Capital of Capital: Money, Banking+Power in New York City 1784

The crisis had first come to a head at the beginning of the year, when Donald T. Regan of the brokerage firm Merrill Lynch, the investment banker William Salomon, and leaders of the city’s most important commercial banks—David Rockefeller of Chase Manhattan, William T. Spencer of First National City Bank, Ellmore Patterson of Morgan Guaranty Trust, and John F. McGillicuddy of Manufacturers Hanover—warned Beame that the city would not be able to find a market for future bond issues unless it cut back on spending to reassure investors of its continued ability to pay its bills. Having run budget deficits for over a decade, the city was dangerously reliant on short-term borrowing just to pay its day-to-day expenses. By the spring of 1975, banks refused to underwrite city bonds, essentially declaring them unmarketable and cutting off the city’s funding.

To City Hall, a federal bailout was necessary in order to restore the confidence of investors, sustain belief in the city’s ability to govern itself, and avoid bankruptcy. The refusal by the White House seemed a bitter rejection, and to some a cynical Republican write-off of a liberal Democratic bastion. Yet, in fact, it was a New Yorker who joined Michigan native Gerald Ford in turning down Beame’s appeal for aid. William E. Simon, Ford’s Secretary of the Treasury, was a former chief municipal bond dealer for the Wall Street investment bank Salomon Brothers and had also served as an advisor to the city on its debt. A fervent believer in free markets and the dangers of big government, Simon insisted that New York City get its financial house in order without handouts from Washington. Any federal aid, he asserted, would have to be on terms “so punitive, the overall experience made so painful, that no city, no political subdivision would ever be tempted to go down the same road.”1

New York’s problems reflected broader economic disturbances as well as its own financial woes. After a quarter century of postwar industrial prosperity, the American economy had hit troubling snags: “stagflation” (a combination of inflation and flat economic growth), oil shortages tied to Middle East political conflicts, and a slumping stock market. Meanwhile, corporations and middle-class families fled New York for the suburbs, denying the city desperately needed tax revenue, and exacerbating poverty in the increasingly African American and Latino “inner city.”

The fiscal crisis ushered in a new era in the relationship between New York City and its banks—one in which the banks took a more assertive, conspicuous, and dominant role in shaping urban policy and the city’s economy. As the turbulent 1970s gave way to a financial boom time in the 1980s and 1990s, banks would be central to the city’s economic resurgence. Meanwhile, the laissez-faire views evinced by William Simon during the fiscal crisis would become increasingly prominent and popular—on Wall Street, across the country, and in Washington, where a new Republican president, Ronald Reagan, sought to implement a conservative “revolution” to downsize a federal government whose powers had been expanding ever since Franklin Roosevelt’s New Deal.

As Republicans and many Democrats embraced a vision of an economy emancipated from the constraints and regulations of “big government,” the New Deal banking regulations put in place by the Glass-Steagall Act in 1933, including the separation of commercial and investment banking, and restrictions preventing commercial banks from underwriting stocks and bonds (see Chapter Six), were loosened and slowly dismantled. This new regulatory philosophy went hand in hand with the growing wealth, assertiveness, and profile of New York banks and the bankers who ran them. After over four decades of New Deal rules controlling what banks could and could not do, a new epoch was dawning in America and on Wall Street. Deregulation freed New York’s banks to create new financial instruments and strategies, and the bigger, richer, and more volatile institutions that resulted would exert a profound influence on the city, the banking system, and an increasingly global economy.

Bankers played an unprecedentedly central and dramatic role in the city’s fiscal crisis and its aftermath. Rohatyn, a partner in the Wall Street investment banking firm Lazard Freres (founded in New Orleans in 1848, and a presence in New York since 1880), was a pivotal figure in both the MAC and EFCB. With the cooperation of city and state officials, other businessmen, and labor leaders, Rohatyn sought to mediate among different New York City interest groups while getting them to accept the demands of the large Wall Street banks, which insisted that the city cut its deficit as a condition of financing its debt. To do so, the government would have to reduce labor costs and spending on city services and new projects, require increased productivity from city workers, raise municipal taxes and fees, and charge tuition at the historically free City University.

The municipal unions, accustomed to years of political power and to negotiating with City Hall for wage and benefit increases for their members, blamed the banks. Wall Street commercial banks, mindful of the more than $1 billion owed them by the city, had grown concerned about their vulnerability to city spending as their exposure to losses in loans to Third World countries, airlines, retail chains, and real estate investments also increased. Critics like the journalist Ken Auletta argued that the banks had helped create the crisis by encouraging the city to borrow when bonds had seemed a low-risk investment while ignoring evidence of coming problems.

To union members fearing for their jobs in a recessionary economy, the flashpoint was that wealthy bankers were dictating the termination of their livelihoods. The leaders of the Municipal Labor Committee (MLC), a coalition of city unions, blasted First National City Bank as the city’s “No. 1 enemy” after bank officials, including chairman Walter Wriston, allegedly lobbied “in the financial community, in the media, in Albany and Washington” to force Beame to reduce services and fire city workers. The MLC’s Victor Gotbaum, pointing out that the affected workers earned $8,000 or $9,000 yearly while Wriston took home $425,000, called for a boycott of the bank. Ten thousand angry demonstrators jammed the sidewalks around First National City Bank’s check-processing and computer center at 111 Wall Street on June 4, 1975, listening to speeches by labor spokesmen and carrying placards reading, “People Before Profits, Mr. Wriston.”3

Yet before the year was out, both the unions and the federal government were ready to make concessions. Union leaders like Gotbaum, fearing that municipal bankruptcy would further erode the position of the unions, ultimately collaborated with the MAC and the EFCB to help resolve the crisis. Managers of the unions’ pension funds agreed to invest in city paper and MAC bonds, while banks and investors continued to shy away from the city’s bonds; by 1978, the six largest banks had less than one percent of their assets in New York City paper, while municipal pension funds held 38 percent of their assets in it. Meanwhile, in December, President Ford relented. Less than two months after the famous Daily News headline, Ford signed federal legislation that provided a series of short-term loans to help the city until the austerity cutbacks could bring municipal spending and revenues into balance.

As the city began to restore its financial house to order, its civic culture underwent a dramatic shift. Since the 1930s, New York’s affairs had been dominated by powerful unions; liberal mayors who could turn to Washington, Albany, and banks for funding; and an array of subsidized public institutions—parks, playgrounds, pools, hospitals, housing, transit lines, schools, and a free university. By the late 1970s, much of that public infrastructure was in disrepair; between 1975 and 1981, the number of full-time municipal employees, reduced by budget cuts, declined from nearly 227,000 to 188,000. Governor Carey, himself a liberal Democrat, had sounded the notes of the new reality in his first State of the State speech in January 1975: “Now the times of plenty, the days of wine and roses, are over. We were in the lead car of the roller coaster going up, and we are in the lead car coming down.” To many bankers and politicians, the idea of the liberal public city appeared discredited. Despite the crucial role that the state and federal government had played in stabilizing the crisis, the private sector—and particularly the city’s banks—seemed to be in the driver’s seat. This impression was buttressed by the actions of New York's banks and bankers. Felix Rohatyn and William Simon, for example, assumed leadership roles, while banks helped to set terms for the City's borrowing and spending and vocally supported austerity measures.4

New York’s return to solvency dragged on for years, underscoring the new economic and political reality. At the end of 1978, the city still had not regained access to credit markets and required further loans from the federal government. Finally, in 1981 Ed Koch, Abraham Beame’s successor in City Hall, managed to balance the budget through further cuts, raised the city’s bond rating back to investment grade (meaning it had a low risk of defaulting), and oversaw the city’s first public bond offering ($75 million) since 1974. Koch restored some of the city’s public commitments as the economy improved during his mayoralty, notably using city funds to start creating 200,000 units of low- and moderate-income housing. Koch also endorsed tax abatements for companies willing to commit to keeping their offices (and hence jobs and tax revenues, albeit reduced) in the city. In an era when many Manhattan banks were moving their back-office operations to less-expensive suburbs nearby, City Hall persuaded Chase Manhattan Bank to relocate much of its back-office staff to the new MetroTech complex in Brooklyn, rather than to New Jersey as originally threatened, in exchange for $235 million in tax breaks and other subsidies. While critics decried tax breaks like this as “corporate welfare,” Koch’s finance-friendly policies put the city’s administration on the leading edge of national politics. In 1980, two years into his first term, the Wall Street Journal lauded Koch’s fiscal austerity and pro-business attitude with an editorial headlined “Supply Side Saves New York,” a reference to the conservative low-tax ideology soon to be associated with the Reagan administration.⁵

Further scaling back followed. In 1980, Democratic President Jimmy Carter, an advocate of business deregulation, and bipartisan supporters in Congress enacted a six-year phase-out of Regulation Q. Two years later, when many of the nation’s thrifts (savings and loan mortgage lenders) faced an insolvency crisis because they could not compete with the more attractive interest rates offered by other institutions, the federal Garn-St. Germain Bill eliminated Regulation Q for thrifts so they could accumulate deposits by offering higher interest rates. The bill also legally allowed thrifts to invest in a wide array of previously off-limits assets, including properties like golf courses and resorts, and the high-yield, high-risk bonds known as “junk bonds.”

Striking closer to the essence of Glass-Steagall’s separation of commercial and investment banking, in 1982 the Federal Deposit Insurance Program began allowing state-chartered commercial banks to partner with investment houses. Arguing that they were at a disadvantage compared to their European and Japanese counterparts, some New York-based nationally chartered commercial banks threatened to curtail their operations unless such restrictions were loosened for them as well. By 1987, the Federal Reserve allowed Bankers Trust, Citicorp (the holding company for First National City Bank, renamed Citibank in 1976), and J. P. Morgan & Co. to deal in previously prohibited securities. Financial leaders had lobbied actively in Washington for the rolling back of Glass-Steagall measures, and leeway provided by courts and federal agencies further relaxed the restrictions.

International investing and lending also boomed. In the late 1970s, Citibank, Chase Manhattan Bank, and other Wall Street commercial banks expanded their business abroad, notably by lending Petrodollars to the governments and companies of LDCs (Less Developed Countries, such as Zaïre, Turkey, Bolivia, and Argentina). Petrodollars were the deposits of oil-rich Arab states and Venezuela accumulating in London, New York, and other European and American banks, which soared after 1973 and 1979 when oil “shocks” produced large jumps in the price per barrel of oil. New York banks paid interest to the oil-producing countries for the use of the deposits, but they profited by charging transaction fees and higher interest rates to governments and business clients in developing nations.

In 1973, international lending had made up a third of the profits of the 13 largest U.S. commercial banks; by 1976, it made up three-quarters. At the same time, New York attracted foreign banks and capital. By the mid-1980s, when a quarter of the nation’s securities firms were based in the city, more than a quarter of the assets of the world’s largest investors were lodged in New York. Foreign deposits accumulated in accounts while multiple foreign banks’ branches opened on Manhattan’s streets and premiere European banks—Barclays Bank, Deutsche Bank, the Bank of Scotland—inaugurated or expanded their American operations out of offices in New York skyscrapers.

In 1998, Weill’s megacompany, now called Travelers Group (and headquartered in a 38-story TriBeCa office tower), merged with Citicorp, the holding company of Citibank, after gaining clearance from the Clinton White House and Federal Reserve chairman Alan Greenspan. The merger involved the exchange of $76 billion in stock and created Citigroup, the world’s largest financial institution. The line separating commercial banking from other forms of finance was blurring and effectively vanishing.

In 1994, another deregulatory federal law, the Interstate Banking and Branching Efficiency Act, eliminated prohibitions on commercial banks owning branches across state lines dating back to the McFadden Act of 1927, further easing the process of consolidation exemplified by Weill’s empire building. In 1990, the nation’s top 10 banks controlled 20 percent of the industry’s capital, and by 2010 it would be twice that. Despite consolidation, industry experts argued that, compared to banks in other developed countries like Great Britain, Canada, and Germany, the American banking sector remained diverse and competitive.

Meanwhile, the age of mergers also saw many of New York's investment banks become public corporations. Originally private partnerships and private corporations controlled by 19th-century family dynasties like the Morgans and Lehmans, these banks began trading their shares openly on the stock market. Donaldson, Lufkin & Jenrette floated its Initial Public Offering (IPO) of stock in 1970, followed by the brokerage and investment bank Merrill Lynch (1971) and other major banking firms, with Goldman Sachs finally offering its stock for sale in 1999. Incorporation allowed investment banks to raise more working capital by selling stock. In going public—selling their shares on the open market to investors—these investment banks also tied their performance to a new measure of value, their stock price. Furthermore, compensation for investment bank executives increasingly consisted of stock options and bonuses linked to how well the bank’s shares were performing in the stock market. Critics would later argue that such compensation packages encouraged bank executives to focus more on short-term gains impressive to shareholders than on long-term (and often more cautious) strategies.

Acquisition-minded companies also financed mergers by issuing and selling a new instrument called the “junk bond,” pioneered by a financier named Michael Milken who worked for the investment bank Drexel Burnham Lambert at 60 Broad Street (until moving his bond operation to Los Angeles in 1978). Junk bonds were securities issued by high-risk companies that, because they were risky, paid bond holders high interest rates. With the assistance of Milken and other financiers, companies used junk bonds to borrow the money they needed to launch takeover bids for other companies, often using the targeted company’s assets as collateral. In this way, junk bonds became a key instrument for financing leveraged buy-outs. By 1988, junk bonds represented one-quarter of all outstanding corporate debt in America, three-fifths of it used in takeover transactions. Meanwhile, traders known as risk arbitrageurs at Goldman Sachs and other investment banks also traded independently, buying and selling shares of target companies on the open market as reports of buy-outs, or the possibility of buy-outs, sent share prices up or down. Several trillion dollars’ worth of mergers took place during the 1990s; by then, investment bankers, arbitrageurs, and lawyers had grown accustomed to merger transaction fees that netted tens of millions of dollars.

Bankers also played a key role in the bidding wars sometimes sparked by hostile takeover attempts. In a hostile takeover, a potential purchaser whose offer was rejected by the management of the target company sought to buy enough of the target’s stock to override the rejection and acquire the company. CEOs of targeted corporations rejected takeover offers when they surmised that they might be sacked, or that a higher offer from another bidder—a friendly “white knight”—would raise the value of their stock while saving the CEO’s job (often with lucrative benefits in the form of stock options and pay hikes). The first hostile takeover by an established corporation came in 1974, when William Sword and Robert Greenhill of the Wall Street investment bank Morgan Stanley helped Charles Baird of the International Nickel Co. (Inco, a conglomerate organized by J. P. Morgan in 1902) make a hostile bid for ESB, a company that manufactured car batteries. ESB in turn engaged Goldman Sachs and the head of its merger team, Stephen Friedman, to work with a “white knight,” Harry Gray of United Aircraft, who agreed to bid against Baird. With two venerable Wall Street investment banks providing strategy and money, Baird and Gray between them drove the stock price of ESB up from $19 to $41 a share before Gray threw in the towel, allowing Baird to buy a controlling interest in ESB. Morgan Stanley’s fee for the work was between $1 and $2 million (between $4.7 and $9.5 million in 2013 dollars). Goldman Sachs earned a similar amount and became known as a bank that would work with corporations to try to defeat hostile bids.13

The Inco-United Aircraft bidding battle, and the profits made by Morgan Stanley and Goldman Sachs, removed the inhibitions of Wall Street firms that had long viewed “M&A” (mergers and acquisitions) as a sideshow and hostile takeovers as unseemly. Leveraged buy-outs were not new on Wall Street; Andre Meyer and Felix Rohatyn of Lazard Freres, for example, had helped the International Telegraph and Telephone Company acquire other companies during the 1960s, a decade in which 25,000 American businesses disappeared, mostly into other companies. But acquisitions had been a specialized field for a small cadre of investment bankers. “M&A was always an adjunct to the underwriting business in the past,” recalled lawyer Joe Flom, a key participant in hostile takeovers. “But once it got started, the banks realized it was a good source of income. Instead of just reacting, they went after the business.”¹⁴

The vast sums to be made in hostile takeovers also prompted newly aggressive tactics. Independent operators like the Oklahoman T. Boone Pickens and the New Yorker Carl Icahn used “greenmail,” buying securities in corporations and then threatening hostile takeovers (backed with junk bond financing), often simply to raise the market price and cash out the securities at a profit. LBOs and hostile takeovers, moreover, usually resulted in downsized companies, as the acquirers laid off employees, cut research budgets, and sold subsidiaries in order to increase profitability and pay off their sizeable leverage debts. One distraught executive at Goodyear, which had fought off a hostile takeover bid in 1986, denounced the LBO as “an idea that was created in hell by the Devil himself.”¹⁵

The higher profits to be made in the 1970s and 1980s from mergers, risk arbitrage, and leveraged buy-outs changed the culture of Wall Street investment banking. To some degree, Wall Street behavior had remained governed into the mid-20th century by the air of “restrained expectancy” noted by a writer visiting a New York investment bank in 1910: “Doors do not slam, men walk softly upon rugs, voices are never lifted in feverish excitement over profit and loss.” Now, as high-stakes bidding and belligerent rivalry became central and even glamorous on Wall Street, the more streetwise, loud, swaggering world of bond trading—often a career for upwardly mobile men from working-class backgrounds—began to penetrate the world of elite banking dominated by Ivy Leaguers and graduates of other prestigious colleges. (“If you weren’t trading bonds, you’d be driving a truck,” William Simon had allegedly once told Salomon Brothers traders, many of whom never finished college.) A new generation of rougher-edged movers and shakers on Wall Street included men like Sandy Weill and Salomon’s Lewis Ranieri, who had grown up in working-class Brooklyn neighborhoods. By 1984, a newly hired manager at Goldman Sachs could be greeted with a trader’s taunt: “Nice to meet you. Let me tell you something: you don’t know shit about options.”16

Hedge funds emerged in a symbiotic relationship with New York investment banks, from which many borrowed heavily in order to make large investments. George Soros, for example, founder of the early hedge fund Soros Fund Management (1969), had worked for the bankers Arnhold & S. Bleichroeder, while John Meriwether of Long-Term Capital Management (LTCM, 1994) had been head of bond trading at Salomon Brothers. In turn, New York investment and commercial banks soon created their own hedge fund departments and desks. Hedge funds made fortunes for investors, and fund managers like Soros and Meriwether took large percentages of the annual investment profits (often 20 percent) and the funds’ annual asset value (1-2 percent) in payment. By 1997, Meriwether was personally worth $300 million, and one of his top traders possessed an estimated $500 million.

For investment banks and commercial banks, trades in CMOs and other derivatives had another advantage: many of them fell outside the reporting requirements mandated by federal regulations, meaning that massive sums could be kept off the official bank balance sheet, immune from regulation or inspection, and not subject to capital requirements. The value of CMOs, however, ultimately rested on the ability of consumer debtors to pay off their credit cards, car loans, and mortgages—a fact often obscured by the dazzling abstractions of tranches and collateralization. Quants believed that they could use mathematics to eliminate risk by using complex derivatives to safely distribute any losses to those most able to bear them. But by obscuring the sources of the underlying debt that gave those derivatives value—debt held by individual homeowners and consumers—the Quants also obscured the very risks they were trying to eliminate. Thus it was harder for investors to know what, precisely, they were investing in.

The role of finance in the city’s fortunes, however, went well beyond these numbers. Not only was it the city’s fastest-growing sector with the fastest-growing wage rate between 1968 and 1995, but also financial companies and their related support services—roughly 14 percent of the workforce—accounted for close to 30 percent of the city’s gross economic output. Banks, along with hedge funds, brokerages, and other financial firms, thus played an outsize role in New York City’s economy, and in the city’s national and global influence. Banks produced jobs, tax revenues, and prestige, a primacy symbolized by the rise of new banking office towers such as the Barclay Bank Building (75 Wall Street, 1987) and the J. P. Morgan Bank Headquarters (60 Wall Street, 1988) on Gotham’s skyline.

Banks also enhanced the city’s role as a cultural capital, using art and philanthropy to both shape their image and grow their network. Chase Manhattan, which under David Rockefeller started assembling a corporate collection of art in the late 1950s (worth almost $100 million by 2003) was soon joined by other New York banks and corporations. Citigroup, for example, assembled an art collection including numerous American masterpieces in its offices at 7 World Trade Center (over 1,100 works would be lost on September 11, 2001). Art collections were both an investment in the bank’s image and a tangible corporate asset. Philanthropy was also on the agenda. Charitable giving in the city and around the world by the leading commercial banks—not including the donations and bequests of individual bankers—would amount to hundreds of millions of dollars annually by the early 21st century. Philanthropy could be both altruistic and strategic, helping banks to improve their reputation and build relationships with clients, politicians, and other community stakeholders.

Savings banks also faced turmoil. A crisis for the nation’s savings and loans banks (S&Ls or thrifts) resulted in the demise of 1,645 of the nation’s 3,234 S&Ls between 1986 and 1995. Most of the meltdown was due to overextended real estate loans and to deregulatory measures that led interest rates to spiral upward beyond what the thrifts could afford to pay to attract and keep depositors. The federal government launched a $105 billion bailout to salvage savings banks and the accounts they held, but the mass shutdowns still resulted in the transfer of mortgage loans to commercial banks and other financial entities selling mortgage-backed securities. Among the casualties of the crisis was New York City’s second oldest savings bank, the Seamen’s Bank for Savings, which folded in 1990; the city’s oldest, the New York Bank for Savings, had already merged in 1982 with the Buffalo-based Goldome Bank, which in turn failed in 1991.

However, those who stayed, especially in the higher echelons, were among the city’s wealthiest people. In 1996, while the average annual wage for all non-FIRE industries in New York City was $37,600, the average FIRE compensation was $99,700; leading investment bankers made far more. To be sure, bankers were aware of their own disparities in income that eluded outsiders. In investment banks, large gaps in salary characterized the divisions between lower-paid “back-office” support staff and “middle-office” bankers and staff (such as risk management and internal consulting departments) on the one hand and much more highly paid “front-office” bankers on the other. The latter were increasingly and aggressively recruited from a small range of Ivy League schools; by 2003, for instance, 37 percent of new Princeton graduates were entering the financial services field. Most were initially expected to work grueling 110-hour weeks in exchange for the promise of great wealth down the line. By the late 1990s, two senior investment bankers at Goldman Sachs could complain to a friend “that they only made 20 million that year,” indicating how far removed they were from the urban world inhabited by middle-class, let alone poor, New Yorkers.18

By 1998, Wall Street employees made up 4.7 percent of the city’s workforce, but they earned 19 percent of the city’s paychecks. Income disparities appeared to reinforce other existing inequalities—educational, economic, and racial. Inequality was expressed geographically as well. In 1989, for example, the average family income in Manhattan’s poorest census tract, West Harlem, stood at about $6,000; in the island’s richest tract, Carnegie Hill on the Upper East Side (an area populated by numerous financial executives), the average family income was more than $300,000. In all, New York County’s income disparity widened during the 1980s to a greater degree than that of any other American county with 50,000 or more people.

Other scandals followed, including one that implicated executives at the derivatives-trading commercial bank Bankers Trust for misleading corporate clients like Proctor & Gamble about the value of complex derivatives. Bankers Trust employees used the code word “R.O.F” (rip-off factor) for the money they could extract from clients who did not understand the complicated derivatives contracts the bank was selling. From 1994 to 1996, Bankers Trust paid out at least $103 million to settle lawsuits and a federal fine. The incident foreshadowed the dangers that intricate new financial instruments could pose to bankers and their clients.19

As New York’s financial world grew in wealth and prominence, its scandals came to pervade popular culture as well. Time magazine cover stories lambasted Boesky and Milken with headlines proclaiming, “Predator’s Fall” and “Making Millions with Your Money.” With his mantra, “Greed … is good” (partly based on an actual statement by Ivan Boesky), Gordon Gekko, the corporate “takeover artist” of Oliver Stone’s film Wall Street (1987), exemplified the entitlement, arrogance, chicanery, and phenomenal wealth many Americans associated with the city’s elite financial world. So did Sherman McCoy, the self-proclaimed “Master of the Universe” in Tom Wolfe’s best-selling novel The Bonfire of the Vanities (1987), who works as a bond trader for the fictional Wall Street investment bank Pierce & Pierce. McCoy’s attempt to cover up a hit-and-run traffic accident in the Bronx enmeshes him in a racially charged political firestorm that ultimately strips him of his privileges and at least some of his smugness. Although activists on the American left had persisted in criticizing the banks during the Vietnam War era and after, not since the time of the Pujo Committee in the 1910s or of the Pecora Committee in the 1930s had New York’s bankers and other financiers attracted such broad criticism in the mainstream media and popular culture. If in the popular imagination banks were increasingly associated with greed, corruption, and unearned wealth, this unease did little to prepare investors or the public for the real dangers posed by new financial instruments such as collateralized mortgage obligations, should American homeowners begin to default on their home mortgages.20

The booming market in complex derivatives, such as mortgage-backed securities, was also sanctioned by the Clinton administration and by Greenspan. By 1998, U.S. commercial banks were, according to Greenspan, “the leading players in global derivatives markets,” reporting “outstanding derivatives contracts with a notional value of $33 trillion.” Looking ahead to the next century, Greenspan publicly sided with “the largest banks,” who regarded government regulation of derivatives trading “as creating more burdens than benefits.” Addressing an audience of futures traders in 1999, the Federal Reserve chairman warned that “both banks and nonbanks will need to continually reassess whether their risk management practices have kept pace with their own evolving activities … and readjust accordingly.” He added, however, that “should they succeed I am quite confident that market participants will continue to increase their reliance on derivatives to unbundle risks, and thereby enhance the process of wealth creation.”22

Most importantly, the very business model of banking had shifted, gradually but dramatically. In the early 1970s, commercial banks had still primarily been in the business of accumulating deposits and extending loans; investment banks had been in the business of underwriting corporate and government securities. Now, at the end of the century, commercial bankers, investment bankers, and other financiers all often focused on a different set of priorities: charging fees for originating loans, then immediately using those loans as collateral to back new derivatives that could be sold to investors. These derivatives, including mortgage-backed securities, were also increasingly traded by the originating banks or firms on their own account with their own money, diminishing the appeal of putting that money into other, less profitable but more traditional loans and investments. Meanwhile, critics who began to warn that complex derivatives were risky and insufficiently understood were largely ignored and defeated in their attempts to promote new regulations. What lay ahead in the new century seemed an indefinite continuation of prosperity, with New York City as its glittering and bustling capital.