TheChek News Flow

The ties that bind

Last week, DD brought you the inside story of the cosy ties between Goldman Sachs and its newest board member, John Hess. The oil tycoon has been a longtime client of the bank and is in the process of completing a sale of his energy business to Chevron, in a deal that will see Goldman potentially reap as much as $80mn in fees from the sale if Hess Corporation completes it. 

Today, we bring you two fresh situations that once again highlight the close relations between companies doing deals and their advisers. And we’d like to hear from you about where you think the lines should be drawn. Writes to us at Due.Diligence@ft.com.

The first involves Boeing, a public company, which on Monday announced an all-stock deal to buy its aviation supplier Spirit AeroSystems that valued its equity at $4.7bn. Boeing is chaired by Steve Mollenkopf, the former longtime CEO of Qualcomm. Mollenkopf is also a senior adviser at Consello, the advisory and investing business set up by Teneo co-founder Declan Kelly. (Recall our coverage of Kelly’s inglorious Teneo exit.)

Consello has already been reported as helping Boeing, which is facing scrutiny due to a series of mishaps, with its search for a new CEO. Boeing said on Monday that Consello was among its advisers on the Spirit deal, alongside lead adviser PJT Partners as well as Goldman. 

Boards have plenty of discretion in which advisers they select, and their comfort with a particular banker or lawyer can be useful in stressful deal negotiations. The question always is whether conflicts of interest are fully disclosed to other directors, and if all sides understand that they first have duties to the ordinary shareholders, not to each other. Consello’s role in the Boeing CEO search and the advisory work raise questions over what sort of disclosures were made to fellow Boeing directors about any potential conflicts.

Boeing said that Mollenkopf’s advisory role with Consello has been called out in the past three proxy statements within his bio “and has been thoroughly reviewed and disclosed”.

Separately on Monday, financial data company Preqin agreed to be sold to asset management giant BlackRock for a staggering price of £2.55bn, or 13 times its expected 2024 revenue of $240mn. Preqin, a private company, is chaired by Bradley Fried, who also happened to be the chair of Goldman Sachs International until April. And, as fate would have it, Goldman Sachs International was the sole adviser to Preqin on its sale.

(Goldman declined to comment while Preqin did not respond to a request for comment.)

The world of dealmaking is big, but sometimes it can seem quite small.

‘We thought there was a capital structure’: how western investors lost billions in China

For much of the past two decades, international investors have been keen to finance one of the world’s most dramatic growth stories: China’s property boom.

But China’s regulators impose strict controls on money moving in and out of the country, especially as debt. So bankers and lawyers used a more creative, if complicated, mechanism to bridge China and the wider world. 

That mechanism, and its implications for the future flow of capital between China and the west, are barely discussed outside specialist circles. DD’s Kaye Wiggins and the FT’s Thomas Hale and Wang Xueqiao took a close look at it in this FT Big Read on China Evergrande.    

Here’s how it worked. Specially created vehicles outside China, often in the British Virgin Islands, would sell bonds to international investors. They would send the proceeds into China as equity investments in subsidiaries. To pay bondholders’ coupons, they relied on equity dividends from those subsidiaries.

The bonds themselves were often issued via Hong Kong, with its westernised legal system and investor protections, and stamped with the logos of some of Wall Street’s biggest banks who had underwritten them. They promised coupons of up to 9.25 per cent, a heady prospect in a low-rate world.

But when things went wrong in China’s property market — beginning when China Evergrande defaulted in 2021, with $20bn of offshore debt in issue — those bonds offered little of the protection that western investors typically associate with debt instruments.

When it defaulted, Evergrande’s offshore bondholders included BlackRock, HSBC and emerging market specialist Ashmore. Those that still had some exposure this year, according to Bloomberg terminal data, included UK insurer Legal & General and US hedge fund Saba Capital Management.

“It will be a very, very low price, like 0.0 something,” one investor said of their firm’s “legacy exposure” to Evergrande. Another described his firm’s holdings in other Chinese developers’ bonds, which he hopes to negotiate some recovery on, as “subordinated equity”, a far more junior entity than a bond secured on real assets. “We thought there was a capital structure in China,” he said. 

“Tourist investors,” or those with little experience of investing in Chinese property groups, had ploughed money into Evergrande’s bonds because it was such a well-known name, said one person involved with the fallout. The person added that some hedge funds “decided, without knowing much, to pile in” when signs of distress emerged.

Advising Chinese developers was a “fee machine” for the banks, said one investor who participated in an Evergrande private placement in the mid-2000s. There were fees from the pre-IPO bonds, the IPO itself, and then high-yield bond issues. 

But any western investor who thought they were buying what they would think of as “a normal bond” was under “an illusion”, this person said. “They were always going to be the part that didn’t get paid.” 

Iran would use ‘all means’ to back Hizbollah if Israel launches full-blown war, official says

Aide to supreme leader warns Israel risks triggering regional conflict in the event of all-out offensive against militant group

An adviser to Iran’s supreme leader has warned that if Israel launches an all-out offensive against Hizbollah, it would risk triggering a regional war in which Tehran and the “axis of resistance” would support the Lebanese militant movement with “all means”.

Kamal Kharrazi, foreign affairs adviser to Ayatollah Ali Khamenei, told the Financial Times that the Islamic republic was “not interested” in a regional war and urged the US to put pressure on Israel to prevent further escalation.

But asked if Iran would support Hizbollah — its most important and powerful proxy — militarily in the event of a full-blown conflict, Kharrazi said: “All Lebanese people, Arab countries and members of the axis of resistance will support Lebanon against Israel.”

“There would be a chance of expansion of the war to the whole region, in which all countries including Iran would become engaged,” he said in an interview. “In that situation, we would have no choice, but to support Hizbollah by all means.”

He added: “The expansion of war is not in the interest of anyone — not Iran or the US.”

Tensions between Iran, the US and Israel have soared since Hamas’s October 7 attack and Israel’s retaliatory offensive in Gaza, with Iranian-backed militant groups launching attacks against the Jewish state and US soldiers in the region.

Hizbollah has traded almost daily cross-border fire with Israel, Houthi rebels in Yemen have attacked ships in the Red Sea and fired drones and missiles at Israel, and Shia militants in Iraq and Syria have attacked US troops and fired projectiles at Israel.

Iran and Israel also launched tit-for-tat missile attacks against each other in April — marking the first direct Iranian strike against Israel from its own soil. However, both sides sought to de-escalate the tension, with the respective strikes considered calibrated and causing limited damage.

But fears of an all-out Israel-Hizbollah war have intensified in recent weeks amid increasingly bellicose rhetoric from both camps, raising concerns in the west about how Iran would react.

Iran’s mission to the UN on Friday warned of an “obliterating war” if Israel launched an offensive against Hizbollah, saying “all options’‘ were on the table.

Another Iranian official told the FT that Iran would be unlikely to directly target Israel, instead mobilising the network of Iran-backed militant groups across the region that make up the axis of resistance.

The concerns come as Iranians prepare for a new government following the death in May of President Ebrahim Raisi in a helicopter crash. A presidential election run-off is scheduled for Friday after no candidate secured more than 50 per cent of the vote in the first round on June 28.

Voters will choose between reformist Masoud Pezeshkian, who wants to re-engage with the west to secure relief from sanctions, including those imposed over Tehran’s nuclear ambitions, and Saeed Jalili, an ideological hardliner hostile to the US.

Kharrazi said that while there would be “some differences” in approach depending on who won, the overall foreign policy strategy was determined by Khamenei and would remain the same.

The election would create the chance for “new openings” between Iran and the west, he said. But to achieve that, western states would need to retreat “from the current policies and engage in negotiations with Iran based on equal footing and mutual respect”.

Kharrazi added. “If they decide to co-operate, we are ready for co-operation.”

The Islamic republic would be willing to hold indirect negotiations with Washington about Tehran’s nuclear programme under a new government, if it would lead to the US rejoining the 2015 accord Iran signed with world powers — known as the JCPOA — he said.

Iran and the west have been locked in a stand-off since former US president Donald Trump unilaterally abandoned the JCPOA in 2018 and imposed waves of sanctions on the republic. The Biden administration sought to revive the accord, but diplomatic efforts collapsed after the west blamed Iran for rejecting a draft proposal to save the deal in August 2022.

The US and European signatories to the JCPOA have since become increasingly concerned about Tehran’s expansion of its nuclear programme. Iran has been enriching uranium at 60 per cent purity — close to weapons-grade — for more than three years. It now has sufficient fissile material to produce about three nuclear bombs within weeks, experts say.

Senior US and Iranian officials held indirect talks in Oman in February and May to discuss the crisis, as well as regional hostilities.

“We are not for building nuclear weapons,” Kharrazi said, citing a fatwa issued by Khamenei in 2003 banning the development of the arms. But he said that if Iran faced an existential threat, “naturally we [would] have to change our doctrine”.

He added that if the west triggered “snapback” provisions to reimpose UN sanctions lifted when Tehran signed the JCPOA, in response to Iran’s continued expansion of its programme, “there would be a severe reaction from Iran in terms of changing its nuclear strategy”.

“Up to now, we have not decided to go further than 60 per cent enrichment,” he said. “But we have been trying to expand our experience by using different machines and different set-ups.”

The west has also been angered by Iran’s sale of armed drones to Moscow, which Russia has used in its war in Ukraine.

Kharrazi insisted Iran was neutral in that conflict, saying it sold drones to Russia prior to Moscow’s invasion of its neighbour. When asked about western concerns that Iran could sell missiles to Moscow, he said: “There have been such accusations, but it is not true.”

However, he said, there was “no obstacle between Iran and Russia for arms deals”, adding that Tehran was in negotiations to buy Russian fighter jets.

“We are due to sign a comprehensive strategic agreement with them in the near future,” Kharrazi said.

Red Sea attacks have pushed up costs and put pressure on profits during critical season for trade

At southern Chinese Christmas tree maker Golden Arts Gifts & Decor, the mood is anything but festive.

With freight costs rising due to attacks on Red Sea shipping by Yemen’s Houthi militant group, manager Richard Chan said this year was shaping up to be one of the worst in his more than two decades in the industry.

“We are not talking about making a profit this year. We just need to survive,” said Chan. “The Red Sea crisis has been such a headache.”

The manufacturer, which counts Walmart as a client and exports about 80 per cent of its products to the US and Europe, said the attacks had delayed shipments. As a result, his clients have requested orders be shipped up to a month earlier than usual.

The challenges facing Chan’s factory are mirrored across China, where manufacturers said they were struggling to meet shortened schedules as US and European buyers demanded orders be front-loaded to ensure timely delivery for the festive peak season.

The average cost of moving a 40ft container between Asia and northern Europe at short notice hit $6,855 in late June, up more than 110 per cent in two months and a roughly fivefold increase compared with the same period last year, according to freight market tracker Xeneta.

“Importers all over the world, including US importers, are nervous because of all the uncertainty and the disruption that is going on currently with the Red Sea crisis,” said Simon Heaney, senior manager of container research at maritime consultancy Drewry. “It seems to be extending and there is no end in sight.”

About 19 per cent of US clients and 26 per cent of European customers surveyed by Drewry in May said they were advancing shipping schedules over fears of supply chain disruptions, Heaney said.

Some worry that planned US tariff increases could further push up freight costs as exporters rush to front-load shipments ahead of the introduction of levies, said Thomas Eisenblätter, executive vice-president of global sea freight at Berlin-based freight forwarder Forto. Goods targeted by the US include electric vehicle-related materials, battery parts and solar cells.

As the Houthi attacks — which started in response to Israel’s war in Gaza after the October 7 assault by Hamas — enter their ninth month, ships are taking longer routes to avoid the Red Sea. Big shipowners have in recent weeks added vessels and launched new services from China. But these efforts have not completely eased the pressure on Chinese manufacturers.

Michael Lu, president of China-based gift box producer Brothersbox, which exports to clients including Marks and Spencer and has a factory in Dongguan, said it was paying 40 per cent more than last year to ship goods to the west in some cases. Not all of those costs could be passed on to customers.

The factory has begun to operate on weekends to meet some western clients’ demands for shipments two weeks earlier than expected. The company has had to “recalculate and reassess our production schedules”, said Lu.

Danny Lau, honorary chair of the Hong Kong Small and Medium Enterprises Association, which includes exporters with factories in mainland China, said many manufacturers had been “hurt” by the tighter deadlines.

“Overtime extra pay in mainland China could be 1.5 to 2 times higher,” said Lau. “It would be amazing if manufacturers can still make a profit this year.”

Anny Cheung, senior director at Hong Kong-based Wah Lung Toys, which manufactures in mainland China, said higher shipping costs and lengthened delivery times were also “likely to lead to increased prices for imported goods and potential delays in product availability in the US and Europe” this year.

Carriers’ ability to cash in on high spot prices is limited however as the costs of many shipments are tied to long-term deals. This, combined with increased capacity in the shipping industry and higher costs associated with longer export routes, has limited potential profit rises at carriers such as Maersk and CMA CGM.

Some shipping companies were breaking long-term contracts to take advantage of the high spot rates, said one person in the industry.

With the prospect of further US tariffs to come as both Joe Biden and Donald Trump drum up protectionist rhetoric, it is unclear how long the “vicious cycle” will last, said Drewry’s Heaney.

Golden Arts Gifts & Decor’s Chan said the company had to borrow to buy new machinery and accelerate manufacturing to cut production times.

But that has put pressure on profits at a time when it is cutting prices to keep US and European buyers, many of whom were seeking to source goods outside China. “Things have been so difficult,” he said.

NATO will station a senior civilian official in Kyiv, among a raft of new measures designed to shore up long-term support for Ukraine that are expected to be announced at a summit in Washington next week, U.S. and alliance officials say.

The steps seek to buttress Ukraine’s prospects to eventually join the alliance without offering it membership. They come amid a right-wing political surge across Europe and the growing possibility that former President Donald Trump could return to the White House and reduce American support for Ukraine.

The North Atlantic Treaty Organization is also establishing a new command in Wiesbaden, Germany, to coordinate the provision of military equipment to Kyiv and the training of Ukrainian troops.

The operation, to be called NATO Security Assistance and Training for Ukraine, will be staffed by nearly 700 U.S. and other allied personnel from across the 32-country alliance. It will take over much of a mission that has been run by the American military since Russia’s full-scale invasion of Ukraine in February 2022.

The new initiatives have been in development for months, but they take on new urgency following President Biden’s weak performance in his televised debate with Trump on Thursday and Trump’s complaints about the money the U.S. has spent on Ukraine.

“A big reason for the change is to Trump-proof the assistance effort to Ukraine,” said Ivo Daalder, who served as the U.S. ambassador to NATO from 2009 to 2013. “Rather than having Washington in charge of managing the training and assistance, NATO will be in charge. So even if the U.S. reduces or withdraws support for the effort, it won’t be eliminated.”

With far-right parties gaining voter support in France, the Netherlands and across the European Union, the institutionalization of NATO’s role could also make military assistance to Ukraine less vulnerable to policy swings among alliance members.

“It does provide for durability in the face of potential national political changes, whether it is as the result of elections in the United States, France, the U.K. or even in the European Union,” said Douglas Lute, a retired three-star Army general who served as the U.S. ambassador to NATO from 2013 to 2017.

Current and former U.S. officials said that the steps would enable the alliance to better coordinate Western countries’ efforts to provide Ukraine with military support, in what has become a protracted test of wills between Moscow and the West on NATO’s border. The plan also aims to make Ukraine’s military more like those in NATO.

Alliance members hope that the summit will also agree on an annual financial pledge of military support to Ukraine, although terms are still under negotiation, NATO diplomats said. Recent discussions among alliance members have included setting a goal of roughly $40 billion annually and increasing the value of many countries’ contributions, though the U.S. would likely continue to be a major donor.

While many NATO members say that the alliance should invite Ukraine to join, initiating a process that could take years, the U.S. and Germany oppose taking such a step at next week’s summit.

In an effort to paper over differences within the alliance, officials say, NATO is likely to describe Ukraine’s bid to join NATO as “irreversible,” building on language in an alliance communiqué last year that “Ukraine’s future is in NATO” and a 2008 communiqué that said Ukraine would become a NATO member one day.

Under the initiatives already agreed upon for final approval at the summit, staff from non-U.S. members will work alongside Americans at the new NATO command to align military-equipment donations with Ukraine’s needs and coordinate deliveries. They will also coordinate training for Ukrainian troops, to ensure what is being offered meets Kyiv’s needs. NATO staff won’t themselves do any training, officials said.

The shifts are aimed at building institutional momentum and spreading knowledge of the nitty-gritty logistics involved in channeling provisions from dozens of countries to Ukraine’s borders. NATO Secretary-General Jens Stoltenberg said last month in Brussels that the changes would put alliance support to Ukraine “on a firmer footing for years to come.”

While the change will broaden NATO involvement, the U.S. will continue to provide most of the staff, which will report to Army Gen. Christopher Cavoli, who serves as NATO’s top commander.

The senior civilian official in Kyiv would focus on Ukraine’s longer-term military- modernization requirements and nonmilitary support, linking to both the planned Wiesbaden command and NATO headquarters in Brussels.

The new steps also signal an important shift in alliance posture. NATO initially kept its distance from Ukraine’s military campaign to avoid accusations it was a party to the conflict. The organizational changes mean it is now prepared to take a more substantial role in helping Kyiv fight Russia.

“Since NATO allies have provided over 90% of total security assistance to Ukraine, NATO is the natural place to coordinate assistance to ensure Ukraine is more capable of defending itself now and in the future,” said a senior State Department official.

NATO’s summit comes at a pivotal time in the American political scene. Biden has touted his role in mobilizing the alliance’s support to Ukraine as one of his cardinal foreign-policy accomplishments, as the White House has sought to help Ukrainian forces stand up to Russia’s attack while limiting the risk that the conflict might escalate into a direct U.S.- Russia clash. Biden also said that halting Russian forces in Ukraine is vital to stopping Moscow’s aggression elsewhere in Europe and even beyond.

“I got 50 other nations around the world to support Ukraine, including Japan and South Korea,” Biden said during the Thursday debate. “No major war in Europe has ever been able to be contained just to Europe.”

Trump called Ukrainian President Volodymyr Zelensky “the greatest salesman ever” for persuading the U.S. to provide military support to Kyiv and said that the conflict there was more of a security problem for European nations than the U.S. “because we have an ocean in between.”

Trump also vowed to negotiate a diplomatic agreement between Zelensky and Russian President Vladimir Putin before he was sworn in as president. Trump didn’t explain what the terms of such a settlement might be, but said that Putin’s demand that Moscow keep four provinces in Eastern Ukraine while Kyiv drop its bid to join NATO was unacceptable.

“I will have that war settled between Putin and Zelensky as president-elect before I take office on January 20,” Trump said.

Aircraft maker faces high-stakes choice over door panel blowout case and implications for US government contracts

Boeing must either plead guilty to felony fraud or go to trial against the US government as the next step in a criminal case stemming from its door panel blowout, according to the latest terms offered to the company by the Department of Justice. 

Under the potential plea agreement, the airline would plead guilty to one charge of conspiring to defraud the US and pay a fine of $243.6mn, the second criminal penalty of this size in the case, according to someone familiar with the matter.

The move comes after the DoJ notified Boeing it had breached the deferred prosecution agreement it signed in 2021 in the wake of the fatal Lion Air and Ethiopian Airlines 737 Max crashes.

The notification followed the mid-air blowout that terrified passengers of an Alaska Airlines flight earlier this year.

The potential agreement, which was communicated to Boeing and the victims’ families on Sunday, would also require Boeing to accept a government-appointed monitor as well as three years of probation, said the person familiar with the matter. 

Boeing has until close of business Friday to respond to the DoJ, after which US courts must be notified by midnight Sunday.

Boeing declined to comment. Paul Cassell, a lawyer who represents families of victims in the 737 Max crashes, said the DoJ was “preparing to offer to Boeing another sweetheart plea deal”.

Families “will strenuously object to this plea deal” and “plan to send a formal objection to the Justice Department soon,” he added.

Agreeing to a guilty plea could raise questions around Boeing’s ability to secure contracts with the US government, which make up a significant portion of its revenue — an increasingly important source of funds as the business faces steep costs in its commercial division. 

The legal wrangling comes as Boeing has agreed to buy Spirit AeroSystems in a deal valuing the airline supplier at $4.7bn. 

Boeing had spun off the parts builder in 2005 but remained its biggest customer. It has said repurchasing the airline supplier would boost safety in the manufacturing process.

The last-minute implosion of congestion pricing, which was set to begin Sunday, shows the challenges of solving America’s most intractable problems

NEW YORK—Patrons at the Comfort Diner in Midtown Manhattan recently encountered an unexpected person working the tables: Gov. Kathy Hochul.

Rather than take orders, she went booth to booth seeking opinions about the city’s first-in-the-nation plans for congestion pricing—a $15 toll on vehicles entering the core of Manhattan.

Nobody realized at the time that the Democratic governor was heading toward a blockbuster announcement: she was about to scrap the program after years of planning and hundreds of millions of dollars spent. In one of the most consequential decisions in decades for America’s most prominent city, Hochul soon said she was indefinitely pausing congestion pricing—less than a month before it was set to take effect on Sunday, June 30.

The abrupt reversal, which some attribute to Hochul’s reluctance to impose a new fee in an election year, leaves metro New York grappling with a historic missed opportunity and fiscal mess. There is no relief in sight for the city’s traffic congestion, which is the worst in the world, according to data published last week.

The epic collapse in New York shows how a fear of dramatic change can give the status quo stubborn power over those trying to solve some of America’s most intractable challenges. That leaves policymakers nibbling at the edges of deeply rooted problems, even after investing huge sums of money and political capital.

Blown up in a New York minute were plans for around $15 billion of planned improvements to the city’s ailing mass-transit system, the largest transportation network in North America. The reversal cast aside around $700 million in meticulous prep work, including a $555-million contract to install tolling cameras—which are already up and ready to go—and $33 million for a customer-service center with 100 employees who have already been brought on, officials said. Planners invested thousands of hours, including going to London and Stockholm to research their congestion-pricing programs, according to people familiar with the travel.

What was supposed to be a transformative moment when New York led the way and boldly tackled traffic congestion, air pollution and transit funding, has instead turned into a surprising loss for a broad coalition that includes major employers, real-estate developers and subway riders.

Surprised by the reversal were Hochul’s own lieutenants, including Janno Lieber, a fierce champion of congestion pricing and the chief executive of the Metropolitan Transportation Authority. The MTA—which carries around 5.5 million passengers each day in the New York metro area—now faces a $16.5 billion-financial hole from the loss of money from congestion pricing and federal matching funds.

Just days after Hochul’s announcement, a beleaguered Lieber joined a conference call with advocates in which he said he was equally shocked and remained committed to the program, three people familiar with the exchange said.

“This is devastating,” he said, according to a person on the call.

This account of the rise and fall of congestion pricing is based on interviews with more than two-dozen officials, advocates and lawmakers who were involved in its development. While they were mixed on the merits of the program and whether Hochul was right to delay it, nearly all were astonished by the suddenness of her decision and how hastily it was rolled out.

A big idea

Notable New Yorkers had long pushed to join global cities—including London, Stockholm and Singapore—that are battling gridlock through congestion pricing. The general concept is simple: install cameras at key entry points and charge drivers to enter busy metro centers. This aims to fund improvements to public transportation—enticing more people to use it—cut pollution and boost health.

Then-Mayor Michael Bloomberg, a billionaire technocrat, first put it on the table in 2007 when he included congestion pricing on a list of items he felt could make New York more sustainable as the city’s population was surging.

He pointed to London, which adopted congestion pricing in 2003. In a report the next year, officials there said the number of cars entering the congestion zone fell 18%, the amount of particulate matter in the air declined by 12%, more people rode buses and bus speeds increased by 6%.

Advocates in New York also noted that while there was some initial opposition in London, it dissipated as people felt the full effects.

But Bloomberg hit a brick wall at the state capitol in Albany, recalled David Weprin, an opponent of the plan. Weprin is a veteran elected official in eastern Queens, where many residents, such as himself, live more than a mile from the nearest subway stop.

“You can take a bus to the subway, but it often takes an hour and a half to get into Midtown Manhattan,” he said. “Driving, as bad as traffic can be, is still less than an hour.”

Lawmakers representing New York City’s outer-boroughs and suburbs banded together to kill the proposal. Bloomberg left City Hall, but in 2010, Andrew Cuomo was elected governor—and grabbed the congestion-pricing baton.

Cuomo, raised near Weprin in Queens, grew up tinkering with muscle cars. The MTA wasn’t an immediate priority after his 2011 inauguration. Soon, though, he drove the authority toward ambitious infrastructure projects—even if that meant less emphasis on routine upkeep.

That became a political problem in 2017, when train delays plagued the city, sparking national news and the so-called “Summer of Hell.” Cuomo launched a maintenance blitz, and the MTA tapped Andy Byford to run the faltering subway system.

Byford, a compact Brit, started his career at the London Underground and brought firsthand experience living with congestion-pricing. He resided in central London when that city began the program, and he witnessed the benefits: traffic fell, and officials were able to start upgrading rail and bus service. After winning a third term in 2018, Cuomo embraced the idea. Byford went to the state Capitol to persuade lawmakers.

In 2019, victory came when New York lawmakers finally passed congestion pricing as part of the state budget. Supporters hailed it as a model for the nation.

“This is the most transit-rich part of the entire country,” said Julie Tighe, president of the New York League of Conservation Voters, an environmental group. “We know that people in other parts of the country are looking to us to see what can be done to address traffic.”

Spending and prep

At the MTA, the vote was a starting gun. Janno Lieber, the current MTA chief, then helmed the agency’s capital program and quickly pounced on the project. The former real-estate executive had helped orchestrate the rebirth of the World Trade Center. With his boyish grin, blond hair and often purple tie, Lieber dove headfirst into congestion pricing.

MTA staff started making trips to Washington to discuss what kind of environmental review would be required under federal law, remembered Midori Valdivia, who was brought on in 2018 as chief of staff to the chairman. She recalled early talk about how including the word “pricing” in the title made it more difficult to communicate the program’s goals of reducing traffic and improving transit. It came to naught.

Meanwhile, New York City’s Transportation Department, which also helped with the planning, dispatched its own team. Employees went in 2019 to London and Stockholm to research how those cities’ congestion-pricing systems worked, according to people familiar with the travel.

The MTA signed its first contracts that year. The largest grew to about $555 million to erect and run the toll cameras and gantries, according to MTA documents. Tennessee-based TransCore finished that work in May of this year. Not all of that money has been spent, and it is unclear if the authority will be able to exit from the contract, a spokesman said.

That was just one part. MTA documents also indicate the authority poured about $97 million into initial study and environmental-review work. More than 600 people contributed to the planning and approval efforts, according to Allison C de Cerreño, the MTA official who oversaw it. The environmental review stretched to more than 45,000 pages, according to a summary included in recent court papers.

Beyond the $555-million contract and $97 million outlay, MTA documents show the authority paid $6 million to other public agencies that worked on the program. The MTA also spent $33 million on a customer-service center, for which an official said roughly 100 people have been brought on board. (Their jobs are on hold, the official said.)

The public was also weighing in: 1,800 people spoke at public hearings in August of 2022, and officials received 70,000 comments on their plan.

In May of 2023, when New York’s congestion-pricing plan won approval from the federal government, Gov. Hochul’s office trumpeted a momentous victory for a program that “will benefit millions of people every day.” A news release blared: “Governor Hochul Announces First-in-Nation Congestion Pricing Will Move Forward, Improving Air Quality and Reducing Traffic.”

That step also prompted lawsuits, which alleged the federal government should have conducted a more extensive review. Plaintiffs included Manhattan-bound drivers, the head of the local teachers union and the state of New Jersey, where Gov. Phil Murphy has complained Garden State commuters already paid tolls to use bridges and tunnels to enter Manhattan. (A federal judge on June 20 partially dismissed some of the suits.)

Lieber, however, held firm through it all, and Hochul backed him up. As recently as December 2023, she appeared at a rally with advocates in Union Square.

“Anybody sick and tired of gridlock in New York City? Anybody think we deserve better transit?” Hochul said as the crowd roared its approval. “Well then you love congestion pricing, right?”

Frustration was rising. The typical driver in New York lost a staggering 101 hours to traffic jams in 2023, up 11% from 2019, according to Inrix, a transportation-research firm.

The MTA board approved the toll amount of $15 in March of this year, and the authority said it would turn on the cameras on June 30. According to estimates, about 100,000 fewer vehicles daily would enter the core of Manhattan as a result.

Cold feet

Gov. Hochul, though, was hardly at the peak of her power. She had a closer-than-expected race against a Republican challenger in her 2022 election, and lost both counties on Long Island—considered key bellwethers. Democrats that year lost their House majority in part because of GOP gains in New York.

Hochul’s signature proposal in 2023—to encourage housing in part by allowing for an end-run around local zoning—was rejected and stirred more trouble in the suburbs. She became increasingly sensitive to the concerns of voters in suburban swing areas in 2024, people who spoke to her said, intent upon not suffering the same fate as in 2022.

A poll released in April showed the lawsuits and complaints about congestion pricing were moving public opinion: 63% of registered voters surveyed said they opposed congestion pricing versus 25% who supported it.

“She had been concerned about the timing of this for a very long time,” said New York state Democratic Committee Chairman Jay Jacobs. “She’s always felt that if we do congestion pricing, it is got to be a time when people can deal with it.”

Hochul privately shared her unease with top state lawmakers, but she didn’t say she was planning to reverse course, they and their aides said. At one point, a couple of months ago, Hochul told Kathryn Wylde, the head of the business group Partnership for New York City, that she was hearing concerns from constituents about the financial impact on commuters, Wylde said.

“‘You need to do a better job of advertising the benefits,’’ Wylde recalled the governor saying. “She was right.”

The governor brought up the idea of a temporary pause in conversations with House Minority Leader Hakeem Jeffries, a Democrat from Brooklyn who has also been focused on winning elections in the New York suburbs, people familiar with their conversations said. Jeffries said he was supportive.

And Hochul spoke with people in public places, including the Comfort Diner. She heard concerns about yet another rising cost, the diner’s owner said.

She didn’t give a heads-up to people she had stood with at that December rally. Members of the MTA board—including her own appointees—said they weren’t notified. Lieber only got official word a few hours before the first late-night press reports, he said.

The summer of ugh

Lisa Daglian, executive director of the Permanent Citizens Advisory Committee to the MTA, learned about the governor’s reversal from early-morning news reports. “It’s almost like, OK, it is a bad dream,” she recalled. “When am I going to wake up?”

Hochul released a video announcement from her office that morning, June 5, saying in part that “circumstances have changed.”

“I cannot add another burden to working- and middle-class New Yorkers—or create another obstacle to continued recovery,” she said.

Daglian rushed from the MTA’s headquarters to midtown to join an impromptu protest outside Hochul’s office. She saw Byford, the former subway chief who is now an official at Amtrak. Byford wasn’t going to protest but was headed into the MTA’s lower-Manhattan offices for what was supposed to be a celebratory send-off for his successor Rich Davey, who is leaving to take a job in Boston.

Instead, the 30th-floor conference room where the luncheon took place was like a funeral, people familiar with the gathering said. Byford and other former transit leaders ate chicken, salad and ravioli. There was no alcohol to drown their sorrows.

A strange scene also unfolded at the state Capitol as Hochul and her aides floated proposals for how to make up the lost revenue from congestion pricing, just two days before lawmakers were set to adjourn for the year. The Hochul administration’s idea to raise taxes on businesses was quickly rejected, legislators and officials said. The next plan was “some kind of strangely worded three-sentence proposal” that was halfway between an IOU and a fiscal guarantee, recalled Democratic state Sen. Liz Krueger. It also wasn’t acted upon.

“There were just a lot of people just totally confused about why this was happening and how it could be happening,” Krueger said. “This was a huge mistake, and there isn’t going to be a good punchline unless she reverses herself.”

Lieber said nothing publicly for days. He was just as disappointed as many of the congestion pricing advocates, people who spoke with him said.

In the following week, MTA officials said they would stop working on the long-awaited Second Avenue Subway. The project had opened in 2017 and was due to be extended into East Harlem. On June 10, Lieber spoke out. Gone was the expansive talk of transformation. Now, faced with fewer resources, he said his new priority was “basic stuff to make sure the system doesn’t fall apart.”

A giant hole

Officials have begun puzzling over how to replace the $1 billion a year they planned to receive from the congestion tolls. It supported $15 billion of a $51.5-billion capital plan. The pause also threatens at least $2 billion in federal funding, which after accounting for the cost of running the congestion tolling system put the full impact at $16.5 billion, an MTA spokesman said. The advocacy group Reinvent Albany said this fiscal hole puts about 100,000 construction-related and manufacturing jobs at risk.

“It’s not just about what we can do in the future, it is undermining what we have already achieved,” said Danny Pearlstein, a spokesman for the Riders Alliance, a public-transit advocacy group that supports congestion pricing.

On Wednesday, protesters gathered outside an MTA board meeting in Manhattan, holding signs reading “New Yorkers Demand Congestion Pricing Now!” Pearlstein led the crowd in chants of “flip the switch, flip the switch!”

More than 100 people signed up to give public comments at the session. One was Jessica Scarcella-Spanton, a state senator from the outer borough of Staten Island, who was a rare supporter there of Hochul’s decision.

“Not only would this have a very detrimental effect on my constituents’ pockets in the cost of it, but the environmental issues are a major problem,” she said, noting traffic could shift outside the congestion zone. “It’s not right to place one borough over another.”

A poll released June 20 found 45% of voters supported Hochul’s decision to put congestion pricing on hold, compared with 23% who opposed it and 16% who were in the middle. But the same poll said Gov. Hochul’s approval ratings had fallen since May and were at an all-time low, with her favorability at 38%.

During the meeting, transit officials detailed the long list of projects that would have to be put off due to the halt of congestion pricing. The purchase of new subway trains and buses? Deferred, along with efforts to make subway stations more accessible. The replacement of 1930s-era subway signal systems on some train lines would also have to wait.

Hochul said in a statement that she is committed to finding another funding source for the capital improvements and “there is no reason for New Yorkers to be concerned that any planned projects will not be delivered.” Lieber said Wednesday he believes the pause is temporary and congestion pricing will eventually happen.

Meanwhile, traffic continues to crawl in Midtown Manhattan. New York City had the worst traffic congestion in the world in 2023, beating out major metropolitan areas such as Mexico City and London, according to Inrix.

Average traffic speeds in Midtown are the worst they have ever been, according to Sam Schwartz, who has tracked traffic trends in the city since the 1970s. The average travel speed in Midtown fell to 4.5 miles an hour in May, the lowest ever recorded for the month. 2024, he said, is on pace to be the worst year ever for traffic congestion.