When bankruptcy was not an option

Felix Rohatyn has had some interesting windows on history.

The storied Lazard investment banker could look across the street from his old 27th floor Park Avenue office to see the once-mighty investment bank Bear Stearns, which was sold off to rival JPMorgan in a government-brokered deal in 2008. Months later, a $700 billion bailout package for the financial industry followed, including $17.4 billion for the country’s troubled automakers.

Felix Rohatyn

But back in 1975, the view was arguably even more poignant. Rohatyn looked down on the island of Manhattan out of a plane en route to a meeting with New York’s governor as the whole city teetered on the brink of financial disaster. Faced with an imminent bankruptcy filing, New York City couldn’t get even a cent from Washington DC. “Ford to City: Drop Dead” blared a famous headline later that year when then-President Gerald Ford announced he would veto any bailout.

History may well repeat itself. Battered by the worst economic meltdown since the Great Depression, cities and states all across the US are facing more than a trillion dollars in budgetary and pension deficits, according to the Pew Center on the States. Their fiscal condition isn’t as bad yet as New York’s was in 1975, says Rohatyn. But he cautions: “It’s damn near there”.

One solution that is oft-considered these days – long-term leases of government-owned infrastructure assets – was off the table then. No one, recalls Rohatyn, proposed to lease, say, the Brooklyn Bridge. “If they did, they were doing it as a joke.”

“If you do it, you’re taking an asset away from the city in order to allow it to service the needs of some other entity,” he says. “That’s just, at best, a zero-sum game.” 

It may be a surprising stance from a star dealmaker who spent almost half a century capitalising on the business of mergers and acquisitions. But after a lifetime of witnessing – and intently analysing – the American experience, the 81-year old Rohatyn isn’t afraid to offer his country some contrarian advice about how to rebuild and improve its infrastructure.

And it begins with a much more active federal role in infrastructure finance – a recommendation Rohatyn bases on love for his country and a study of its history. 

Lost in the stacks

Part of that love undoubtedly stems from the refuge the US gave him after World War II. Born in Vienna to a Polish-Jewish family in 1928, Rohatyn and his family moved to France in 1933, only to be forced to flee the country seven years later following the Nazi invasion.

After arriving in New York City in 1942, Rohatyn learned English and went on to enroll at Middlebury College in Vermont (“because”, he once told writer Cary Reich, “I liked to ski”).  The physics major spent his summers as a $37.50-a-week clerk at Lazard, where the firm’s senior partner, André Meyer, quickly took a shine to Rohatyn, 30 years his junior, according to Reich’s biography of Meyer.

The friendship helped launch a career unlike any other on Wall Street. Over the course of nearly 50 years, Rohatyn banked some of the US’s most powerful corporations, including ITT, the insatiable conglomerate that gobbled up 68 companies under Lazard’s watch (according to Charles Geisst’s Deals of the Century).

Indeed, Rohatyn’s Wall Street career is so remarkable that, look for his name in the Columbia University library and you’ll find yourself searching stacks of practitioners’ guides to mergers and acquisitions. A book that does not appear: Bold Endeavors: How Our Government Built America, And Why It Must Rebuild Now – Rohatyn’s 2009 call for the US to rebuild its infrastructure.

Why, then, write a book about infrastructure – when he could easily rest on the profits of a long and successful investment banking career?

As Rohatyn prospered in the US, he looked backed with fascination to Europe, where a continent levelled by war rebuilt and created a network of modern highways and high-speed rail to reverse its fortunes. America, meanwhile, channelled fewer resources toward its growing infrastructure needs.

“And after a while it became kind of a very, very deep interest on my part as to what could be done. And mostly I saw [that] as more time went by, the less and less got done,” he says.

Clearly, he argues, the US needs to invest more in its infrastructure. One of the first figures he points to in Bold Endeavors is the $1.6 trillion the US needs to spend to bring its infrastructure up to an acceptable standard, according to the American Society of Civil Engineers. By the time the book was published, the society had raised that estimate to $2.2 trillion.

“I think we’re at this point where people are beginning to recognise that there is a huge problem here,” he says.

Banking on support

Big problems, of course, require big solutions. So far, though, even baby steps toward tackling the US’s infrastructure spending deficit have not materialised.

Last year, President Obama submitted a $5 billion request for an infrastructure bank in his fiscal year 2010 budget. The bank, essentially a smaller version of something Rohatyn has been advocating for years, would have fostered federal direct investment as well as private investment in transportation projects. But Congress turned the request down, citing “the complexity of this proposal”.

The news didn’t sit well with Rohatyn, who had looked with displeasure on Washington DC bailing out General Motors and Chrysler by providing the automakers access to the $17.4 billion in loans just a year earlier.

“The auto industry gets more attention than infrastructure. And clearly, it should be the other way around,” he says. “I mean if we can keep General Motors alive, we should be able to build an infrastructure bank. It would undoubtedly cost less.”

The plan he lays out in the epilogue of Bold Endeavors would indeed provide a lot of investment power for relatively little government outlay. The National Infrastructure Bank, as Rohatyn calls it, would be funded with initial capital of $60 billion and would rank, prioritise and fund promising infrastructure projects of vital interest to the nation’s economy. It could lend directly, guarantee debt, provide interest rate subsidies or direct subsidies to help get projects off the ground.

Leveraged with other sources of capital – “beginning with private sector capital,” he says – such an institution could provide up to $1 trillion of investment in the US’s infrastructure.

An additional benefit: the bank would serve as a “professional counterpart” to investors interested in infrastructure. That is, rather than relying on earmarks and political influence to channel its resources toward projects, a streamlined, transparent process would determine what deserves funding and when.

“That was one of the things that attracted me to this notion of the infrastructure bank,” Rohatyn says, “that you can, to some extent, get rid of the earmarks.”

It’s an idea that earned Rohatyn a hug and a peck on the cheek from Democratic Congresswoman Rosa DeLauro during a press conference in Washington DC this year in which she urged the creation of an infrastructure bank.

There’s just one catch: “In order to do that, you have to have the political will first.”

Drivers wanted

And finding that will has historically not been an easy task for America.

Sure, there is the occasional Robert Moses – New York City’s so-called “master builder” of the mid-20th century who undertook a plethora of infrastructure projects but gained infamy for the draconian, single-minded way in which he did it.

“You know, you can’t be right all the time,” Rohatyn says of Moses. A copy of The Power Broker, Robert Caro’s magnum opus on the man, sits on a shelf behind his desk. “Certainly, making those investments was a worthwhile thing to do and I wish we had a Robert Moses today.”

But most of the time, as detailed in Bold Endeavors, whenever the country had to make critical investments in its future, the opposition was so fierce that it seems like a miracle anything got done at all.

Take the Homestead Act, for example. This 1862 piece of legislation offered settlers vacant plots of government-owned territory in exchange for their willingness to move there and develop the land. For an expansive country that stretched from sea to sea, with very little in between, this should have been a no-brainer.

Yet, as Rohatyn points out in his book, it took no fewer than 14 years and seven attempts for the bill’s champion, Andrew Johnson, to get it through Congress. And on June 22, 1860, after it finally got passed by both the House and Senate, it got vetoed by then-President, James Buchanan. It was only when President Abraham Lincoln came to power shortly thereafter that a new bill was finally passed and signed into law.

Rohatyn is undeterred by historic examples like this. “I’m not of the school that thinks that everything happening in the Congress is terrible,” he says. “The fact that you have an idea that might work doesn’t make it perfect.” Ideas need refinement, which naturally takes time and determination. The larger problem, he says, is the influence of money in politics.

“But that doesn’t mean that it’s all hopeless,” he adds, before offering one of his quick-witted one-liners: “I mean if we thought that, we’d probably be in Russia.”

Still, is there anyone alive today that, like Johnson in the 1860s, could really champion the cause of revitalising American infrastructure?

“I tell you, I’ve been very impressed by the Governor of Pennsylvania,” he says, referring to Democrat Ed Rendell. “I think he has the drive, he has the intellect, he has the vision to drive this bus. And the more I see him, the more impressed I get.”

As he is being driven to an appointment one Tuesday morning in April, Rendell makes a call to Infrastructure Investor and says he accepts he has a role to play – but only as “one of the drivers”.

“I think I’m joined by my co-chairs, Gov. Schwarzenegger and Mayor Bloomberg in this regard,” he adds, pointing to the Republican California governor and Independent New York City Mayor who sit with him at the helm of his infrastructure investment advocacy coalition, Building America’s Future.

Rendell says the “incredibly modest” Rohatyn should play a driver’s role as well. “Felix always minimises his own role and, you know, seems to not have any great awareness of what an important voice he still is,” Rendell says.

Rendell also fondly recalls first learning about Rohatyn. “I read about him, like many people did, when he led the effort to save New York City. And, you know, I was born in New York … and I admired him greatly for his role in turning the city around.”

To the rescue

Fulfilling that role, recalls Rohatyn, was “the most marvellous experience of my life”. It all began when, one afternoon in 1975, he found himself called out of a meeting to take what was said to be an important call.

“What office crisis, I wondered, could demand my immediate attention?” he recalls wondering in Bold Endeavors.

The call was from the chief of staff to the governor of New York, Hugh Carey. New York City – the largest city in the US – was on the brink of bankruptcy, and the governor needed to see him right away.

Rohatyn jumped on the first shuttle to LaGuardia Airport. That’s when he found himself looking out the window on Manhattan, wondering what the impact of bankruptcy would mean to the city’s thousands of police, firemen, sanitation staff and other employees – not to mention the capital budget necessary to keep the city’s infrastructure in good order.

“We were facing very, very difficult problems,” he recalls. “And everybody was telling us, ‘you can’t fix it, so why don’t you declare bankruptcy?’” But even by the time he got to Carey’s office, he had made up his mind: bankruptcy was not an option.

Carey placed Rohatyn on a panel with three other appointees to advise him on how to resolve the crisis. The solution they came up with was to create an entity called the Municipal Assistance Corporation (MAC), which would effectively act as a bank to New York by collecting taxes on its behalf and issuing its own bonds.

The moment of truth came on 17 October 1975. That day, New York City was prepared to file for bankruptcy. A press release announcing the filing was drafted and ready to go in the event that the local teachers’ union did not buy approximately $150 million of MAC-issued bonds the city needed to refinance its debt. At the last minute, the pension furnished the funds and the bankruptcy was averted.

President Ford, embarrassed by the “Drop Dead” headline, agreed to a $2.3 billion loan to help the city balance its budget. Unions agreed to job cuts and wage freezes, the city’s bankers agreed to restructure their debt.

“I think nobody really lost sight of the objective at any time throughout this. I mean anybody who participated in this believed that there was no better alternative than what we were doing. I think they were right,” he says, adding that “it was really a bipartisan solution and it really included all of the various pieces of the city”.

Given the outcome, one can forgive him for not having reached for a concession or lease of a city-owned structure to tide the city over financially. Even today, he’d advise against it. “Not if it’s to be used as a long-time shot to get you another six months or another year in a sort of hopeless kind of game,” he says.

Rendell, who gained fame and applause in the investment banking community for championing a proposal to lease Pennsylvania’s 531-mile turnpike in 2008, agrees: “You wouldn’t want to do it to plug an operating budget gap – not at all.”

Especially, one could argue, if you’ve got someone like Rohatyn ready to strike a difficult deal when his home city needs him most.

However, cities wishing to hire him for his dealmaking skills will likely be sad to learn that he is not available: in January this year, he rejoined Lazard as a special adviser to its chief executive, Kenneth Jacobs.

“It’s my old role at Lazard, which is just showing up,” he jokes.

But in today’s time of need, he believes, others will rise to the challenge to fill his place. “There are people here who can climb the mountain again,” he says.

And the US, he is confident, shall overcome its problems: “I still have faith.”