Wriston, Walter B.
I am Walter B. Wriston, Chairman of Citibank and Citicorp. Let me say at the outset that I am extremely proud of the role played by Citibank in helping to resolve the City's financial crisis. While New York City is still in the throes of financial reform, the facts are that it is not being run by a Federal judge in bankruptcy. The facts are that the investors in City notes and bonds are being repaid. The facts are that social and municipal services continue to be performed. In short, the objective desired by all citizens of keeping the greatest city in the world out of bankruptcy has been achieved through the cooperation of the Federal Government, the State Government, the City Government, the banks and the municipal labor unions. This is not an inconsiderable achievement; it is one in which all the participants can take considerable pride.
Against this background, I welcome this opportunity to discuss the role of Citibank as an underwriter of New York City securities during the City's fiscal crisis. Let me state straight-away that I do not concur with the account of Citibank's role as conveyed in the SEC Staff Report of August 26, 1977. Nor do I agree with the arbitrary time limit assigned to the City's financial crisis.
A period of 191 days has been excised with surgical precision out of the broad context of the City's financial management. Even within that excessively narrow focus, however, the Report distorts or omits salient facts in order to mount two principal allegations: that the banks (1) deceived the investing public about the City's true financial situation, and (2) kept the market going for the sole purpose of buying time to dispose of their own holdings of City notes.
To understand the City's fiscal crisis and refute the allegations made against the banks, it will be necessary for me to provide a bit more historical perspective than you will find in the SEC Staff Report.
In the 1960s the City, with strong Federal and State encouragement and promises of funds, initiated a number of expensive and broad-based social programs. It is clear, in retrospect, that the City gradually departed from its traditionally conservative funding and accounting practices to cover these increasing expenditures.
This raises the one major point on which the SEC staff and I are in absolute agreement: "The City's financial crisis was primarily the result of insufficient revenue to meet mounting City expenses."
The discrepancy between City income and outgo continued to grow. Concern over the level of debt, particularly short-term debt, grew along with it. Yet, the City's leaders assured the public that the increasing debt was appropriate to the City's financial situation and that the required revenues would be available to service the increased debt.
When the impact of worldwide recession began to cast serious doubt on these predictions, in 1974, Citibank and others urged City officials to acknowledge the problem and start cutting expenses. We stated that, the City took the necessary steps to balance expenses with income (including increased Federal aid) then, in our exact words, "the City fiscal situation not be viable and New York City paper would be suspect."
For our trouble, we were picketed in the streets and roundly abused at City Hall. Mayor Beame produced a list of revenues he anticipated during the coming months, insisted that the figures were firm, and scolded us for "bad-mouthing the City."
Throughout early 1975 we still expected that public pressure and the high cost of borrowing would compel City leaders to bite the bullet and demonstrate their determination to achieve fiscal responsibility by cutting expenses. In that expectation, Citibank continued to underwrite City note issues, participate in the market for them and, where necessary, supply interim loans to the City.
The City's leadership repeatedly refused to adopt significant reform measures and it became increasingly clear that large amounts of outside State and Federal aid would be necessary to meet expenses.
By early April 1975, the appetite of investors for large amounts of New York City securities--even at high interest rates--disappeared and the market closed to City issues.
At this dramatic point, the SEC Staff Report ends abruptly. But history does not.
In the spring of 1975, New York State advanced the City $800 million which was not actually due till the summer and fall. The banks underwrote a special issue of State notes for the purpose.
In June, the banks agreed to purchase $280 million of City notes for their own account.
New York State established The Municipal Assistance Corporation, or MAC, as a State agency to provide emergency funding and some measure of financial stability to the City. It became apparent, however, that the investing public regarded MAC as New York City in disguise, when only about $2 billion of an overall $3 billion MAC offering was actually sold. About $1.5 billion of that was placed with institutional investors such as banks, New York City pension trusts, and insurance companies.
In the fall of 1975, New York State created an Emergency Financial Control Board to oversee the City's fiscal affairs, in combination with a $2.3 billion emergency transfusion to the City. Once again, the banks underwrote the new State borrowings needed for that transfusion.
Even these extraordinary rescue efforts did not prevent the Legislature from imposing a three-year "moratorium" in November on the City's outstanding $2.4 billion of short-term notes. Public noteholders were offered, and encouraged to exchange their City notes for, ten-year MAC bonds. However, the banks and City union pension funds agreed not to exchange the $850 million of City notes they held and not to present these notes for payment until the moratorium expired.
The banks and the City union pension funds further cooperated by accepting an artificial, below-market interest rate and a stretch-out of maturities to ten years on their MAC bond holdings of $1 billion and $600 million, respectively.
When all of these concessions and arrangements were in place, the Federal government finally agreed, in December 1975, to provide the City with seasonal, short-term financing.
In November 1976, one year after the "moratorium" was imposed, it was invalidated by the New York State Court of Appeals. The City was required to repay all notes in full.
To ease this debt burden, the banks and pension funds recently agreed to convert their remaining City notes to new long-term MAC bonds and to stretch out the maturities of MAC bonds they already owned from an average of five to nearly fifteen years.
That is the broad perspective in which the performance of New York City's underwriters should be judged. Not 191 days.
Even now the story is not over. The City is still in the throes of fiscal reform. The size of next year's budget gap is being hotly contested in public among City officials. Obviously, problems of great magnitude are yet unsolved. However, one salient, not-to-be-forgotten fact remains: NEW YORK CITY DID NOT GO BANKRUPT.
The City still functions, but with one notable difference-- there is greater awareness of the dire consequences of paying out more than is taken in.
I would like to turn now to the specific charges made against Citibank by the SEC staff. Their Report alleges that during the period when we were striving to maintain the City's borrowing capacity, we were simultaneously selling off or "dumping" our own holdings in City securities.
Let's take a close look at that charge. Citibank holds state and municipal securities (including New York City obligations) in three different categories: The Dealer Account, the Portfolio Account and Investment Management activities.
When we take our share of a new issue as an underwriter, we place it in the Dealer Account inventory, together with other state and municipal securities purchased in the open market. Because our is to distribute or re-sell those securities in the marketplace, the charge of "dumping" them is not only untrue, it is meaningless. The size of the inventory we hold to trade in the market at any given point in time is a function of market activity and our view of market trends. Despite the fact that the size of a dealer inventory is meaningless in this context, it is worth noting as to the "dumping" charge, the inventory balance of New York City securities in our Dealer Account over the SEC study period from $24 million to $30 million.
Despite an increasing risk that the market might not buy our inventory, and despite repeated refusals by City officials to even acknowledge the crisis--let alone act on it--Citibank continued to participate in the market for City notes through its Dealer Account. We believed then, and believe now, that it was imperative to keep this investor access open.
Our second account is the bank's own Portfolio Account in which we carry various state and municipal securities as investments with the intention of holding them to maturity. During the entire period under review, we could not possibly have "dumped" City notes from this account for the simple reason that there was not a single City note in the account.
There were New York City in our Portfolio Account, however. They amounted to something over 8 percent of our total state and municipal securities. We did not sell one single New York City bond from our Portfolio Account throughout the entire crisis period studied by the SEC. Except for the few City issues that matured, our holdings of City securities in the Portfolio Account were unchanged throughout this period from beginning to end.
Clearly, the charge of "dumping" is a phantom accusation. Nothing of the kind occurred.
That leaves us with the final Citibank area holding City obligations: Investment Management activities.
The SEC staff makes much of the fact that Citibank's Investment Management Group ceased in January 1975 to sell or purchase City securities on its own initiative, though specific requests from customers to buy and sell them were accommodated.
The assumption that this constituted a bankwide attitude toward City securities is wholly unjustified. The decision was made independently by the Investment Management Group. They felt, in light of the City's well-publicized financial problems, it had become more appropriate for trust customers-- like other investors--to weigh higher risk against rising interest rates and decide for themselves whether to invest in City securities.
This leaves us with one puzzling question. In the midst of so much heated controversy and adverse publicity about the City's financial problems, with interest rates soaring--a classic indicator of greater risk--why didn't the City's investors back off long before they did?
The SEC staff offers the explanation that naive investors were deliberately misled by unscrupulous underwriters. As proof, they submit a survey of individual investors, 90 percent of whom now deny that they had any awareness of potential risk when they bought City notes. I suppose, in theory, it is possible to imagine a person at that time who had at least $10,000 to invest, who never read a newspaper, who never saw a fiscal crisis headline, who never heard a high-decibel debate on radio or television, and who invested without the least inkling that there might be a worm in the apple. It is possible to imagine . is extremely doubtful. And 90 percent is ridiculous on the face of it.
There is a more believable explanation. New York City had a credibility problem, in reverse. Rather than too little investment credibility, it had too .
One must remember that these City issues were all short-term notes. That is, the funds to repay investors were expected to come in shortly through taxes, Federal and State aid payments, or proceeds from the sale of new long-term City bonds. Even if disaster lurked down the road for New York, an investor could imagine getting in and out quickly with handsome short-term interest before it happened. Besides, if doubts flickered up, key City officials periodically reported , that nothing was basically wrong; and , that the notes in any event were full faith and credit obligations of the City, supported by its taxing and other revenue gathering powers.
No one outside the City administration could analyze the complex tax data and past experience on which anticipated tax receipts were certified. Only the participants who prepared applications for Federal and State aid could judge the probability of receiving these certified revenues. Only the public officials who designed and operate the City's intricate accounting systems could evaluate the integrity of the cash flow projections being cranked into prospective City bond issues.
With City officials asserting publicly that the funds to repay City notes would be forthcoming, investors continued to invest, even though the interest rate warning flag was rising.
Bottom line--it was the fact that a city of 8 million people can not be liquidated and the conviction that somehow--someway--its financial needs will be met, that led investors to continue buying City notes in the face of the most damaging publicity any city's financial managers have ever suffered.
Even with the benefit of hindsight, it is difficult to see what more the underwriters could have done. The SEC staff implies that we should have forced City officials to publish--or published ourselves--a detailed prospectus of the City's total financial position. But the underwriters had neither the authority to compel City officials to publish such a document nor the information to do so themselves.
Accordingly, we urged City officials to provide better information, but it is by no means certain that the City, itself, could have produced, in the emotionally charged crucible of New York City's financial crisis, the corporate-type prospectus envisaged by the SEC staff.
To state it flatly, there were more urgent problems to solve at that time. When the house is on fire, you don't sit on the curb drafting new safety regulations.
I consider the efforts of New York City's underwriters successful, despite the temporary closing of the markets, because alternatives--were found. The one alternative suggested by the SEC Staff Report--a precipitous retreat from the City's credit problems by the underwriters--would have produced not only disruption of the entire municipal securities market, but irreparable damage to the City and its investors. Likewise, if City officials had delayed any longer in facing up to chronic budget deficits and other financial failings, it would have been more difficult and costly to correct later.
I did not participate at every stage in the arduous and conscientious working out of these enormously complex problems. But I saw enough to convince me that the resolution reached was the best available under very trying circumstances. I am proud of the contributions made by Citibank to this outstanding civic achievement.