1987. 153

Leslie Wayne, “5-Year Stock Rally: The Far Reaching Impact,” NYT, August 3, 1987.

257

August, The Great Depression of 1990, a forecast from the unorthodox economist Ravi

Batra reached number three on the New York Times best-seller list for non-fiction.154

Felix Rohatyn told the Washington Post, “We’re going to face a recession—it should

have been here by now. When it happens, there will be a weak stock market, and the

ripple effect in New York will be felt from the investment banks that have been living

very high, to the real estate market, to the high-fashion boutiques.”155

As Kenneth

Lipper, the investor and former deputy mayor of New York put it, “You move further and

farther out on the high wire, and when you fall, it's a long way down.”156

The failure in early autumn of the once heralded New York Insurance Exchange

was a local case in point about the fragility of the speculative economy. The NYIE was

dominated by underwriting syndicates with limited capital. These groups had gained

market share by taking marginal risks that larger insurance firms declined to underwrite.

These bets quickly soured. Between 1982 and 1984 a spate of hurricanes and large

property-casualty losses burned through their capital and reserves. By September 1987,

eight of the fifty underwriting syndicates had gone under, and $25 million had been

drawn down from the exchange’s insolvency fund. Joseph Fahys, the Exchange’s

president remained optimistic. “The exchange of the future will have syndicates with a

larger base of capital, superior underwriting talent and a much leaner and more efficient

154

Thomas C. Hayes, “Economist of Mystic? Tune In, Around 1990, To Find Out,” NYT, August 30, 1987. 155

Margot Hornblower, “In the Shadow of the Boom,” Washington Post, August 24, 1987. 156

Leslie Wayne, “5-Year Stock Rally: The Far Reaching Impact,” NYT, August 3, 1987.

258

back office”157

He was rearranging the deckchairs. On Monday, November 23, the

members of the exchange voted to halt writing or renewing insurance policies. "Most of

the bad business was third-party liability insurance that was priced unrealistically low,"

said a spokesperson, which at last admitted the obvious.158

The bohemia of the Lower East Side was also in trouble. Gentrification was

inexorably pushing out the starving artists, performance spaces, and small galleries that

had given the neighborhood its energy. David Rothenberg, a former Off Broadway

producer explained, “there’s always been room in this town for dreamers and poets.

Sadly it seems that the weavers of dreams are becoming expendable.”159

“There used to

be a sense of community,” sighed the art dealer Gracie Mansion. “Now, it’s just another

art neighborhood. There’s Madison Avenue, 57th

Street, SoHo and the East Village.”160

The cafes, gift shops, and boutiques that had sprung up to cater to art buyers remained

attractive amenities for the urban gentry. As gentrification continued to press into the

neighborhood, local housing activists posted signs on vacant city owned buildings that

read: “This Land is Our Land. Property of the People of the Lower East Side. Not for

Sale.”161

Even the artists themselves, the successful ones who had built careers and even

made smallish fortunes, were questioning the culture that had shaped their artistic lives.

157

Priscilla Ann Smith, “Insurance Exchange Is in Turmoil as 8 Syndicates Fail, Losses Mount,” WSJ,

September 25, 1984. 158

“Insurance Exchange Votes to Halt Writing of Policies,” WSJ, November 24, 1987. 159

Samuel G. Freedman, “Real-Estate Boom Cited As Peril to Arts in City,” NYT, April 15, 1986. 160

Douglas C. McGill, “At Boom Slows in East Village,” NYT, July 25, 1987. 161

Lisa W. Foderaro, “Will it Be Loisaida or Alphabet City,” NYT, May 17, 1987.

259

Keith Haring in his quest to merge “so-called high art and low art” had opened his Pop

Shop in 1986. “There are so many copies of my stuff around,” Haring mused, “people

should know what the real thing looks like.”162

In his journal on October 9, 1987,

however, Haring wrote:

I am 29, and I’ve been showing my works internationally on the “gallery circuit (i.e., art

market) since around 1982. My things started appearing auctions around 1984 and since

then have been in many auctions. Unfortunately, many of the people who were buying

my work original in 1982 of ’83 were merely buying it as an investment. They could

care less whether they like it so long as it would make them money. I thought many of

these people were assholes in the beginning and naively sold them works that may not

have been of great quality. They are now reselling all of these things and making much

more money than I made originally. The whole system sucks dick, but it is almost

impossible to avoid.163

There were signs of speculative froth lapping over the art market as well. On

March 30, 1987, a pair of bidders, dueling in anonymity over the telephone, first at

$100,000 a second, then at $500,000 a second, sent the price of a Van Gogh “Sunflower”

to $39.9 million dollars, almost four times the previous record for a piece of art.164

Some

dealers got nervous. “Anybody who says it can’t collapse wasn’t there in 1930 to 1933.

You couldn’t sell anything,” warned Klaus Perls, long-time New York art dealer. “This

is a fantasy world like 1929, when people just didn’t want to believe that another group

of suckers wasn’t going to bail them out tomorrow.”165

But money needed an outlet. As

Lawrence Kudlow, the chief economist at Bear, Stearns, noted, “in the 70’s, you would

have blamed this on inflation. . . . .In the 80’s, we haven’t had any real inflation. I think

162

Marla Donato, “Hanging Out,” Chicago Tribune, October 1, 1986. 163

Keith Haring, “October 9, 1987,” Keith Haring Journals, 187. 164

Francis X. Clines, Van Gogh Sets Auction Record: $39.9 Million,” NYT, March 31, 1987. 165

Meg Cox, “Spring Finds Art Market Vigorous, But Some Pain a Gloomy Future,” WSJ, May 19, 1987.

260

you have to say it is all due to the remarkable creation of new wealth.”166

For that

reason, Jeffrey Deitch who had cofounded Citibank’s art advisor service in 1979,

remained optimistic. ”There is a globalization of the art market, like the securities

market,” Deitch assured prospective clients. “Even if the Hong Kong buyer is out or the

German buyers feel a political dampening, someone else in the world is riding high and

ready to buy.”167

On June 28, 1987, the city’s Commission on the Year 2000 issued its report,

optimistically titled “New York Ascendant.” The report offered some of bold boosterism

that had defined the city before the fiscal crisis.

New York City is one again crowded, energetic and exciting. Its economy is

booming. Everyday brings new business and new customers to a wide variety of

neighborhoods. Retails stores are opening everywhere. Wall Street is again the world’s

capital in finance and auxiliary services of all kinds have sprung up to oil the machinery

of finance, real estate and insurance.168

But Robert Wagner Jr, who had led the commission, remarked later on the report

that he might have “made it something a little less optimistic and tamer, thought the

report itself is a report not of an ascent of a jet plane but much more the ascent of a

mountain climber on a very tough mountain.”169

An even better description would have

been a mountain range with the jagged peaks and deep valleys of race, class, power

fragmenting the city into cantons.

166

Rita Reif, “Global Market Brings Auction Records,” NYT, August 10, 1987. 167

Meg Cox, “Boom in Art Market Lifts Prices Sharply, Stirs Fears of a Bust,” WSJ, November 24, 1986. 168

David W Dunlap, “The Shattered Vision of the Booming 90s,” NYT, March 8, 1992. 169

“The Reminiscence of Robert F. Wagner Jr,” Columbia University Oral History Research Office, 108.

261

The academics, politicos, and business leaders who had served on the commission

were well aware that the city’s growth had been unevenly distributed, especially when

compared with the post-war period, and that its physical and social infrastructure—the

ladders of economic mobility—was breaking down. “And above all, for us [Commission

members], a deep concern that New York would not be a city of opportunity in the future,

which is if anything what has given it a soul,” Wagner remembered. “For 300 years

[New York City] was a place where people came and were given a chance to enter into

the middle class, into the mainstream.”170

For many New Yorkers it did not work that

way anymore. The problem was as easy to see as the knots of beggars who had seemed

to multiply that summer in Times Square and subway stations, outside ATMs, on the

steps of churches, supermarkets, and the department stores. They could have been

arrested for loitering. But the cops had other things to worry about.171

“New York

Ascendant” warned that if the city’s “underclass” continued to grow, “the New York of

the 21st century will be not just a city divided, not just a city excluding those at the

bottom, but a city in which peace and social harmony may not be possible.”172

The

report’s authors, however, confronted the same problem that had led to the rejection of

the Master Plan for New York City in 1973. The city’s finances were certainly in better

shape, but there were not enough funds available, the report writers argued, for the city to

pay for the major social expenditures necessary to decrease poverty.

170

The Reminiscence of Robert F. Wagner Jr,” OHRO, 109-110. 171

Lydia Chavez, From Subway to Church, the Panhandler’s Cup Is Out,” NYT, July 31, 1987. 172

Quoted in Joseph Giovannini, “A Vision of New York as It Reaches for the Next Millennium,” NYT,

July 5, 1987.

262

As Felix Rohatyn framed the problem, “In New York, you have dizzying amounts

of wealth living cheek by jowl with sickening levels of poverty. But because of our

brush with bankruptcy, the city no longer has any illusions about the ability of

government to solve all the problems of poverty . . . .We’re conscious of our limits.”173

What’s striking is that the “limits” Rohatyn was referring to were, in part, the result of the

priorities that the city’s elite, including Rohatyn, had quite consciously chosen, knowing

what the social consequences would be. The decisions made to free “slack resources”

had subsidized the rise of the city’s precarious economy but had limited what was

available for everything else. The hope had been that, eventually, there might be

something for the rest of the city: more jobs, more money for social services. That had

not happened on a large scale. “We all expected some trickle-down effect of the boom

economy,” said David R. Jones, who had been the director of the city’s Youth Bureau,

“and it’s not working.”174

But what had been the debatable in 1977 had become the

intellectual gospel of 1987.

In light of those “limits,” Osborn Elliott, Abe Beame’s former Deputy Mayor for

Economic Development, had little optimism that funds could be found to bridge what he

called the “divided city” that left two of every five children, 700,000 of them, in poverty.

The Reagan Administration, Elliott argued, had “shredded, among other things, much of

our social safety net—along with the means to repair it.” Ordinary New Yorkers, he

suggested, would have to step into the gap; volunteering to give their money and time to

173

Margot Hornblower, “South Bronx, 10 Years After Fame,” Washington Post, August 25, 1987. 174

Sam Roberts, “Gather Cloud: The Poor Climb Toward 2 Million,” NYT, June 11, 1987, B1.

263

alleviate the city’s major social problems, from teen-age pregnancy and homelessness to

drugs addiction and high school dropouts.175

It was same logic that had justified the

creation of the city’s shift towards the “supply-side” in the first place; that the promotion

of private self-interest would yield public rewards. Yet by the summer of 1987 it was

clear that these principles did not work for the protection, let alone the enhancement, of

the city’s common life.

One place to see the problems of voluntarism was in the continuing crisis over a

homeless population estimated in 1987 at 27,000 people. In addition approximately

35,000 families were “doubled up” in the city’s housing projects (where the waiting list

stood at an interminable twenty years for an apartment) and another 73,000 were

squeezed into private housing.176

Almost 9,000 children were living in the city’s sixty

“welfare hotels.”177

The city had responded with a new homeless shelter plan to move

the 10,000 souls who were sleeping on the floors of old armories into better quarters.

Some were modeled on the old SROs with 200 people housed in private rooms and

shared baths. “The mayor has moved forward and we should give him credit for that,”

remarked Robert M. Hayes, legal counsel to the Coalition for the Homeless. “In the

historical context we have traveled full circle from subsidizing the conversion of S.R.O’s

to rebuilding what we destroyed.”178

Shelters were sited in poor and marginal areas

where the city owned vacant land, a strategy that almost guaranteed neighborhood

175

Osborn Elliott, “How New Yorkers Can Help the City,” Op-Ed, NYT, August 4, 1987, A23. 176

Margot Hornblower, “South Bronx, 10 Years After Fame,” The Washington Post, August 25, 1987. 177

Lydia Chavez, “Welfare Hotel Children: Tomorrow’s Poor,” July 16, 1987. 178

Suzanne Daley, “New York City to Build Five Shelters Modeled on S.R.O. Hotels,” NYT, May 20,

1987.

264

consternation. “What we need around here is a supermarket not a shelter,” said one

Bushwick resident.“ The nearest one [supermarket] is a mile away. The old folks are

afraid to walk there and they can’t afford a cab. What are we going to do if there are

more criminals in the neighborhood?179

It was easy enough for the Times to call this an

example of NIMBY-ism, the cry of Not In My Back Yard. In retrospect, however, these

complaints, however uncharitable, seem quite reasonable. The city’s beggars and bag

ladies would no longer harass, or simply unsettle, the free-spending tourists and bankers

in Manhattan. Meanwhile, the outer borough residents would assume the risks to their

property values and personal safety that came with trying to humanely warehouse the

poorest of the poor

The rubble that Jimmy Carter and Ronald Reagan had visited at Charlotte Street

in the South Bronx was finally gone. The grand plans for the neighborhood’s

redevelopment, created and then shelved by the city in the aftermath of Carter’s 1977

visit, had finally amounted to something: Charlotte Gardens, ninety-one incongruous

aluminum-sided ranches, surrounded by quarter-acre lawns and white fences. These

homes were far better than the rubble they replaced. But it was a not the 732 apartments

that had originally been planned for the site.180

What had shocked America ten years

earlier had become what ecologists would call a “sacrifice zone,” a place given up on in

the name of rebuilding the “commanding heights” of New York City’s, and America’s,

economy.

179

Suzanne Daley, “Go-Ahead for Shelter Plan Generates Visions of Ruin,” NYT, August 21, 1987. 180

Sam Roberts, “Charlotte Street: Tortured Rebirth of a Wasteland,” NYT, March 9, 1987.

265

“There’s a hopelessness in this community. These youngsters don’t feel there’s

anything out there for them,” sighed Mary Morales, who ran a clinic for pregnant

teenagers in the South Bronx. “Fifteen-year-olds who were raised by single parents are

having their own children. What’s new is that a lot of youngsters in our community are

suicidal.”181

The woes in the South Bronx were further compounded by the spread of

AIDS as the virus passed from needles-to-needles, from lovers-to-lovers, and from

mothers-to-children. “The structure is so rotted out already,” said Ernest Drucker, the

director of community health at Montefiore Hospital, “To superimpose this is almost

unimaginable.”182

In the words of a methadone patient at Montefiore “Up here, people

have been waiting all their lives to get screwed, and here it is.”183

In 1987, contained both flickers of hope and the realization that the number of

new AIDS infections and deaths continued to climb relentlessly. Since 1986, the GMHC

had doubled its paid staff, to seventy, in order to organize 1,500 volunteers and a budget

of $4 million dollars. Despite the acuity of the crisis, sixty percent of the group’s funding

still came from private donations.184

Those donations, however, were growing, along

with philanthropic funds for AIDS research. In 1983, five foundations had put their

dollars on the line against the virus; by 1987 the number had risen to sixty. “In the last six

months, there has been an enormous change in the response of foundations, corporations

and the public generally,” remarked Mathilde Krim, head for the National Foundation for

181

Margot Hornblower, “South Bronx, 10 Years After Fame,” The Washington Post, August 25, 1987. 182

Jane Gross, “An Ever-Widening Epidemic Tears At the City’s Life and Spirit,” NYT, March 16, 1987. 183

Ibid. 184

Ibid.

266

AIDS Research. “I cannot pinpoint any single event as the reason, but people have

finally caught on that AIDS is a potential threat to everybody and has an impact on

health, the economy and our lives.”185

“The hardest thing for the public, for all of us, is

that we desperately want certainty,” said Stephen C. Joseph, the Health Commissioner.

“There just is no certainty on most of these issues, except that we face an enormous toll

of illness and death.”186

A man whose partners had already died from the AIDS asked his

support group, ‘If I get sick, who’s going to take care of me?’ They replied. “‘Everybody

will be sick already.’ ‘Or taking care of someone else.’ ‘Or gone.’”187

The most promising development in AIDS treatment had come on March 20,

1987, with the Food and Drug Administration’s approval of azidothymidine, marketed by

Burroughs Wellcome Company under the brand name Retrovir, but known thereafter by

its acronym, AZT.188

While it had been developed with research support from the

National Institutes of Health, the new drug retailed for $10,000 per patient per year. The

drug had already created a storm of controversy due to the FDA’s insistence on

proceeding with its double-blind protocols to test not just for safety but effectiveness.

The approval of AZT sent a signal that perhaps there were more and better treatments in a

laboratory somewhere, just waiting for the FDA to act.189

The FDA had its reasons for

continuing what seemed to AIDS activists an infuriatingly deliberate pace of drug testing.

As Dr. Samuel Broder, who directed AIDS drug testing at the National Cancer Institute

185

Kathleen Teltsch, “Foundations Widen Efforts on AIDS,” NYT, July 28, 1987. 186

Bruce Lambert, “AIDS Forecasts Are Grim—And Disparate,” NYT, October 25, 1987. 187

Jane Gross, “An Ever-Widening Epidemic Tears At the City’s Life and Spirit,” NYT, March 16, 1987. 188

Irvin Molotsky, “U.S. Approves Drug to Prolong Lives of AIDS Patients,” NYT March 21, 1987. 189

Chambré, Fighting For Our Lives, 141-142.

267

argued in 1986 when AZT was in clinical trials, without the full studies “a good drug

could be lost or a bad drug could be accepted as effective. Once either of those things

happened, it would be difficult, perhaps impossible, to undo the damage.”190

There was a paradox of risk at work here. On the one hand, the campaign to

reduce the number of AIDS infections called for an emphasis on risk reduction: safer-sex

with fewer partners, testing, and clean needles for users. Some of these measures were

voluntary; for others, the city was willing to bring the full power of its authority into play.

In 1985, Ed Koch told a press conference after the city closed the Mine Shaft bar,

notorious as a space for anonymous sex between patrons: “Maybe it brings to the

consciousness of those who have a predilection to engage in this suicidal behavior how

ridiculous it is, how self-defeating it is and how lethal it is. Maybe it will deter them as

well. We don’t know. But we’re going to do the best we can.”191

Yet for someone who

was already infected and living under an indeterminate death sentence the calculations of

risk and reward changed dramatically.

On Mach 10, 1987, Larry Kramer, now separated from the GMHC, arrived at the

Lesbian and Gay Community Center as a last minute substitute speaker:

At the rate were going. . . two thirds of this room could be dead in less than five years. . .

. If what you’re hearing doesn’t rouse you to anger, fury, rage and action, gay men will

have no future here on earth. How long does it take before you get angry and fight back?

Did you notice what got the most attention at the recent CDC conference in Atlanta? It

was a bunch called the Lavender Hill Mob. They got more attention than anything else at

190

Erik Eckholm, “Should the Rules Be Ben in an Epidemic,” NYT, July 13, 1986. 191

Joyce Purnick, “City Closes Bar Frequented by Homosexuals,” NYT, November 8, 1985.

268

that meeting. They protested. They yelled and screamed and demanded and were

blissfully rude to all those arrogant epidemiologists who are running our lives . . .

We can no longer afford to operate in separate and individual cocoons. . . .Every one of

us here is capable of doing something . . . . We have to go after the FDA—fast. That

means coordinated protests, pickets, and arrests.192

On March 12, 350 people attended the first meeting of what would become the

AIDS Coalition to Unleash Power, or ACT UP. In an Op-Ed published the New York

Times on March 23rd

, Kramer accused the FDA of “withholding” a long list of drugs,

each a potential cure: ribavirin, Ampligen, Glucan, DTC, DDC, AS 101, MTP-PE, and

AL 721. “AIDS sufferers,” Kramer argued, “who have nothing to lose, are more than

willing to be guinea pigs. . . . We cannot understand for the life of us, or for what life in

us many of us still cling to hungrily, why the F.D.A. withholds them—especially when so

many victims are so eager to be part of the experimental process.”193

On March 24, ACT UP staged its first demonstration, a sit-in of 200 on Wall

Street, announced with a flier demanding “No More Business As Usual!” The choice of

the target appeared to have more to do with the group’s need to maximize media attention

than any specific anti-capitalist message. “Our complaint isn’t really with the stock

market,” said Kramer. “We want the media.”194

But business as usual looked very good indeed. On October 13, 1987, Ronald

Reagan spoke in Somerset, New Jersey at the affluent edge of New York’s suburban

192

Quoted in Chambré, Fighting For Our Lives: New York’s AIDS Community and the Politics of Disease,

121; for the context of Kramer’s departure, Gould, Moving Politics, 47 193

Larry Kramer, “The F.D.A.’s Callous Response to AIDS,” Op-Ed, NYT, March 23, 1987. 194

Chambré, Fighting For Our Lives, 122.

269

sprawl. He was quite satisfied with what his administration had accomplished and

looking forward to the 1988 presidential election:

In fewer than 30 days, America will have another celebration. Our economic expansion

will go on the record books as America's all-time, peacetime champion—59 months of

peace and economic growth. This land of opportunity has never recorded a run like that

before. And talk about world-class performances—to tell from the leading indicators, the

champ's not even breathing hard. . . . . Americans are dreaming great dreams again. And

entrepreneurs—young and old, male and female, black and white—have been popping up

like daisies all over the landscape to chase those dreams, and with them have come new

companies, new technologies, and new opportunities for everyone. Yes, a new spirit of

adventure, a new excitement, is in the American air.195

On October 19, 1987 readers of morning papers, commuters on the buses and

train traveling into the city from Somerset, were greeted with the news of the city as it

was, and of the city as it would be. The Reagan administration was debating a military

response to an Iranian missile attack on an American-registered ship off of the coast of

Kuwait.196

The middle-class African-American neighborhoods in southeastern Queens—

Jamaica, St. Albans, and Cambria Heights—were caught in the crossfire of crack dealers

fighting to serve the drug trade in suburban Long Island.197

Readers learned that “AIDS

Is Killing Women Faster, Researchers Say.”198

And there were worries on Wall Street as

well. The previous week, equity prices had taken a hard fall—a 9.49 percentage point

drop in the Dow. Yet, for the moment, inflation was low, commodities cheap, and profits

strong. David Rockefeller remarked, “I don’t think there is reason to be alarmed, but one

has to be concerned . . . .The reason to be concerned is that this will cause people to sell

195

Ronald Reagan, “Remarks at a Luncheon Hosted by the New Jersey Chamber of Commerce in

Somerset,” October 13, 1987. The American Presidency Project (On-Line). 196

John H Cushman Jr., “Reagan Chooses the U.S. Response to Iranian Attack,” NYT, October 19, 1987. 197

Peter Kerr, “A Crack Plague in Queens Brings Violence and Fear,” NYT, October 19, 1987. 198

Gina Kolata, “AIDS Is Killing Women Faster, Researchers Say,” NYT, October 19, 1987.

270

without any basic reason.” 199

But selling, however, had already begun in Sydney,

Tokyo, and in Hong Kong.200

New York now lay in the path of that storm. It was time to

pay the price of risk.

199

Alison Leigh Cowan, “In the Aftermath of Market Plunge, Much Uneasiness,” NYT, October 19, 1987. 200

Ibid.

271

Chapter Five: The Price of Risk, 1988-1992

“Satan’s Portfolio”

“Jesus Christ, what’s going on?” “I don’t fucking believe this!”

“Holy fucking shit!” shouted the Yale men and the Harvard men and the Stanford men.

Ho-lee fuck-king shit.” Tom Wolf, Bonfire of the Vanities1

On October 19, 1987, Black Monday, the Dow Jones Industrial Average lost 508

points, or 22.6 percent of its value. This was almost twice the loss of 12.8 percent on

October 28, 1929, the worst day of the Great Crash. All the other stock market indexes

posted record declines as well. It was, in the words of NYSE chairman John J. Phelan,

“as close to a financial meltdown as I’d ever want to see.”2 For every one stock that rose

in value that day, another forty declined. President Reagan cautioned against further

panic. “Everyone is a little puzzled [in Washington],” he said. “There is nothing wrong

with the economy.”3 And Reagan was right: there was nothing wrong with the economy,

at least that had not been wrong on Friday, October 16th

. But something had gone

terribly wrong within the market itself.

Ironically, the heart of the problem lay with a financial product, “portfolio

insurance,” designed to reduce the level of risk for large money managers like pension

1 Tom Wolf, Bonfire of the Vanities (New York: New York, Farrar, Strauss and Giroux, 1987), 58.

2 Tim Metz, Alan Murray, Thomas E. Ricks, Beatrice E. Garcia, “Stocks Plunge 508 Amid Panicky

Selling,” WSJ, October 20, 1987. 3 Ibid.

272

funds and insurance companies. Using computer models, some designed for automatic

“program trading,” fund managers would sell stock index futures (contracts to buy a set

number of shares in the companies of the S&P 500 index at a set price) when the stock

market fell. Then, as the price of shares declined, the futures, whose price was derived

from the value of shares they represented, could be repurchased at a lower price. The

money manager would then earn the difference between the higher price of the future that

he sold and the lower price of the future that he had repurchased. Thus, portfolio

insurance promised that a large investor could “insure” his portfolio against losses.

Managers were “hedging their bets” so losses in the stock market would be compensated

for by gains in the futures market.4

On Black Monday, the initial decline in the stock market set off wave of futures

sales. This was exactly what portfolio insurance was designed to do. The problem was

that the futures contracts were sold in Chicago—and they could be sold quickly and

easily. The market for the shares, however, was in New York. There, trading was much

slower, as money managers sat on the sidelines, waiting until the market found a bottom

where they thought it would be safer to buy again. That bottom was not found. Buyers

stayed away all day. This meant that the difference in speed between the two markets

became very dangerous. Because of the greater speed in the Chicago market, futures

prices fell much faster than the prices of the stocks they represented. Indeed, the S&P

500 futures fell so fast that the price of those contracts dropped below the value of the

4 George Anders, “Investors Rush for Portfolio Insurance,” WSJ, October 14, 1986.

273

underlying stocks themselves. A new trade created itself, reversing the normal process of

portfolio insurance. Savvy market operators could sell shares, then buy the futures, and

collect the difference between the two. Losses in the stock market could be turned into

gains in the futures market. This process, however, triggered another wave of futures

sales as managers sought to protect themselves against falling prices. This led to the sale

of more stocks. And so the decline fed upon itself, like a snowball rolling down the side

of a mountain. By 3:00 PM “the record of the price of each purchase and sale, ran 111

minutes late. It became impossible to tell at what prices stocks were selling. Thoroughly

panicked investors tried to get ahead of the program trading. So they put in offers to sell

at any prices in the hour before the closing bell at 4PM. 5

That is how $500 billion dollars of stock market value disappeared in one day. As

Peter U. Vinella, a partner at Berkeley Investment Technologies, explained, “The

problem was that everyone is working from roughly the same theories. They all get the

same feedbacks. And that leads everyone to take the same action.”6

For a moment after the crash, as the players in financial services recovered from

the shock to their system, there was a pause to reassess the relentless forces of the bull

market that had led to the “divorce [of] our financial system from reality” in the words of

5 Richard Bookstaber, A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial

Innovation (Hoboken, NJ: John Wiley & Sons, 2007) 14-28; Donald MacKenzie, An Engine, Not a

Camera: How Financial Models Shape Markets (Cambridge, MA: The MIT Press, 2006), 184-200; James

Sterngold, “The Hours That Changed the World of Wall Street,” NYT, October 26, 1987. 6 David E Sanger, “New Reliance on Computers is Altering Investors’ Tactics,” NYT, December 15, 1987.

274

takeover lawyer Martin Lipton.7 “The Wall Street yuppies have been very good ‘paper

entrepreneurs’ in cooking up new schemes to move money quicker from pocket A to

pocket B,” said Robert Reich, perhaps enjoying the chance to deliver some rhetorical

comeuppance. “Perhaps now, we’ll find out if they can contribute to the nation’s

productivity—if they can make the pie bigger instead of just rearranging the slices.”8

Remarkably, given the differences in their politics, Reich’s views converged with those

of Walter Wriston. “Kids 28 or 30 were making a million a year trading paper. Things

just got out of balance,” Wriston remarked. “And the market has a wonderful way of

penalizing things that get out of balance.”9 But Wriston’s technological determinism

remained undaunted, despite the chaos that had resulted from the computerized feedback

between the future’s market and the stock market; “That system wasn’t built by

economists. It was built by technology and it isn’t going to go away.”10

That was true.

But the larger truth lay in something that Wriston would have been loath to admit, that

“the system” had been built by governments through their pursuit of financial

deregulations. And it would be sustained not because computers would endure but

because governments were willing to try to save financial markets from their own self-

destructive tendencies.

Without government intervention, what happened on Black Monday could easily

have slid into an economic death spiral, from a stock market crash to a general financial

7 William Glaberson, “The Plunge: A Stunning Blow to a Gilded, Impudent Age,” NYT, December 13,

1987. 8 Lee A Daniels “After the Fall: Will the Yuppies Rise Again?” NYT, November 2, 1987.

9 Dennis Farney, “Main Street’s View of the Crash if Far From Wall Street’s,” WSJ, December 30, 1987.

10 William Glaberson, “How Risk Rattled Wall Street,” NYT, November 1, 1987.

275

panic. In the early morning of Tuesday, October 20th

, Wall Street found itself in deep

trouble. The credit that kept the market functioning had disappeared after the crash. The

specialist firms that acted on the floor of the New York Stock Exchange to serve as

buyers and sellers of last resort had their order books filled by brokers with outstanding

sell orders. But the specialists had no remaining capital to buy more shares, and, it

appeared, no one to whom to resell their existing inventory of shares. The commercial

banks that provided the market makers and other securities dealers with the day-to-day

loans that kept them in business were wary of extending more credit to their clients. This

was justifiable, given that the value of their clients’ collateral was the stocks whose prices

had just collapsed. Rather than extending more credit to their fragile clients, the banks

began calling their loans, demanding immediate repayment. The securities firms were in

no position to repay. And that would have meant their bankruptcy and the liquidation of

the stocks they held as assets, driving the market further downwards, triggering another

round of failures.

Federal Reserve Chairman Alan Greenspan and the head of the New York Federal

Reserve, E. Gerald Corrigan, understood this risk and exercised the power at their

command to avert it. On the morning of the 20th, the Fed began aggressively buying

government securities. This increased the money supply--the pool of available funds for

banks to lend--driving down short-term interest rates. The Fed also instructed the major

commercial banks to keep lending to their customers and to stop demanding immediate

repayment. John J. Phelan, the chairman of the NYSE, summarized the strategy as, “The

276

banks would be kept liquid; [then] the banks would make sure everyone else in the

system would stay liquid.” The plan worked. The ten largest New York banks doubled

their lending to securities firms that day, from $6.5 billion to $12 billion. Major

corporations, encouraged by the relaxation of SEC rules, began a wave of stock buy-

backs for their now discounted shares. The market stabilized and rallied on Wednesday,

October 21st, or its biggest gain in history.

11

Atlas did not shrug.

Nor did the leadership of New York City. Even before the crash, major financial

firms had been announcing layoffs. The crash led to even more cuts at Salomon

Brothers, Kidder Peabody, Chemical Bank, and Chase Manhattan. There were fears of

further layoffs among the lawyers and accounts that serviced the industry. Layoffs also

meant the accumulation of vacant commercial real estate, lower rents, and less new

construction. There were fears that newly cost-conscious bankers might be tempted to

move their operations out of the city.12

Shortly after the crash Mayor Ed Koch

announced a hiring freeze for city jobs, “I am concerned for New York City,” he

explained. “There will be a loss of jobs and income in financial services and a reduction

11

James B. Stewart and Daniel Hertzberg, “How the Stock Market Almost Disintegrated A Day After the

Crash,” WSJ, November 20, 1987; Alan Murray, “Fed’s New Chairman Wins a Lot of Praise on Handling

the Crash,” WSJ, November 25, 1987; the Fed chairman’s later description of events matches closely with

the earlier newspaper reports, Alan Greenspan, The Age of Turbulence: Adventures in a New World (New

York: The Penguin Press, 2007) 105-110. 12

Alan Breznick, Timothy Middleton, and Gary Lebow, “N.Y. Aftershocks: Recession Looms as

Brokerage Cuts Ripple Through City,” CNYB, October 26, 1987.

277

in tax receipts.”13

But even as New York was trying to trim expenses, including delaying

the hiring of 1,948 police officers, the Koch administration would do what it took to keep

finance jobs in the city. In November 1987, the mutual fund manager Dreyfus

Corporation agreed to keep its headquarters and 700 employees in Manhattan. In return

the city and state would make amendments to the tax code worth $8 million per year for

the company. “Nobody wanted to see them go,” said Alair A. Townsend, the city’s

deputy mayor for finance and economic development, “and knowing there is a level of

support at the state level didn’t hurt.” The stock market crash had, in Townsend’s words,

“reminded us of the importance of the financial services industry here.” As an

anonymous state official framed it, “We had to keep them in New York. We didn’t want

to lose the front office.”14

Once again, when confronted with economic turmoil, the city

chose to support risk-taking in financial services, while at the same time running the risk

of degrading public services.

Between the fall of 1987 and the summer of 1992 the culture of risk became a

permanent fixture of life in New York City. What had begun as policy proposals and

civic experiments in economic regeneration under Abraham Beame, and had been

systematized and diffused under Ed Koch, would be ratified and reinforced by David

Dinkins, the city’s first African-American mayor, following his election in 1989. The

city would continue to use its tax base and political influence to promote speculative

13

Roger Lowenstein, “New York City Freezes Hiring As Mayor Cites the Possible Effects of Stock Crash,”

WSJ, October 28, 1987. 14

Roger Lowenstein, “Dreyfus Agrees to Stay in New York City In Exchange for Tax-Reduction Accord,”

WSJ, November 2, 1987.

278

development, despite the now clearly dangerous ground that this economy rested upon,

and the pain that the breakdown of this economy would inflect on the metropolis. While

Dinkins won the mayoralty as an alternative to Koch, both in style and substance, once in

office his policies continued to prioritize the interests of the business elite in the name of

saving a city, which under his watch endured a miniature fiscal crisis. The Dinkins

administration prioritized stabilizing New York’s economic order over its social policy,

mirroring larger trends in American capital markets and in national politics.

Despite the experience of the Crash of 1987, the collapse of the junk bond market,

and the death rattle of the savings and loans, the push for financial deregulation

continued. The solution to a decade’s worth of creative yet self-destructive risk taking

was to allow more firms to take on more, not fewer, risks. By 1992, a new “common

sense” of freer trade, lower taxes, and a smaller, government had become a bipartisan

dogma. Despite the accumulated evidence about what it cost to live in such a society,

and how fragile it was, the culture of risk became enshrined as the intellectual consensus

and as the bipartisan status quo, both in New York City and in the United States.

The price of this culture was a painful one. Not to those who drove the process of

risk-taking and profited from it—and who emerged from this periods with their fortunes,

if not their reputations intact—but for everyone else caught-up in it. On Christmas Day,

1987, Paul Moore Jr., the Episcopal Bishop of New York, offered a chilling jeremiad on

the opinion page of the New York Times. “An economy based on fear and greed is not

God’s portfolio but Satan’s,” he warned. “In Satan’s portfolio fear and greed prey on one

279

another until the economy, like a careening armored tank, crushes the house of the poor

and burns up the sources of their livelihood across the world.”15

Moore then asked:

“Could our economy be seen as a means for the well-being of our people rather than an

end in itself, in pursuit of which lives are destroyed?”16

The answer was no.

The final act in the triumph of risk, the decision to pay the price it entailed, did

not mean that all alternatives disappeared, but rather that they were displaced from the

political mainstream. Just as important pockets of America never accepted the New

Deal, parts of New York rejected the culture of risk. For the activists of ACT UP felt as if

there was no alternative but to fight not only for their lives, but for a very different

culture, one that celebrated community over autonomy and life over profit. Many of

them did not live to see anything resembling a victory. Much of their message was

diluted by time and the transformations of the experience of AIDS, and of gay and

lesbian life, that ACT UP helped catalyze. It was left to some of the city’s most

marginalized people to preserve a very different vision of society.

Street Fights, 1988-1989

By the end of 1987 it was clear that the Koch administration was not aging

gracefully. While Koch was more than willing to raise campaign contributions from

developers, he had kept his personal finances disentangled from his public duties. Many

of the political allies he had made in the remnants of the Democratic machine had not.

Corruption scandals engulfed Donald Manes, the Queens borough president, Bronx

15

Paul Moore Jr, “God’s Portfolio,” Op-Ed, NYT, December 25, 1987. 16

Ibid.

280

Democratic chair Stanley Friedman, Brooklyn boss Meade Esposito, and Bronx borough

president Staley Simon. To the voting public, Koch’s third term began to look like an

interminable series of investigations.17

About the only person to emerge looking better

from the proceedings was Rudolph W. Giuliani, the politically ambitious U.S. Attorney

for New York who spearheaded a number of the corruption investigations. “We’ve got a

lot more educating to do,” said Giuliani in 1987, sounding more like a candidate than a

public prosecutor, “Why does it cost so much to live and do business here? Part of the

answer is the amount of political corruption and organized crime we’ve tolerated.”18

Giuliani, however, was not the only aspirant to higher office who benefitted from Koch’s

misjudgments.

So too did David Dinkins. In 1988, Jesse Jackson sought the Democratic Party’s

presidential nomination for a second time. The first time, in 1984, Jackson had referred

to New York City as “Hymietown” a remark that had bitterly antagonized Koch. On

April 1, 1988, Koch retaliated. He told a reporter that Jews would have “to be crazy” to

vote for Jackson “in the same way that they’d be crazy if they were black and voted for

someone who was praising Botha and the racist supporters of the South African

administration.”19

By late 1988, even Felix Rohatyn was left to wonder whether “the job

[of Mayor] is humanly possible to do over a period of 12 to 16 years? What the city

needs, and what we may not be able to find, is someone who still has the illusion that

17

For a discussion of the scandals in Koch’s 3rd

term see Soffer, Ed Koch, 355-70. 18

Margot Hornblower, “Private Prosperity, Public Corruption,” Washington Post, August 26, 1987. 19

Soffer, Ed Koch, 376.

281

New York is governable.”20

Despite Koch’s opposition, however, Jackson had won New

York City in the primary. David Dinkins and organized labor saw a powerful new voting

bloc in first time African-American and Latino voters who had been organized by the

Jackson campaign.21

They also saw opportunity in Koch’s weakness.

The aura of sleaze surrounding Koch, and his intemperate remarks, were not the

only problems the mayor faced. Preservationists under the venerable banner of the

Municipal Art Society, including celebrities such as Jacqueline Onassis, Paul Newman,

and Henry Kissinger, had organized themselves against a proposal by the MTA to sell the

Coliseum at Columbus Circle to developers for a pair of giant office towers. Their

anchor tenant was Salomon Brothers. The towers would cast a mile-long shadow on

Central Park. Kent Barwick, president of the society, described the process that led to the

towers approval as one in which “the city stepped out of its role as balancer of interests

into its new go-go role as entrepreneur.”22

By the end of the building boom, the push for

development at any price had taken on an unseemly air. “The physical transformation of

a city changes it for generations, for centuries,” said Robert Caro, author of The Power

Broker. “I see a city being cemented into place against the sky—a city of monstrous

buildings, with a disregard for human scale, human values. Koch is building a big city,

not a great one. The Koch administration, I fear, will go down in history surrounded by

20

Roger Lowenstein, “New York’s Ed Koch, Brash and Contentious, Battles to Stay Mayor,” WSJ,

November 18, 1988. 21

David N. Dinks, A Mayor’s Life, 125-129. 22

Roger Lowenstein, “Building That Would Shade Central Park Draws Quiet Civic Group Into the Light,”

WSJ, September 25, 1987.

282

shadows, the shadow of corruption and the shadows cast by enormous buildings.”23

Even

worse, from the perspective of the city’s economy, was that the “monstrous buildings”

were emptying out.

From the beginning of 1988, it was clear that the city’s commercial real estate

market was in trouble. There were still voices of optimism. In January Meyer Frucher,

president of Battery Park City Authority, predicted, “At the end of the day, these [new]

buildings will be filled. This is not Houston. New York is not totally dependent on one

industry.”24

But the commercial building boom had been driven by one industry—

financial services—and the ancillary businesses that enabled the market to move. In that

respect, New York was like Houston, without the hinterland of oil fields. By April 1988,

thirteen percent of the city’s 400 million square feet of office space was empty. There

were still seventeen new buildings under construction, ready to add another 10 million

more square feet onto the property market. Even more ominously for the city’s prospects

was that the vacancy rate in northern New Jersey, which stood at 19.8 percent, and in

Stamford, Connecticut, where it had reached 20.1 percent, significantly higher than in

New York. If firms wanted to move out of the city, or simply threaten to do so to collect

tax breaks, there was space available to make that threat credible.25

On June 9, a group of the old “Muffle” men met in the offices of developers

Lewis Rudin. They talked about the dysfunction in the schools, the continued

23

Quoted in Bonnie Angelo, “Troubled Times for Hizzoner,” Amsterdam News, December 5, 1987. 24

Roger Lowenstein, “Manhattan’s 10-Year Real Estate Boom Is Weakened by the Stock Market Crash.”

WSJ, January 15, 1988. 25

Thomas J. Lueck, “New York Office Vacancy Level is Highest Since 70’s,” NYT, April 13, 1988.

283

deteriorating of bridges, and the homeless. Times reporter Sam Roberts mused “Cynics

might snivel that the very problems the leaders now seek to solve were, to some extent,

exacerbated by economies imposed in response to the fiscal crisis.”26

There was no peace on the Lower East Side that summer. There was graffiti that

read “death to yuppies,” “1988=1933,” “your home is mine,” and “$1,500 Rent,” dabbed

on the walls, spray-painted onto sidewalks, and etched into windows. Members of the

Missing Foundation, a brutally loud rock band (known for setting trash barrels on fire, on

stage) proudly described the last three tags, which they had pioneered, as “property

devaluation,” a form of protest against gentrification. The Missing Foundation had as

their logo an upside-down martini glass signaling, “the party’s over.” It also had popped

up all over the neighborhood. At the same time there were banners hung over the streets

reading “Drug Dealers Get Out.”27

In the midst of this raucous atmosphere lived some of

the poorest of the poor. The homeless had established shantytowns in the vacant lots

around Tompkins Square Park. “I say if this country keeps going the way it is, the

middle income people, in two or three years, they’re gonna be coming to us to learn how

to survive,” said Michael Cruzado, who lived with his wife in a shack near Avenue C.

“Once that landslide starts moving, you’re gonna get caught in it.”28

The homeless were

also entrenched in the park itself. The novelist Don DeLillo described the encampments

in his novel Mao II (1991):

26

Sam Roberts, “Bred in Crisis, Fed on Austerity, ‘Muffle’ Is Back,” NYT, July 14, 1988. 27

Frank Bruni and Don Broderick, “It’s Yuppies Vs. the Hippies,” New York Post, August 8, 1988; R.J.

Smith, “Message in a Bottle: Homesteaders Rock the Lower East Side,” Village Voice, August 23, 1988;

Kirk Johnson, “A Neighborhood of Vigorous Opinions,” NYT, August 13, 1988. 28

Gregory Jaynes, “Intense Nights In a Cold Shanty On Sixth Street,” NYT, December 30, 1987.

284

A tent city. Huts and shacks, she was thinking of the word; lean-tos, blue plastic sheeting

covering the lean-tos and the network of boxes and shipping containers that people lived

in. A refugee camp or the rattiest edge of some dusty township. There was a band shell

with bedding on the stage, a few bodies stirring, a limp of inert bedding suddenly

wriggling upward and there’s a man on his knees coughing up blood.29

Like the neighborhood’s ongoing open-air drug market, the park was a media-

friendly symbol of the city’s dysfunction, casual turn towards lawlessness, and its stark

inequalities. On the night of August 6th

, 1988, it became a symbol of something even

more dangerous—of a class war in the streets. There had already been scattered protests

in July after a 1:00 A.M. curfew had been imposed on the park, angering the punks and

skinheads who had been throwing all night-street parties there. The police swept the

park, and while leaving the homeless alone, forced everyone else to leave the park. There

had been small-scale street fighting on the evening of July 30, after a demonstration had

been called against the police presence. Another one was set for 11:00 P.M. on August

6th

. That night, Captain Gerald F. McNamara came prepared with eighty-six officers on

foot and eleven on horseback. He explained, “We don’t want to get into a situation

where we under-police something like this and it turns into a fiasco.” 30

That’s what

happened, however, when several hundred protests arrived with banners declaring

“Gentrification is Class War.” The marchers, who were drunk and angry, cursed out the

cops while throwing bottles and firecrackers at the police lines. McNamara called for

29

Don DeLillo, Mao II (New York, Penguin Books, 1991, 1992), 149. 30

Todd S. Purdum, “Melee in Tompkins Square Park: Violence and Its Provocation,” NYT, August 14,

1988.

285

reinforcements, but apparently never waited for them to arrive before taking action

against the demonstrators.31

The police on the scene were inexperienced not only in crowd control but also in

the basic restraint that comes from years spent on the streets of a restless city. As the city

had rehired police officers to fill in the ranks of a constabulary run-down during the fiscal

crisis, the median years of experience on the force had dropped from fifteen years to

three-and-a-half. Almost half the city’s cops had been on the job for less than five

years.32

At the 1:00 AM, curfew time, these officers were set loose on the crowd. Police

Commissioner Benjamin Ward described what happened next:

“He [the commander on the scene, Deputy Chief Thomas J. Darcy] left his subordinate

[McNamara], a newly-made captain, in charge, an ex-marine who said, ‘Charge.’ Well,

you can’t say ‘Charge,’ to a bunch of police officers who have not been trained to act in

military fashion, and charge them against an unruly bunch of demonstrators, who think

they’re the only ones who know the American way, and throwing bottles and rocks and

stones at police offices is part of their First Amendment rights. You can’t say to mounted

police, and police with clubs and guns, “Charge.” That’s what he did. He said,

“Charge,” they charged, and we had a police riot. 33

Mayhem ensued as the police fell upon the protesters. This set off waves of

intermittent street fighting as crowds of demonstrators and police officers rushed back

and forth. The police beat whomever they caught. “I cannot begin to understand what

was going through the cops’ heads,” wrote Sandra Koponen, who observed the resulting

violence as the police “swung their clubs, breaking people’s bones, calling people bitch,

31

Ibid. 32

Leslie Gevirtz, “Cops in Crisis: Police Riot in Tompkins Square Was No Accident,” Village Voice,

August 23, 1988; “The Reminiscences of Benjamin Ward,” Columbia University Oral History Research

Office, 172. 33

Ibid, 171.

286

nigger, jap bastard, punk scum.”34

Police helicopters swept over the scene looking for

rooftop assailants. A group of protesters grabbed a police barricade and then rammed it

through the front door of the upscale Christadora House condominiums, a hated symbol

of gentrification, and vandalized the lobby. By 6:00 A.M. the last demonstrators had

dispersed. At least thirty-one civilians and thirteen offers suffered injuries. Given the

scale of the violence, it is surprising that only nine arrests were made. Apparently the

cops had been looking for targets rather than collars. Much of the mayhem had been

caught on camcorder and began playing on the city’s newscasts.35

Some residents of the Lower East Side appreciated the chance to finally “fight

back” against gentrification with more than spray-paint. “The community resistance to

the TSP [Tompkins Square Park] police riot is actually the first time that a whole

community stood up, their lives on the line (for the police riot could easily have turned

into a massacre), and declared’ NO!’ to gentrification,” said a neighborhood report on the

violence. “In this lay the historic significance of that resistance—a heroism that strikes

fear among the rulers and profiteers.”36

Josh Whalen, a collaborator on World War 3

Illustrated, a political graphic magazine and a participant in the night’s melee, saw what

happened as a sign of a generational divided, the revolt of a generation raised under

Nixon and Reagan that had “never believed” that “the United States was an essentially

34

Sandra Koponen, “The Manifestations of Corruption,” City Week, August 22, 1988. 35

Todd S. Purdum, “Melee in Tompkins Square Park: Violence and Its Provocation,” NYT, August 14,

1988, 1. 36

Joel Meyers and Clayton Patterson, “Report on Tompkins Square Police Riot and Related Matters,” June

1, 1989, Jane Churchman Papers, Tamiment Library, Box 1, Folder 29.

287

good place, that government essentially served the interest of the people.”37

So it made

sense for Whalen and his comrades to fight back on an anarchic basis. “And if my

lawyer can’t do enough for me, if the court system doesn’t defend me, I take it to the

streets,” Whalen continued. “And so do my neighbors, like we did Saturday night.”38

The police assault spurred outrage. The New York Post columnist Pete Hamill,

while baiting the “skinheads for whom Tompkins Square Park serves as the Sierra

Maestra in the war against Mom and Dad up in [the upper-crust suburbs of] Scarsdale

and Rye,” portrayed the incident as a warning of worse to come. “On Saturday night,

New York might have witnessed something that has more to do with the scary future than

the amusing past. Years of drugs and indifference and greed have transformed us into

Calcutta. And we have created the most dangerous people in any society: those who have

nothing to lose.”39

Yet that summer one could also see an alternative to the “war of all against all” or

the war of “us vs. them.” A group of New Yorkers who could already see the loss of

everything in their lives had been embracing danger in the name of community. On

August 30, 1988, 1,000 people massed at the intersection of Broadway and 100th

St. on

the Upper West Side. Eight days earlier a gang of teenagers armed with knives and bats

had been “shouting anti-homosexual epithets,” in the polite language of the Times and

jumped two men, sending them to the hospital. The protestors held a candlelight vigil

37

R.J. Smith, “Message in a Bottle: Homesteaders Rock the Lower East Side,” Village Voice, August 23,

1988. 38

Ibid. 39

Pete Hamill, Column, New York Post, August 8, 1988.

288

chanting: “We will not be victims.”40

They sat down in the street and forced the cops to

haul 100 of them to jail. ACT UP had organized the protest.41

The organization’s

posters, stickers, and buttons, all adorned a the pink triangle on a black background, had

been appearing all over the city. By the summer of 1989 there were sixty groups

affiliated with ACT UP from coast to coast. “People with AIDS are fighting back,” said

one member. “The posters are a rallying cry for people who are sick of sitting around

support groups and who want to get out and fight for their lives.”42

Hundreds of people—gay men, lesbians, straight people of both genders, AIDS-

positive and negative— packed ACT UP’s meetings, run by volunteers, in Greenwich

Village.43

The meetings created a space to turn grief and shame into rage and action.

“Standing at the back of a packed room at the Gay and Lesbian Community Center, I

found myself heaving dry sobs, hoping no one could see my visceral reaction,” recalled

ACT UP member Charles King. “At least there was something I could do. I could fight

back. And even if we didn’t win, I wouldn’t be going down alone.”44

The meetings were

also a place to find love and lovers, to join smaller affinity groups that would choose their

own actions and tactics, and even to find people to party with, after protesting. “It was

just electrifying. The apparent democratic character of the gatherings, the apparent

commitment to an egalitarian ethic in which who you were or what you were was

secondary to the passion and strength of your commitment,” recalled another member,

40

John T. McQuiston, “1,000 Protest Attacks Aimed at Homosexuals,” NYT, August 31, 1988, 41

Ibid. 42

Andrew Miller, “Anatomy of a Demo,” GCN, April 2-April 8, 1989, 16. 43

Thomas Morgan, “Mainstream Strategy for AIDS Group,” NYT, July 22, 1988, B1. 44

Gould, Moving Politics, 185.

289

Kendall Thomas. “The sexiness of it, the libidinal energy was palpable, alongside the real

anger.”45

The meeting’s forged a communitarian counterpoint to the overwhelming

individualism of the culture of risk.46

There is a tragic irony here. Many of those who

had been written off as “faggots and junkies,” in the words of writer David Leavitt,

would fight for their lives, and each other.47

Others who had gained the most from the

culture of risk embraced the nihilistic impulse that lay just over the edge of society’s

boundaries.

On October 25, 1988, Theodore Forstmann, the leveraged-buy-out pioneer,

warned in an opinion piece in the Wall Street Journal, “Today’s financial age has become

a period of unbridled excess with accepted risk soaring out of proportion to possible

reward. . . .Watching these deals [LBOs] get done is like watching a herd of drunk drivers

take to the highway on New Year’s Eve. You cannot tell who will hit whom, but you

know it is dangerous.”48

Forstmann’s solution was not to put more police on the

highways of high finance. He gave the rich-man’s version of DIY vigilantism.

Forstmann concluded: “Legislation is not the answer because it will create more

problems than it cures. Markets and their participants must correct their own

inefficiencies.”49

This was a polite way of saying that the “drunk drivers” should be

allowed to kill themselves and anyone else that crossed their paths. The regulators were

willing to oblige. A year after the crash, only one of the reforms recommended by the

45

Ibid, 18. 46

This argument is based off the experiences described in Gould, Moving Politics, 182-212. 47

For this phrasing see David Leavitt, “The Way I Live Now,” NYT, July 9, 1989. 48

Theodore J. Forstmann, “Violating Our Rules of Prudence,” Op-Ed, WSJ, October 25, 1988. 49

Ibid.

290

federal group responsible for the disaster investigation, the Brady task force, had been

created. A coordinate set of “circuit breakers” had been put into place on the major

markets to prevent the repetition of the wild selling that had defined Black Monday. But

larger regulatory changes, such as assigning the Federal Reserve Board the responsibility

of acting as an “inter-market regulator,” responsible for coordinating policy between the

stock and futures markets, had met, “a cool Washington response” in the words of two

Wall Street Journal reporters.50

Yet there was still one great “megadeal” left to be do: the contest for the right to

break-up the cigarettes-and-snacks conglomerate RJR Nabisco. By late October 1988

rumors circled on Wall Street that F. Ross Johnson, the firm’s president and CEO,

planned to take the company private for $17.6 billion—an amount roughly triple the size

of largest completed LBO to date—and then break up the company to repay the buyout

loans.51

A rival group, led by Kohlberg Kravis Roberts, jumped into the fray with a

competing offer. This resulted in what one reporter called a “clash of financial

engineering at its most extreme form.”52

KKR ultimately prevailed and won the approval

of RJR’s shareholders for an acquisition priced at $25.3 billion or $109 a share.53

Great

fees flowed from the buyout. Some 200 banks collected $325 million in one-time-fees,

50

George Anders and Scott McMurray, “Changes Since Crash Can’t Prevent a Repeat But Might Soften

One,” WSJ, October 17, 1988. 51

John Helyar, Betsy Morris, and Steve Swartz, “RJR Nabisco Chief Considering Buy-Out Of Concern For

$17.6 Billion, Or $75 a Share,” WSJ, October 21, 1988. 52

Peter Rogers, “Spivvy Finance Threatens A First World Debt Crisis,” The Guardian (UK), November 5,

1988. 53

Randall Smith, Jeffrey H. Brinbaum, and Thomas E. Ricks, “Will Others Follow as RJR Tames

Megadeal Frontier?” WSJ, December 2, 1988; Peter Waldman, George Anders, “KKR Completes Buy-Out

of RJR Without Fanfare,” WSJ, February 10, 1989.

291

plus an additional $73 million per-year afterward, in exchange for providing $14.5 billion

in loans.54

Drexel Burnham made more than $250 million for itself by selling over $5

billion in junk bonds that financed the remainder of the buyout.55

Legislators and

regulators in Washington ultimately chose to do nothing. “It’s just like corporate

raiders—there was lots of heat, but no smoke,” said Senator John Chafee (R-R.I).

“When it gets right down to it, and gets into the complex definitional problems, it’s very

tough [to regulate]. For every cure it raises an illness that’s worse. It is far easier to

deplore them [LBOs] than to solve the problem.”56

The RJR deal also marked the last major junk bond underwriting for Drexel

Burnham, as the unseemly and illegal side of Michael Milken’s dealings caught up with

the company. As an investment banker at Drexel put it, “Michael had a major blind spot

that developed as things went along. He very much had a trader’s mentality, as far as

rules and laws and regulations were concerned. He viewed them as impediments to the

free flow of trading activity that should be regarded with contempt; I don’t think he took

securities regulation seriously.”57

That put the issue mildly. The full extent of his

criminality, and that of Drexel’s junk bond operation in Beverly Hills, remains unknown.

The available evidence suggests that it was pervasive. Some of those crimes began to see

54

Robert Guenther, “Banks Offer Glimpse at LBO Portfolios, Showing That Many Loans Are Re-Sold,”

WSJ, December 13, 1988. 54

Ibid 55

Steward, Den of Thieves, 480. 56

Randall Smith, Jeffrey H Brinbaum, Thomas E. Ricks, “Will Others Follow as RJR Tames Megadeal

Frontier,” WSJ, December 2, 1988. 57

Dan G Stone, April Fools: An Insider’s Account of the Rise and Collapse of Drexel Burnham (New

York: Donald I Fine, 1990), 56.

292

daylight in 1986. The arbitrageur Ivan Boesky had been implicated in an insider trading

investigation that ultimately ensnared a number of prominent investment bankers and

lawyers. In exchange for leniency, Boesky detailed to the U.S. Attorney’s office his

criminal dealings with Milken, who had raised $600 million in capital for Boesky’s

arbitrage operation. Giuliani took center stage in the prosecution. In December 1988

Drexel plead guilty to six securities law violations and agreed to pay $650 million in

fines and to fire Milken.58

On April 24, 1990, Milken himself plead guilty to six

felonious violations of securities and tax laws.59

On November 21 of the same year,

Federal District Judge Kimba M. Wood handed down a ten-year sentence. She told

Milken:

When a man of your power in the financial world, at the head of the most important

department of one of the most important investment banking houses in the country,

repeatedly conspires to violate, and violates, securities and tax laws in order to achieve

more power and wealth for himself and his wealthy clients, and commits financial crimes

that are particularly hard to detect, a significant prison term is required.60

His career was over, on Wall Street at least. But Milken’s financial innovations

endured. Little noticed amidst the din of mega-deals like the RJR Nabisco buyout, the

creation of “AAA” securities from junk bonds continued to gather momentum. By

January 1989 Institutional Investor noted that the “magic” of securitization had already

resulted in fifteen public and private offerings of investment grade securities, worth $2

billion dollars, that were backed by high-yield debt. Some of these bonds were from

58

Steward, Den of Thieves, 478-479. 59

The felonies were: Conspiracy, Helping to File False Information With the SEC, Securities Fraud,

Violating SEC Reporting Requirements, Mail Fraud, Aiding and Abetting in the Filing of a False Tax

Return, see Floyd Norris, “Milken’s Plea Reflects Ethics of Drexel in 80’s,” NYT, April 25, 1990, D1. 60

Kurt Eichenwald, “Term Is Longest of Any Given in Scandal,” NYT, November 22, 190, A1.

293

existing thrift portfolios, while others came from new specially created junk bond

portfolios that had been designed for the specific purpose of securitization and resale.61

A

manager at Chase Manhattan, which had built such a fund for sale to overseas investors,

provided the firm’s rational. “Foreigners with high net worth tend to be a very

conservative group,” he said. An investment-grade fund allowed the bank to offer, in the

manager’s words, “a conservative investment in what many perceive to be a high-risk

area.”62

The portfolio also let Chase Manhattan offer a higher return to its investors,

attract more dollars to manage, and, collect more fees for itself. As a business

proposition it made perfect sense.

Given the troubled state of Drexel, it appears that the firm engaged in junk-

backed securitization to a relatively limited extent. It built new bond out of old ones for

Imperial Savings and Mellon Bank. It helped put together a joint $540 million junk

securitization, sold to foreign investors, with the help of the giant insurer AIG.63

But

there were other firms that were interested not only in selling junk-backed securities but

also in developing more advanced “multiple-tranche” securitizations that allowed

investors to trade-off between income and “seniority,” that is the ability to recover their

capital in the event of default. For example, the Chicago firm, Duff & Phelps issued an

“A tranche” at 10.05 percent, a B tranche at 13.25 percent and a C tranche at 15.29

percent interest. This increased the potential market for securitization.64

In 1989, Wall

61

Hilary Rosenberg, “The Unsinkable Junk Bond,” Institutional Investor, January 1989, 48-50. 62

Floyd Norris, “New Acceptance for Junk Bonds,” NYT, January 23, 1989. 63

“Securitization of Junk Bonds Boosts Appeal,” Pension and Investment Age, August 8, 1988. 64

Anise C. Wallace, “Making ‘Junk Bonds’ Respectable, NYT, December 15, 1989.

294

Street issued $1.5 billion of collateralized bond obligations—and more was to come with

blue-chip issuers such as the Westinghouse Credit Corporation and Equitable Life

moving deals into the pipeline. What had begun as an esoteric solution to the problems

of Imperial Savings and Loan, finding a way to sell-off the shaky thrifts portfolio junk

bonds, had become a tool for the most powerful players in finance.65

The ratings agencies and “old fashioned” investment managers that Milken had

berated for so long were slowly converted to the profits that came from the “financial

engineering” of dressing up bad credits. Milken himself had proposed to do exactly

that—securitize risky bank loans—on an industrial scale. “I feel that what has been done

in the case of Mellon can be done even more effectively for large money-center banks

and their asset bases,” he explained. “Financial institutions will have more freedom to

continue to have a leadership position in international financial markets.”66

He never

had the chance. Others would. As early as 1988, Martin Meyer, a well-know banking

industry gadfly, had pointed out in his Barron’s column the depth of the problems that

Milken’s plan could create:

The danger that good money will go chasing increasingly bad credits is present

here too, of course, especially if Congress repeals Glass-Steagall and allows banks to

securitize their own junk in the 1990s as they did in the 1920s. Even if the law continues

to require a second opinion [from ratings agencies] before such operations are carried out,

there is clearly some risk of competition in laxity among underwriters thirsting for this

business and increasing careless about what paper backs the bonds.67

65

Constance Mitchell, “One Man’s Junk Becomes Another’s CBO,” WSJ, December 14, 1989. 66

Sarah Bartlett, “Mellon’s Spinoff of Shaky Loans,” NYT, July 28, 1988. 67

“Martin Meyer,” Slicing the Mellon: Behind the Good Bank, Bad Bank Scheme, Barron’s, August 15,

1988.

295

Two years later, banks received the underwriting powers that made Meyer’s

scenario possible.

It was 7 A.M., on March 28, 1989, time for the push of commuters to begin

surging over the Brooklyn Bridge. It was a good time to send a message and, for those

willing to commit civil disobedience, try to block the flow of traffic. The placards of the

demonstrators assembled at City Hall Park, and diffused throughout the neighborhood,

reflected their anger: a photograph of Koch below which sat the phrase “10,000 AIDS

deaths—How’m I Doin’?” while others read, “How many more must die?” “One AIDS

Death Every Half Hour.” The protesters chanted Act up! Fight back! Fight AIDS!”

With between 3,500 to 2,500 protestors assembled, it was the largest AIDS

demonstration in the city’s history to date.68

Newspaper vending machines were stuffed

with darkly satirical copies the New York Crimes, with a front-page of stories including:

“N.Y. Hospitals In Ruins; City Hall to Blame; Koch Fucks Up Again," "Women and

AIDS: Our Government's Willful Neglect," and "Koch City Plans: AIDS Deaths Help

Gentrification."69

Two hundred demonstrators were arrested.

The success of ACT-UP was measured not only in its ability to raise awareness

but also by its ability to produce results by catalyzing the medical research bureaucracy.

Perhaps its greatest breakthrough came in June 1989. Dr. Anthony Fauci, director of the

National Institutes of Allergy and Infectious Diseases, the federal agency funding most

68

Bruce Lambert, “3,000 Assail Policy on AIDS Ring City Hall,” NYT, March 29, 1989. 69

Chris Bull, “You Can Fight City Hall! Massive ACT UP/NY Demo Target Koch, City, for Dismal

Response to AIDS,” GCN, April 2, 1989.

296

AIDS research, announced what he called a “parallel-track approach to clinical trials.”

In this system, patients would have access to promising drugs as soon as the drugs were

proven safe, even while tests for effectiveness were under way.70

In December 1989

Fauci described ACT UP as an important ally in the fight against AIDS. “When they

were just protesting, they would often make medically or scientifically unreasonable

demands. But over the past year they’ve adopted a stance of well-informed articulate

activism. They give us a very good grass-roots perspective of the needs of the

community and how what’s available can best be applied to the people affected by the

epidemic.”71

This development reveals the complicated relationship between ACT UP

and the culture of risk. The organization emphasized aggressively confrontational protest

tactics, taking the risk of alienating their supporters and potential allies, and placing

themselves at risk. But they were protesting for the right to take personal risks by short-

circuiting the drug-approval process. At the same time ACT UP challenged the

relationship between profit and risk. The drug AZT, still the only FDA-approved

treatment for AIDS, and its manufacturer Burroughs Welcome, were a ripe target for

direct action.

On September 14, 1989, the infiltrators into the New York Stock Exchange

dressed in suits and ties with nametags that identified them as traders for the investment

bank Bear, Stearns. The organizer of the operation was Peter Staley, who knew the world

70

Gina Kolata, “AIDS Researcher Seeks Wide Access to Drugs in Tests,” NYT, June 26, 1989. 71

Cynthia Crossen, “AIDS Activist Group Harasses and Provokes to Make Its Point,” WSJ, December 7,

1989.

297

of finance well, since he had been a $200,000 per year Treasury bond trader at J.P.

Morgan. Staley had learned on the Street to keep his sexuality to himself: “Trading

floors on Wall Street were like locker rooms, with just vile, homophobic, sexist, racist

language, testosterone up the wazoo,” he said later.72

In 1985, Staley learned that he had

AIDS. He had discovered ACT-UP during its inaugural Wall Street protest in 1987, on

his way to work. “That night when I turned on the TV,” he remembered, “I was blown

away by how they were able to transmit their anger to an entire nation. I decided that

these were my people.”73

He became a full-time activist. In June 1988 he was arrested

with ten others after chaining himself to the door of a Japanese pharmaceutical company

accused of not allowing Americans with AIDS access to a potential medication sold

overseas. “We’re all very angry and every year that goes by, we’re going to up the ante,”

he told a reporter afterwards.74

And ACT-UP certainly had. On September 14,1989

Staley and four other members quietly chained themselves to an unused balcony

overlooking the stock exchange floor. When trading opened, they blew air horns and

dropped a banner that read: “SELL WELLCOME,” the makers of AZT. "There's a

difference between a $500 drug sold at 80% margins and an $8,000 drug [AZT] sold at

80% margins," Staley explained: "We have a drug that could slow a world-wide

72

“Peter Staley Interview,” ACT UP Oral History Project, 2006, 13. 73

Victor F. Zonana, “An Activist Group for the ’80s Aims to ‘Shame People Into Action,’” LAT, April 4,

1989. 74

Thomas Morgan, “Mainstream Strategy for AIDS Group,” NYT, July 22, 1988.

298

epidemic, and it's being sold only to the people and the countries that can afford it. Africa

isn't getting AZT."75

On September 18, Burroughs Wellcome cut the price of AZT by twenty percent to

$6,500 per year. The company’s spokesperson acknowledged that the protests had been a

factor.76

Even the Bush administration was willing to commit heresy against the profit

motive. “The societal good has to outweigh the good of one company,” James O. Mason,

the Assistant Secretary of Health and Human Services, told the press in October “The

companies that manufacture these drugs have got to be socially responsible.”77

The same sense of social responsibility failed to find a footing in that year’s

mayoral contest that played itself out in an atmosphere live-wired with racism and

bigotry. In April a group of young African-American men were arrested and later

convicted (based on false confessions) for raping and brutally beating a white jogger in

Central Park while engaged in a so-called “wilding.”78

In August, Yusuf Hawkins, a

sixteen-year-old African-American teenager, was gunned-down by a white mob in

Bensonhurst, Brooklyn, where he had gone to buy a used car. When Rev. Al Sharpton

led African-American protest marchers into the neighborhood, they were met with further

racist outrages by local counter-protesters. On September 12, David Dinkins won fifty-

one percent of the Democratic primary, thwarting Koch’s campaign for a fourth term as

75

Marilyn Chase, “Burroughs Wellcome Reaps Profits, Outrage, From Its AIDS Drug,” WSJ, September

15, 1989. 76

Philip J. Hilts, “AIDS Drug’s Maker Cuts Price By 20%,” NYT, September 19, 1989, A1. 77

Victor F. Zona, “White House Urges Drug Pricing Restraint,” LAT, October 14, 1989, A18. 78

Craig Wolf, “Youth’s Rape and Beat Central Park Jogger,” NYT, April 21, 1989; Susan Saulny,

“Convictions and Charges Voided In ’89 Central Park Jogger Attack,” NYT, December 20, 2001.

299

mayor. The mayhem of the spring and summer had made Dinkins’s appeals to racial

peace, combined with a “law-and-order” promise to be “the toughest mayor on crime this

city has ever seen,” an attractive combination for Democratic voters.79

Dinkins’s general

election opponent was Rudy Giuliani.

Given the demographics of the city’s electorate, the further ugliness that ensued

seems almost inevitable. Giuliani had the loyalty of Catholic voters. Dinkins had the

backing of New York’s Latinos and African-Americans. The city’s Jewish community

was the one potential “swing” demographic and both campaigns sought to discredit the

other in the eyes of Jewish New Yorkers. The Giuliani campaign brought on-board

Jewish comedian Jackie Mason, who did it more harm than good when he told an

interviewer, “There is a sick Jewish problem of voting for a black man no matter how

unfit he is for the job.”80

So too did attempts to brand Dinkins’s a “Jesse Jackson

Democrat” in the Yiddish press.81

Dinkins campaign engaged in its own brand of self-

destruction when it paid election-time hush money to convicted kidnapper and notorious

anti-Semite Sonny Carson, who proceeded to remind reporters that his anger was directed

towards all whites.82

Dinkins responded by telling Jewish voters, “My opponent

campaigned with a man who was the only governor in America who refused to condemn

the vile idea that Zionism is racism—White House Chief of Staff John Sununu.”83

Ultimately, Dinkins won the mayoralty by the narrowest of margins, with the help of

79

Chris McNickle, To Be Mayor of New York, 304-305. 80

Ibid, 307-308. 81

Ibid, 307-308. 82

Ibid, 310. 83

Ibid, 311-312.

300

vigorous campaigning by organized labor, and even a gracious-in-defeat Ed Koch. As

the election boiled, the problems that Dinkins would have to deal with were getting

worse.

In the fall of 1989 conditions in New York’s financial markets began to

deteriorate once again. In August Congress passed the Financial Institution Reform,

Recovery and Enforcement Act of 1989 and established the Resolution Trust Corporation

(RTC) to liquidate failed S&L. Thrifts were required to dispose of their junk bonds

within five years.84

That month the Dow closed at a record high. But in early September

after trouble at the highly leveraged retailer Campeau Corp, the junk bond market began

to fall apart. Not only did the price of the bonds begin to decline, with an estimated loss

of $10 billion out of a $200 billion market, but sellers stopped being able to find buyers at

any price.85

“Many of these [LBO] deals have been put together based on the thesis that

pieces of the company will be able to be sold to other people for big prices,” said J. Ira

Harris, a senior partner at Lazard. “It’s the greater fool theory to a large extent.

Eventually, somebody decides they don’t want to buy anymore.”86

In mid-October,

Citibank and Chase Manhattan failed to find enough other banks willing to partner with

them in providing credit for a $7 billion leveraged buy-out of United Airlines. The result

was a “mini-crash” of the stock market on October 13, 1989, as investors rushed out of

the stocks that they had bid-up in anticipation of buyouts or takeover bids. Junk bond

84

Mason, From Buildings and Loans to Bail-Outs, 244 85

“Down Jones Industrials Establish Record As Takeover Talk Powers Surge of 56.53,” WSJ, August 25,

1989; Matthew Winkler, David B. Hilder, James A. White, “Mounting Losses Are Watershed Event for Era

of Junk Bonds,” WSJ, September 18, 1989. 86

Sallie Gaines, “High Yield Bonds Showing High-Risk Side,” Chicago Tribune, September 17, 1989.

301

prices continued to decline.87

By November, Wall Street firms had announced cuts to

commissions, bonuses, and further rounds of layoffs, adding to the 15,000 jobs that had

been cut since the 1987 crash.88

Paying the Price, 1990-1992

On January 1, 1990, David Dinkins was sworn into office as the first African-

American mayor of the City of New York. It was a momentous occasion in the city’s

history. On examining the colonial Negro Burial Ground, discovered in Lower Manhattan

in 1991, Dinkins exclaimed: “My God, how things have changed. Negroes were buried

there because that was without the city. Here I stood, the first African-American mayor

of the city of New York, examining the place where I would have had to have been

buried. I couldn’t have been buried in the city.”89

In his inaugural address he declared,

“No matter how rich and powerful we become, we cannot be satisfied when so many

children experience the sunset of opportunity at the very dawn of their existence.”90

The

conditions to make those changes, however, had been eliminated long before

inauguration day.

By mid-February 1990, the once mighty Drexel Burnham Lambert was in deep

trouble. In September 1989 it had paid out $500 million worth of the fines and restitution

that it had owned to the federal government as part of the company’s plea bargain. The

87

Stewart, Den of Thieves, 503; David B. Hilder and Linda Sandler, “Mega-Merger Game Will Survive,

Some Say, but Tone Will Change,” WSJ, October 16, 1989. 88

Matthew Winkler and William Power, “Tough Times on Wall Street Dictate Still More Layoffs,” WSJ,

November 21, 1989. 89

David W. Dunlop, “Unfree, Unknown: Buried Slaves Near City Hall,” December 26, 1991, B3. 90

“Text of Dinkins Speech ‘We Are All Foot Soldiers on the March to Freedom,” NYT, January 2, 1990

302

firm’s balance sheet was weighted down with an inventory of hundreds of millions of

dollars’ worth of junk bonds whose price had continued to slide since October.91

Compounding the bonds had not only lost value but had become illiquid—there were no

buyers for Drexel’s portfolio. The credit market and the commercial banks had lost

confidence that the firm could repay its loans. The flow of short-term credit that Drexel

required to function on a day-to-day basis dried up. It was a miniature version of the

problem that the securities industry as a whole had faced after Black Monday.92

This

time there would be no federally orchestrated rescue. Given the firm’s criminal record,

there was little interest in Washington propping up the company by pressuring the

commercial banks, Drexel’s key lenders, to extend more credit or allow for a delayed

repayment. As one Bush administration office explained, “The only interest was in

trying to make sure the problem stayed confined to Drexel.”93

On February 13, unable to

arrange for further financing, Drexel defaulted on $100 million in loans and filed for

bankruptcy.94

A senior executive summed up the company’s death, “We were too close

91

Matthew Winkler and Laurie P. Cohen, “After Turmoil of 1989, Once Mighty Drexel Continues to

Struggle,” WSJ, February 5, 1990; Michael Siconolfi, Laurie P. Cohen, Barbara Donnelly, and Kevin G.

Salwen, “Drexel’s Unraveling Began Six Months Ago,” WSJ, February 15, 1990. 92

Michael Siconolfi, Robert Guenther, William Power, and Laurie P. Cohen, “Embattled Drexel Puts Itself

Up for Sale,” WSJ, February 13, 1990. 93

Alan Murray and Kevin G. Salwen, “Fed, SEC Officials Decided Hands-Off Policy Was Best,” WSJ,

February 14, 1990. 94

Kurt Eichenwald, “Drexel, Symbol of Wall St. Era Is Dismantling; Bankruptcy Filed,” NYT, February

14, 1990.

303

to the edge. We just didn’t think we faced so much risk.”95

Ten days later, 3,300 of

Drexel’s 5,300 employees were out of work.96

The revolutionary firm had succumbed to a classic error of revolutionary

movements: it had believed its own propaganda about the safety and liquidity of the junk

bonds it had popularized. But the revolution lived on. Shortly after the bankruptcy

filing, across the street from the firm’s headquarters, Drexel’s now surplus promotional

merchandise went on sale, including a coffee mug with emblazoned with “No Guts, No

Glory” and T-shirts with the slogan “Back to the Future.”97

The sell off went far beyond

T-shirts, however. Crain’s New York Business reported optimistically, “Many of Wall

Street’s secondary firms and small boutiques, in particular, are expected to benefit from

the influx of so much talent. These firms are staring at once-in-a-lifetime opportunity to

nab top people at realistic salaries to reinforce their current businesses, or plunge into

new ones.”98

A number of Drexel alumni, including veterans of Milken’s trading desk,

would go on to successful careers in trading, leveraged buy-outs, and corporate deal-

making.99

More importantly for the future of finance, the firm’s ideas were not only

defended but also recycled.

A little over two weeks after Drexel’s collapse, in an opinion piece in the New

York Times, two securities attorneys advocated repackaging the junk in the portfolios of

95

Kurt Eichenwald, “The Fall of Drexel’s House of Risk,” NYT, February 26, 1990. 96

Michael Siconolfi and William Power, “Drexel Aftermath: Life Out On the Street,” WSJ, February 23,

1990. 97

Tom Herman, “Drexel Now Touts Mugs, Baseball Caps With No Refunds,” WSJ, March 26, 1990. 98

Peter Grant, “Drexel Shock Waves Rattling N.Y. Economy,” CNYB, February 19, 1990, 1. 99

Jenny Anderson, “The Drexel Diaspora,” NYT, February 6, 2005.

304

Drexel and the Resolution Trust Corporation into new unit investment trusts that would

allow banks to “generate much-needed fee income from underwriting and managing

these new issues.” The Times evocatively paired the piece with an illustration of a

fanciful farm machine ingesting lemons and spitting out a conveyer belt of lemonade.100

To avoid adding to the federal budget deficit by holding loans to maturity the RTC began

a large-scale program of securitization—packaging and selling “bad” loans, as ‘Ritzy

Maes,” although to commercial banks rather than to small investors.101

And junk bonds

themselves continued to have their defenders. “Once language is set it is hard to get the

public to change the language, but it still pains me to hear the term ‘junk bond,’ ” said

Senator Phil Gramm (R-TX) in the March hearings into Drexel’s collapse. “I would not

succumb to the temptation to call a financial instrument that is the lifeblood of small,

medium-sized and independent businesses ‘junk bonds.’ The only junk bonds I’m aware

of are the bonds issued by the Federal Treasury.”102

It was a cheap shot, but Gramm’s

remarks reflected a broader consensus on both the left and the right that markets, not the

government, were the ultimate arbiters of success and failure in economic policymaking.

An important justification for the continuation, indeed the intensification, of the

culture of risk was a growing intellectual closure on the long debate in American society

100

Andrew J Donohue and Jay G Baris, “Salvaging the Junk Market,” NYT, February 25, 1990. 101

Paulette Thomas, “Mortgage-Backed ‘Ritzy Maes’ Stroll Down the Street With RTC, WSJ, July 12,

1991; Paulette Thomas, “RTC Plans Commercial Mortgage Issue,” WSJ, December 17, 1991; Thomas

noted that the $1 billion in planned issuance of securities backed by commercial mortgages would expand

that market by 25%, see also Paulette Thomas, “RTC Securitizes Commercial Property Loans,” WSJ,

February 12, 1992; Susan Schmidt, “RTC’s Packaging of S&Ls’ Assets Raises Questions, Washington

Post, November 12, 1992. 102

U.S. Congress, Senate, Committee on Banking, Housing, and Urban Affairs, The Issues Surrounding the

Collapse of Drexel Burnham Lambert. 101st Congress., 1

st sess., 1990 (Washington, D.C.: U.S.

Government Printing Office, 1990), 60.

305

about the merits of deregulated capitalism. By the late 1980s the Soviet Union and its

satellites had embraced market-based reforms. The collapse of Eastern European

communism then confirmed that the deregulated marketplace was not only a superior

system but also the only conceivable system for economic management. Some of these

arguments for continued deregulation, like those of Walter Wriston, rested on a belief

that the rapid advances in communication and computer technology had outrun any

attempt at regulation. In 1985, Wriston wrote about the triumph of what he called the

“Information Standard” in the international economy. “If a country did not like the gold

standard or the gold exchange standard or the Bretton Woods arrangement, it could opt

out of the system,” Wriston told readers of the Wall Street Journal. “Today, there is no

way for a nation to opt out of the Information Standard. There is no place to hide. . . .The

new Information Standard, unlike all prior arrangements, is not subject to effective

political tinkering.”103

That, for Wriston, was the information standard’s great virtue.

When political scientist Francis Fukuyama posed his famous question “The End

of History?” in the summer 1989 issue of The National Interest he answered in the

affirmative, describing the end of the Cold War as “an unabashed victory of economic

and political liberalism.”104

This led Fukuyama to see an end-point of “universal

homogenous state as liberal democracy in the political sphere combined with easy access

to VCRs and stereos in the economy.”105

While Fukuyama himself argued against what

103

Ibid. 104

Francis Fukuyama, “The End of History?,” National Interest, Summer 1989, 3-18. 105

Ibid.

306

he saw as the simplistic “Wall Street Journal school of deterministic materialism,”

popularizers of related visions had no such hesitancy.106

Lawmakers would still make

laws, but markets would have the ultimate veto power over taxes, spending, and

regulation. Fukuyama was not alone. “Now a 23-year-old foreign exchange trader with a

PC in Tokyo can vote on U.S. tax policy,” columnist Paul Gigot wrote approvingly in

1989. “Global markets impose a daily discipline on politicians unknown a decade

ago.”107

The same market-determinism that had been applied in the 1970s to the

economic problems of New York City, and in the 1980s to global financial regulation,

now appeared to apply to the global economy as a whole.

What Wriston, Fukuyama, and others missed was that the decision to move from

the Bretton Woods system of managed exchange rates to a free-floating global capital

market had been, ultimately, a political one. Its framework was made by nations,

especially by the United States. The same constructed quality can be said for the

deregulation of investment banking, commercial banking, and the Savings and Loan

system in the United States. The supporters of market determinism were correct,

however, in their belief that once such a system had been created, it gained the power to

supersede politics. Until, as happened on Black Monday, the power of the state was

required to keep these markets working.

But it was not only on the right that the language and practice of risk was

triumphant. For liberals as well there was no turning back. Even socialist Michael

106

Ibid. 107

Paul Gigot, “ ‘Greed Decade’ Was Really the Freed Decade,” Op-Ed, WSJ, December 8, 1989.

307

Harrington, writing in his 1986 analysis of Francois Mitterrand’s failed attempt at a

“rupture with capitalism,” concluded “ ‘Keynesianism in one country’ is not possible.”108

Mitterrand had taken radical steps after his election in 1981, like the widespread

nationalization of French industry and major wage increases for the lowest-paid workers.

But global markets in goods, currencies, and sovereign debt—in other word’s Wriston’s

information standard—meant that these policies could not be sustained, Harrington

argued. Capital fled from France. So, by 1983, the Mitterrand government had reversed

course. It had imposed austerity, with palliatives for the poorest citizens, such as

expanded government employment, but austerity nonetheless. The international

“market” had triumphed over French politics.109

France despite its nuclear arsenal, its

own currency, and all of the other powers of a sovereign state, had found itself in a

similar position to New York City in the mid-to-late seventies.

For American liberals the triumph of the market over politics required society to

adapt itself to the market. In The New Republic in 1989, Robert Reich argued for a

significant change in course. “We [America] are becoming but a region—albeit still a

relatively wealthy region—of a global economy whose technologies, savings, and

investments across borders, making it hard for individual nations to control their

economic destinies.”110

In this globalized environment, Reich argued, it would be those

Americans who performed “symbolic-analytical services,” who would benefit the most,

108

Michael Harrington, The Next Left (New York: Henry Holt & Company, 1986) 140; reprinted as

“Mitterrand’s Term: A Balance Sheet,” Dissent, January 1987, 92. 109

Harrington, The Next Left, 116-140. 110

Robert B. Reich, As The World Turns,” New Republic, May 1, 1989, 25.

308

because they could sell their products in the world marketplace. Perhaps not surprisingly,

most of the jobs that Reich listed in this category were in finance and related industries

that employed, in his description, “workers who reveal ways of more efficiently

deploying resources or shifting financial assets” or who “grab money from people who

are too slow or naïve to protect themselves by manipulation in response.”111

In essence,

Reich’s “symbolic analysts” would be people who either created or managed different

kinds of risks. Public policy, Reich argued, should be aimed at “ensuring any talented

American kid can become a symbolic analyst” and upgrading jobs, turning routinized

work into “symbolic analysts at a level very close to the production process.” The burden

for managing this shift, Reich argued, “turns out to rest heavily on education.”112

Reich

still could inveigh against specific kinds of speculative capitalism. In the January 1990

issue of Dissent he decried America’s overleveraging, a divisive “whoever dies with the

most toys wins” mentality and the “waste of talent” that emphasized training in finance

and law over science and engineering,113

But Reich’s overall intellectual trajectory is striking. The New Deal had sought to

shape the financial and business system so that they could better meet the needs of

ordinary Americans by protecting them from risk. Industrial policy had sought the same

goals. But now Reich had reversed the equation. To obtain their full citizenship,

Americans would need to change the goals of government, and, implicitly, themselves, in

111

Ibid, 26. 112

Ibid, 28. These observations would become the basis for Robert Reich’s The Work of Nations:

Preparing Ourselves for 21st-Century Capitalism (New York: Alfred A Knopf, 1991).

113 Robert B. Reich, “A Culture of Paper Tigers,” Dissent, January 1990, 62-64.

309

order to take advantage of the risks created by unrestrained global capital flows.114

This

philosophy had already gained significant traction in the Democratic Party through the

Democratic Leadership Council, among whose members were then Arkansas Governor

Bill Clinton and Tennessee Senator Albert Gore.115

What this intellectual shift meant in practice was that the solution to the

recessionary consequences of the risk taking in the 1980s was to allow the financial

sector to take on more, not less, risk. As Ted Forstmann framed it in a Wall Street

Journal editorial published on December 13, 1990. American companies suffered from

“a dangerous overhang in the debt market.” Therefore, according to Forstmann, “The

U.S. must repair its national balance sheet and reduce the cost of capital to business.

That can occur only if companies have ready access to the lowest current cost form of

capital—equity financing.”116

The Federal Reserve had already come to a similar conclusion. On September 20,

1990, the Federal Reserve did so and granted a subsidiary of J.P. Morgan, the parent

company of the commercial bank Morgan Guarantee, the power to trade and underwrite

corporate stocks. The Fed did so by permitting the firm to use a loophole in the existing

law that allowed a bank holding company to have a securities unit—as long as that unit

was not “principally engaged” in equity market activities, like trading or issuing stocks.

J.P. Morgan Securities would be “principally engaged” in trading Treasuries and

114

Howard Brick, Transcending Capitalism: Visions of a New Society in Modern American Thought

(Ithaca, NY: Cornell University Press, 2006), 258-59. 115

See for example Peter T. Kilborn, “Democrats’ Ideas On Economy Shift,” NYT, August 12, 1986. 116

Theodore J. Forstmann, “Blame the Tax Code, Not Milken, for Junk Bonds,” Op-Ed, WSJ, December

13, 1990.

310

municipal bonds, which had always been permitted activates under the law. So the Fed

reasoned that the securities subsidiary could also have up to ten percent of its total

revenue from trading stocks.117

In January three more banks, Bankers Trust, Canadian

Imperial Bank, and the Royal Bank of Canada received the same powers.118

It was not a

complete repeal of Glass Steagall: only Congress could do that. But it came very close to

the edge without requiring any legislation.

Coming in the midst of the savings and loan crisis, the regulatory shift drew fire.

The chairman of the House Banking Committee, Representative Henry B. Gonzalez (D-

TX) denounced Greenspan’s move:

Clearly the authority to deal in equity securities introduces a new element of risk for

institutions insured by the Federal Treasury and taxpayers. It is irresponsible for the

Federal Reserve—under any rationale—to willy-nilly add massive new risks to the

banking system at a time when the taxpayer-supported insurance fund is strained to its

limit.119

The reasons Gonzalez articulated were very similar to those that had led to Glass-

Steagall in the first place. Yet amidst the closure of debate about the virtues of a

deregulated financial market, however, a different kind of logic had taken hold. Letting

banks underwrite and trade stocks would make them safer, supporters of the Fed’s

decision argued. In response to J.P. Morgan’s new underwriting powers, the financial

writer Ron Chernow published an editorial in the Wall Street Journal. He began with

what seemed like the perfect argument against the relaxation of banking regulation. “For

117

Michael Quint, “Regulatory Shift Allows U.S. Banks to Trade Stocks,” NYT, September 21, 1990. 118

Stephen Labaton, “3 More Banks Given Authority to Trade Stocks,” NYT, January 16, 1991. 119

Stephen Labaton, “Defenders and Detractors View Bank’s New Powers,” NYT, September 22, 1990.

311

20 years now,” Chernow said, “Our commercial banks have courted disaster. The list of

their lending fiascoes—shipping, real estate investment trusts, farmland, Third World

debt, leveraged loans, and commercial property—is truly astounding. Unless we assume

that all commercial bankers are dunces, we must suspect some deep, systemic flaw

behind this flirtation with disaster.” 120

Chernow identified the flaw as beginning when

large corporations gained direct, or deeply discounted, access to the international capital

market of the stateless Eurodollar. Individual savers, meanwhile, had moved their money

from passbook accounts, where regulation capped interest rates to the unregulated money

market funds offered by money managers. In response, bankers had shifted the focus of

their lending to their riskiest customers. Deregulated banks would be able to draw upon

diverse sources of revenue, and would therefore take fewer risks and “shift emphasis

along with their clients” from making loans to underwriting shares depending on business

needs.121

The editors of the New York Times agreed with Chernow’s line of reasoning.122

So too did the financial system’s regulators. In a November 1990 speech before the

Securities Industry Association, Treasury Secretary Nicholas Brady argued that the

constraints of the McFadden Act and Glass-Steagall had led the commercial banking

industry to choose “among the more risky and often less attractive kinds of lending—

such as commercial real estate and loans to highly leveraged companies.”123

Diversified

120

Ron Chernow, “Don’t Punish the Banks, Liberate Them,” Op-Ed, WSJ, September 24, 1990. 121

Ibid. 122

Editorial, “Regulate Banks: Less, and More,” NYT, December 10, 1990. 123

Stephen Labaton, “Administration Backs Revamping of Banking and Securities System,” NYT,

December 1, 1990.

312

banks would be stronger because they would take a variety of risks. It was the same kind

of reasoning that had justified the securitization of junk bonds.

As events had shown, this argument contained a ring of truth. But it was also

incomplete. Banking deregulation would not remove the incentive for individual bankers

and financiers to pioneer and sell the risker, more lucrative, and ultimately disastrous,

financial products that Chernow had mentioned. If Walter Wriston had not created the

“ship loan” for Aristotle Onassis, if Michael Milken had not pioneered junk bonds, they

would have remained rather ordinary bankers; comfortable and privileged men, but

without the boundless power and wealth both craved. They would have lost the

competition for clout, bonuses, and promotions within their own firms. And even if a

bank stifled such creative people, its competitors might not. One could copyright a brand

name, patent an invention, or keep a proprietary computer program a secret. But there

was (and is) no way to patent an idea in finance. After one firm invented a new type of

loan or sold a new security, all of its competitors knew the basic principles of such loans.

In a competitive, deregulated environment, the risk of a bank adopting a “not invented

here” mentality would be to court a loss of market share, lower profits, and a lower stock

price. In the age of “shareholder’s rights,” it would also be a good way for the CEO of

that bank to lose his job. Taking the same risks as the competition made for a sound

corporate strategy, even as it pushed towards an unsound economy.

The risks of further deregulation did not require an analysis of hypothetical

scenarios to conclude that banks would speculate to the limit of their balance sheets and

313

the law. It was taking place at the very moment of the Federal Reserve’s liberalization of

Glass Steagall. The products were derivatives, specifically synthetic derivatives. A

traditional derivative was linked to one particular financial product, like shares in IBM or

the S&P 500 Index; or to a physical resource, like a specific quantity of West Texas

crude oil. It was traded on exchanges, which gave market participants a quotable price to

buy or sell their holdings. A synthetic derivative was a private contract between an

investor and a bank. The price came from whatever multiplicity of factors an investor

wanted —securities, commodities futures, interest rates, foreign currencies--assuming, a

bank was willing to sell such a contract. Synthetic derivatives were customized for each

client and they were not sold on an open, competitive exchange. So they were much

more profitable to sell. Moody’s Investors Service noted in November 1990: “The

derivate business is proving to be one of the few that can generate attractive [profit]

margins, often due to their customized and proprietary nature.”124

As Martin Leibowitz,

chairman of the research policy committee at Salomon Brothers, put it, “Synthetics are a

big growth area for sure. Investors see respectable people they know are using them. It’s

becoming a credentialized product.”125

By 1991, the major firms in the derivatives

market, such as Bankers Trust, were making profits of $100 to $200 million per year

selling. They did so by selling secretive financial products that no one seemed to fully

124

Michael Siconolfi, and William Power, “Wall Street Tries New Ways to Make Money,” WSJ,

November 27, 1990, C1. 125

Barbara Donnelly and Craig Torres, “Sluggish Wall Street Is Rushing Into ‘Derivatives,’ ” WSJ,

November 30, 1990, C1.

314

understand.126

On January 30, 1992, E. Gerald Corrigan, the New York Fed President

who had assisted Greenspan in the rescue of Wall Street after Black Monday, felt

compelled to issue a warning about the new securities to the Mid-Winter Meeting of the

New York State Bankers Association at the Waldorf-Astoria Hotel, “High-tech banking

and finance has its place,” he said, “but it not all that it is cracked up to be. . . . I hope this

sounds like a warning, because it is. Off-balance-sheet activates have a role, but they

must be managed and controlled carefully, and they must be understood by top

management as well as by traders and rocket scientists.”127

Corrigan’s warning went

unheeded by the city’s bankers.

As November 1991, Felix Rohatyn wrote what must have sounded like an epitaph

for the age:

We have just seen the end of the greatest decade of speculation and financial

irresponsibility since the 1920s. Financial deregulation, easy credit, and regulatory

neglect have combined with a degradation of our value system to create a religion of

money and glamour . . . Beginning first in New York, but subsequently spreading to the

rest of the county and to the world, our so-called financial wizards turned the country and

its values into a vast casino.128

That casino, and New York’s dependency on its profits, continued to grow. And

the city was willing to pay the price for keeping the casino in town, despite concentrated

speculation’s power to destabilize the city’s economy and society. The Dinkins

administration accepted the logic articulated by former Deputy Mayor Kenneth Lipper in

December 1989: “New York City’s tax structure is a pyramid precariously balanced on

126

Craig Torres, “Bull Market For Derivatives Outruns Rules,” WSJ, July 24, 1991, C1. 127

E. Gerald Corrigan, “Rebuilding the Economic and Financial Fundamentals: The Case for Vision and

Patience,” FRBNY Quarterly Review, Winter 1991-92, 5. 128

Felix G Rohatyn, “The New Domestic Order?” NYRB, November 21, 1991.

315

its narrowing point,” said Lipper. “The hundreds of thousands of unemployed and

working poor people n New York present City Hall with bottomless needs that are

heavily borne by an extremely small taxpayer base numbering in the thousands.”129

As

Dinkins said on September 11, 1991, “Lower Manhattan is the engine which drives our

city.”130

By October 1990, three major securities firms—Morgan Stanley, Prudential-

Bache Securities, and the Smith Barney—were asking for tax breaks to remain in New

York. Dean Eberling, analyst at Shearson Lehman Brother, said, “If you can extract pain

from the city, that’s probably the best alternative. It’s a buyers’ market and New Jersey

and Connecticut are the leverage that the firms are using.”131

Daniel S. Bayer, the vice

president for economic development at the New York City Partnership, gave a sense of

how seriously the city’s business community viewed the renewed threat of relocation.

“The thing that is different today is that some financial service firms are now taking a

serious look not just at whether an operations center or data office should be in the city,

but at whether the headquarters itself should be in the city.” Morgan Stanley’s departure

Bayer argued, would question “the future of the city as the world financial capital.”132

Similar arguments were made following the 1991 merger of Chemical Bank and

Manufacturers Hanover. “It [banking] has been a steady and powerful engine for us

here,” said Ron Shelp, again of the New York City Partnership. “But there is not natural

129

Kenneth Lipper, “What Needs to Be Done?” NYT, December 31, 1989, SM28. 130

Thomas J. Lueck, “Decline Follows a 2-Decade Boom in Lower Manhattan,” NYT, September 12, 1991. 131

Michael Siconolfi, “Three Securities Firms Consider Seeking Greener Pastures Outside New York

City,” WSJ, October 26, 1990. 132

Robert J. McCartney, “Is Wall Street Fleeing Wall Street?,” Washington Post, November 27, 1990.

316

right to assume that banking will always be centered here.”133

Dinkins fought to make

sure that it would.

His effort took a similar form to previous retention efforts—a combination of

lobbying for deregulation and the use of tax incentives to retain financial service firms.

As had Beame and Koch before him, Dinkins rejected the taxation of securities trading.

In the fall of 1990, as the banks and brokers were threatening to leave the city, he joined

with Governor Mario Cuomo, Senator Daniel Patrick Moynihan, and Wall Street’s

lobbyists to kill a proposed securities transaction excise tax. 134

Organized as the

“Mayor’s Committee On Global Competitiveness,” Wall Street executives argued that

the tax would cause, “long-term damage. . . to the competitive viability of our securities

market.”135

In August 1992, the Dinkins administration succeeded in retaining

Prudential’s securities arm, in exchange for the city granting the firm $29.5 million in

sales tax abatements, $24.1 million in real estate tax abatements and a mortgage

recording tax waiver worth $4.2 million dollars. “[Prudential] had launched an intensive

two-year search for more affordable space,” said Dinkins. “But we are fighters. And this

is a win for us.”136

In October 1992, Morgan Stanley accepted an offer to remain in the

city, rather than move to Stamford with the firm’s 4,000 jobs, in exchange for $30 million

worth of in city and state tax breaks.137

In November 1993, after eight months of

negotiations, Kidder Peabody, then the investment banking subsidiary of General

133

Michael Specter, “Banks’ Merger Another Blow to N.Y.’s Economy,” Washington Post, July 16, 1991. 134

Kevin G. Salwen, “How Wall street Won Fight to Kill Tax on Trades,” WSJ, October 2, 1990. 135

“Dinkins’s Team Says No to Stock Tax,” WSJ, September 12, 1990. 136

Neil Barsky, “Prudential Unit Signs Lease to Stay in New York City,” WSJ, August 6, 1992. 137

Neil Barsky, “Morgan Stanley Set to Announce Deal on New York Office,” WSJ, October 19, 1992.

317

Electric, agreed to stay as well. The price for Kidder’s 3,000 jobs was $31 million in tax

breaks plus several million more in “growth incentives.”138

In a recession, however,

someone else would have to pay to keep the city’s budget in balance. In Dinkins’s case it

would be the people who had elected him.

Even before running for mayor, Dinkins had been warned about the city’s

deteriorating fiscal outlook. He recalled Barbara Fife, Dinkins’s Chief of Staff when he

was Manhattan Borough President, telling him, “Dave, I think it is a bad time to run for

mayor. The revenue picture is awful, and looking forward two, three years it is getting

worse. It is really bad. If you get elected, you are not going to have any funds to make

changes and do the things you want.”139

Dinkins replied, “If there is going to be such a

reduction in resources, that’s just where someone like me is needed—to direct them to

the places where the need is greatest.”140

But Dinkins underestimated the depth of the

recession or failed to communicate to his supporters, especially community activists and

municipal union leaders how little would be available for their existing programs, much

less new ones. The result was a sense of betrayal. “My sense is that you get a people’s

movement that develops, it elects a people’s candidate, and then there is a coup, right?”

said Journalist Juan Gonzalez in the early 1990s. “When the establishment in this city

138

Jennifer Cody, “Kidder Peabody Agrees to Stay in New York,” WSJ, November 1, 1993. 139

David N. Dinkins, A Mayor’s Life, 131. 140

Ibid.

318

realized that a people’s movement was about to come to power, they grabbed Dinkins so

fast that he still hasn’t stopped turning around.”141

The fiscal year 1991-92 budget cut 7,100-classroom position in city schools,

2,112 school aides, and sixty three percent of the school supply budget. There was a fifty

percent cut in programs to reduce infant mortality and a three-quarters reduction in lead-

poisoning control. Street sweeping was cut nearly in half.142

As Dinkins put it, “This

budget contains a lot more pain and a lot less gain than any of us would like.”143

His

major success in 1991 was winning the approval in Albany of a $1.8 billion anti-crime

program that added 3,500 new police officers, the cost covered by the extension of a

surcharge on the city’s personal income, higher property taxes, and a $2 scratch-off

lottery game.144

As the Dinkins administration struggled to control the city’s budget deficit, it also

took the offensive to take control the city’s public space and give at least the impression

of public order. “It’s now almost a cliché to say New York has become a third-world

city,” wrote a reporter for the Christian Science Monitor. “There are shanties under

bridges, in vacant lots, and until recently in a public park.”145

That park was Tompkins

Square. It was not the image that the recession battered city was trying to cultivate.

After the 1988 police riot, the situation at the park remained precarious. On Memorial

141

Quoted in Roger Sanjek, The Future of Us All: Race and Neighborhood Politics in New York City

(Ithaca, NY: Cornell University Press), 170. 142

“How the Budget Plays Out,” NYT, July 3, 1991, B5. 143

Josh Barbanel, “Differences Split: Dinkins and City Council Agree on Service Cuts and Tax Increases,”

July 1, 1991. 144

Kevin Sack, “Dinkins Crime Plan Wins the Backing Of Top Lawmakers,” NYT, February 8, 1991. 145

Cameron Barr, “Park Closing Stirs Neighborhood,” CSM, September 24, 1991.

319

Day 1991, after the end of a punk show, street fighting broke out, leading to thirteen

arrests and eighteen injured police offices. Deputy Mayor Fife told the press, with a hint

of understatement, “We do not find that the park is being used appropriately.”146

The

status quo had to go. So it did. Before the dawn light of June 3rd

, three hundred and fifty

riot police descended on the park to remove the two hundred homeless people living

there. Sanitation crews packed up their belongings. Parks Department workers began

assembling a ten-foot tall barbed wire fence that would surrounded three-quarters of the

park for a year-long renovation. At an estimated cost of $2.3 million the plan included

tearing down the band shell.147

Those parts of the park that remained open, such as the

playground, had a 9:00 P.M curfew. Dinkins decried the scene at Tompkins Square Park

as “disturbing, disruptive and dangerous,” declaring, “The park is a park. It is not a place

to live. I will not have it any other way.148

On the evening of June 25, the police cleared

a smaller encampment of fifty to sixty people who had been living in front of the

Coliseum at Columbus Circle, where the MTA had plans to install a restaurant.149

Fife

framed the two closures as the municipality taking a stand against “symbols of a city out

of control.” She continued, “The Mayor feels there’s not one segment of the public that

can privatize a public area.”150

146

Alessandra Stanley, “Tompkins Sq. Park Where Politics Again Turns Violent,” NYT, May 30, 1991. 147

Barbara Day, “Homeless Folk Lost the Battle of Tompkins Square Park,” Amsterdam News, June 15,

1991 and John Kifner, “New York Closes Park to Homeless,” NYT, June 4, 1991. 148

John Kifner, “New York Closes Park to Homeless,” NYT, June 4, 1991. 149

Nick Ravo, “Homeless Living Outside Coliseum Face Removal Tonight,” NYT, June 26, 1991. 150

Sam Roberts, “Evicting the Homeless,” NYT, June 22, 1991, 1.

320

The push to remove the visible homeless reflected a hardening not only of the

Dinkins administration but also of the coarsened sentiments of many city residents.

Shortly after the closure of Tompkins Square Park, New York Observer columnist

Richard Brookhiser argued that society needed to differentiate between “those who are on

the street because of a sudden economic shock, and those—the bums—who through

recklessness and accumulated bad habits, simply make a life of it and behave

accordingly.151

For New Yorkers who had some money to give, but far from enough to

isolate themselves from the push-and-shove of city life, the seemingly endless requests

for spare change had gone from a shock to a nuisance, even a threat, as they rode the

subway, drew cash from an ATM, and entered and exited restaurants and grocery

stores.152

As Times columnist Anna Quindlen wrote later, “We have become so

accustomed to people sleeping on sidewalks and in subway stations that recumbent

bodies have become small landmarks in our neighborhoods.”153

Even Dinkins and his

generally idealistic advisors began to wonder if the problem was insurmountable. The

city provided more permanent housing for the homeless between 1986 and 1991, tripling

the number of family apartments, to 3,200 units, it appeared as if more poor people were

entering the emergency housing. There was a belief among officials that the poor were

“gaming” the emergency housing system, which gave them priority for subsidized

151

Barbara Day, “Is NYC’s Public Becoming More Intolerant of the Homeless?” Amsterdam News, July 6,

1991. 152

Fox Butterfield, “New Yorkers Growing Angry Over Aggressive Panhandlers,” NYT, July 29, 1988. 153

Anna Quindlen, “No Place Like Home,” NYT, May 20, 1992.

321

apartments, to escape being “doubled up” with family or friends.154

The Mayor himself

had argued against this claim when he was Manhattan Borough President, writing “There

is little evidence that families forsake stable housing arrangements hoping to get an

apartment through the city.”155

The crackdown on the homeless continued into the fall. In September the Staten

Island Ferry Terminal in Battery Park was closed due to a fire. An abandoned building in

East New York burned, killing a firefighter who was searching for any homeless

residents.156

In response, the Dinkins administration ordered the city to make sure that its

buildings were locked up and cleared of any unwanted residents. “It would be an order to

remove unauthorized person from those locations,” said Dinkins. “We’re not chasing the

homeless out. We’re making the facilities secure against anybody who ought not to be

there.” 157

That included the homeless. On October 15, police in riot gear once again

came at dawn to the East Village. This time they moved to clear the shantytown’s

dwellers from the vacant lots around Tompkins Square Park. City bulldozers then

plowed under the cardboard, plastic, and whatever salvaged furniture that had made its

way into the camps.158

Three days later, William J. Bratton, New York City Transit

Police Chief, announced a winter campaign to remove the homeless from the city’s

154

Celia W. Dugger, “Families Seek Out Shelters As Route to Better Homes,” NYT, September 4, 1991. 155

Todd S. Purdum, “For Dinkins, It’s a Retreat: Fiscal Realities Lead Mayor to Backtrack,” NYT,

September 6, 1991. 156

Dennis Hevesi, “Citing Fires, Dinkins Aide Orders Removal of Homeless From City-Owned Property,”

NYT, September 15, 1991. 157

Felicia R. Lee, “Dinkins Rejects Idea That Order Hits Homeless,” NYT, September 17, 1991. 158

Thomas Morgan, “New York City Bulldozes Squatters’ Shantytowns,” NYT, October 16, 1991, James

Barron, “Bulldozers Leave Some Bereft, Some Relieved,” NYT, October 16, 1991.

322

subways system. “We take strong exception to those who argue that people should be

allowed to live in the subways,” Bratton told reporters. “The subways are not safe.”159

That was true. In 1989 alone seventy-nine homeless people had been run over by trains,

electrocuted by the “third rail,” committed suicide, or had frozen and starved to death

underground.160

But the city had not been willing to push them out during the winter.

Now it was. Anyone who violated the MTA’s rules, whether against beating the fare,

begging, or even sleeping, could take a free bus to the shelters or walk the streets.

Officers were assigned to work in teams to make sure that the vagaries of the heart did

not interfere with the rule of the law.161

Homeless advocates accused Dinkins of hypocrisy between his rhetorical

commitment to fairness and his administration’s actions. But Dinkins was unbowed. “As

we lawyers say, when you change the facts you change the law,” Dinkins explained,

“And the facts today are different than the facts were two years ago.”162

The difference

was money. “It’s very difficult to talk about making the homeless system the system it

should be when there is no money,” said Nancy G. Wackstein, director of the Mayor’s

Office on Homelessness and Single-Room-Occupancy Housing Services. In exhaustion

and frustration she resigned that September. “Clearly the money dried up at a time when

we came in with a lot of good ideas.”163

159

Seth Faison Jr., “Tougher Campaign Is Vowed Against Homeless in Subway,” October 19, 1991. 160

David Machalaba, “Transit Systems Face Burden of Providing Last-Resort Shelter,” WSJ, July 18, 1990. 161

Seth Faison Jr., “Tougher Campaign Is Vowed Against Homeless in Subway,” October 19, 1991, 1. 162

Sam Roberts, “What Led to Crackdown on Homeless” NYT, October 28, 1991. 163

Thomas Morgan, “Dinkins’s Chief Homeless Policy Adviser Resigns,” NYT, September 4, 1991.

323

Those with money had ideas of their own about how to control public space. In

July, Dinkins signed legislation enabling the creation of the Times Square Business

Improvement District (or BID). It was the city’s twenty-second such district. The BID

planned on raising $4.6 million to hire private security guards and sanitation workers, and

provide programs for the homeless to safeguard the State of New York’s acquisition of

redevelopment property within Times Square.164

The same month saw the creation of the

34th

Street Partnership for the twenty-eight blocks surrounding Penn Station,

encompassed Macy’s, the Empire State Building, and Madison Square Garden. The 34th

St Partnership raised $6 million a year to pay for tourist assistance booths, new street

lighting, and more security, to prevent anything that would keep visitors from getting “a

bad first impression of the city,” in the words of one landlord.165

The City’s Department

of Business Services celebrated the district’s creation: “During recessionary times it is

even more important for business to work together for the city’s long-term health.”166

That they did. By December, over one hundred people had been hired and trained by the

34th

Street Partnership. It was not a coincidence that in the summer of 1992 the

Democratic National Convention would be coming to the Garden.167

One segment of

“the public” could in effect privatize public areas, so long as it did so profitably.

164

James C. McKinley Jr. “Business-Tax Zone For Times Sq. Area Is Signed Into Law,” NYT, July 24,

1991. 165

Rachelle Garbarine, “A Special Tax Will Help Spruce Up Around 34th

Street,” NYT, September 11,

1991. 166

Ibid. 167

“34th

Street In ’92 Uplift,” NYT, December 29, 1991.

324

For the vast majority of New Yorkers, however, these changes were

overshadowed by the news of the disastrous loss of control over public space that had

occurred in Crown Heights, Brooklyn, between the evenings of Monday, August 19 and

Thursday, August 23. That Monday, the trailing car in the motorcade of Grand Rebbe

Menachem M. Schneerson, leader of the Lubavitch sect of Hasidic Judaism, hit a car at

the intersection of President Street and Utica Avenue. The chase car hit another vehicle

entering the intersection, which spun-out and killed a seven-year-old African-American

boy and injured his cousin. Rumors circled in the largely African-American

neighborhood that the ambulance had evacuated the driver of the car had failed to treat

the injured child—killing him. A crowd gathered at the scene, tempers flared, and a

twenty-nine year old Hasidic graduate student was stabbed to death. By the time the

streets cooled, thirty-eight civilians and 152 police officers had been injured.168

Dinkins’

detractors called what happened a pogrom. The reality was both more prosaic and more

profound. The State of New York’s official report on the riot faulted the police

department’s leadership for a breakdown in command-and-control. This meant that the

NYPD waited until Thursday to deploy its ultimate riot-control weapon, the force’s sheer

size, to saturate the area with “blue shirts” and could intimidate the crowds into

dispersing. There is no substantiative evidence that Dinkins gave an order to deliberately

“hold back” the police.169

But Crown Heights was, in miniature, the sum of what the

city’s power brokers had feared from the 1960s into the 1980s: war in the streets,

168

McNickle, The Power of the Mayor, 237. 169

This overview of Crown Heights is based on Chris McNickle, The Power of the Mayor, 225-241.

325

neighbor against neighbor, race against race. The “gorgeous mosaic” that David Dinkins

had envisioned was cracked. So, in retrospect, was the mayor’s political career.

Yet that summer and fall, amidst budget cuts, barricaded parks, Crown Heights,

the locked-up buildings and the sweep of private security, ACT UP succeeded in

challenging the power of the law on one of its great idea fixes, the war on drugs. New

York was one of eleven states that made it a crime to buy, sell, or carry hypodermic

needles without a prescription. A black market filled the void; a clean needle with a

retail price of thirty cents had a street price of five dollars, out of the reach of most users.

Addicts thus shared needles, and with them, traces of each other’s blood and the AIDS

virus and other diseases. The Koch administration had attempted to provide clean

needles, although users had to go downtown to the Health Department’s office to get

them. Only 300 people enrolled in the program out of the city’s estimated 200,000 IV

drug users. In February 1990, Dinkins cancelled it.170

Dinkins called the program a

“surrender” to drug use. “I think we need to go at fighting drug addiction in the first

instance and I don’t want to give people the paraphernalia to continue using drugs,” he

said.171

Former addicts disagreed with the mayor’s position. There were six addicts for

each spot in the city’s treatment programs. Since 1985, members of the Association for

Drug Abuse Prevention and Treatment (ADAPT) had been working out in the streets and

shooting galleries in order to show users how to clean their gear. In December 1989,

170

Michel Marriott, “Needle Exchange Angers Many Minorities,” NYT, November 7, 1988. 171

Todd S. Purdum, “Dinkins to End Needle Plan for Drug Users,” NYT, February 14, 1990.

326

ADAPT met with ACT UP to enlist the organization’s help. As Edith Springer from

ADEPT’s told the group, “We look to you to make us look conservative.”172

Members of

ACT UP obliged by joining ADAPT’s campaign to reach addicts, distribute clean

needles, and challenge the law itself.

On March 6, 1990, members of ACT UP very prominently set up a table on the

Lower East Side to give out clean needles. As planned, they were arrested.173

At trial in

June 1991 the activists were acquitted. Judge Laura E. Drager accepted their appeal to

“necessity justification” under state law. “This court is also satisfied that the harm the

defendants sought to avoid was greater than the harm in violating the stature,” she wrote

in her verdict. “Hundreds of thousands of lives are at stake in the AIDS epidemic.”174

In

late October, Dinkins dropped his opposition to clean needle distribution. By then, ACT

UP was already, illegally, distributing 3,000 to 3,500 needles a week at six sites in the

Bronx, Brooklyn and Manhattan.175

Less than a week later, Dinkins announced a

privately financed pilot program to give out clean needles not just from the Health

Department but also on the streets. Explaining his rational behind the shift, Dinkins told

the press, “This is an issue that runs real deep. People disagree. Good people of good

will who have studied it do not all agree. But people die from AIDS, so it warrants

172

Andrew Miller, “Substance Abuse Group Holds NY Teach-In for ACT UP,” GCN, January 8-14, 1989,

3; Gina Kolata, “AIDS Strategy for Addicts Is Faulted,” NYT, December 24, 1989. 173

Bruce Lambert, “10 Seized in Demonstration As They Offer New Needles,” NYT, March 7, 1990. 174

Ronald Sullivan, “Needle-Exchanges Had Right to Break Law, Judge Rules,” NYT, June 26, 1991. 175

Mireya Navarro, “Dinkins Panel Is Moving to Revive Needle Exchange to Combat AIDS,” NYT,

October 29, 1991.

327

further examination by some of us who have heretofore resisted.”176

Once again, ACT

UP had catalyzed a major shift in public policy. Calvin O. Butts, pastor of Abyssinian

Baptist Church, continued to express doubts about the exchanges. But he did not object

to the plan moving forward. “I love drug addicts because they are my brothers and

sisters,” Butts said. “Love compels me to take a look at possible solutions.”177

In the

shadows of fear and hatred, love held out a fragile hope to the despair of the city and the

fatal logic of “us” and “them.”

Despair, however, seemed to be winning the battle for the city’s soul. In a poll

taken by the New York Times that November, fifty eight percent of the city’s residents

believed that the city would be a worse place to live in a decade. Sixty percent wanted to

live somewhere else. Black and white New Yorkers were equally pessimistic about the

city they uneasily shared.178

Dinkins had little cheer to add in his “State of the City

Speech” on January 2, 1992. “We have just ended another very difficult year, as life

proved to be a little harder, a little harsher than the year before.”179

He said:

A turnaround in the national economy will happen only when Washington commits itself

to better lives for people—not to better bombs for our armies and tax breaks for the

privileged. Indeed as we work to fill gaps of billions of dollars where there once was

Federal aid, we sometimes feel quit frankly, as if Washington has placed a giant boulder

in the paths of all state and local officials, directing us to roll up the steepest of hills. Yet

we cannot let the callous elimination of Federal dollars crush our dreams.180

176

Mireya Navarro, “Dinkins Endorses Privately Financed Needle-Swap Plan,” NYT, November 5, 1991. 177

Mireya Navarro, “Studies (and Politics) Guided Switch on Needles,” NYT, November 12, 1991. 178

Sarah Bartlett, “”Beyond Just Complaining: Self-Fulfilling Pessimism Is Said to Infect New York,”

NYT, December 27, 1991. 179

“Excerpts From Mayor’s Speech: A Vision of a City,” NYT, January 3, 1992, B2. 180

Ibid, Calvin Sims, “Dinkins Proposes Efforts to Rouse New York Economy,” NYT, January 3, 1992.

328

But in the absence of those federal dollars, the city would have to find ways to

pay for its dreams on its own, as it largely had for over a decade. And even that would

prove difficult. The mayor’s budget plan, announced in late January, called for capital

spending cuts, higher taxes, and a municipal wage freezes to close a projected $1.5

billion budget deficit for the next fiscal year.181

In early February, the details of a report commission by Dinkins on New York

City’s economic development leaked to the press. Arthur Levitt Jr., now the former head

of the AMEX, had been the committee’s chairman. His fellow committee members were

drawn from the now familiar coalition of financiers (the Blackstone Group), organized

labor (the Building and Construction Trades Council, DC 37), utilities (Brooklyn Union

Gas, N.Y. Telephone), and the New York City Partnership. Deputy Mayor Sally

Hernandez-Pinero represented City Hall. The committee recommended the creation of a

“development bank” capable of issuing its own bonds, to fund $500 million worth of

infrastructure and construction projects annually. Its programs were planned to include

an expanded Javits Center and a biomedical research complex in the Bronx. After an

initial investment of $250 million by the city, revenue from these developments would

repay the bonds. Since the development bank could operate autonomously from the

city’s appropriations process, economic development would no longer “have to compete

every year in annual budget wrangling with financing for drug-treatment programs of

181

James C. McKinley Jr., “Dinkins Orders Deep Cuts in an Austere Budget Plan,” NYT, January 31, 1992.

329

new homeless shelters,” in the words to the Times.182

If the plan had been implemented,

the city would have gone from subsidizing the banks to becoming a banker itself.183

The

culture of risk was alive and well in the discussion of municipal development strategy.

Instead of radical innovation, the old mechanisms and strategies of economic

development continued apace. In March, the career banker Barry F. Sullivan succeeded

Sally Hernandez-Pinero as Deputy Mayor for Finance and Economic Development.

When asked about the future of manufacturing in the city, Sullivan replied, “Markets

work. And to the extent that certain kinds of activities are able to be better done

somewhere else, you watch the pull of the market.”184

The same month the City Council,

with Dinkins’s approval, voted to extend the program of real estate subsidies begun under

Beame, despite the city’s seventeen percent vacancy rate for commercial property.185

In

June, Dinkins went to Europe, touting New York to foreign investors as “the richest

marketplace on the planet” and a “key center of international trade, communications,

finance and tourism.”186

Some of his allies, however, wondered if anything that the trip

produced would benefit the city’s middle class, let alone the very poor. Doug Henwood,

writing in the Amsterdam News on June 13, 1992, criticized Dinkins’ marketing of New

York as a “global city,” writing that “globalization leads to a labor market with a

182

Sarah Bartlett, “Panel Pushes For Investing in the Future,” NYT, February 12, 1992. 183

For a defense of the proposal from the panel see Roger C. Altman and Arthur Levitt Jr. “More Jobs,

Jobs, Jobs,” Op-Ed, NYT, July 18, 1992, 23. 184

Sarah Bartlett and Todd S. Purdum, “New Deputy Mayor, A Banker, Outlines His Business

Development Plan,” NYT, March 29, 1992. 185

Sarah Bartlett, “A Tax Boon, Or Boondoggle?” NYT, March 1, 1992. 186

James C. McKinley Jr., “Dinkins Returns From Europe, Hoping Investment Will Follow,” NYT, June 6,

1992.

330

radically split personality—several hundred thousand high-end professional jobs and lots

of crappy menial jobs in personal and business services.”187

It was easy to appreciate his

frustration.

By that summer the city’s fiscal picture had improved. There was even a

projected budget surplus to end the 1991-92 fiscal year that let Dinkins rescind his

proposed tax increases.188

Rents and real estate prices had fallen and attracted new

residents, driving up the volume of apartment sales. Broadway revenues were at a record

and Moody’s increased its ratings on the city’s short-term debt. The city’s the

unemployment rate remained at a grueling 11.5 percent, compared to a 7.8 percent

nationwide. There were still 60 million square feet of empty commercial real estate. But

the fear that the banks and brokerages were going to pack-up had dissipated.189

And Wall

Street was preparing for better times ahead. National Westminster Bank, Bank of Tokyo,

and Goldman, Sachs, Nomura Securities and Credit Suisse were once again rebuilding

their trading floors with an estimated expenditure of $1 billion for remodeling, new

terminals, office furniture, and hundreds of miles of fiber-optic cable planned for 1993.

“The people who work on those trading floors are among the highest-paid people in the

world,” remarked an industry consultant. “You have to keep them healthy and happy in

their work, or else they’ll simply go over to another company with a better trading floor

187

Doug Henwood, “New Unemployment Rate and the Mayor’s European Trip,” Amsterdam News, June

13, 1992. 188

Alan Finder, “Dinkins Announces Surplus Has Grown and Drops Tax Plan,” NYT, May 27, 1992, A1. 189

Neil Barsky, “Back from the Dead: Having Hit Bottom, New York City Begins a Slow Turnaround,”

WSJ, July 6, 1992.

331

that will.”190

It was also the summer of the Democratic National Convention, the party’s

fifth in the city, and preparations for the event filled the headlines. The homeless, fearing

a crackdown, had moved away from the Garden. Ian Fischer, a Times reporter, called the

shift “a victory of sorts for recent efforts to manage the homeless.”191

On July 14, the second day of the convection, 10,000 marchers walked in protest

from Columbus Circle to Times Square under the banner of United for AIDS Action, a

coalition of 300 groups. They marched for national healthcare, anti-discrimination

legislation for people with AIDS, and more research and education. David Dinkins and

Jesse Jackson spoke, drawing boos from members of ACT UP who wanted a nonpartisan

rally.192

As far as ACT UP was concerned, indifference to AIDS was a bipartisan

affliction. When Clinton had campaigned in New York during the primary season he had

been heckled by Robert Rafsky, the organization’s AIDS-positive media coordinator.

Rafsky gave Clinton the group’s message loud and clear: “We’re not dying of AIDS,

we’re dying of 11 years of Government neglect.” Then Rafsky accused the contender of

“dying of ambition.”193

To which Clinton retorted with his characteristic mixture of

empathy and self-pity, “Let me tell you something. If I were dying of ambition, I

wouldn’t have stood up here and put up with all this crap I’ve put up with for the last six

months. I’m fighting to change this country.”194

190

Douglas Feiden, “Bull Market: Wall Street Pours Profits Into New Trading Centers,” CNYB, December

14, 1992. 191

Ian Fisher, “Fewer Homeless in View Before Convention,” NYT, July 8, 1992. 192

Catherine S. Manegold, “10,000 Protesters Demand Help for People With AIDS,” NYT, July 15, 1992. 193

Robin Toner, “AIDS Protester Provokes Clinton’s Anger,” NYT, March 27, 1992. 194

“Heckler Stirs Clinton Anger,” NYT, March 28, 1992,.

332

The exchange gave Rafsky an opportunity to describe what ACT UP meant to

him on the editorial page of the Sunday Times. “There was a sense or transformation in

the air, both personal and political,” he wrote. “If a group of poor, obscure artists could

create the ‘Silence=Death” logo and watch it become an international icon, anything was

possible. . . . It’s always possible that we’ll win. The drug, or drugs, that will turn AIDS

into a chronic illness, like diabetes will finally be discovered. As in the old country-

western song, the handing tree will become the tree of life. But it’s not likely, at least not

in time for me.”195

The plague took him less than a year later.196

Yet a different kind of gay politics had reasserted itself, one conducted in the

discreet world of political gatherings rather than in the streets. In May, Clinton raised

$100,000 at a Hollywood fundraiser, the largest event held by the gay community for a

presidential candidate up to that time. By early October, the Clinton campaign had

collected $2 million dollars in campaign contributions from wealthy gay donors.197

“The

gay community is the new Jewish community,” said Rahm Emmanuel, the Clinton

campaign’s national finance director. “ It’s highly politicized, with fundamental health

and civil rights concerns. And it contributes money. All that makes for a potent political

force, indeed.”198

The more popular and less controversial, red ribbon that had debuted

in the spring of 1991, was replacing the pink triangle as a symbol of AIDS activism.199

195

Robert Rafsky, “A Better Life for Having Acted Up,” Op-Ed, NYT, April 19, 1992. 196

Marvine Howe, “Robert Rafsky, 47, Media Coordinator For AIDS Protesters,” NYT, February 23, 1993. 197

Jill Abramson, “Clinton Campaign Coffers Are Getting Strong Support From Gay Community,” WSJ,

October 30, 1992. 198

Jeffrey Schmalz, “Gay Politics Goes Mainstream,” NYT, October 11, 1992. 199

Jesse Green, “The Year of the Red Ribbon,” NYT, May 3, 1992.

333

On July 16, 1992, the forecast called for a morning haze and afternoon sun as

light winds brought in cool air to the sultry city.200

On Wall Street, the Dow climbed

16.21 points to close at 3,361.63. The thirty-year Treasury bond yielded 7.60 percent.201

The Yankee’s continued their slump, losing to the Angels, 3-2, in Anaheim, California.202

That day, in a Bronx apartment, police officers found three murdered bodies

decomposing in the heat: a middle-aged man, his wife, and their teenage son. There were

ten bags of heroin, bags, and scales on a table. The son had been blindfolded with duct

tape before he was executed. There was also a 3-month old under the family bed, hidden

by her mother who had died a foot away from her child. The baby was alive.203

The night before, the Democratic National Convention nominated Bill Clinton for

the presidency.204

The losers in the primary contest were given their chance to have their

say. Senator Paul Tsongas denounced the policies of the Bush and Reagan

Administrations’ “They told us it was morning in America. They told us we could have

it all. They lied.”205

But Reagan and Bush, not to mention Koch, Dinkins, and even

Abraham Beame, had come to an understanding that the terrain of politics, economics,

and culture had shifted. The underpinnings of the New York and the America that

Governor Cuomo pined for in his address to the conventioneers, of singing “proud songs,

happy songs, arm in arm with workers who have a real stake in their company’s success,

200

“Metropolitan Forecast,” NYT, July 16, 1992. 201

“Dow Up 16.21, After Jump on Perot News,” NYT, July 17, 1992. 202

Michael Martinez, “Ball 4 Produces Loss 46,” NYT, July 17, 1992. 203

Ian Fisher, “3 Slain in Bronx Apartment, But a Baby Is Saved,” NYT, July 17, 1992, B3. 204

Robin Toner, “Choice Is Affirmed,” NYT, July 16, 1992. 205

R.W.Apple Jr. “Bursts of Fire at an Orderly Convention,” NYT, July 16, 1992, A1.

334

who once again have the assurance that a lifetime of hard work will make life better for

their children than it’s been for them,” had fallen away.206

Clinton, and his running mate Al Gore, understood this too.

On the evening of the 16th

, Clinton accepted the nomination. At the opening of

his acceptance speech, he stood in front of 22 million Americans watching in prime time.

He thanked his hosts in New York and his fellow contenders. He joked about the endless

speech at the 1988 convention. And then he began in earnest. “One sentence in the

Platform we built says it all. The most important family policy, urban policy, labor

policy, minority policy, and foreign policy America can have is an expanding

entrepreneurial economy of high-wage, high-skilled jobs.”207

The market came before, the story of Clinton’s hardscrabble boyhood and before

Clinton’s proposed “New Covenant” between the American people and their government.

The United States of America, like New York City, had learned to pay the price of risk.

206

Ibid. 207

William J. Clinton: "Address Accepting the Presidential Nomination at the Democratic National

Convention in New York," July 16, 1992, The American Presidency Project; for the audience figures see

“T.V. Audience Is Put at 22 Million,” NYT, July 17th

, 1992, A11.

335

Conclusion: By the Daylight and the Twilight of Risk, 1993-Present

Daylight

David Dinkins failed to win a second term as mayor in the city’s 1993 election.

“When asked why I lost, I used to say ‘Why do you think?’” Dinkins wrote in his

autobiography. “I did not want to say it out loud, but it’s time. Now I say, ‘Racism,

plain and simple.’”1 Certainly voter turn-out in largely white, Republican, Staten Island

was unusually higher, thanks to a referendum by residents to try to secede from the city.

By 1993, Dinkins had accumulated his share of blunders and mistakes. He had alienated

his former supporters in the municipal unions, especially the UFT, which declined to

endorse him, denying Dinkins the use of the union’s powerful “get-out-the-vote”

machinery. The decline in crime and the increase in police strength happened too late to

burnish his “law and order” credentials. The mayor’s perceived indifference to the

Crown Heights riot drew conservative Jewish voters into the Giuliani camp. And by

eschewing the deliberate race baiting of the 1989 campaign Giuliani drew in more liberal

white and Latino voters who had previously supported Dinkins but had grown dissatisfied

with his performance.2 It was an undistinguished end for a troubled mayoralty. The

defeat made Dinkins the first African-American mayor not to win re-election in a major

city.

1 David N. Dinkins, A Mayor’s Life, 355.

2 Chris McNickle, The Power of the Mayor, 324-333.

336

The story of New York City, and America, after 1993, is one in which the culture

of risk completed its journey from being a crisis-born social experiment to become a set

of social norms. Administrations changed; financial markets skyrocketed, crashed, and

rebounded; but the basic structure of the culture of risk endured. Giuliani and his

successor Michael Bloomberg added distinctive layers and elaborations designed to

restore the city’s “quality of life” and make living in the city feel like less of a risk,

especially for those with the option of living and working elsewhere. But the foundations

of city life since the fiscal crisis—a speculative economy, profitable creativity, and a

willingness by the powerful to accept severe social dislocation—remained.3 Much the

same can be said of the “New Democrat” Bill Clinton and the “Compassionate

Conservative” presidency of George W. Bush. New York’s dependency on Wall Street

grew, as did income inequality, a trend that also played out in national policy and politics.

The full implications of these developments, however, veiled from mass politics until the

financial crisis of 2008. In the wake of that crisis, in New York City and the United

States, there have been flashes of doubt in the culture of risk. Indeed, by 2013, one can

argue that the United States had entered into an age of doubt, much like the one that

began in 1973. Perhaps it is the beginning of the “twilight of risk” and the search for a

new way of working and living.

3 For the argument in favor of a basic continuity of policy between Dinkins and Giuliani see Michael

Powell “Another Look at the Dinkins Administration, and This Time Not By Giuliani,” Op-Ed, NYT,

October 26, 2009.

337

As mayor Giuliani’s signature accomplishment was the intensification of the

Dinkins program to clampdown on crime and other the symptoms of social disorder. It

suited his style. “People didn’t elect me to be a conciliator,” said the mayor. “If they

wanted a nice guy they would have stayed with Dinkins . . . .You don’t change ingrained

human behavior without confrontation, turmoil, anger.”4 As outlined in Police Strategy

No. 5: Reclaiming the Public Spaces of New York announced by Giuliani and William

Bratton in July 1994 the police were to focus on eight “signs of a city out of control,”

identified as “peddlers and panhandlers; street prostitution; boom box, motorcycle, and

nightclub noise; mentally ill street people; graffiti; illegal dumping; alcohol sales to

minors; and hazardous traffic violations.”5 With the 8,000 additional police officers

provided by the Dinkins administration’s “Safe Streets, Safe City,” the merger of the

Transit Authority and Housing police, and additional hires, the NYPD expanded from

29,000 to 40,000 officers.6 A larger force, plus a host of changes in departmental

strategy such as allowing street patrol officers to make drug busts, led to a soaring

number of arrests. In 1994 summonses for “quality of life” offenses increased from

175,000 to 500,000 and misdemeanor arrests increased from 90,000 to 220,000.7 In 1998

this offensive extended, less successfully, to “speeding drivers, litterbugs, reckless taxi

4 Fred Siegel, The Prince of the City: Giuliani, New York, and the Genius of American Life, with Harry

Siegel (San Francisco: Encounter Books, 2005), 181. 5 Quoted in Roger Sanjek, The Future of Us All: Race and Neighborhood Politics in New York City (Ithaca,

NY: Cornell University Press), 161. 6 Wayne Barrett, Rudy! An Investigative Biography of Rudolph Giuliani (New York: Basic Books: 2000),

342. 7 Andrew Kirtzman, Rudy Giuliani: Emperor of the City (New York: William Morrow, 2000), 88.

338

drivers, and dangerous bicycle riders.” 8

The results were impressive. In 1993 there were

1,927 murders in New York City. By 2000 the death toll had declined to 671. The total

number of reported crimes in the same period declined from over 430,000 to a little more

than 184,000.9 Skeptics, however, noted a number of other factors that contributed to the

fall in crime. There was a decline in crack cocaine use, improved technology (which

made it harder to steal cars, fence car parts, or break into to pay phones), and increased

security at commercial buildings. There had also been improvements in trauma

surgery.10

Some of the anti-crime effort was targeted against criminally imposed barriers on

economic growth such as breaking the Mafia’s ability to collect extortion at Fulton Fish

Market, in commercial garbage hauling, and at the Jacob Javits Convention Center.11

Arguably, however, the point of the effort was not so much to reduce crime per se but to

control the disquieting signs of urban disorder and make day-to-day life feel less risky.

Not everyone enjoyed a feeling of greater security. The aggressive use of “stop-and-

frisk” powers by the NYPD, the most visible of the tools the department used to

“reclaim” public space disproportionately targeted African American and Latino men.12

In addition to the expanded use of the NYPD, the Giuliani administration also

used its broader police power to slash the city’s welfare rolls—by approximately 550,000

8 Ibid, 222.

9 Dan Barry, “A Man Who Became More Than a Mayor,” NYT, December 31, 2001, A1.

10Barrett, Rudy!, 350-360.

11 Siegel, The Prince of the City, 167-174.

12 Editorial, “Police Tactics in Question: ‘Stop and Frisk’ in New York,” NYT, December 4, 1999, see also

339

by 2000—and curb another symbol of an out of control city.13

At a 1995 budget briefing

Giuliani was asked, “Is it your unspoken strategy that poor people should move to

another city or state?” He responded, “That’s not an unspoken strategy. That’s the

strategy. We just cannot afford it. Those left out will have the option of moving

elsewhere. This will help make New York City more like the rest of country.”14

The

Giuliani administration’s policies mirrored the overall urban agenda of the Clinton

administration: more police, the replacement of AFDC with the limited-term Temporary

Assistance for Needy Families (TANF), the demolition of public housing in favor of

subsidized “free market” rentals, and the expansion of tax-advantaged “enterprise zones”

to encourage economic development.15

The growth of tax revenues, Giuliani’s reputation for ruthlessness, and his lack of

animosity towards labor ensured the general acquiescence of the city’s unions, including

DC 37. In 1995, the union accepted a “double-zero” contract, with no raises for the first

two years of the five-year agreement. The union agreed to welfare recipients performing

“workfare” in job classifications previously reserved for union members. In exchange,

Stanley Hill received a “no-layoff pledge” and a promise that some of the new hires

might become union members at a later date. Hill then supported Giuliani in the 1997

mayoral race against the liberal Ruth Messinger. Some of this political shift also

reflected escalating corruption within the union’s locals, which lead to Hill’s retirement

13

Barrett, Rudy!, statistic is on 320, for the tightening of eligibility procedures and the use of investigations

and workfare, see 313-320. 14

Quoted in Sanjek, The Future of Us All, 184. 15

Biles, The Fate of Cities, 318-347.

340

in 1998 after AFSCME had put the union in trusteeship. It was a humiliating moment in

the life of a proud union.16

Giuliani did believe, however, that New York City should have an economic base

that looked very different from the rest of the country. His 1995 budget message

declared that the city’s “special economic genius is to be the nation’s business and

financial headquarters with a vast number of white-collar jobs for which skill and talent

requirements have been increasing.”17

While much more interested in crime control,

welfare reform and other issues that appealed to his lawyerly training and prosecutorial

instincts, he did have an economic vision—firmly rooted in the “supply side” and the

promotion of the financial sector. Speaking at the city’s free-market Manhattan Institute,

he adhered to the now familiar dictums of simplified supply-side philosophy. Lower

taxes spurred higher economic growth and promoted the social good. “This is no

question that there is an enormous correlation between cutting taxes and jobs. Raising

taxes will take us back to where we used to be, which is a city that locked people into

poverty.”18

Between January 1994 and November 1998 his administration granted

$445.4 million to twenty Wall Street companies with package deals such as $75 million

for Bear Stearns and $50.5 million for Credit Suisse First Boston.19

That was before a

blockbuster $900 million city and state aid package to retain the New York Stock

Exchange, an organization that had been “flirting” with relocation to Jersey City. “The

16

Freedman, Working Class New York, 325, 313, 333; Moody, From Welfare State to Real Estate, 144. 17

Sanjek, The Future of Us All, 184. 18

Eric Lipton, “Tax Increases Would Cost Jobs, Mayor Warns,” NYT, September 6, 2001. 19

Charles V. Bagli, “Wall Street Plays Relocation Card, and City Pays,” NYT, November 8, 1998.

341

public investments in the exchanges are not simply corporate retention deals,” said Carl

Weisbrod, former president of the Economic Development Corporation, defending the

package in remarkably similar terms to the Amex retention offer made almost exactly

twenty years earlier. “They’re infrastructure deals, no different than the Erie Canal.

Financial services are the key to our economic health and future. Insuring that this

industry remains concentrated in New York and competitive is a major public policy

objective.”20

A rising stock market came to be seen as meeting “public policy objectives” that

went far beyond Wall Street’s traditional boosters. In the 1980s, the culture of risk had

diffused itself institutionally, through leveraged buy-outs, hostile takeovers, and the risky

lending of commercial banks and the S&Ls. For a good number of Americans, the stock-

market boom of the 1990s personalized the culture of risk. In 1984, 7.5 million people

had investments in 401(k) plans; by 2000 that number had swelled to 34 million. About

half of American households owned stocks, compared with ten percent in 1960, and at

least a third were invested in mutual funds. An important part of this transition was

involuntary. Firms had abandoned traditional “defined-benefit” pension plans, in which

the company assumed the risk if its investments made inadequate returns, in favor of

“defined-contribution plans” such as the 401(k). A worker might receive a company

20

Ibid.

342

“match” to his or her contribution, but beyond that, individuals assumed the rewards and

risks of their investments.21

Retirement was not the only part of American’s life where the culture of risk

intersected with the everyday the business of making a living and building a life. A few

statistics from Jacob Hacker’s The Great Risk Shift are telling about the proliferation of

risk—and the fears that it created. In 1982, in the midst of a recession accompanies by

ten percent unemployment, twelve percent of workers told pollsters that they were

“frequently concerned about being laid off.” In 1996, with unemployment at five

percent, forty-six percent of workers expressed the same fears. This made sense. By

1997 sixty-nine percent of large employers had abandoned “no-layoff” rules and other

promises of job security. By the mid-1990s the level of year-to-year fluctuation in

household incomes had grown to a level five times that of the early 1970s.22

This is the

economy created by the continued shift towards “shareholder’s rights,” both fueled the

great bull market in the 1990s and the wave of corporate layoffs, “rightsizings,” and

“downsizings,” that accompanied it.

This risk shift was not necessarily unwelcome as the language of “the market”

and “personal responsibility” diffused, seeping into a much broadening consciousness.

The proliferation of investment clubs and the amateur day-traders who tried to make fast

money at the professional’s game helped popularize and legitimate a grass-roots version

21

Fraser, Every Man A Speculator, 582-583 22

Jacob S Hacker, The Great Risk Shift: The Assault on America Jobs, Families, Health Care and

Retirement and How You Can Fight Back (New York: Oxford University Press, 2006), 18, 68, 27.

343

of the culture risk. A long parade of market propaganda drew on both old-fashioned

dreams of abundance and the latest version of techno-utopianism that assigned talismanic

power to any investment with “.com” in its name. As the public and corporate sectors

continued their retreat from responsibility to citizens and workers, achieving two of the

great goals of a secure society—higher education for ones children and a secure

retirement—became the domain of private risk-taking. And as long as the Dow Jones

soared, from 3,000 in 1990 to 6,000 in 1996 to 10,000 in 1999, the odds of such a risk

looked quite favorable indeed.23

Although it is important to note that outside the

corridors of power or the edges of bohemia, there was for little room for choice about

whether or not to seek a life on the edge.

Further away from the public eye, the machinery of creating new, more

profitable, and riskier financial products pushed onward. In April 1994, Procter &

Gamble announced that it had lost $157 million in derivatives. The company’s chief

financial officer told analysts he had though the firm was buying “plain vanilla-type

swaps.” As interest rates rose though, “we started to realize there was an exposure that

those involved hadn’t spotted prior to that.”24

Ultimately an embarrassed Bankers Trust,

which had sold them the swaps, settled with P&G for $120 million. 25

Alan Greenspan

responded to the fallout from P&G’s losses with the language of risk that he deployed on

so many occasions:

23

Fraser, Every Man A Speculator, 582-616. 24

Lawrence Malkin, “Procter & Gamble’s Tale of Derivative Woe,” NYT, April 14, 1994. 25

Ibid, for the settlement, Laurie Hays “Bankers Trust Settles Dispute With P&G,” WSJ, May 10, 1996.

344

There are some who would argue that the role of the bank supervisor is to minimize or

even eliminate bank failure; but this view is mistaken, in my judgment. The willingness

to take risk is essential to the growth of a free market economy . . . If all savers and their

financial intermediaries invested only in risk-free assets, the potential for business growth

would never be realized.”26

Greenspan was not always so sanguine when it came to financial markets.

Famously he told the American Enterprise Institute in 1996, “How do we know when

irrational exuberance has unduly escalated asset values, which then become subject to

unexpected and prolonged contractions as they have in Japan over the past decade?”27

Despite the problems arising from derivatives, however, Greenspan remained as

committed to deregulation in the late 1990s, as he had been earlier in the decade. When

Sandy Weil, head of the financial-service conglomerate Travelers Group, mentioned his

plan to merge Travelers with Citicorp in 1998, the Chairman made no objections. This

was despite the fact that, theoretically, the combined firm would have to dismantle itself

to meet the requirements of Glass-Steagall. But Weil understood Congressional attitudes

as well as those of the Greenspan Fed. Rather than drawing condemnation on Capitol

Hill, the purposed merger finally catalyzed the last step in the process of deregulation.28

In 1999, the Financial Services Modernization Act (Gramm-Leach-Bliley) was passed

into law. After he signed the bill, President Clinton remarked, “This legislation is truly

historic, we have done right by the American people.”29

Glass-Steagall had been

26

Quoted in Bernstein, Against the Gods, 328. 27

Quoted in Charles R. Geisst, Wall Street, 371 28

For details on the origins of the merger and the political background behind it see Monica Langley,

Tearing Down the Walls: How Sandy Weill Fought His Way to the Top of the Financial World—and the

Nearly Lost it All (New York: Simon and Schuster, 2003), 272-294, 340-43. 29

Quoted in Charles R. Geisst, Wall Street, 386.

345

repealed. The long campaign for American “universal banking” had ended in triumph.

Weil and John Reed, Wriston’s successor at the helm of Citicorp, promised that the

resulting liberalization of finance would “unleash the creativity of our industry.”30

Greenspan called it “an unsung moment of policymaking for which there ought to be a

little song.”31

What kind of song he did not say.

The Giuliani administration was aware of the risks posed by the city’s economic

dependence on finance. But given the perceived difficulties of creating an alternative

municipal economy, he persisted in the course set out by his predecessors. In 1996, he

proposed some modest tax and zoning changes to maintain the approximately 280,000

manufacturing jobs that remained in the city. Fran Reiter, then the Deputy Mayor for

Planning and Community Affairs, reflected on the mayor’s purported desire to avoid the

boom and bust cycle of the 1980s and early 1990s. “The financial sector was where we

[New York City] really concentrated our resources,” she said. “The city made a

conscious decision that that’s the kind of economy we wanted. It was foolish.”32

Giuliani himself, however, could be cavalier about the loss of blue-collar work. “This

loss might have meant something when the city’s economy was declining,” he said after

the Swingline Stapler factory announced its relocation to Nogales, Mexico, in the

30

Langley, Tearing Down the Walls, 341. 31

Greenspan, The Age of Turbulence, 199. 32

Kirk Johnson, “Giuliani Offers Plan to Nurture the City’s New Industries,” NYT, May 1, 1996, B1.

346

summer of 1997. “Nowadays, the city can do without employers who do not want to pay

their workers a decent wage.”33

Even if Giuliani had wanted to promote industry as aggressively as he had

subsidized finance, there was little industry remaining to work with. By 1993, the city

had a significantly lower share of its workforce in manufacturing (9 percent) than did Los

Angeles (18 percent) and Chicago (16.5 percent). By then New York had roughly double

the percentage of financial sector employment, at 14.5 percent, as compared with Los

Angeles (6.5 percent), Chicago (8.5 percent).34

As one official framed it in early 1997:

“New York is as heavily dependent on Wall Street as Houston is on oil and Seattle is on

Boeing. And over the years we’ve had plenty of reminders of how highly volatile Wall

Street is.”35

Giuliani’s successor, Michael Bloomberg likewise encouraged the decline of

industrial jobs—through zoning changes that transforming the city’s waterfront into a

new frontier for retail and real estate development.36

By 2009, manufacturing accounted

for just 3.2 percent of the workforce in the city.37

The civic rewards of the bull market of the 1990s seemed to justify such policies.

By 1997 Wall Street provided 17 percent of the city’s wages, despite remaining at 4.5

percent of the city’s workforce. The long-term trend of automating and relocating the

clerical back-office had proceeded unabated, despite the efforts of the Koch and Dinkins

33

David Firestone, “Rivals Say Giuliani Belittled Stapler Factories Closing and Job Losses,” NYT, July 8,

1997, B6. 34

Sanjek, The Future of Us All, 125. 35

Vivian S. Toy, “Wall Street Sends the City a Windfall,” NYT, January 31, 1997. 36

Eliot Brown, “A Sea Change in Waterfront Plans,” WSJ, October 18, 2010. 37

Christin Haughney, “The Mayor Has Added Many Jobs, And Lost Some, Too,” NYT, October 15, 2009.

347

administrations to retain this position. But the jobs that remained were even more

lucrative. The securities industry paid $26.6 billion in bonuses from 1994 to 1997

compared with $6.5 billion from 1985 to 1987.38

Personal income tax revenues

increased sixty-two percent in the Giuliani years, allowing for a twenty-five percent

increase in city spending, to forty billion in his last budget.39

The crash of speculative

technology stocks in late 2000 and early 2001 then brought the city’s economic strategy

into question once again. The author Charles R. Morris wrote in August 2001:

Are New Yorkers doomed to repeat the cycle of stock-market driven boom and bust

forever? The great hopes for a more diversified economy have faded with the dreams of

the dot-com entrepreneurs. If that’s a harbinger of what’s to come, our next mayor will

be dispensing bitter medicine. And we’d better get used to it, because this market

downturn could well be a long one.40

The terrorist attacks of September 11, 2001, however, put fears of a very different

kind of risk on the minds of New Yorkers. Taking World Trade Center’s birthday to be

April 4, 1973, it made the towers twenty-eight years old, in the prime of their lives, when

the hijackers cut them down.41

Banker, maintenance man, carpenter, computer

programmer, accountant, priest, clerk, secretary, fire fighter, and police officer, died

together in smoke and fire and falling steel.42

The terror inflicted that day exhibited a

38

Norimitsu Onishi, “City’s Reliance on Wall Street Raises Concern,” NYT, May 26, 1998. 39

Greg David, Modern New York: The Life and Economics of a City (Palgrave Macmillan, 2012), 111. 40

Charles R. Morris, “When All Roads Lead to Wall Street,” Op-Ed, NYT, August 17, 2001. 41

National Commission on Terrorist Attacks Upon the United States, The 9/11 Commission Report (New

York: W.W. Norton & Company, 2004), 285-311. 42

This is a composite portrait taken from Dean E. Murphy, Nichole M. Christian, et al, “The Missing: A

Man of Endearing Habits and a Father Loved Even by Strangers,” NYT, October 4, 2001; “A Nation

Challenged: Portraits of Grief,” NYT, December 31, 2001; Daniel J. Waking, Elissa Gootman, et al, “A

Joke Teller With a Repertory, a Raconteur and a Rakish Bon Vivant,” NYT, December 18, 2001.

348

depraved indifference to its victims. The heroes of the hour sacrificed their lives in the

name of duty, and honor, and love.

There were also prosaic risks that arose in the aftermath of the attacks, the fear

that terrorism would undermine the city’s economic base by frightening away tourist

dollars and causing Wall Street to decamp from Manhattan. It was fitting then that

Giuliani’s successor Michael Bloomberg was the first mayor to have been created by the

culture of risk as a financial information and technology entrepreneur.43

In his 1997

autobiography Bloomberg bragged about how in the early days of his firm his first

employees and the future mayor installed their soon-to-be ubiquitous news terminals

themselves:

Amid old McDonald’s hamburger wrappers and mouse droppings, we dragged

wires from our computers to the keyboards and screens we were putting into place,

stuffing the cables through holes we drilled in other people’s furniture—all without

permission, violating every fire law, building code, and union regulation on the books.

It’s amazing we didn’t burn down some office or electrocute ourselves. At the end of the

day, ten or eleven o’clock at night, we’d turn it on and watch what we’d created come

alive. It was so satisfying.44

A driven cosmopolitan, a man who had put his already ample wealth on the line to

build a business, Bloomberg unapologetically enjoyed the rewards that success had

brought him, while also conscientiously practicing the early 21st Century version of

nobless oblige. It was natural enough for him to govern in the same way he had made his

fortune. In 2005, Bloomberg told a reporter about his approach to developing the city:

43

Michael W. Miller and Matthew Winkler, “A Former Trader Aims to Hook Wall Street On—and to—His

Data,” WSJ, September 22, 1988. 44

Michael Bloomberg, Bloomberg by Bloomberg, With Matthew Winkler (New York: John Wiley and

Sons, 1997), 59.

349

It would be a tragedy if we let the naysayers stop us doing things. What has always been

great about New York has been that we’ve built the big things and taken the risks.

People say, ‘You were a business guy. You don’t understand politics.’ Yes. I was a

very successful business guy because we took the risks in the business. We built for the

future. You never know what the future is going to be like, but you have to build in

advance. Running risks is exactly what you want to do. If you don’t run any risks, you

will never make any progress.45

Bloomberg and his advisors understood the system of municipal priorities that

had been assembled in pieces by their predecessors: balance the budget, encourage the

riskiest elements of capitalism to build the city’s economy, maintain public order, and

then, if possible, redistribute some of the proceeds to maintain social peace with key

interest groups. As David Doctoroff, his Deputy Mayor for Economic Development,

summarized this philosophy in 2004, “Our job . . . is to invest the City’s money wisely so

that the pie is ultimately bigger than it is today . . . to invest scarce dollars to earn more

dollars that will enable us to pay for . . . important priorities—health care, housing, police

and fire protection, the list goes on.”46

The city was in “a very competitive business,”

said Andrew Alper, his head of the Economic Development Corporation, and New York,

given the “hassle factor,” was not a “low-cost producer” among urban centers. Instead,

Alper’s position was to “know our clients.”47

And the city’s first client was the global

pool of investment capital and those who served its needs. “Hedge funds can indeed be

run from anywhere,” wrote financial journalist Daniel Gross in the fall of 2007. “But

they need cash, and they need prime brokers—large banks that lend them money and

45

Quoted in Julian Brash, Bloomberg’s New York: Class and Governance in the Luxury City (Athens:

University of Georgia Press, 2011), 247. 46

Quoted in ibid, 201 47

Quoted in ibid, 85.

350

clear their trades—and they need traders and lawyers, accountants and private bankers,

psychologists and decorators. Nowhere is the concentration of professionals who cater to

the needs of the very rich greater than in New York.”48

Financial capital’s needs in the Bloomberg era were somewhat different from

those faced by previous administrations. To sell the city as a premium product in the

global marketplace, “quality of life” became not just an ongoing problem to be managed,

cheaply if possible, but also a competitive advantage. Risking another fiscal crisis would

place the city’s edge in jeopardy. In his 2003 State of the City Address, Bloomberg

explained:

During the fiscal crisis of the 1970s, services were cut so much that crime gripped whole

neighborhoods, fires guttered whole blocks, and garbage littered the streets . . .. I won’t

permit history to repeat itself. . . . Last month, we took the difficult but necessary step of

raising the property tax rate. . . . .No one like the imposition of taxes. . . . But devastating

the very services that make this the world’s second home is far worse than paying more .

. . . Taxes and frugality are far better than crime, filth, and abandonment.49

The eighteen percent increase in property taxes was the largest in the city’s

history. The levy raised $1 billion in the first six months and $2 billion in the next fiscal

year.50

The ultimate risk that was worth taking, for Bloomberg, was his mayoralty’s

reliance on, and encouragement of, speculative finance as New York City’s economic

core. Continuing its pattern of declining employment through the boom and bust cycle,

the securities industry employment had peaked at 190,000 jobs in October 2007—10,000

48

Daniel Gross, “The Capital of Capital No More?,” NYT, October 14, 2007. 49

Brash, Bloomberg’s New York, 119. 50

David, Modern New York, 122.

351

fewer than in 2000 at the height of the dot-com boom. Compensation for those who

remained, however, continued to soar, accounting for twenty-eight percent of all wages in

New York City for an average salary of $400,000 dollars.51

While Bloomberg professed

an aversion to the use of the retention subsidies that his predecessors had given to retain

financial service firms, he was still willing to use the proceeds of speculation to finance

more of the same. In his first eighteen months as mayor, there were sixty-three job

retention deals, including offers to Wall Street stalwarts such as Merrill Lynch and Met

Life.52

Bloomberg’s advocacy for the city’s financiers went beyond tax breaks.

On January 22, 2007, Bloomberg, and Senator Charles Schumer (D-NY) released

a study that they had commissioned by the Economic Development Corporation in

conjunction with the international consultancy McKinsey & Company, “Sustaining New

York’s and the US’ Global Financial Services Leadership.” At a press conference

announcing the report, Schumer said, “The last thing that New York and the country, for

that matter, need is to wake up one morning and find we are no longer the financial

capital of the world. This report shows that could happen not just for I.P.O’s but for all

financial services, all too easily and all too soon.”53

As it had been thirty years before,

London was identified as New York’s primary competitor. The City’s comparatively

light regulation again was seen as its principal competitive advantage. In the report

London drew praise for its lightly regulated Alternative Investment Market (AIM) for

51

Ibid, 165. 52

Moody, From Welfare State to Real Estate, 170. 53

Jenny Anderson, “U.S. Financial Sector Is Losing Its Edge, Report Says,” NYT, January 22, 2007.

352

new issues of shares; to Britain’s lower levels of securities litigation; the less “punitive”

and “overly public” regulatory approach of the UK’s Financial Service Authority (FSA);

and lower capital requirement for its banks.54

This was especially worrisome for the

McKinsey’s consultants, “since European lenders are beginning to embrace US-style

credit terms, critical to leveraged lending and sub-prime consumer finance markets.”55

The report’s recommendations could have been written in the late 1970s. The

consultants argued for another federal deregulatory push. They also argued that New

York City needed to make additional investments to retain the financial services industry,

for example by creating of “world’s best graduate program in financial engineering.”

The city along with New York State could (and implicit in the tone of the report should)

encourage more risk-taking by creating a “special financial services zone,” relying

“primarily on tax incentives,” would attract the “next-generation financial services

business and support industries.” In addition, the report argued that there should be an

effort to “expand and adapt the concept of an international banking zone, based in New

York, to other financial sectors.”56

To emphasize his support for “Sustaining New York,”

Bloomberg went to London that February to lobby federal regulators from long distance.

While in The City he told reporters, “The F.S.A. is an example of the kind of streamlined

and responsive regulatory framework Congress must implement if New York City is to

54

McKinsey & Company. Sustaining New York’s and the US’ Global Financial Services

Leadership. Accessed January 27, 2014. Available: http://www.nyc.gov/html/om/pdf/ny_report_final.pdf,

9-17. 55

Ibid, 13. 56

Ibid, 26-27.

353

remain the financial capital of the world.”57

These recommendations were overtaken by

events.

The story of the 2008 financial crisis has been told elsewhere. Indeed it has been

told in this dissertation: loose underwriting standards driven by an appetite for fees, lax

regulation, the collapse of innovative securities in a suddenly illiquid market, the

widespread failure of “hedging” instruments, a cascading global panic, and, ultimately,

the need for massive government intervention to rescue the financial system. All of these

events had taken place during Black Monday in 1987. Parts the 2008 crisis are visible in

the junk bond rout of 1989 and the ensuing collapse of Drexel Burnham Lambert in 1990.

In 2008, they happened together in a chain reaction that, if it had not been stopped, would

have destroyed capital’s intermediaries in a global bank run.58

In the aftermath, much of

the rest of the economy would have withered and died without access to credit.

Speculative finance sold itself for over a generation on the premise that it served society.

In the final analysis, however, society held its nose and served speculation once again. It

was that or a Great Depression.

The bailout provided by the Troubled Asset Relief Program (TARP) also saved

the City of New York from falling over the edge of the commanding heights upon which

its economy has been precariously perched for decades. For the United States as a whole,

the “Great Recession” lasted a wrenching twenty-seven months. Six percent of American

57

Sewell Chan, “Mayor Takes His Message to London,” NYT, February 5, 2007, C2. 58

Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report (New York: Public Affairs

2001), 353-386.

354

workers, 8.4 million people, lost their jobs. In New York City, by contrast, the downturn

lasted about seventeen months and the city lost 3.5 percent of its jobs—140,000 of them

all together. The recession was the second shortest in the city’s modern history—cold

comfort to the afflicted—but it made for a remarkable contrast with the decades-long

warnings of impending municipal disaster.59

The reason was money: $197 billion from

the Troubled Asset Relief Program that shored up the capital of the city’s banks and

brokerages, especially its largest and most powerful. The names of the biggest recipients

of TARP funds, receiving a $114 billion infusion are the familiar names of this

dissertation: Citigroup, J.P. Morgan Chase, Goldman Sachs, Morgan Stanley, and Merrill

Lynch (which ended the crisis as an appendage of Bank of America).60

After enduring the

brief humiliation of a de facto nationalization, Wall Street went back to work. By

February 2010, it was hiring again and pay packages were moving upward. “The offers

are not near where they were in 2006, but there is still a war for talent,” observed an

executive recruiter. “Everyone though the ice age had returned but the thaw has come

and we’re in catch-up mode.”61

For the moment at least, the city had kept its edge.

New York’s recovery seemed to validate the city’s pursuit of global “super

money” and the tolerance of rising income inequality. Finance created a city even more

bifurcated than it had been in the era of “Gucci bags and bag ladies.” By 2007, the top

one percent of households in the city accounted for forty-four percent of the city’s

59

David, Modern New York, 204. 60

Ibid, 4. 61

Nelson D. Schwartz, “Wall St. Hiring in Anticipation of a Recovery,” NYT, July 11, 2010,

355

income. This was triple the class’ share in 1987, when it had stood was seventeen

percent at the height of the “greed decade.” This figure was even more shocking since it

was almost double the “one percent’s” share, twenty-three percent, of the national income

as a whole in 2007. The bottom ninety percent’s share of the municipal pie had dropped

from fifty-nine to thirty-four percent between 1987 and 2007.62

For Bloomberg, this deep polarization of wealth was ultimately the driving force

of a good society. In a September 2013 interview with New York he remained insistent

on the necessity of his, and his predecessor’s, vision of New York City’s economy. “If

we can find a bunch of billionaires around the world to move here,” he said, “that would

be a godsend, because that’s where the revenue comes to take care of everybody else.”

And financial regulation remained, ultimately, the enemy of growth. “If you want to

come out of a recession, you need banks out there being expansive and making loans.

Not ‘Let’s protect the country so that banks don’t take any risks!’” Bloomberg told his

interviewer. “The way to help those who are less fortunate is, number one, to attract

more fortunate people. They are the ones that pay the bills. The people that would get

very badly hurt here if you drive out the wealthy are the people he [Democratic mayoral

candidate Bill de Blasio] he professes to help.”63

It was an argument that, if it had been

made in 1973, would have drawn praise from at least some quarters for its candor. But in

2013 it was conventional wisdom for the city’s elite, a doctrine now old enough to have

absorbed the stench of accumulated grievances.

62

David, Modern New York, 170. 63

Chris Smith, “In Conversation: Michael Bloomberg,” New York, September 7, 2013.

356

There was plenty of anger to go around. In 2009 the Bloomberg administration

trumpeted the “creation or preservation” of 94,000 units of affordable housing, including

72,000 units for the poor, during his Mayoralty. Simultaneously, however, over 200,000

units had become unaffordable as rising rents pushed them out of the rent control pool.64

By early 2013, there were over 50,000 New Yorkers living on the streets and in two

hundred and thirty-six homeless shelters. This included about one of every one hundred

of the city’s children.65

Policing continued to intensify even as the crime rate continued

to decline. Between 2002, the first year that the NYPD was required to make its totals

public, and 2011, the number of stop-and frisks increased by six hundred percent, to

almost 685,000. Ninety-two percent of those stopped were male and eighty-seven-

percent were either African American or Latino.66

The Bloomberg administration also

showed a heavy hand in the heart of the city. In the pre-dawn hours of November 15,

2011, the NYPD rousted members of the anarchic anti-capitalists of the Occupy Wall

Street movement from Zuccotti Park in Lower Manhattan. The force arrested two

hundred demonstrators. It was an ironic turn of events in a space named after the man

who declared that he “did not believe in master plans.” Using words reminiscent of

David Dinkins on the clearing of Tompkins Square Park, Bloomberg told the press,

“health and safety conditions [in the park] became intolerable” and “New York City is

64

“Manny Fernandez, As City Gains Low Income Housing, The Market Takes It Away,” NYT, October 15,

2009. 65

Ian Frazier, “Hidden City,” The New Yorker, October 28, 2013. 66

Ryan Devereaux, “Scrutiny Mounts as NYPD ‘stop-and-frisk’ Searches Hit Record High,” The Guardian

(UK), February 14, 2012.

357

the city where you can come and express yourself. What was happening in Zuccotti Park

was not that.”67

Bloomberg’s policy decisions were not conducive to building a long-term

political coalition in an electoral democracy. This was especially true since the Mayor

had eschewed integrating himself into the city’s ethnic and party politics where he might

have groomed a successor. It is not surprising then that in the 2013 election the city’s

voters rejected Bloomberg’s favored candidates, City Council Speaker Christine Quinn in

the Democratic primary, and Republican candidate Joseph Lhota, in the general election.

Instead New Yorkers chose Public Advocate Bill de Blasio.68

On the first page of his

campaign agenda, “One New York, Rising Together,” de Blasio told his potential

supporters, “Addressing the crisis of income inequality isn’t a small task. But if we are to

thrive as a city, it must be at the very center of our vision for the next four years.”69

Journalist Thomas B. Edsall termed it a “new urban populism,” with an unapologetic call

for not only for better public services but also for higher taxes to pay for them.

Underlying these commitments was a declaration that rising income inequality was a

social ill in and of itself.70

Rhetorically at least this marked a decisive shift away from

the idealization of the private charity and entrepreneurship.

67

James Barron and Colin Moynihan, “City Reopens Park After Protesters Are Evicted,” NYT, November

15, 2011. 68

Michael Barbaro and Kate Taylor, “Bloomberg Decides Not to Endorse a Successor,” NYT, September

13, 2013, Michael Barbaro and David W. Chen, “De Blasio Is Elected New York City Mayor in

Landslide,” NYT, November 5, 2013. 69

Bill de Blasio For Mayor. One New York Rising Together. Accessed February 1, 2014. Available:

http://www.billdeblasio.com/issues/rising-together, 2. 70

Thomas B. Edsall, “Bill de Blasio and the New Urban Populism,” Op-Ed, NYT, October 22, 2013.

358

At his inauguration on January 1, 2014, de Blasio took direct aim not only at his

predecessor, but at the policies of every mayor of New York since 1974:

Of course, I know that our progressive vision isn’t universally shared. Some on the far

right continue to preach the virtue of trickle-down economics. They believe that the way

to move forward is to give more to the most fortunate, and that somehow the benefits will

work their way down to everyone else. They sell their approach as the path of “rugged

individualism.

But Fiorello La Guardia — the man I consider to be the greatest Mayor this city has ever

known — put it best. He said: “I, too, admire the ‘rugged individual,’ but no ‘rugged

individual’ can survive in the midst of collective starvation.”71

Time will tell how de Blasio’s words translate into policy and whether those

policies will seek to mitigate the worst symptoms of the culture of risk. Time will also

show if de Blasio’s election is the harbinger of a whole-scale attempt to re-imagine the

underlying assumptions that govern life in New York. The story that he will play a part

in shaping offers little reason for optimism. Regardless of their backgrounds and

beliefs—Democratic, Republican, Independent, “clubhouse” and “reformer,” black and

white, Jewish, Protestant, and Catholic—the culture of risk has found support from all of

the men who have governed under it. The pair of three-term mayors in this dissertation,

Koch and Bloomberg maneuvered within its boundaries more effectively, than two-term

(but one-minded) Giuliani and the single terms of Dinkins and the overwhelmed Beame.

These distinctions arose from macroeconomic conditions, personal style, and managerial

competency rather than from substantive policy differences. The mayors of New York

sharpened, softened, and re-focused the culture of risk to create a system of governance

71

“Text of Bill de Blasio’s Inauguration Speech,” NYT, January 1, 2014.

359

and a way of life that has proven to be remarkably persistent. There has been, as

Margaret Thatcher put it a generation earlier, “No alternative.”

In The Twilight of Risk

In 1973, New York City and the United States faced a great rupture with the past.

It was a loss of faith in the underlying beliefs that had governed the city and the nation

since the 1930s. This break was felt by the powerful in their suites and by the plain

people in the streets. Each, in his or her own way, faced the realization that the ethos of

high modernism with its emphasis on planning and the coordinated action by democratic

and technocratic institutions, was coming apart. This system’s objectives, as

systematized in the 1930s and 1940s, had been creating security for what its promoters

saw as broad mass of people whose hands had built America but now hid in empty

pockets. They were hands too that might rise up in fury. The system broke from within,

as inflation began spiraling, the Bretton Woods system dissolved, and as the politicians,

generals, bureaucrats, business elites, and labor leaders who were tasked with managing

its day-to-day operation—blinded by the hubris that came from a long run of success—

failed to live up to the promises that they had made. The excluded majority of American

society, who demanded both inclusion within the system’s protection and freedom from

the exercise of repressive, degrading power, also hammered at its foundations.

New York City benefitted from the high modern period extensively and supported

it eagerly. It was the “model city” of the midcentury. When the break with higher

modernism came in the form of the 1975 fiscal crisis, the city publically confronted the

360

conflict about how to govern and the proper objectives of government. The city could

surrender its democratic rights and prerogatives to a bankruptcy judge—or fight for its

independence. The city fought. It used its political and financial muscle to secure state

and then federal loan guarantees that created a narrow window in which New York City’s

precarious finances could be rebuilt. And they were.

To do that, the city’s elite in business, politics, and organized labor deliberately

took two intertwined risks. The first was that the city would not attempt to rebuild its

broken manufacturing economy or its burned-out neighborhoods. Instead, New York’s

limited resources went into creating a new city whose foundation was riskiest form of

financial and real estate speculation, endeavors that sought to attract a global pool of

liquid capital. To do this meant taking a second risk: that as the city’s infrastructure—

both human and physical— broke down its already precarious society would not collapse,

before there were enough revenues to stem the damage. Both of these risks were known,

and accepted, by those with the power to take them. Two further sets of risks followed

from these choices. In a time of austerity, New Yorkers were forced to take risks that

they had no consented to in order to make a decent life for themselves, or even for the

sake of their own survival. The temporary vacuum of power also created space for the

creation of art—images that fought against the calculated indifference of the city, but that

also became another form of currency in the speculative marketplace.

Taken together, these four risks—the embrace of speculative capitalism, the

acceptance of social disorder, the necessities of precarious survival, and the opportunities

361

for the application of iconoclastic creativity as a form of protest and, profit—created a

culture of risk with its own set of norms, values, and expectations. It was individualistic,

acquisitive, and iconoclastic. It was unmoored in any time but the now, and, even more

importantly in the next. It was a culture that was willing to bet whatever was available on

whatever opportunity lay closest at hand. The culture of risk gave the conscientious

individual the impossible task of assuming the responsibilities neglected or abandoned by

government. It gave license and sanction to well-heeled predation.

This culture spread through capital markets as a new generation of financial

products and techniques for using them reshaped corporate America, from the head-office

to the ship floor, by consent and coercion. It spread through the economic policies and

political rhetoric of the Reagan administration whose own values and convictions,

conceived of in the Sun Belt parallel to the culture of risk, ultimately merged with it. It

reached out into the art galleries. It spread like a virus. It came at the same time as the

Virus.

The activism of the Gay Men’s Health Crisis and ACT UP took place within the

culture of risk. Unyielding, confrontational, willful in its provocations, like many social

movements, the campaigns of gay and lesbian New Yorkers and their allies in the face of

otherwise certain death, bore the marks of a particular time, place, and circumstance. The

goals of these movements, however, made them the first great refusal to accepting the

culture of risk as a way of life worth living. They fought for a future that many of the

movement’s earliest members knew they would never live to see. They built a

362

community in place of fragmentation, an ethos of responsibility against hedonism, to

remind the city, the state, and the nation that government could not abdicate its most

basic of responsibilities—to safeguard the lives of its citizens—without a fight. In

important ways ACT UP succeeded.

The same cannot be said for the culture of risk as a whole.

By 1990, when David Dinkins assumed the mayoralty, the price of risk had

become all too clear. While Dinkins lacked the force of personality, the charisma, to sell

his program to the electorate, it would form the template for the future governance of

New York City. With an indelicate, even ruthless sensibility, Giuliani completed the

crackdown on public disorder, the most visible risks to public life, even at the cost of

further racial polarization. Like their predecessors, however, New York’s mayors of

recent years, Giuliani and Bloomberg, have used the city’s coffers and clout to promote

the growth of an ever more deregulated, and risky, Wall Street to drive the city’s

economy. In the middle of the 2010s, it seems clear that there is a great impasse in the

history of the City of New York and in the American life that the city plays such an

outsized role in shaping. The city and the nation can continue to pay the price of risk or

they can choose a different path. Where the former leads is now well established and can

continue.

It is certainly possible that the future will see the continued, perhaps intensified,

use of new financial instruments and their further diffusion into daily life. There is much

that can be exploited—both in New York City and in the investment world in general.

363

The subways, the water supply, the airports and bridges, the Health and Hospital’s

Corporation all remain in public hands. Each of them is a tempting franchise for future

“monetization” in the global marketplace and another source of “uncommitted resources”

for New York’s next speculative project. Or perhaps the pursuit of risk will triumph in

the city again, not from “neoliberal” public policies but through the invention of a

powerful new financial instrument. Such a product may sit on an unknown spreadsheet,

glowing on a trader’s terminal, waiting for the future that it will shape. In his 2003 work

The New Financial Order: Risk in the 21st Century, the economist Robert J. Schiller asks

his readers to picture “international markets in human capital,” “livelihood insurance

policies,” and “home equity insurance policies.”72

As this dissertation has shown,

however, the creation of new financial products relies on decisions (including the choice

to do nothing) made by regulators and politicians. Therein lies the freedom for society to

choose. In light of the history written in this dissertation, it is hard to argue that the

choice to take yet more risk will create a better foundation for the majority’s civic and

national life.

Then there is the road that might be taken. It is not easy, quick, or painless. Most

of all it is not know. To create a mainstream alternative to the culture of risk will require

a reimagining of New York City’s politics—and in America’s as well. But as this

dissertation has shown, revolutions in American thought, belief, and action, have

72

Robert J Schiller, The New Financial Order: Risk in the 21st Century (Princeton, NJ: Princeton

University Press, 2003), 6.

364

occurred in our time. There is nothing inevitable about our economic life, our culture,

and our politics. After Black Monday in 1987, Paul Volcker told a reporter:

The point I would make is that we don’t have to sit here helplessly amid all these

kinds of speculations or let them work themselves out in the marketplace. We can

control events, if we do the right things. I’m not saying we can fine-tune it. You can get

a situation that is so upset and filled with risk that there is no right policy. I don’t think it

has to get that way. I think we’ve had a little warning, we haven’t had a catastrophe.73

Articulating this point with more precision, it can be said that there have been

many private enterprise systems in the history of the United States. In 1927, Volcker was

born into a very different system from the one he grew-up in. In-turn he created another.

In his lifetime, and ours, we may see yet another. Barring a complete catastrophe, what

lies beyond the culture of risk will rise in different ways from different quarters. It will

take artifacts and practices that already exist and repurpose them for what will be. Over

time, these changes in business, work, politics, activism, and modes of cultural

representation will become discernable as a coherent project. The past offers few guides

as to the specific policies and practices that will define this new era. There will never be

another New Deal, just as there will never be another Market Revolution or another

Gilded Age. Each of the epochs came from a different time and circumstances. They

built upon roots generations in the making and were catalysts by events as short as a day.

The same can be said of this “Age of Risk” and what will follow it.

But if I could give a principle to begin with, it would be one from Richard

Rhodes: “Before it is science and career, before it is livelihood, before even it is family

73

Leonard Silk, “Volcker on the Crash,” NYT, November 8, 1987.

365

or love, freedom is sound sleep and safety to notice the play of morning sun.”74

That

strikes me as a good criterion to begin with in the search for the kind of society that each

of us deserves to live in. “One can conceive of a city with art and culture and music and

architecture and the flowering of all good things, as the image of the heavenly city,”

Dorothy Day wrote in The Long Loneliness (1952).75

One does not have to believe as she

did to embrace the possibilities for a good urban life that lie beyond the dead-end of

“Fear City” and an anxious nation. Together, it is possible to step back from the edge.

74

Richard Rhodes, The Making of the Atomic Bomb (New York: Touchstone, 1988), 197 75

Dorothy Day, The Long Loneliness: The Autobiography of Dorothy Day (New York: Harper and

Brothers, 1952), 159.

366

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