Felix Rohatyn—Holocaust survivor, investment banker, U.S. military veteran, and ambassador to France—died Saturday at 91. He lived a remarkable life, escaping Austria and then France as a child and rising to the top of New York's financial world. He's most remembered, though, for a public role. In 1975, Governor Hugh Carey tapped him to save New York City from municipal bankruptcy. He ably did that—in large part through financial innovation.
Starting in the 1950s, New York spent beyond its means. Beginning in the mid-sixties, the city began borrowing to paper over gaps between day-to-day revenues (taxes) and day-to-day spending (fire, police, sanitation, education, and, increasingly, social services such as welfare). By the spring of 1975, New York projected a billion-dollar “cash-flow interruption” against $5 billion in annual tax revenues, because the city's banks were nervous about lending money to an insolvent city and were about to cut off the cash. The city didn't need money just to fund its current-year deficit; it needed money to refinance the $3 billion in short-term debt it had already incurred. Otherwise, it would default— representing the biggest bankruptcy ever in the world of municipal finance, which investors considered nearly as safe as U.S. Treasury bonds.
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