May 6, 2009 / 9:17 PM / 11 years ago

U.S. cities need national bailout agency: Rohatyn

NEW YORK (Reuters) - The architect of the 1970s financial rescue of New York City said on Wednesday the federal government should create a powerful national agency to bail out dozens of floundering U.S. cities.

Felix Rohatyn, a former managing director at the investment banking firm Lazard Freres and Co. LLC, speaks at the Reuters Infrastructure Summit in New York, May 6, 2009. REUTERS/Brendan McDermid

Felix Rohatyn, the chairman of New York’s Municipal Assistance Corp. from 1975 to 1993, said at the Reuters Infrastructure Summit that policymakers should look to the Reconstruction Finance Corp. created in 1932 as a model to aid cities and states as they confront their biggest deficits in decades.

“I think this all is unfortunately virgin territory,” he said, referring to the impact of the 17-month-old national recession on state and local governments.

Rohatyn, author of “Bold Endeavors,” a history of landmark U.S. infrastructure investments, said the depression-era reconstruction bank was a successful lender to local governments, banks and businesses.

The 1930s bank bought preferred stock from the institutions it helped; this let taxpayers share in any future gains.

Rohatyn suggested this kind of funding model might work for the new national agency he outlined.

Today, scores of cities and states are running billions of dollars of deficits. Some have suspended non-critical services by furloughing workers to save money. California and New York state have raised taxes, unpopular steps in a recession.

Unlike the U.S. government, which can print money to close deficits, states and cities are required to balance their budgets.

Rohatyn said hard-pressed state and local governments should be temporarily allowed to run deficits instead of curtailing vital services.

If these governments cannot solve their deficits by themselves, then a national agency could step in, he said. That was how New York state’s control board solved the city’s budget crisis in the 1970s.

“I think there is a yawning need for a serious look at urban and state problems,” Rohatyn said.

In addition to leading the Municipal Assistance Corporation, which sold debt for New York City during its near-brush with bankruptcy, Rohatyn helped lead the state Control Board, which wielded huge power over city budgets.

The board stepped in after New York City’s elected leaders were unable to agree on measures to balance the budget.

Rohatyn recalled that tens of thousands of city workers were laid off in just a few years while subway fares doubled.

Reporting by Michael Connor, Karen Pierog, Joan Gralla, Jim Christie and Ciara Linnane

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