Senate report on Lamont appointment paints damning picture

March 14, 2019

Gov. Ned Lamont has nominated David Lehman to be his senior economic adviser, and questions have arisen about Mr. Lehman’s experience as co-chairman of the Mortgage Department at Goldman Sachs before the recent financial crisis. Many people say his actions then were ethically flawed. Senate Leader Martin Looney says, “We have to do a pretty careful vetting process” before supporting his appointment.

The vetting process should not be difficult. I did a quick internet search and found, within minutes, the U.S. Senate Permanent Subcommittee on Investigations report on “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.” Browse through pages 498 to 513 to see what the U.S. Senate report says was going on.

“Goldman’s senior management knew its sales force was selling CDO securities at inflated prices, and that the CDO securities were rapidly losing value. ... In addition, even after selling the CDO securities, Goldman marked down their value, causing some customers to incur substantial losses within days or weeks of making a purchase.” (p. 507-508)

“One Goldman salesperson expressed remorse: ... ‘Aggregate loss for our clients on just ... 5 trades alone is ($1 billion-plus)’” (pg. 508). If a salesperson noticed something like that, shouldn’t Mr. Lehman have?

In Mr. Lehman’s recent testimony in Hartford, he said, “I did not know at the time that those securities would be worthless.” This testimony may be true technically — he didn’t know for a fact that the securities would be worth exactly $0.00. But he had to know that they would not be worth much. The Senate report quotes an email a former Goldman managing director sent to Mr. Lehman when he got his new post as head of the CDO Origination Desk: “The HG (high-grade) deals in particular are very poor. I thought the alladin deals had some potential but fortius 2 is going to be a real mess. These are not just my views — they are from customers whose views resonate in the market. ... I should add altius 3 is a doozy as well. I’ll spare you the detailed list.” (pg. 498).

The report even quotes Mr. Lehman: when a Goldman “sales representative asked about providing information about the firm’s CDO marks to a customer, Mr. Lehman wrote: ‘We cannot put this on paper — it concerns me they want something specifically in writing.’” (pg. 509-510).

The report says one Goldman executive, a Mr. Sparks, testified that “in 2007, the Mortgage Department expected its CDOs ‘to perform,’ (but) a contemporaneous draft that he helped prepare in May 2007 stated that the ‘desk expects (the CDOs) to underperform.’ Many other emails provide his negative views of the CDO market at the time, including emails in which Mr. Sparks described the subprime market as ‘bad and getting worse’, and directed Goldman’s mortgage traders to ‘get out of everything’... He wrote, among other things: ‘Game over,’ ‘bad news everywhere’ and ‘the business is totally dead’ ... many of Mr. Sparks’s dire predictions were made before three of the four CDOs discussed at the hearing were even offered to customers.” (pg. 512).

According to the report, the three CDOs were issued in March and April 2007, before Mr. Lehman was made head of the CDO Origination Desk in May, but is it possible he was completely unaware, and remained completely unaware, of what was going on? Was he totally clueless? His response to the salesperson doesn’t sound like it.

The report sums up, “Customers who purchased CDO assets from Goldman in 2007 generally suffered substantial losses from those investments, and several went bankrupt. ... Goldman was not only aware of its clients’ predicaments, but in some cases, Goldman purchased CDS protection or equity puts on its clients’ stock, essentially betting that the stock price would fall or the company would lose value.” (p. 510 - 511).

In the report overview, it’s stated that Goldman “continued to market new CDOs in 2007, even as U.S. mortgage delinquencies intensified,” and “kept producing and selling high-risk, poor-quality structured finance products in a negative market, in part because stopping the ‘CDO machine’ would have meant less income for structured finance units, smaller executive bonuses, and even the disappearance of CDO desks and personnel, which is what finally happened.” (p. 11)

Please remember that the details above are from an official U.S. Senate report. Shouldn’t reading a U.S. Senate report be part of the vetting process?

Gov. Lamont, Sen. Looney and any politician who will be voting on Mr. Lehman’s appointment — if you care about the state’s economy, before putting him in charge of it, would you please spend a few minutes reading just a few pages of the official Senate report on what Goldman Sachs and Mr. Lehman were involved with? Even just browsing them should be enough. Pages 498 to 513 should do.

Greg Darak lives in Trumbull.