My pal, and Lola Jane Farrell’s honorary uncle, Doug Kass, once quipped that if you could remember the 1960’s it was because you didn’t have enough fun. I remember the music well enough. I still listen to it. Maybe the best music ever. If you remember the 1970’s in New York City you wish you could go back to the ’60’s. The City was dirty, seemingly lawless with the “squeegee guys” attacking your car if you stopped at a light, and had a general feeling on being unsafe.
The City’s finances were absolutely unsafe. Profligate spending had brought New York to the brink of bankruptcy. Officials didn’t act like it, figuring they could always kick the can down the road. They conjured up wonderful financing gimmicks like RAN’s — Revenue Anticipation Notes — to get the cash needed today by hocking alleged revenues that would appear later (and sometimes didn’t). TAN’s were Tax Anticipation Notes and raised money from investors to be paid when taxes got collected later. Forget that those taxes were going to be needed later to pay the City’s bills. Abe Beame was the Mayor when the bill came due. He was a true New Yorker. His parents fled Poland and he was actually born in London. He went to City College and became an accountant. He taught public school and served in City government for decades as budget director and Comptroller. When he ran for mayor his slogan was “He knows the buck.” But neglectful leadership for many years came to a head and the City was on the brink.
An acknowledged budget deficit of $600 million proved to be $2.2 billion. The City had accumulated $14 billion in debt (a mountain in 1975), and $6 billion of it was short-term and needed to be rolled over regularly. In February of 1975, a scheduled offering of the above-mentioned TAN’s was cancelled when the underwriter bailed. Beame attacked back with 8,000 layoffs that proved to be less than 500. Employee reductions included retirees who had left months before. A “hiring freeze” resulted in 13,000 more jobs. Pleading with the Feds brought the famous headline, “President Ford to City: Drop Dead.”
New York State responded with the creation of the Municipal Assistance Corp, and Big Mac came into being. Big Mac converted some city taxes to state revenues and were used as the guarantee for Big Mac bonds. Felix Rohatyn, another immigrant whose family fled the Nazis, headed up Big Mac. He was the chief rainmaker at Lazard and one of the foremost bankers of the day. He had gone to Middlebury — which I mention because my son Chris did as well. After working to rescue NYC he became Ambassador to France and now still hangs his hat at Lazard.
It was necessary to pay 11% interest on the early Mac issues when high-grade municipal paper was yielding around 7%. But since such luminaries as President Giscard of France and Chancellor Helmut Schmidt of Germany were expressing international concern about a NYC failure, it was considered necessary to do whatever it took. Punitive payroll cuts followed and, cleverly, the City’s pension funds were required to buy Big Mac bonds and eventually 40% of the pension was so invested. Talk about getting your attention!
Having spent the past two weeks in Europe (half business and half vacation) it occurs to me an NY-style approach to the Greek issue should be employed. President Ford told NYC to drop dead but at the end of the day, after severe cost cutting and what-not, both the Feds and the State government got involved in righting the ship. The Greek government used a modern day TAN/RAN end-run with a Goldman-concocted currency swap that I sure don’t understand (and if you don’t understand it could be because they don’t want you to) to push debt down the road and make it appear their finances were ok. So truing up accounts brought the deficit as a percent of GDP from a low-single-digit number to a healthy teenage number, and I still don’t trust it.
On February 15th, finance ministers from the 16 Euro countries told Greece to cut its budget deficit to 8.7% of GDP this year. Too bad they didn’t listen to 155 German economists who submitted a paper in 1999 that said “some” (read Greece) were using “creative accounting” that would “undermine confidence in the euro.” Chancellor Merkel of Germany, the richest of the euro countries, has said Germany won’t give a single euro to Athens until Greece cuts its deficit. Over 50% of Greece’s budget is used for salaries and pensions. The average retirement age is 58, and tax evasion is a national sport. Over 30% of the VAT tax goes uncollected and if you believed the tax returns, 95% of those that file make less than 30,000 Euros. The system is rife with corruption and tax collection is a negotiation at best. Chancellor Merkel: tell Greece to drop dead and go hire Felix Rohatyn. Mayor Beame died at age 94 but Felix has an institutional memory of how to fix these things. Civil servants need to take a pay cut, the average retirement age has to go up, and taxes have to be collected. Otherwise Greece will be the first to seek a bailout and Portugal, Spain, and Italy will line up behind them. Let the International Monetary Fund (IMF) be the European version of Big Mac. But don’t go long the euro against the dollar!
Much more to come this week as I get back into a groove. But the health care summit on Thursday could be interesting. President Obama has a chance to regain some momentum by making the Republicans look to be obstructionist. But it’s a slippery slope. The President feels the “message” has not been communicated properly. But it may be the “substance” is being rejected and that people don’t want to change their health care. Live TV could make this illuminating.
I don’t think here has ever been a bull market that hasn’t had a 10% correction in the first 12-14 months. This market started last March so we are not yet to the one-year anniversary. But I still like the bet we have a correction going on.
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Vincent Farrell | 212-380-4909 | vfarrell@soleilgroup.com
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