Handing Connecticut’s chips to a hustler
The Vampire Squid has come to live in our State Capitol.
Our newly nominated Commissioner of Economic Development and Senior Economic Advisor is David Lehman who volunteered to leave his job at Goldman Sachs to serve the common ruck of Connecticut.
Matt Taibbi in 2010 famously described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
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The description was so apt that it became — in Taibbi’s judgment — overused.
So let’s come up with our own analogies. Let’s agree that the New York Knicks need a new coach. Let’s hire a very successful sports bettor. Let’s not hire somebody who has built a successful basketball team and taught them offense and defense. Instead, let’s hire someone with a proven facility for guessing whether the team will beat the point spread on any given night.
Right away, you’d have some questions about whether this person has the right background.
But then imagine that the bettor you’re hiring to coach the Knicks was prominently associated with one of sports betting’s bigger scandals. That’s what’s happening here, but, to explain it, I’m going to need your patience. The internet has trained you to react strongly to situations that can be boiled down to, “OMG! He’s in blackface” or “That kid is smirking at that Indian!”
Many things, more important things, are happening while you are thus occupied.
Ready? In 2006-2007, Goldman Sachs faced a problem. The firm was deeply involved in the world of Collateralized Debt Obligations (CDO). In simple terms, these are huge numbers of mortgages. The money people owe on those mortgages is treated as an asset.
During that period, Goldman Sachs suddenly realized that many of those mortgages were worthless, because the borrowers could not and would not pay the money they owed. The company went into crisis mode, with traders working long hours and sleeping little.
Their solution: structure these malarial “assets” into packages and then bet against those packages — the so-called short position. At the same time, Goldman Sachs also marketed the same CDOs to its clients. In other words, they told some people these were good investments while they themselves were treating them as bad investments. You make money off the suckers, and you make even more money by betting the opposite way.
At the heart of this strategy was the “structured products” department at Goldman. It had two co-chairs. One of them was Lehman.
When the American economy cratered in 2008, people were angry about all kinds of things. One group of investors gradually realized they had been suckered by Goldman into making positive bets even as the firm made a fortune on its negative bets. They complained to regulators and to Congress. They sued.
One object of their ire was a CDO called Hudson Mezzanine. Goldman had its sales people out pushing investors to jump in. What was in the CDO? Goldman said it was “sourced from the Street,” which would usually mean that Goldman had nosed around Wall Street and plucked a mixture of blossoms for this bouquet. In reality, all the assets were already sitting in Goldman’s books. The company made a small long bet so it could claim its behavior was “aligned” with its own clients. It made a much bigger short bet ($2 billion). Cha-Ching!
When Senate investigators inquired as to how Goldman could possibly say that Hudson - entirely made up of Goldman’s own troubled assets — was “sourced from the Street,” David Lehman’s answer was that Goldman is, after all, part of the Street.
Did this hurt you, Average Joe or Jane? Well it hit hedge fund owners a lot harder, but if you had money parked anywhere in the investment ecosystem, I’m comfortable saying yes. Goldman’s cynical behavior helped push the market’s influenza from “manageable at home” to “call an ambulance.” I have retirement money with Morgan Stanley which took a huge hit by getting on the “up” escalator of Hudson Mezzanine and then watching its “friends” from Goldman sail past on the “down.”
And, to use a favorite trope of Lamont’s, Lehman was in the room where it happened. He was SO in that room.
In the same period when Lamont’s office was trial-ballooning a sale taxes on groceries, it was also bringing this tender shepherd of the American economy into the fold. That suggests a mentality blinded by Greenwich gold. They didn’t think we’d mind paying more for our Pop-Tarts, and they didn’t think we’d notice the vampire squid sitting by the throne.
Lehman is scheduled to start work Feb. 19. His nomination will be sent to the General Assembly for advice and consent. Here’s an idea! Ask him about this stuff. Also in 2007, Goldman had a White Castle hamburger eating contest. Talk about the Wolf of Wall Street: roughly 10 or so traders wolfed down meat and bread while their colleagues bet on the outcome. Maybe ask about this too. Just to brighten the mood.
Colin McEnroe’s column appears every Sunday, his newsletter comes out every Thursday and you can hear his radio show every weekday on WNPR 90.5. Email him at firstname.lastname@example.org. Sign up for his newsletter at http://bit.ly/colinmcenroe.