All the Presidents' Bankers (57 page)

They decided to face the issue head-on. Rockefeller released a statement about the “serious errors of judgment” that had been made, noting that Chase had asked Farber to resign. There was no mention of accountability at the top.
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The incident was the precursor to another move by a future head of JPMorgan Chase, Jamie Dimon, who blamed reporting errors for a $6.2 billion loss in 2012. The firm was ultimately instructed to pay a paltry $1.02 billion fine, less than 1 percent of its total asset base at the time, just more dust swept beneath the carpet of banker impunity.

As it turned out, several months later, interest rates did drop. Rockefeller announced that Chase would restate its financial statements once it had done a complete securities inventory.
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(On September 21, 1976, Chase accepted the SEC’s findings of “inadequate controls,” and that was the end of the matter.)

The nation’s nightmare was not over by a long shot. A steep recession had engulfed the country following the energy price hikes and related inflation in 1974.
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Hundreds of thousands of autoworkers had been laid off by Christmas of that year. New York City hovered on the brink of bankruptcy. The “me decade” investors got hosed. Mutual funds would experience eight years of declines during which customers extracted their money rather than see it diminish to nothing. The “misery index” (the rate of unemployment plus inflation) was 17 percent, with inflation at 11 percent.

Wriston leveraged the economic malaise to strengthen his influence over domestic economic policy. In late December 1974, he inserted an extra $15 billion personal income tax cut into Ford’s 1975 tax reduction package through the back door of the Labor Management Committee. President Ford decided this tax reduction should be expedited and asked Congress to streamline the process for the next two years.
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Global Shock and Opportunity

By early 1975, all that oil-related money in the hands of bankers began to concern Congress, particularly the multinationals subcommittee of the Senate Foreign Relations Committee, which had begun investigating the political implications of American investment abroad in 1971.
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Chairman Frank Church began asking banks to reveal the details of their petrodollar deposits from each OPEC nation.

The senators were unconcerned that these money flows crisscrossing the globe were evading US banking laws. The committee’s concern centered on the question of whether these Arab billions could be used to influence American foreign policy. Of course, the answer was yes. The committee sent a list of questions about the OPEC country funds to all the major banks. The biggest ones, Citibank, Chase, Morgan, and the Bank of America, refused to reply. In fact, they were outraged.

“Much of the information you requested would involve a break of our obligation to keep confidential the affairs of particular clients,” wrote J. P. Morgan chairman Ellmore Patterson to the committee.

“We consider information of the type requested to be highly confidential,” wrote Chase vice president Michael Esposito, “since its disclosure would be very useful to our competitors.”

Church responded defiantly by holding another hearing in the Capitol. David Rockefeller flew to DC in his private plane to attend. When he arrived, he warned Congress that disclosing the banks’ figures could bring down the whole western banking system.
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The banks that were later too big to fail were, in the 1970s, too big to tell. Though Rockefeller later wrote that throughout the 1960s and 1970s, whenever he traveled to the Middle East he checked to see if there had been any US policy changes since the last time, and debriefed Washington upon his return,
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the idea of sharing the finances that stemmed from his liaison was too much to ask.

Chase’s Ridiculous REIT

For David Rockefeller, the problems were multiplying. Congress had passed a bill that allowed investors to speculate in collections of real estate assets, as long as 90 percent of the profits were returned to them. This spawned a flimsy product called Real Estate Investment Trusts, which ignited the biggest domestic lending debacle since the 1930s. The REITs enabled banks and lenders to go into speculative overdrive, borrowing big from investors on the back of shady real estate deals (a reoccurrence with slightly different characteristics would spark the financial crisis of 2008). Ultimately, the REITs had to pay out far more than the underlying real estate contained in them was worth, and as a result many went bust.

Under Rockefeller’s guidance, Chase Manhattan had been the first major bank to create its own REIT. The REIT was established in April 1970 within a subsidiary, CMART (pronounced “smart”), which collected approximately $1 billion in assets to back it. The First National City Bank and First Chicago Bank each made $750 million worth of loans to their own REITs.
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For four years, CMART netted big fees and paid juicy dividends to its shareholders. As speculative capital flooded in to take advantage of these trusts, though, pressure mounted to keep sourcing more real estate projects to line the trusts—in other words, for banks to lend more money to bad real estate deals. Just as in the 1920s, lenders lowered their standards and fraudulent real estate evaluations escalated, just to make the REITs appear profitable. From 1971 through 1974, Chase more than doubled its real estate lending from $2 to $5 billion. Four times the value of its equity capital was exposed to real estate including $827 million in loans to REITs.
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Thus when the bustling real estate market came to a screeching halt, CMART was hit hard. A chain reaction that tanked many REITs had begun
in December 1973. The dominos fell fast. Chase real estate loans got crucified. By mid-1975, its nonperforming loans totaled $1.87 billion, reaching a July 1976 peak of $2.2 billion.
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From 1975 to 1979 Chase would charge-off $600 million in real estate loans. That plus other nonperforming assets produced a total loss of $1 billion (nearly $4 billion today). Only the international loans and operations saved Chase from greater failure.
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Hence, it was more important than ever to Rockefeller that all his high-powered friends in the Middle East remained business partners. As domestic finances went south, the banker’s international arms would save the day. That was a major reason global expansion was crucial, not just to Rockefeller but to any big US bank chairman. There would always be some geographical area or emerging market producing profits to offset losses from bad bets or risky practices.

The Big Apple Faces Bankruptcy

New York City was facing dire financial straits by early June 1975. The Big Apple had nearly run out of funds to pay for its daily operations and had no way of refinancing its short-term debt. Mayor Abraham Beame gathered a group of Wall Street bankers to come up with solutions to his debt problem, even though the city’s biggest banks, notably Chase and Citibank, had happily extended much of New York City’s debt to begin with. But the bankers didn’t get very far.

Beame even turned to the bankers for a bridge loan to keep the city running. Chase rejected the request. J. P. Morgan CEO Ellmore Patterson demanded that the mayor balance the city’s budget “immediately” in exchange for financial assistance.
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The mayor responded by releasing a public letter to Patterson criticizing the bankers’ efforts to pass laws restricting taxes as part of the initial $641 million package, which included taxes on the financial industry to balance the budget. But that was the kind of tit-for-tat that could only be won by the side with the money.

On June 14, the day before New York City would have defaulted, the state deferred to the bankers’ demands for effective austerity measures, and created the Municipal Assistance Corporation (MAC) to audit city operations and issue long-term bonds, backed by sales-tax revenues, that would replace short-term debt and give the city some breathing room.

But investors shunned MAC’s $3 billion in bonds.
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Bankers didn’t really try to sell them very hard either. As a result, the city flirted with defaulting again. Finally, the bankers agreed to purchase more MAC bonds—for a price.
Wriston was largely heralded for saving New York City, but in actuality, he refused to buy MAC bonds unless New York City made austerity concessions. So to satisfy Wriston, Mayor Beame froze wages, cut twenty-seven thousand city jobs, hiked subway fares, and allowed the state to “nationalize” certain city programs. He also cut social programs to pay for banker and bondholder bailouts. In response, the banks agreed to buy $2 billion of the $3 billion MAC securities. However, investors still balked.

The MAC couldn’t sell enough of the rest of the bonds to keep the city from tanking.
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To get their money back, the bankers decided to try to persuade President Ford to aid the city. On September 23, 1975, Rockefeller, Wriston, and Patterson met with Ford, Treasury Secretary Simon, and Fed chairman Arthur Burns to talk about a government bailout for the loans they had extended to New York City. It would be a banker bailout, not a citizens’ one.
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By early October, the Fed and other central banks intervened to prop up the dollar, which was being hurt by the New York City credit problem. They promised to lend more money to banks in case of a default. New York City owed $2 billion to the banks at this point, including $400 million to Chase and $340 million to Citicorp.

New York City desperately awaited Ford’s decision. On October 20, 1975, Ford responded, “This nation will not be stampeded. . . . It will not panic when a few desperate politicians and bankers try to hold a gun to its head.”
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Nine days later, Ford rejected New York City’s request for federal aid, a slap in the face to the city and its bankers. The next day, the
New York Daily News
ran the infamous headline “Ford to City: Drop Dead.”
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Ford would later claim that headline cost him the 1976 presidential election, though it took some months before the bankers abandoned him.

Billy Joel memorialized the perils facing New York in his hit song “Miami 2017 (Seen the Lights Go Out on Broadway).” His lyrics evoked the stark class divide between the bankers on Wall Street and the politicians in Washington, and the citizens of all the boroughs of New York City—the difference between the haves and the have-nots.

On November 15, 1975, New York State passed the Emergency Moratorium Act, putting a three-year freeze of principal payments on $4.54 billion of short-term loans. The act increased taxes and cited the inability of New York City to “provide those basic services essential to the health, safety and welfare of its inhabitants.” In practice, this was a default, but not in language.
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The act wound up saving the city’s finances and the bankers’ loans, but it inflicted much hardship on its citizens through austerity measures. The
entire episode revealed the extent to which the bankers would refuse to use their power to even help their own city.

Just before the 1976 election, with Jimmy Carter holding a decisive lead, the
New York Times
ran an article headlined “Anxious Wait of Business for Carter’s Economic Lineup.” Carter’s choice for Treasury secretary was already “the favorite guessing game in business and economic circles.” The best odds were given Bank of America chairman and “expert” in the international field A. W. Clausen.
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After Carter won the election, Ford returned to private life. He was noted primarily for pardoning Nixon, turning his back on New York City, and two assassination attempts during his presidency.

Perhaps it was the fact that Nixon wasn’t inclined to fully embrace the bankers, or that Ford had rejected New York citizens and its bankers—whatever the case, the fracture between the president and the bankers in the early 1970s would open up to reveal the Frankenstein nature of the financiers by the end of the decade. In the past few decades, an alignment with US foreign policy had helped the financiers expand globally. But now they realized that whether their power and goals were aligned with, or divergent from, those of the Oval Office, they would be perfectly fine.

CHAPTER 14

T
HE
L
ATE
1970
S
: I
NFLATION
, H
OSTAGES
,
AND
B
ANKERS

“Our people are losing that faith, not only in government itself but in the ability as citizens to serve as the ultimate rulers and shapers of our democracy.”