New York City sold its rescue bonds to the teachers' pension fund it had fought

By the fall of 1975 New York City's finances had collapsed to the point that commercial banks, burned by prior municipal debt, refused to buy any more city bonds, and a newly created Municipal Assistance Corporation had already sold what the market would absorb of untested MAC bonds meant to refinance the city's short-term debt. With the city's cash literally running out and federal aid still uncertain, the state's rescue plan needed one more large buyer willing to take on securities no ordinary investor wanted, or the city would miss payroll and default within days.

The city had spent the crisis locked in an adversarial relationship with its public-sector unions over layoffs, wage freezes and program cuts, making organized labor the least likely source of a bailout in the conventional telling — a union's job is to fight management, not bankroll it. Albert Shanker's United Federation of Teachers had itself voted against buying the bonds only days earlier, citing exactly the risk any prudent investor would flag.

Sold the bonds to the teachers' pension fund by showing that a default would destroy its members' jobs and pensions, making the risky purchase the only hedge.

The teachers' pension fund's solvency and members' jobs depended on the city surviving, unlike banks that could walk away.

Refusing to buy the bonds didn't avoid the risk of default for the union; it left that risk unhedged.

The union had a rational reason to accept bond risk that a normal investor would decline, once the default alternative was made concrete.

The acute time pressure forced a decision, making the trade-off between buying bonds and facing default starkly clear.

When conventional lenders won't lend, look to stakeholders whose own survival is tied to the borrower's; their downside from failure can exceed the risk of lending.

Shanker committed the fund to $150 million in untested bonds as cash ran out; the city avoided default and the bonds turned a solid profit. Shanker's decision is credited by his own union and by historians of the crisis as the deciding factor that kept New York City solvent through the fall of 1975, and it stands as a rare case of a labor union becoming its adversary's largest emergency creditor because its members' own long-term interest ran through the city's survival.