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At the last minute, however, Carey and Levitt devised another temporary fix, by legerdemain. Although Levitt would not buy MAC bonds, he did agree to buy $250 million worth of the otherwise unsalable state notes, thus providing the state with money to lend to the city. In addition, Levitt said he might "conceivably" buy another $250 million worth of state notes, if they could not be sold to anyone else. That should enable the city to get through October and probably November.
Even so, the crises left the city's overall fiscal situation still worse than before. The supply of financial tricks to keep New York afloat is just about exhausted, and the state's credit has worsened. To officials' dismay, Moody's Investors Service last week lowered its rating on New York State general-obligation bonds, from A a to A 1, which could cost millions of dollars in higher interest. At the same time, Moody's knocked down its rating on New York City bonds by two grades, from A a to A l, a category in which bonds are "judged to have speculative elements."
Last Resort. In search of a permanent solution, Carey and Rohatyn journeyed to Washington again to lobby for help from Congress. At their request. Democratic Senator William Proxmire of Wisconsin scheduled hearings before his Senate banking committee this week on an array of bills to aid the city. Because of overwhelming congressional opposition to a direct subsidy, most attention has focused on one proposal that would authorize federal guarantees of state securities designed to help finance local governments. The proposed legislation would make the guarantees available only as a last resort.
Carey and Rohatyn were further encouraged by Federal Reserve Chairman Arthur Burns' warning before the House Budget Committee that the New York City financial crisis "could injure the recovery process now under way in our national economy." Burns would not elaborate on that statement, but it is a significant shift in his position and puts him at odds with Treasury Secretary William Simon and President Ford. Simon and Ford have consistently minimized the damage a default by New York might have on the ability of other cities and towns to sell bonds. Both also have firmly opposed federal help for the nation's largest city.
But time is running out. Rohatyn warned that without federal help, New York may have to default by December. That would ruin the city's credit, force a drastic cutback in services and probably cause an exodus of major corporations. Said he: "The flow of blood would be irreversible."