Could New York Go Bankrupt Again?

Today's guest is Richard E. Farley, author of Drop Dead, a history of how the richest city in America got addicted to spending, saturated in debt, and crashed the municipal bond market—and then managed to get a federal bailout in the nick of time.

In 1975, New York City almost went bankrupt. Farley argues that the same conditions are reemerging today: runaway budgets, gimmicky accounting, overpromised entitlements, and politicians more interested in ideology than arithmetic. He wrote all this before the rise of mayoral candidate Zohran Mamdani, who promises to blow spending through the roof, enact new taxes, and create masses of new regulations.

If you want to understand what it takes to bankrupt a city, listen up. New York might be sleepwalking into another fiscal disaster, and this time, there might not be a bailout waiting.

0:00—Intro

1:24—Mamdani's agenda and economic collapse

6:03—How New York went broke in 1975

8:21—Budget fraud and political chicanery

12:20—Out of control spending

16:20—Municipal bond market saturation

20:11—Bailout politics of Mayor Abraham Beame, Governor Hugh Carey, and President Gerald Ford

31:47—Who is Felix "the Fixer" Rohatyn?

36:37—Why the budget grew during the austerity era

38:59—How NYC returned to budget normalcy

42:53—Is New York repeating the mistakes of its past?

47:00—Mayor Eric Adams and former Gov. Andrew Cuomo

50:12—Why NYC won't return to the Bloomberg model

56:32—Generation gaps and voter behavior

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Transcript

This is an AI-generated, AI-edited transcript. Check all quotes against the audio for accuracy.

Nick Gillespie: Richard E. Farley, thanks for talking to Reason.

Richard Farley: Thank you for having me.

You work in the world of finance and all of this—what is your best estimate of, if Mamdani wins in the fall and he gets his, you know, he runs the table, he gets to do everything he wants. What happens to the population of New York?

Well, let's talk about what happens to the fiscal situation and the taxes, because that will drive a lot of it. And also, there's one thing we need to talk about too, which is law and order.

I think that if you increase the budget by $20 to $25 billion—which I think he's clearly capable of doing—we're not even talking about the nonsense about grocery stores, although he's only saying 5 or 6 grocery stores. So that's probably a sidebar.

If you increase the budget by $20 billion—which I think he's capable of doing—that's an increase of 15 to 20 percent in a time when every projection says revenue is going to decrease. If you throw into that taxes that will drive people to New Jersey, Westchester, etc.

Or totally out of the area.

Or totally out of the area. That could create a structural deficit equal to that. That money's not coming from the federal government as long as Trump's here, and there's a Republican Congress—or even one house of Republicans.

And part of what you argue in the book is, the bigger difference too, is New York is still the fourth most populous state, but it is no longer in play.

What's amazing to be reminded of in reading Drop Dead is that New York would sometimes vote Republican, sometimes vote Democrat. It was a swing state. And now everybody knows—like, Democrats can say "fuck you," and Republicans can certainly say "fuck you"—right? Because it's not coming their way.

Correct. Now I think no one will allow New York City to devolve into chaos. There will be a bailout at some point. The issue under consideration are what would those  conditions be?

When you have to worry about winning the nomination in 1976, you have to treat New York with a little bit of kid gloves. If you don't have to worry about that—because a Democrat couldn't lose it if he tried or she tried, and a Republican couldn't win it if he or she tried—you can play politics the other way and be more draconian.

So that's something to keep an eye on.

But I think the real issue—of whether or not you lose people in New York and degrade the tax base to create a very serious fiscal crisis quickly—is if people feel unsafe in New York City.

And by that, you don't mean financially. You mean…

It's partly that, but also physically.

If I have a Marxist in Gracie Mansion—I wonder if the Marxist will live in Gracie Mansion; I don't know—and I think he is a Marxist. I mean, he says, "I want to seize the means of production." I think you trust people when they say these things.

Who also says things like "globalize the intifada" and then won't really back off of that in a way that decries violence. What will the policing policies be? He's never really backed off of "defund the police" in an aggressive way. He won't say he'll keep Keechant as police commissioner who now, I think, may be the most popular political figure in the city, if you want to call the police commissioner a political figure.

You absolutely should. And, you know, there has been—this is also something to think about nationwide—there's been a decline in violent crime year over year.

People are talking about it's going to be the biggest single thing. Clearly, policing matters. But it's not clear exactly how much. But you're basically saying if we get a guy who is a "defund the police," romancer of revolutionary violence, things are going to get hairy.

I don't know. I think there's a risk of that.

He's a bit of an empty vessel. He's 33 years old. He's a bit of a dilettante, in my judgment. He's relatively new to city politics. Never really run anything. He is very glib. He's very handsome. He's charismatic. But what does he really stand for and mean?

And when you have the executive function of overseeing the largest police force in the country—in a city where there's a thin veneer of law and order—we saw that in 2020. It doesn't take much for street gangs to go down and decide they're going to loot and make a lot of money off of a ineffective law enforcement apparatus.

The book is Drop Dead: How a Coterie of Corrupt Politicians, Bankers, Lawyers, Spinmeisters, and Mobsters Bankrupted New York, Got Bailed Out, Blamed the President, and Went Back to Business as Usual (And It Might Be Happening Again).

I have no responsibility for the subtitles.

But you know what? You've got to own it, right? I don't know that I need to read any more of the book after that. But this is about the fiscal crisis of New York City in 1975.

Correct.

Can you summarize quickly what was happening in New York that brought the biggest city in America to the brink of bankruptcy?

Yeah. I think the larger quantity of factors affected all large industrial Northern and Midwestern cities. Recession of 1973 and of 1974, rising interest rates, the cutback in aid from Washington—LBJ's poverty programs, et cetera—being scaled back by Nixon. You had a longer-term impact of the hemorrhaging of industrial jobs, really starting in the late '40s but accelerating.

The peak year for industrial jobs as a percentage of the economy was in the late '40s.

Correct. I think New York was still the leading industrial state until about '48, '49. Even though the low-skilled jobs were moving out, you had an influx of low-skilled workers from the South escaping discrimination. And from Puerto Rico, obviously, looking for a higher standard of living. You had a similar exodus of white ethnic working-class voters. So you had this shift in demographics and economic impact, which would have been a problem no matter what.

But in a lot of ways, I mean, one of the things you're arguing is that, "Yeah, that's true, and it was true everywhere in every type of city, but the real problem was what was going…"

Absolutely. You can discuss it a number of different ways, but there were two things unique to New York. One was the chicanery—the accounting shenanigans, the budgetary fraud, the illegal incurrence of debt to mask deficits. So we'll put that in one bucket.

That's, of course, the most fun to talk about. If we're not going to talk about chicanery and characters, we might as well write about librarians in the 1970s.

What was going on in New York City was also mirrored at the state level under Nelson Rockefeller

Correct. Not quite as bad, but on a larger scale.

But basically what we saw—and throughout many states, many cities—there was just a commitment to spend a lot more money than was coming in.

And to use what were previously thought to be unethical, perhaps even illegal, means of doing so. Of course. Nelson Rockefeller—famous for the moral obligation bond. Through John Mitchell…

Yeah, explain that.

Sure. Way back when—when dinosaurs roamed the earth—when a government wanted to issue debt, it issued it under the full faith and credit of the state, the city, what have you, Ok? And all jurisdictions had constitutional limits or legal limits on how much you could incur.

Beginning in the 1920s, because they didn't want to get the referendum vote—which you needed from the voters to approve that kind of debt, and voters at some point were going to say "no more"—they came up with agency debt.

Which was, the state of New York, for example, forms a subsidiary, calls it the Port Authority. And the Port Authority or the Triborough Authority issues the debt. And the debt is paid by real sources of revenue that have been deferred from the state to that entity—tunnel and bridge tolls, port fees. Those bonds were what they call "self-liquidating," which means a bond investor looks at the projections of the tolls and other revenue—stadium authorities, ticket sales—and says, "Ok, this will more than repay my debt, I'll buy the bonds."

Nelson Rockefeller, starting in the early '60s, took an idea that a lawyer named John Mitchell came up with for a federal government education program to build schools.

And this is not just any John Mitchell.

Oh no, this is the John Mitchell—Watergate fame, Martha Mitchell fame, and all kinds of fame.

John Mitchell came up with an idea that said, "Even if you want to borrow for programs that won't repay themselves—like low-income housing—you can get bond buyers to buy it as long as you convince them, with a wink and a nod, that the state will stand behind it."

Well, responsible people, like the comptroller of the state at that point, Arthur Levitt, said, "Oh, wait a minute. If the state's going to stand behind it, you have to get a referendum. There's no winking and nodding here."

But Nelson Rockefeller loved the wink and the nod. And they came up with something where they explained it to the market by saying, "The state is not legally obligated to repay your debt. But if the program doesn't generate enough revenue, it's morally obligated." And the governor agrees to submit a bill to the legislature to require the state to make good on the debt. And the market bought off on it.

Why did the market do that? Is it because they were like, "Hey, you know what? The economy is booming. There's some bust, but we're still…"

There are different theories on that. I think the biggest theory was they were convinced in 1961, I think when it first came in, that the political power of Nelson Rockefeller and his allies in the state of New York would make good on this debt.

1961 was the last year that New York was the most populous state in the country.

Correct.

Right, because by '62, I believe, California overtook it, which is a big backdrop of what's happening in New York City.

Just to back up one sec. Of course, the rating agencies are always around.

Yeah.

And the rating agencies bought off on rating these bonds and giving them a decent rating. So you've got the sort of creep where the politicians say, "Wink and a nod," the rating agencies say, "Okay, we'll take that and give it a good rating," and then the market says, "Fine." And once you have a precedent of a bond deal being priced appropriately in the marketplace, then the sky's the limit.

And starting in the late '50s, early '60s, New York City also—again, following different parts of the country—just said, "You know what? Let's spend more."

And you write in the book—and this is, you know, I guess it's not surprising, but it remains shocking—that New York City in the '70s was spending more per capita than any other city in the country.

Yes.

What was it spending it on?

We talked about two differences between New York and other cities, and of course, other cities didn't have a fiscal crisis. One was the chicanery. The other was that New York City took on more obligations and responsibilities than any other city in the country.

What are we talking about? Its own university system. Well, you had a state university system—SUNY—which is very large. You had private universities, Catholic universities. Ok. You have a hospital system. Well, that may have made sense before Medicare. But why do you need Medicaid—why do you need a hospital system when you have the federal funding of private hospitals?

They ran the courts. Until '68, they ran the subways. You may say to someone, "Well, why would a city take on this responsibility given the fiscal issues that that entails?"

Well, it's very simple. It's called patronage jobs. They want Democratic politicians in New York to be able to hand out those jobs and those contracts and those goodies—not Democratic politicians at all.

So New York had an incredibly bloated budget.

Correct.

One of the takeaways from the book is that, through the mid-'70s, basically everybody who lived in New York was getting multiple streams of revenue from the city. Either they worked for it. They might have had a no-show job. Or they were benefiting from some other kind of stream.

So there are two things to keep in mind. One is when Mayor Wagner gave the unions the right to collective bargaining, that really transformed the dynamic of the relationship between the city and the unions.

Victor Gotbaum said very bluntly in 1967, "We have the power to elect our own boss." And over the course of the Wagner administration into the Lindsay administration and into Beame, you saw increased benefits to public employee unions.

This also reflected a national trend, because it was JFK who signed off on collective bargaining for public unions.

If you count the number of votes of public employee union members and their immediate family members who are voting age, that's enough votes to win just about every Democratic primary for mayor, going back all the way to '67.

So when you have that sort of power and influence—when you realize that—then your demands become greater and greater, and the pressure to accede to those demands obviously becomes overwhelming.

So you sign off. "You" meaning, you know, Abe Beame and the City Council and everybody in a political job is like, "Okay, yeah, we're going to give more money to more voters. And then we're going to use these bullshit techniques to convince them."

Correct. And the overwhelming political imperative to not take away from the voting citizens is really—if you want to put your finger on one thing—it's that. It's easier to never give in the first place than it is to take away.

And once you have this enormous smorgasbord of government-financed programs—which helped the middle class, by the way, much more than the poor.

Yeah, no, no, on both ends, right? Like they're the ones who use the parks and use CUNY ultimately, or City College. But they're also the ones getting the jobs—

And working in the hospitals—doctors, nurses, and orderlies…

Well, this is the biggest misconception. Healthcare is a middle—

And the union worker sounds like a very well-paid middle. I come from a family of teachers—union folks.

Although not in the New York area.

No, this is up in Providence. The dynamic wasn't installed yet.

So then what happened in 1975, where it's like, suddenly, the mask is off, and it's like, we're screwed?

Simply stated, the municipal bond market stopped funding New York City municipal bonds.

Municipal bonds were a great investment when everyone is making money and has taxes to pay because they're triple tax-free. So it's a good asset class when you want to not pay a full income tax on the income.

When, after a recession, you have a lot of losses, it becomes a less attractive asset class. Now, because of the chicanery—which we can talk about in a second—New York had saturated the municipal bond market with its debt. It had, I think, over 25 percent of all municipal bonds were New York bonds.

That's amazing

Given that portfolio diversification says never have more than 10 percent of any issuer in your asset class. And it was over 30 percent of short-term debt.

Now, people would park their money in short-term municipal bonds because they were tax-free and thought to be safe. But when you have such an enormous saturation, you then have a problem—particularly in an asset class that's no longer as economically attractive.

And one of the smart things Beame had done when he was comptroller in his first stint was diversify the pension portfolios so that not all of their securities are invested in New York City securities. Something like 80 percent of New York's pension must invest in New Jersey securities. When you divest that, you also saturate the market. So you had that dynamic.

So the municipal bond market collapses for New York. Nobody wants to buy their bonds.

Right. So why was it so saturated? Well, because they were borrowing to do things they shouldn't be borrowing to do.

Now, you're not supposed to borrow to fund short-term expenses—ordinary course, annual expenses. You're only supposed to borrow long-term to finance bridges, schools, capital assets.

You point out in the book, almost on every page, that New York was just like, "We're not doing any capital improvements. We're not maintaining anything. This is all money that is going directly into somebody's—"

I think at one point at the peak, over 50 percent of all borrowings—long-term—for so-called "capital assets" were actually for ordinary expenses.

Let me give you an example. There was a fellow named James Cavanaugh, who was a wonderful rogue from Brooklyn. He never went to college. He was a genius at manipulating numbers—both in terms of showing fake layoffs and in terms of showing.

So he came up with an idea that said, "No, wait a minute. Teachers have an average career of 25 years, 30 years, whatever it is. And they do teacher training all the time, right? So isn't the useful life of that training a 30 year asset? Let's go into the bond market and borrow long-term to pay for teachers' salaries."

Anybody looking at that rationally is going to say, "That's nuts."

He would do things like, "OK, we need some short-term debt because we have a liquidity issue. Let's send our tax bills for embassies and churches and rectories and all kinds of things so that we can march it down to Salomon Brothers and other banks on Wall Street and do a bond issue backed by those real estate tax receivables," which was all nonsense.

All right, they're not going to pay.

No, but you hope to roll over into some real taxes later on to sort of refinance that. And in a low-interest environment of the '60s, you could get away with that.

But when interest rates spike, all of a sudden now the interest on what you borrowed in a phony way now becomes a real expense.

Which is happening on a macro level contemporaneously.

They would do other things like, look, 5 percent of all Medicare and Medicaid reimbursements disallowed, right? For various duplicative and not-covered. They would borrow 100 cents on the dollar in what they call RANs—Revenue Anticipation Notes.

You can borrow short-term as long as you repay it during the year, because a city's expenses are relatively even over the course of the year, its revenues are lumpy. So you can borrow against those to smooth it out. And of course, they abused that in these ways.

So the witching hour comes. 

Correct.

We're in 1975, the early part of 1975. It's clear New York is going to go bankrupt. It's going to default on its debt.

Correct. It was clear much earlier than that.

Oh, but I mean, this is when stuff gets moving, right? And like Governor Hugh Carey.

Oh, the insiders knew it.

Governor Hugh Carey is one of the heroes of the book, if there is one.

Well, it depends what you mean by "hero." The most effective players in terms of advancing their own interests would be Hugh Carey, and I think he's a hero overall.

But that's because he's Irish.

John Scanlon is a hero—but maybe not necessarily…

This is like—I feel like you're fighting the Gangs of New York-era wars or something.

Scanlon maybe was not the most honorable hero in the book. In terms of being effective, he's wildly effective. I think Arthur Levitt is one of the real heroes.

In any case, in 1975 it becomes apparent that New York is going to need a federal bailout.

Correct.

And then the question is the timing. Because essentially, if it happens before Thanksgiving of 1975, it's going to be on the federal government's terms—in Gerald Ford's terms in particular. If it happens after Thanksgiving, then Ford is running for re-election.

And it's like he's going to do whatever he needs to in order to get 41 electoral votes from New York—which does turn out to be the difference between him winning or Carter winning. And Carter won.

And actually it was New York City. Because had Ford done as well as—or even slightly worse than—Republicans typically did in New York City, he would have won New York State in the election. He did historically bad. Only Alf Landon in '36 and Goldwater in '64 did worse.

So Hugh Carey and Abe Beame. Abe Beame is kind of the first political figure I remember—as somebody born in the early '60s. A total dweeb. A non-entity. An apparatchik. He was indistinguishable from a Soviet Kremlin member, right? Who was Abe Beame?

He escaped Russian communism.

Yeah, so it's like ouch. I'm sorry for that comparison. What was Abe Beame trying to do in order to…

You've got to understand Abe Beame. His father escaped the czar. His father was a radical escaping czarist oppression, and then escaping the extreme politics of the Russian Empire and Poland in those days—escapes to London and then New York.

Abe Beame, as a young man, wandered into the Madison Democratic Club in Crown Heights, Brooklyn, and decided he was going to be a Democrat. He wanted to be an American and wanted to be involved in American politics. And that was the most powerful Democratic organization—maybe in the country—for the next generation or two.

And this was at a time, too, when the Democrats had taken over most of the big cities.

The Democrats did some smart things, Ok? They decided they were not just going to be a party of the Irish. They became a party of the Irish, and then the Jewish, and then the Italians, and then Hispanics, and the Blacks.

So the Jews were moving to Brooklyn, very large numbers in the 1920s, and the Crown Heights Democratic Club needed to co-opt them. And Abe Beame came in, and they said, "Here's a guy we want."

All right, let's jump forward a couple of decades. Abe Beame is coming off—you know, he followed…

After licking envelopes for three decades, he finally gets his chance.

And John Lindsay had been the mayor right before him. And then suddenly, Abe Beame is the machine candidate, right?

Well, he was the machine candidate for comptroller in '61. Then he was the machine candidate for mayor in '65 and lost in that famous election with Lindsay and Bill Buckley.

Yeah, right.

And then in '69, he got his job back as comptroller. And then'73, he's again the nominee of the bosses of New York. Maybe the last time there were bosses of New York, was '73.

He was good as a comptroller, right? In terms of, like, he knew how to park money.

He was a capable, competent guy. But he came with that machine clubhouse politics mentality. He was perhaps a bit too tolerant of corruption. He was a very pro-union guy. He was certainly a very pro–civil rights guy. There were many things admirable about Beame.

But he's not the guy you want running a city that's about to go bankrupt.

No. He is about as establishment and measured—and not going to change things radically.

Which is what's called for, because you have massive outlays…

He was quite the guy. He wanted to prove that that clubhouse system—which got them in trouble to begin with—was actually the way to keep going into the late 20th and maybe 21st century.

Ok, so then he's working with Hugh Carey—who's also from Brooklyn, right? And is an Irish guy who was a long-term congressman.

Carey… Angling, this is very interesting, Ok? Carey's career was becalmed in the early 1970s because he was supposed to be the whip. He was supposed to get the job that went to Tip O'Neill.

But Hugh Carey could at times be aloof and moody, and he got stabbed in the back by two Irish congressmen from Brooklyn who resented him. They went to Carl Albert and to Hale Boggs and said, "If you put Hugh in there, we're going to give you a hard time."

Why didn't they like Hugh Carey? 

Hugh Carey, he had a lot of money. His brother was one of the richest guys around. And Hugh could afford to be independent, Ok? And Hugh was ambitious. He ran for mayor, and he was clearly someone who viewed Congress as a stepping stone to greater things.

And nobody likes rich, ambitious people who are successful.

He was also pretty tall too, right?

He was tall. He was handsome. Look, the guy had a very tough life. He had 14 kids. His first wife was a widow whose husband died in the South Pacific.

I think his wife might've had the tougher job if he had 14…

Correct. And then at 49 years old, with all these kids, she dies of breast cancer. His brother dies in a plane crash. Two of his kids die when he's running for mayor in a car wreck out on Shelter Island.

So here he is now with all of these kids, and has the blow of being stabbed in the back, and loses the whip seat. And he was basically thought to be done in '74 when he runs for governor. And he was not the favorite at all. Didn't get the nomination of the party.

But '74 was the best year to be an outsider. It was the Watergate year—the famous midterm election where the Democratic majorities were enormous. And Hugh, with the assistance of David Garth, a brilliant media man, ran his campaign, and his brother's millions—ran perhaps the best gubernatorial primary campaign in New York.

And he kind of anticipated a Reagan Democrat, right?

He was the last of that breed, yeah. That generation—I guess Mario Cuomo's of that ilk too—but they sort of combined progressive politics with traditional values that still captured what ultimately became the MAGA base.

Right, public imagination. Yeah. They were very patriotic. They constantly talked about America.

Moynihan, I think, is from that ilk. Tip O'Neill was from that ilk. But yeah, that's a lost breed.

So Carey and Beame…what did they do to kind of string Ford out as long as possible?

It was clear by the fall of '74 that the city was going to go broke in '75 and that a bailout was needed. And the state had its own fiscal issues—couldn't do it. Everybody knew the money was going to come from…

And the money was going to come from Washington, because New York—

Bordered on electoral vote…

So much politics…

So many people….

As we're going to come back to that.

What saved New York was 41 electoral votes.

And it was never in question. I mean, this is part of your—this book is a revisionist account of the fiscal crisis in New York.

Yeah ok.

Where everybody knew a federal bailout was coming. And you point out, the book is called Drop Dead because of the famous New York Daily News headline…

John Scanlon's finest work.

That speech, Gerald Ford said, "I'm going to bail out New York"

"But here are my conditions."

And so that gets twisted into Drop Dead, not at all. But everybody knew it was coming.

Correct.

So what did they do to string them out as well?

Well, you've got to understand the dynamic here. Ford decides he wants to run for president—even though he told Nixon he didn't. Once you're in the White House, you kind of like living there.

But he had a problem. He had Ronald Reagan, who was going to challenge him for the nomination. And Ronald Reagan had the support of the conservative base of the Republican Party. Ford chose Nelson Rockefeller to be his vice president. So if you're trying to fend off a challenge from the right, as a Republican running for president, and your running mate at the time is the most liberal Republican in the country…

And the guy who got booted—who lost the nomination, '64, to Goldwater—because Rockefeller is the liberal Republican, right? The country club Republican.

And now you are going to have to bail out New York City.

Where Nelson Rockefeller was governor of New York, etc. 

So Ford's saying, "Oh great." And remember, Ford's secretary of the Treasury was Bill Simon, who ran the municipal bond desk at Salomon Brothers. So he was very well informed of what this was all going to be about.

So Ford said, "OK, I've got to walk a very thin line here. If I'm perceived to be too generous to New York, Reagan is going to use that against me and maybe beat me." And remember, that nomination fight went all the way to the convention floor. It's the last convention that ever mattered, friend.

Right, yeah.

On the other hand, if he was too hard on New York, the Republican delegates from New York might bolt.

And the first event of the 1976 presidential season was the Republican Convention, which back then chose about a third of the delegates—on January 6, 1976. See, the Republicans were making this transition from the old system—where most delegates were chosen—the overwhelming majority by conventions—to the open primary system. So they still held back a few.

And if those Republicans on January 6th were upset with Ford because he raked the city over the coals, they could have withheld their approval—which would have been big news. The vice president is on the ticket. He's a New Yorker. He's the titular head of the party. The party revolts.

Next, you have Iowa. Next, you have New Hampshire. That could have been it for Ford.

So Ford had to hold on to that, which he ultimately did. But that required him to also not be draconian in how he dealt with New York. So he thought he was walking that line very well.

And he knew that if he didn't get it over with—if people went into the Thanksgiving/Christmas holidays in New York thinking the city was going to be in default—the resentment against Ford would have been overwhelming.

So Tip O'Neill came up with a strategy. He figured this out and said, "Ford's going to want this over by Thanksgiving." That was Tip's conclusion right away.

So he basically said to Carey, "If you can hold—if you can find the money to keep the city running through Thanksgiving, Ford will cave." Which is, of course, exactly what happened.

So talk about the myths that have arisen about who saved New York. 

It's a very long list.

Well, let's start with the one named Felix.

Yes.

Ok. Who is Felix Rohatyn?

Felix Rohatyn was perhaps the greatest investment banker—maybe of all time—to give him his due. An incredibly capable guy. Energetic. A Rolodex better than anyone you could imagine.

He was a frustrated politician. He wanted to be secretary of the Treasury or head of the Federal Reserve. He ultimately had to settle for ambassador to France—not so bad.

It was kind of an insult. 

But he had those ambitions.

He was doing very well for a while. He was in front of Congress in the antitrust hearings of Manny Celler in the late '60s. He was chosen by the New York Stock Exchange to go out and get their bailout in 1970.

And then he stubbed his toe. There was the IT&T scandal, where there were alleged…

Explain what IT&T was.

Yeah. There was a [Department of Justice] investigation of antitrust violations and other violations. And Felix went down to Washington to try to— Harold Geneen was his biggest client—IT&T. He went down there smoothed it over, and there were later allegations that there were briberies.

Nothing tied Felix to any of this, but the taint of being associated with that…

And IT&T was one of these kind of shadowy mega-conglomerations—reaches all over the world.

Right. All the conspiracy theories…

Involved in the Chilean overthrow of Allende, etc.

So Felix was tainted in the mid-'70s. They called him "Felix the Fixer," which is not quite the chairman of the Federal Reserve moniker.

So he wanted to undo that. And when he saw what was coming down the pike in New York in '75, he said to himself, "If I can be useful in this, and this works out reasonably well for New York, I could rehabilitate my reputation."

Of course, he did it brilliantly. He volunteered a lot of time—was very effective. So I don't want to diminish his public service, all right? But the idea that his brainchild, the Municipal Assistance Corporation, saved New York, is just factually unsupportable

Which is the thesis of the documentary that's out now, Drop Dead City, co-directed by his son, which is…

I'd be loyal to my father too. I'd put the best spin on. But the fact of the matter was the Municipal Assistance Corporation was formed over the Memorial Day weekend to bridge the gap so that that oversaturation could get soaked up and the city could access the municipal bond market again in September.

It was supposed to sell $3 billion of bonds to tide the city over. And then in the interim, they would fix the budget, get rid of the corruption in the budgeting process, and the market would accept New York securities again.

Of course, it took four or five years for the city to access the bond market. And it's interesting—the MAC only sold a billion of bonds. They were going to do three offerings. Only one was sold. The other two floundered.

Nobody would buy them.

Because the market saw through it: this isn't like some separate credit. It's the same New York City credit and a moral obligation of the state of New York. Which the state reneged on its moral obligations when the UDC went under earlier in the year.

It's easier to say this with hindsight—but if Nelson Rockefeller is invoking "moral obligation," you should run as far as possible, right? You know, from whatever he's talking about.

There are some things about Rocky I admire. He was a great politician.

Yeah, loved art.

Loved art. Was quite a character in his own right. But the Municipal Assistance Corporation, while a useful vehicle after the bailout was obtained and the city was stabilized, had virtually nothing to do with stabilizing the debt.

Why do you think so many people are invested in the idea that what happened was—and I think Richard Brody, in The New Yorker, reviewing Drop Dead City, talked about how, whatever else you can say about it, this documentary is a paean to liberal governance. Like, when governments really did the things they needed to do for their citizens. And it's a shame—something, something happened, and like…

Oh, because they can't help themselves. The sort of elitist, left-leaning—I don't want to get overly political here—but they love that notion because they themselves are elites. They all went to the fancy boarding schools. They go to the same book parties. They want nothing more than one of their own to be a hero in—effectively—a government overreach, I would say.

The idea of a government that does everything for everybody is good. And then the people who make that…

And if our people are the heroes, that's ideal.

One of the things that is amazing in the book you talk about is that from 1975 to 1978, the budget of New York City grew by 20 percent. So this is in the most austere of austerity periods ever. Talk a little bit about the ways in which people—like, jobs were not actually cut, budgets were not actually cut. 

How does this happen?

It's very simple. Let's take the most extreme example. When Beame announced his layoffs in '75, when you actually parsed through it, very few people actually lost paychecks.

They would claim internships—unpaid internships. "We laid people off. We got rid of those." A program where a position is not filled yet, "We just don't fill them." More layoffs. "We move job classifications from a city-funded program to a federal program." Job loss. Well, no the cash outlays have not changed at all.

So that was one trick they used early on.

Then what you saw was, after '75 and going further, the union contracts continued to effectively get even better. Now, they did lose some headcount—but most of the headcount losses were the low-paid, entry-level folks. So the people who run the unions obviously take care of themselves.

And you point out that that means, disproportionately, it was minorities and women…

Minorities and women suffered the most.

Yeah, the most recently hired are the first…

And it was the established white males who ended up getting larger pay increases. You also had cuts in services to the most needy. So where there was real austerity, it was in chest X-ray programs, for example, which were done away with. 

And like hospitals in the Bronx.

Correct. Special education programs. People who don't have lobbyists, people who don't have unions representing them—those programs got decimated.

Now, one of the things that's fascinating, though, is that later in the '70s, the guy who succeeds Abe Beame is Ed Koch.

Right.

Fights off Mario Cuomo in a very tight run

Famous '77 race.

But I believe it was by 1978 that the city had balanced the budget?

A little later than that. But what happened was…

What did they do to actually get back to some kind of budget normalcy?

Well, the '75 bailout was to fix the short-term debt. Everybody knew there was going to need to be another one. In '78, the federal government came in again. But this time, there was no conflict. Carter, with the Democratic Congress, were all in favor of it. They had a signing ceremony on the steps of City Hall.

But there was still a structural deficit and still financing issues. The city still could not borrow in a normal way. It accessed the market again by '79, but not in a robust way.

I mean, not being able to sell your debt should be a budget disciplinary action, right? It's like if I'm a person and nobody will give me credit…

"I will bail you out."

So what happened was a transformation of the American economy by way of the financial services industry. The share of the economy which was financial services basically went up by 50 percent over the course of a decade and a half. And all, not all of it, but the vast majority of that wealth and tax revenue flowed into New York City.

So the hero is Michael Milken.

Who's working out of Southern California in the morning and—

Victory City. Correct.

It's fascinating because people still remember him. They know he's the junk bond king who went to federal prison and had to pay off everything. But you say he's the hero of New York's robust recovery?

I said he's the felon who represents the ascendancy of New York, when Tony Scotto, the union leader, the felon who represents its demise. And there's some truth to that.

I think the resurgence of that industry—and the resurgence of Wall Street—beginning in 1980, really, and continuing until, you know, knock on wood, now, is really what saved New York City.

It is amazing when you look back at New York. In 1975—was that the actual year of the "Fear City" pamphlets? The police were…

Which, again, you've got to understand what was going on.

Abe Beame was negotiating with Warren Anderson, the Republican Senate leader, to get more money for the city. And there were seven Republican state senators in New York City who were at risk of bolting, Ok? So Warren Anderson had to placate them.

Those Republican districts were pretty much white, pretty much middle class, very much focused on law and order. So the unions knew that if they could scare the bejesus out of those seven districts—by saying the city's going to devolve into chaos and mayhem in the streets—that Warren Anderson would cave and give the city more money.

So Beame was aware of—and probably complicit in—the "Fear City" campaign.

And this is a pamphlet that the police produced. 

Handed out at the airports and in Midtown hotels, saying, "Be careful, tourists. In New York City, you'll get mugged and raped and beaten up."

Yeah, later becomes an Iggy Pop album.

Correct. And that was one of the tactics used by the city insiders to put pressure on the state to get more money. And it worked.

You go from that to, you know, 10 years later—certainly by 1987, which I think is the year The Bonfire of the Vanities comes out—and Tom Wolfe is talking about the "masters of the universe" and New York's economy, which, compared to now, is nothing. But it was, it was unbelievable.

We thought people who made $100 million a year were wealth beyond your imagination.

A thousand dollars.

One hundred million. When Michael Milken made $500 million in one year, people thought this was the most outrageous thing. Now, if you run a major private equity fund, that's a normal year's paycheck.

Let's update this now, because of the lengthy subtitle of your book—which actually takes six or seven pages to read—but it is, you know, "How New York Went Back to Business as Usual and It Might Be Happening Again."

If you look at recent appraisals of the New York City budget—both by people within the government and watchdog organizations—they all say the same thing: that since 2023, Fiscal 2023, the city has been spending more than it's taking in on an annual basis.

Some of that there's been a surplus because during COVID a lot of money from the feds, etc., came to the cities and states. If you look down the road, in the city's 5 year plan forecasts deficits of $11 billion in 2027, $13 billion in 2028, $13 billion again in 2029…

I haven't seen a comprehensive analysis yet of what the big bad bill—the big beautiful bill…

You're right—BBB.

I call it BBB because that's what the city's credit rating is going to be once people go–

Is that going to take money away from the city?

Yeah, the city and the state. And it's unclear how much.

So are we back to where we were in—maybe not 1975—but 1971, '72?

Well, let's talk about the two things that caused New York to have a fiscal crisis when other large cities didn't.

One was the chicanery—we don't know what's going on there. You only learn about that after the fact.

Two is the city taking on more responsibilities and obligations than other cities do.

Well, we have a Democratic nominee right now who says he wants to increase universal childcare through 6 years old. Well, that's going to cost you $10 billion. You want to give away free bus service? That's going to add a billion dollars.

You want to add 4 percent to the business corporate income tax. What's that going to do in terms of businesses leaving?

You want to have a surplus of 2 percent income tax surcharge on millionaires. Who in New York City, a millionaire is doing quite fine, but you're not exactly a master of the universe anymore.

Or let's be more clear about it. A million dollars is a lot of money—you're doing well in New York or anywhere else. The difference really is that the financial industry is not anchored here in the way that it used to be.

That's a wild card.

Remember, what happened in '75 was the culmination of well-paying industrial jobs leaving. And they left because they could. There were lower taxes and lower wage rates.

We thought for a very long time you had to be in New York City. And for years you did—back when there was no interstate branch banking.

If I may—I remember my parents talking about… they had been living in New York for decades. My father was born in Hell's Kitchen in the '20s. But when California— I remember them saying when California surpassed New York as the most populous state, everybody in New York was like, "Oh, don't worry about it. Everybody wants to be in New York City. It will come back."

And then flash forward 10 years later, you know, politicians had been saying the same thing—and it was, "No. It's never coming back."

Remember, before trading became effective electronic, you traded stocks on the New York Stock Exchange. To be a member, you had to have an office in Lower Manhattan.

Before unfettered interstate branch commercial banking, you had to have deposits in New York State. The big banks had to be here. That's all gone now. You can literally pull the plug on Friday—and people have—and replug in in Palm Beach or Austin, Texas, on Monday. Seamlessly.

And, you know, in the '70s and '80s, certainly, you could also defect. You could still work in New York, but you'd move to Connecticut or New Jersey, which were tax havens by comparison. No longer true.

Or maybe with Mr. Mamdani in there, it may be.

Well, yeah, but it won't be because they're reducing their taxes. It's just lower than—

They'll be lower than if they lived in New York City.

We can talk about Mamdani as a threat. Isn't it worth also talking about, I mean, the people he's running against? And at this point, it looks like Andrew Cuomo and Eric Adams—the incumbent mayor.

And Curtis Sliwa.

Yeah. But I mean, is he a factor?

What, you know, what went wrong that gave Mamdani, you know, a clear path to the Democratic Party nomination?

Yeah. I think that Andrew Cuomo was perceived by the Democratic primary voter to be less energizing, inspirational—what have you—than Mr. Mamdani.

He also ran a very safe and conservative campaign, almost akin to a "Rose Garden" campaign that took very few chances and tried to win by getting the endorsement of as many community leaders and business leaders and running an air campaign and hoping for a low-turnout primary.

And out of nowhere comes Mr. Mamdani, who then links arms with Brad Lander, and he peaks at just the right time and gets the 500,000 votes that are necessary to win the Democratic primary.

Are people wrong? And I realize, you know, we're talking about a Democratic primary, so it's a subset of Democratic voters in New York, which is a subset of voters in—

Really though, you got 1.1 million votes in this primary. The last two generals were around that same amount.

Andrew Cuomo, you know, left office in disgrace. He presided terribly over New York State. He was terrible on COVID-19 policy and lied about it. He's not good on that. He came in, it sounded like he was going to undo his father's terrible legacy of just blowing out the budget in New York and raising taxes. He didn't do any of that.

Correct.

So, I mean, the voters are right to repudiate somebody like Andrew Cuomo. What about Eric Adams? Is Eric Adams, then, like, the last least-bad alternative, or…?

I think so. I've made it clear that I'm going to support Eric Adams. I think Eric Adams has turned the corner in a lot of ways.

What does that mean?

Well, I think he went in—

He's demanding first-class upgrades on Turkish Airlines, as opposed to just a couple hours in the lounge.

He was guilty of excessive loyalty to longtime personal friends and put them in positions of power—particularly in law enforcement, where he started his career in politics.

And that came back to bite him very quickly. And I think by putting Randy Mastro in as first deputy mayor and Ms. Tisch in as police commissioner, I think he has shown that he has learned those lessons.

And I mean, if this had happened a year earlier, and he had had 2 years of Mastro and Tisch, I think he would be a much more formidable candidate.

Why does New York City so regularly generate mediocre citywide politicians? You know, if you take out Bloomberg—who, as a good libertarian, I was bothered by many of his nanny state stuff—but like everybody I talked to in New York, of all different levels—everybody is libertarian here. Everybody is tolerant and pluralistic, and everybody just wants the garbage collected, crime kept low, and business able to function.

Why aren't there Bloombergs falling off of trees? As opposed to—it's more likely that you get an Eric Adams, Bill de Blasio, a late-stage Rudy Giuliani?

Because I think most people don't want to spend their entire lives in municipal government, particularly elective office. And in order to get your hands on the apparatus to get elected—unless you are a Bloomberg and you can write a check for $50 million—it's very hard to parachute in and do that.

So the things that motivate those people—and I agree, that's most New Yorkers—I mean, this is why it's been so economically successful for 400 years. Because it attracts people with that entrepreneurial instinct who want to be left alone. They don't care about your race, creed, religion, etc.—"What can you do for me?"—in a very good way.

Those people are not attracted to serving in the City Council, by and large.

Because that's how you really have to do time and move up.

Correct.

And then if you do that, though, you're beholden to all the people who helped you along the way.

In order to make the several billion that Mike Bloomberg had when he ran for mayor, you've got to do something else. And making that transition is sometimes difficult because of the resentments and other things that come into play.

Are there large cities that you think are governed well, that New York should look to as alternatives?

No. Let's rattle off the list. Would you say L.A., Chicago, Boston?

Maybe Houston? Houston's growing.

I don't know as much about Houston as…

I mean, the cities in Texas are all growing, but this is where you never know how much of what's happening is because of local politics or state politics, or national politics, or global politics.

Remember that we had to suffer through 40 years in order to get Giuliani, and then 50 years to get Bloomberg.

Are we entering a large cycle, perhaps? Not to sound like Oswald Spengler, but New York has these boom periods that last 50 or 75 years, and then they start to—I mean, New York under Wagner… you can see it in relief. Looking backward like, "Yeah ok, this ship was clearly headed for the iceberg. The coordinates were locked in decades before it happened."

You could say going back to O'Dwyer. O'Dwyer's second term was maybe the start of the decline.

So is that just… this is just a process of collapse and renewal?

I don't go for these sort of cycles of history. I think it's too simplistic.

Well, can I ask—are you a registered Republican?

No, I'm a registered Democrat.

Registered Democrat. Ok. But what can the Republican Party do? Either at increasingly at the state level or also at the city level?

I think there's a major opportunity for the Republican Party in New York. There's been historically high migration of Black and Hispanic—particularly male—voters to the national Republican Party. Trump, like it or not, did—

He gained with basically every demographic, but larger amounts with men.

And if you look at recent immigrants and Hispanics and others—and middle-class Blacks—these are people who are in favor of smaller government, lower taxes, entrepreneurial, traditional values. Which I know is not necessarily a libertarian thing, but it certainly is more aligned with the Republican platform these days than the Democratic.

These are not "woke" constituencies. I find it encouraging in this most recent Democratic primary that the nonwhite candidate won the white vote, and the white candidate won Black voters.

So what's going on with that? Because Mamdani did very well among higher-income people.

And higher-educated white people.

Is that just white guilt?

No.

What is it, then?

I think it's an ideological shift. We talk about affordability, Ok? And housing is where it's most focused on.

They say, "Gee, I'm 28 years old. I can't afford a house. But my grandparents could." I think back to my parents. And they rented a house for two years. These were teachers. These were not impoverished people. And they saved every penny. There was no vacation, there were no new clothes, there was no… nothing fancy. They didn't have an air conditioner. And they saved their money, they got a down payment, and owning the home was their priority—because that was the marker of being successful in America.

"I'm not a renter. I'm an owner. I'm going to do whatever it takes." It turned out to be foolish economically, but my father repaid his mortgage in 5 years.

Yeah.

In '64, just in time for the LBJ interest rates to start going up. If he'd taken the mortgage payments and invested in Treasuries, he would've been better off.

But that was the mentality. That was the priority.

You can't say, "Ok, I buy the latest iPhone immediately. I have the fancy clothes and the vacations and the Instagram and this and that and the other. But how come I don't have the money to buy a house? And I don't want a house in Nutley, New Jersey. I want a nice house in Park Slope."

Is it ideological or generational?

I think it's both. Look, my mind wasn't poisoned by this Marcusean higher education. It was there, but they were the crazies in the humanities department. Everybody ignored them.

And you're 59?

Yeah.

So, is part of it that the people who are under 40 or under 45 have grown up in an incredibly rich country—which we don't acknowledge, generally speaking? So if you're second, third, fourth generation going to college—even if you have student debt—you're living in a different world than people who remember moving every six months because the rent can't be paid, and so you moved farther out into Brooklyn or Queens and so forth?

I think the bemoaning of affordability relative to the standard of living is quite shocking.

Are there any Republicans though, and we'll end on this, you talked about older candidates talking about New York as this great American experiment.

This might have died with David Dinkins, talking about the glorious mosaic as opposed to the melting pot in the '80s, but the idea that New York is a place you come where you'll be accepted. You might not be liked, but you'll be tolerated. And you can make it. You can find people who will help you, and you'll create your own world.

Who on the Republican side of things—certainly nationally, but also locally—is acting that way? Because that seems to me something that's an opportunity, right? 

I think someone like Marco Rubio could make that argument. And I think does, from time to time.

Noticeably less so than when he emerged in the beginning of the teens.

With Trump…

And Trump is busy sending people escaping socialism in Venezuela back to Venezuela with a vacation…

I think it's a bad look. Look, I'm sympathetic to having borders and getting rid of people who are lawbreakers…

Absolutely.

The visual workers—

But I'm saying, in New York…

He's deporting future Republicans, by the way. These people—a lot of them—are going to be hardworking…

Oh, wait until they see how poorly run the prisons in Venezuela are. They're going to be lifelong Republicans.

But in New York City, is there a constituency for that, "What is great about New York? Everybody is kind of weird and different"? 

I think they're out there. I think if you get a Dominican billionaire—and I'm sure there are some, and there will be more—who wants to do what Bloomberg did: "I love the city. I want to make a huge difference. I can. I have credibility with immigrant groups."

I think that immigrant story is as vibrant as it's ever been. And I don't think we necessarily know who that is now. But I think there is clearly a market demand for that.

Ok, we're going to leave it there. The book is Drop Dead. The author is Richard Farley. The subtitle—I'm not going to repeat it, because it's too long.

You don't have enough time.

But this is fascinating because it is about a particular epic moment in urban history that's within memory—but totally it's forgotten—and might be happening again.

So thank you, Richard, for writing this.

Well, I hadn't lived a wholesome enough life to deserve Mamdani to come out right when the book was launching last month. But here we are.

Thank you. 

• Producer: Paul Alexander
• Audio Mixer: Ian Keyser

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