The Winter of N.Y.’s Discontent

Shakespeare in the Park, the annual star-studded summer theater series in Central Park, may have shuttered months ago, but New York is still in a Shakespearean mood. For this is shaping up to be the winter of our discontent. Something is rotten in the state of New York. An odorless toxin is spreading from the octagonal headquarters of Bear Stearns on Madison Avenue, and from the gilded towers occupied by Citigroup and Merrill Lynch. The killer can be traced to decomposing subprime mortgages and debt extended to private-equity firms.

The first victims were chief executive officers—like Stanley O'Neal of Merrill Lynch, sent packing in October in the wake of multibillion-dollar credit writedowns. But the poison has spread to highly paid grunts. After Thanksgiving, Bear Stearnssaid it would sack some 650 professionals, and the law firm Thacher Proffitt told a couple of dozen associates in its real-estate and structured-finance units—the twentysomething white-collar sweatshop workers who helped paper the subprime bond deals—to get their résumés in order. Citigroup, the city's largest for-profit employer, is rumored to be plotting the unkindest cuts of all. Responding to a CNBC report that the bank might slash 45,000 jobs, Citigroup said it was considering cuts but that "any reports on specific numbers are not factual." (The same might be said about the valuation of subprime debt on Citigroup's books.)

Until very recently, it seemed that New Yorkers, whose fortunes are driven by the animal spirits of Wall Street and by a free-spending class of global rich, would stand proud as a happy few. Even as the national housing market sagged and consumer spending slowed, Manhattan's co-op market continued to boom. Tourists, drunk on their potent home currencies, turned Rockefeller Center into Eurotrash Central. But as the winter solstice approaches, the city is waking up to the same cold reality that has slapped banks in the face: many items it regarded as assets have instead turned out to be liabilities.

First came the 19-day stagehands strike (Et tu, Broadway?). New York City Comptroller William C. Thompson Jr. estimated the stoppage cost theater and hotel owners up to $2 million a day in losses. With the strike over, life has returned to the theater district. But not to the streets in front of the Ed Sullivan Theater on Broadway, where the David Letterman show, crippled by the continuing writers strike, is on hiatus. At noon last Tuesday, the normally jammed Angelo's Pizza, housed in the same building as Letterman, was serving a scant 13 customers. Across the street, Hashmat Ali, who sells gyros from a cart, said business is down 30 percent since the strike.

New York is about to witness a version of trickle-down economics, as the woes afflicting some of the nation's higher earners will soon make life more difficult for the middle class and working poor. In 2006, the finance and insurance sectors accounted for about 9 percent of the city's 3.6 million jobs, and about 30 percent of its wages. And the city reaps the benefits from the symbiosis between insanely profitable Wall Street firms and insanely expensive New York real estate. It collects a 1.6 percent fee on the value of all commercial- and residential-property transactions, as well as a 1.6 percent tax on mortgages for such properties. These taxes provided $2.7 billion in revenues in 2006. The gusher of profits on Wall Street—much of it fueled by the manufacturing of debt to buy real estate—translated into more funds for New York, through corporation taxes and personal-income taxes.

But this summer's credit meltdown took a toll on both sources of cash. With banks burned by subprime debt and home buyers turned off by tighter credit terms, many individuals and institutions have decided to neither a borrower nor a lender be. Meanwhile, profits for the members of the New York Stock Exchange—which the city's budgeters use as a proxy for Wall Street—have crumbled like Macbeth's army in Act V. New York City's Office of Management and Budget projects such profits, an impressive $20.9 billion in 2006, will fall 29 percent to $14.8 billion in 2007. In October, Mayor Michael Bloomberg ratcheted down expected revenues for the current fiscal year (which runs through June 2008) by $238 million, and directed agencies to cut spending by 2.5 percent this year and 5 percent next fiscal year.

The hits keep on coming. Wall Street veterans may dimly remember subways as the way they got to work before they could afford a car service. For the rest of us, they're a crucial means of transportation. Later this month the board of the Metropolitan Transportation Authority is slated to vote on a proposal to raise certain fares.

New York's woes can be seen as a long-overdue comeuppance to a city, prone to hubris and arrogance, that stimulated and benefited greatly from the late credit orgy. But today, more than ever, Gotham deserves the sympathy of the nation. (Three words: New York Knicks.) The benefits of what New York produces—from "Rent" to financing for companies—emanate throughout the country. More broadly, what happens in New York is not likely to stay in New York. For it has become a dense, loud, microcosm of the U.S. economy—a media-saturated machine oiled by cheap money, buoyed by elevated real-estate prices, and staying afloat by selling everything that's not nailed down to visitors from abroad.

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