Friday, December 31, 2010

Felix Rohatyn and New York City

The great thing about holiday weeks - besides being able to catch up with my family (whether they want to or not!) - is that I get a chance to read some of the books I've been wanting to catch up on.

For example, I just finished Felix Rohatyn's memoirs entitled Dealings. Rohatyn was a leading investment banker for many years working as a senior partner at Lazard Freres. The book is a fairly easy read, perfect for the holidays. As one review suggested, reading Rohatyn's book is like listening to a rich uncle tell stories, full of anecdotes about famous people.

Rohatyn's most notable work, in my opinion, occurred in the mid-1970's, when he was a major player in helping New York City avoid bankruptcy. The City at that time was desperately short of cash, and when President Gerald Ford told the City's leaders that no federal help would be forthcoming (thus eliciting the famous headline in the New York Post: "Ford to City: Drop Dead") it looked like New York would be forced to default.

Of course, New York did not default, although it did restructure some of the terms of its debt obligations.

It was very instructive to anyone who invests in municipal bonds to read the section of Rohatyn's book which discusses the immense effort that City leaders made to avoid any delays to the payments of their debt.

Everyone involved - from the mayor to the heads of the very powerful unions in New York - realized that any sort of default would be a catastrophe.

Even President Ford - who earlier in the process had been steadfast in his belief that New York would have to figure matters out on their own - eventually approved federal approval of guarantees to aid New York.

This episode - and others like it - make me confident of the credit quality of most municipal debt. Yes, municipal finances are a mess, and tough choices will need to be made.

But the bottom line is that most municipalities need the credit markets more than the markets need any debtor, and municipalities will do almost anything to avoid timely repayment of interest and principal.