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Closer to the Edge: City and the Triumph of Risk

DISSERTATION

Presented in Partial Fulfillment of the Requirements for the Degree

in the Graduate School of The 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

Abstract

“Closer to the Edge: and the Triumph of Risk” explores the historical 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 . 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 as a whole.

ii As recent events such as the 2008 financial crisis have demonstrated, the influence of the culture of risk endures to the present day.

iii

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 , nothing can be accomplished in a city, or in . 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, , The LaGuardia and Wagner

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

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

Robert F. Wager Labor Archive at . Further afield, I wish to thank the Digital Collections and Archives of Tufts University in 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.

iv 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 -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 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 v 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 vi joy. Her intellect is as strong as her heart. Limitless. Her husband Matthew Merguerian makes me want to take the “in-” out of brother-in-law. Finally, I thank my parents,

Jillayne and David Arena. They never doubted my 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.

vii

Vita

December 19, 1983…………………………Born, , 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

viii

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

ix

Introduction: Risk, New York, and 20th Century America

Don’t push me cause I’m 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 (, , , , and ) 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. 1

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 , 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. 2

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 Press, 1977). 3

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: and the Great West (New York: W.W. Norton & Company, 1991). 4

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). 5

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 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 . 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 : Industrial Workers in Chicago, 1919-1939 (Cambridge: Cambridge University Press, 1990) 6

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: Press, 1990). 15 Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War (New York: Knopf, 1995). 16For 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). 7

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

17Jacquelyn 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 (: 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 (Princeton: Princeton University Press, 2005). 20 Angus Burgin, The Great Persuasion: Reinventing Free Markets Since the Depression (Cambridge, MA: Harvard University Press, 2012). 8

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). 9

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 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. 10

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 ’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). 29Jürgen 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: Press, 2010). 11

“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 “” 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 (: University of 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). 33Nelson Lichtenstein, The Revolution: How Wal-Mart Created a Brave New World of Business (New York: Metropolitan Books, 2009). 12

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, ,

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 and City

Hall, and in two neighborhoods, the East Village and the , 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.

34For example, Shermer, Sunbelt Capitalism; Mike Davis, City of Quartz: Excavating the Future in Los Angeles (New York: Verso, 1990, 2006).

13

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 .

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). 14

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 ’ 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 “” 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: , 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, ; 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 , 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 New York (New York: Oxford University Press, 2010). 39 , 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). 15

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

16

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 (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 , and Mayor , 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). 17

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

18

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. , 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 and , 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

41For 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) 19

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 .42 In September 2011 the protestors of Occupy

Wall Street descended on in . And in 2013 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). 43William 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) 20

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

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. 21

claimed the lives of 1,669 New Yorkers. 5 That April 4th, the Times reprinted an excerpt from a speech by Senator Charles Mathias (R-) 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 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. 22

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 , , 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 , 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. 23

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 , 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. 24

were an example of how to make “megalomania compatible with economics.”16 For its efforts, “the Port Authority has built the 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, , 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 . 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. 17Ibid. 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. 25

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 , 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 of the , 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. 22Michael Newman, “In Praise of East Fifth,” NYT, January 27, 1973. 26

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 “” 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, 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. 27

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 ’s for the 50th anniversary of the “House that

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

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. 28

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, 29

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 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. 30

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 labor leader, built “a base—any constituency— and that is the saddest thing of ” 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, “ 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. 31

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 .”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 (: Academy Editions, 1977, 1978, 1981), 9. 43 Ibid, 10. 44James C. Scott, Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (New Haven, CT: Yale University Press, 1998), 4. 32

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 . 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. 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

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). 33

Headquarters and .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

46Zipp, 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: Press, 1995). 34

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 , 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 (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

49Joshua 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. 35

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 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); , The Best and the Brightest (New York: Random House, 1972). 53 Mumford, The Myth of the Machine: Volume II, 300. 36

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 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 , 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. 37

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 , 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, , 1973. 38

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. 39

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. 40

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 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 , 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). 41

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

64Biles, 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. 42

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

67Editorial, “The Best Laid Plans,” WSJ, June 18, 1973. 68Venturi, 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. 43

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. 71Ibid, 96. 72 David Edgerton, The Shock of the Old: Technology and Global History Since 1900 (New York: Oxford University Press, 2007), 29. 44

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. 45

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. 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. 46

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. 47

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

83Steve 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. 48

Street will have moved a long way toward transforming itself into an impersonal national slot machine—presumably fairer to the but of much less interest as a microcosm of America.”86 In an address to the , 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 (), 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. 49

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. 50

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 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. 51

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

94Ibid. 95 Quoted in Jeffrey Frieden, Banking on the World: The Politics of American International Finance (New York: Harper and Row, 1987), 77. 96 , Memoirs (New York: Random House, 2002),for the building of One Chase Manhattan Plaza, 60-166; D-LMA 387-391. 52

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. 53

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 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 (New York: Farrar Straus Giroux, 1992), 331. 101 Zweig, Wriston, 219-220. 54

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 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. 55

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.

106Ibid, 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. 56

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 .

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 , 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. 57

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 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). 58

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. 115Edward I. Koch, “The Muscle of the Mayor,” Op-Ed, NYT, January 22, 1973. 59

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, , 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 , 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.

116Maurice 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. 60

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, , 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. 61

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. 123Editorial Cartoon, “Beame, You’re Too Tight!,” , 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. 62

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 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. 127For Beame’s savings estimate see “New York’s Pension Funds Transfer to Black Ink,” WSJ, July 6, 1964. 63

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. 64

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. 65

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

136Marcia 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. 66

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 helped build. Don’t let him do this to New York.” Another advertisement in , 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 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.

141Ibid, 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 67

In the words of , “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 , “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. 68

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 Shenker, “For the City’s Next Mayor, Words of Advice, Wisdom and Warning,” NYT, November 6, 1973. 151Frank 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. 69

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 , “Homosexuals March Down 7th Avenue,” NYT, June 25, 1973. 70

officers, and, official recognition from the state.155 In 1971, this did not sit well with

Justice T. Paul : “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. 71

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. 72

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 , 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. 73

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. 74

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 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

168Ibid 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. 75

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. 76

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 , former 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. 77

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. 78

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 . 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 79

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. 80

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. 81

Times critic.190 When they arrived in LA, the 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. 82

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. 83

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 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. 84

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 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. 85

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. 86

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. 87

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 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. 88

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. 89

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 . 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. 90

for-profit and racialized fear, a place where at dusk, “no-one in his right mind would stroll alone.”10 Thankfully, Petit did not 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

10Jane 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. 91

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. 92

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 . 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 , 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. 16Ibid, 22. 93

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. 94

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 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. 95

“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. 96

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. 97

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. 98

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,” , 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. 99

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 .

“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. 100

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 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. 46Shefter, Political Crisis, Fiscal Crisis, 64-66. 101

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 ’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. 102

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 , 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. 51Cannato, The Ungovernable City, 548-551. 52Rohatyn, 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. 103

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. 55Freeman, Working-Class New York, 267-70. 104

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

105

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. 106

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. 107

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. 108

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. 109

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. 110

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. 111

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. 112

“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. 113

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. 92Rockefeller, 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, “ Urges Temporary Help for City From U.S.,” NYT, September 28, 1975. 95David Rockefeller, Memoirs, 506. 114

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 , 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?” , April 8, 1976. 115

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. 116

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. 117

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.” 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. 118

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. 119

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 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. 120

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 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. 121

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 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. 122

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. 123

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. 124

“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. 125

that he was using the subterfuge of economic development to implement Mr. Starr’s inhuman proposals for New York.”130 Representative , 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

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. 131Thomas 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 126

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. 127

“ ‘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. 128

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. 129

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 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, . 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. 130

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 home of the Mustang 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. 131

More serious proposals for legalizing up to twenty-six casinos in the city were floated by Democrat , 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. 132

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, bats, and knives, entered

Washington Square Park, the heart of . 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. 133

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. 134

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 “A Spot of Hectic Browsing for the Queen,” NYT, July 10, 1976. 135

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. 136

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. 137

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. 138

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

“ 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 139

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. 140

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 1 141

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. 142

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 1 143

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. 193Eli 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. 195Ibid. 144

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,

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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 1 146

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. 147

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.

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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. 149

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. 150

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. 151

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, : 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. 152

to live. One 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. 153

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

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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,”

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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 , 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. 156

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 19Ibid, 8. 20 Ibid, 9. 157

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. 158

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. 159

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. 160

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

32Ibid, 1-2. 33Ibid, 2. 161

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

34Ibid, 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. 162

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 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

38Temporary Commission on City Finances, The City in Transition, 137. 39 Ibid, 216. 163

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. 164

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 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. 165

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. 49Stuart Bruchey, Modernization of the American Stock Exchange 1971-1989 (New York: Garland Publishing, 1991), 92-93. 166

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. 167

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. 54Citicorp, Citicorp Annual Report and Form 10-K 1978, (New York: 1979), 6. 168

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. 169

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. , 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. 170

37. In an April 7, 1976 speech to the 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. 61Michael Oreskes, “To Victor Belongs the Spoils,” Daily News, June 22, 1980. 171

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. 172

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. 69For 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). 173

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. 174

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. 175

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. 176

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, , 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. 177

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 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, , 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. 178

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. 179

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. 180

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. 181

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 , 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. 182

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 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. 183

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 to make it read: ‘This time Around Send Us Your Rich.’ ”103

And the “big money” came. “The rest of the world 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. 184

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. 185

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 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 , But the Money Rolls In,” WSJ, June 5, 1981. 186

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 W. Arenson, “New York’s New Financial Markets,” NYT, November 16, 1980. 187

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 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. 188

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. 189

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. 190

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. 191

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-

131Clyde 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. 133Citicorp, Citicorp Reports 1981 (New York: 1982), 6-7. 134The First Boston Corporation, First Boston Annual Report 1981 (New York: 1982), 8. 192

term finance” and, for government finance “tax exempt commercial paper.”135 As banker at 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

135Ibid, 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. 193

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. 194

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. 195

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. 196

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

145Ibid, 14. 146Ibid, 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,. 197

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. 198

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. 199

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. 200

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. 159Ibid. 160 Frank Lynn, “Mayor Takes 75%,” NYT, November 4, 1981. 161 “Excerpts From the Text of Koch Victory Speech,” NYT, November 4, 1981. 201

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. 163Walter Waggoner, “Business Lobby Group for city is Organized by David Rockefeller,” NYT, June 11, 1980. 164Edward 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. 202

the risks its members had helped create.166 In the wake of the 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. 168Ibid. 169Ibid. 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. 203

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 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. 204

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 , 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. 205

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). 206

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. 207

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. 208

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. 209

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. 210

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 , Predator’s Ball, 85 14 Anise C Wallace, “Drexel’s ‘Junk Bond’ Files Are Purchased by Salomon, NYT, April 10, 1990. 211

On January 4, 1982, the writer 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. 16Ibid. 212

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, , 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. 213

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. 214

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 , “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. 215

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

25Charles 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. 216

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 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

27Paul 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. 217

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. 218

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 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. 219

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. 220

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. 221

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. 222

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. 223

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

51Michael C Jensen, “The Free Cash Flow Theory of Takeovers: A Financial Perspective on 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. 224

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 -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. 225

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. 226

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. 227

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. 228

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. 229

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, , 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 . 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). 230

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—, 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. 231

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. 232

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 . 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. 233

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 .’ 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. 234

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. 235

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 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

84Ibid. 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. 236

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

87Ibid. 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. 237

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. 238

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. 239

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. 240

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 , 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 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), 87 241

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. 242

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. 243

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. 244

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. 245

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. 246

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

121Ibid. 122 “A Takeover Bid Tests Burlington’s Chairman,” NYT, May 5, 1987, D2. 247

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. 248

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. 249

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 , “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. 250

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 , “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. 251

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. 252

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. 253

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. 254

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 , 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 ’s Green Pastures,” WSJ, April 27, 1987 and “Penney Will Go to Dallas, Officials in New York Say,” WSJ, April 29, 1987. 255

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. 256

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. 257

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 , , 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. 258

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. 259

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. 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. 260

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. 261

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,” , 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. 262

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. 263

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. 264

“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. 265

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. 189Chambré, Fighting For Our Lives, 141-142. 266

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. 267

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

192Quoted 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. 268

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. 269

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. 270

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. 271

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. 272

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. 273

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. 274

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

275

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

11James 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. 276

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. 277

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

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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 , the Queens borough president, Bronx

15 Paul Moore Jr, “God’s Portfolio,” Op-Ed, NYT, December 25, 1987. 16 Ibid. 279

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, 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. 280

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 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. 281

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

23Quoted 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. 282

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. 283

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. 284

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. 33Ibid, 171. 285

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. 286

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 . 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. 287

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. 288

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. 49Ibid. 289

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 , 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. 290

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. 291

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 , “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. 292

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. 293

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. 294

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 , 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. 295

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. 296

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. 297

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. 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. 298

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 , 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. 299

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. 300

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

87Stewart, 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 301

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

91Matthew 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. 302

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. 303

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. 101Paulette 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. 102U.S. Congress, Senate, Committee on Banking, Housing, and Urban Affairs, The Issues Surrounding the Collapse of Drexel Burnham Lambert. 101st Congress., 1st sess., 1990 (Washington, D.C.: U.S. Government Printing Office, 1990), 60. 304

about the merits of deregulated capitalism. By the late 1980s the and its satellites had embraced market-based reforms. The collapse of Eastern European 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. 305

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. 306

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. 307

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. 308

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. 309

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. 310

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. 121Ibid. 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. 311

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

312

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. 313

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. 128Felix G Rohatyn, “The New Domestic Order?” NYRB, November 21, 1991. 314

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. 315

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. 136Neil Barsky, “Prudential Unit Signs Lease to Stay in New York City,” WSJ, August 6, 1992. 137 , “Morgan Stanley Set to Announce Deal on New York Office,” WSJ, October 19, 1992. 316

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. 317

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

141Quoted 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. 318

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. 319

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. 320

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. 321

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. 322

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 . 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. 323

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

Menachem M. Schneerson, leader of the Lubavitch sect of , hit a car at the intersection of President Street and . 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 . 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. 324

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. 325

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. 326

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. 327

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 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. 328

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 “,” 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. 329

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. 330

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. 191Ian 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,. 331

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. 332

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. 333

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. 334

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. 335

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. 336

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. 337

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 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 338

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 . 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. 339

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. 340

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

20Ibid. 341

“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. 342

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. 25Ibid, for the settlement, Laurie Hays “Bankers Trust Settles Dispute With P&G,” WSJ, May 10, 1996. 343

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

26Quoted 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. 344

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. 345

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 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. 346

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 , “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. 347

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. 348

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. 349

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. 350

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. 52Moody, From Welfare State to Real Estate, 170. 53 Jenny Anderson, “U.S. Financial Sector Is Losing Its Edge, Report Says,” NYT, January 22, 2007. 351

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

54McKinsey & 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. 56Ibid, 26-27. 352

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. 353

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: , J.P. Morgan Chase, , 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, 354

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. 355

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,” , October 28, 2013. 66 Ryan Devereaux, “Scrutiny Mounts as NYPD ‘stop-and-frisk’ Searches Hit Record High,” The Guardian (UK), February 14, 2012. 356

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. 357

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 — 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. 358

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

359

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

360

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

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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.

362

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. 363

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. 364

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. 365

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Oral Histories—Collected

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Discography

370

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Grant, James. Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken. New York: Farrar Straus Giroux, 1992.

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Harris, Howell. The Right to Manage: Industrial Relations Policies of American Business in the 1940s. Madison: The University of Wisconsin Press, 1982.

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Journal Articles and Conference Papers

Corrigan, Gerald E. “Rebuilding the Economic and Financial Fundamentals: The Case for Vision and Patience.” FRBNY Quarterly Review. (Winter 1991-1992): 1-5.

Cowie, Jefferson and Nick Salvatore. “The Long Exception: Rethinking the Place of the New Deal in American History.” International Labor and Working Class History no. 74 (Fall 2008): 3-32.

Fridson, Martin S. “Fraine’s Neglected Findings: Was Hickman Wrong?” Financial Analysts Journal vol. 50, no. 5 (September-October 1994): 43-53.

Hall, Jacquelyn Dowd. “The Long Civil Rights Movement and the Political Uses of the Past.” Journal of American History vol. 91, no. 4 (March, 2005): 1233-1263.

382

Jensen, Michael C. “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): 102-143.

383