Ex-Goldman Partner Has a Plan to Fix Connecticut’s Broken Economy

(Bloomberg) -- David Lehman’s appointment to the top economic post in the state of Connecticut was bound to cause a stir.

Not only was Lehman a partner at Goldman Sachs Group Inc., a bank whose name alone triggers outrage and cries of “Government Sachs” from its many detractors, but he helped oversee the unit that peddled those complex subprime mortgage securities that blew up during the financial crisis a decade ago. His role in the affair led to a public appearance before a fact-finding commission in Washington.

And yet, when Lehman, a decade-long Greenwich resident, reached out one day early this year to the new Connecticut governor, Ned Lamont, to express his interest in joining his administration, the response that came back was quick and emphatic: Absolutely.

Avoiding controversy, it turns out, was not on the forefront of Lamont’s to-do list as he put together his cabinet. Instead, he was -- and still is -- almost singularly focused on jump-starting a state that, while long the richest in the country per capita, has failed to rebound from the crisis. And Lehman fit perfectly into the roster of ex-corporate bosses he was assembling as advisers.

“He has the smarts, the private sector background, a damn good network of business associates around the region and around the country,” said Lamont, a Democrat. “He’d be a game changer.”

A registered Republican, Lehman, 42, left a 15-year career at Goldman, most recently as global head of real estate finance, to take a job (foregoing a salary) that’s arguably now the most important in the administration: senior economic adviser and commissioner of Connecticut’s Department of Economic and Community Development.

Fund Managers

While the state might be best known as home to billionaire hedge fund managers like Ray Dalio and Steve Cohen, high-paying financial and manufacturing sectors are shedding jobs and the state’s population has declined by 22,000 since 2014. Only the economies of Alaska and Wyoming performed worse in the last 10 years.

The only bright news is that while Connecticut’s economy lags, its finances have stabilized, in part because of Wall Street bonuses. The state’s rainy day fund is on pace to reach $2.8 billion by June 30, providing a cushion in a recession.

Lehman’s prescriptions for Connecticut include some of the standard economic development tropes: faster rail service, better highways, closer partnerships with universities, better job training.

But he is also proposing unconventional approaches. He wants to reverse the typical way states lure companies by handing out subsidies only after they’ve already created high-paying jobs, not before. It’s an approach that may leave corporations cold given the fevered competition to land jobs.

Lehman also wants to engineer a population shift to the state’s cities, which now lack the heft that tend to attract companies and young people. The state should set of a goal of doubling the populations of its cities -- which now number between 100,000 and 150,000 -- over a 25-year period, Lehman said.

“We’ve got the suburban and rural thing covered,” he said. Economic growth “is going to be in these higher density transit-oriented developments.”

Executive Suite

Lehman is among a host of former private-sector executives who have taken jobs with Lamont, a former telecom executive. Former PepsiCo Inc. chairman Indra Nooyi helps run a group that recruits businesses to Connecticut. Colin Cooper, former chief executive officer of the Whitcraft Group, an aircraft parts maker, was named the state’s first chief manufacturing officer to advocate for Connecticut companies. Josh Geballe, a former International Business Machines Corp. executive, was charged with overhauling aging computer systems.

Lehman began working in commercial mortgage backed securities at Goldman in 2004 after stints at Morgan Stanley and Deutsche Bank. Three years later, he was asked to sell off the firm’s collateralized debt obligations as Goldman believed that the subprime mortgage market was facing trouble.

One CDO, called “Timberwolf,” became notorious after a former Goldman executive described it as ‘one shi--y deal’ in an email released by U.S. lawmakers investigating the bank. Lehman instructed Goldman personnel not to provide written information about how the bank was valuing or pricing the Timberwolf securities, according to the Senate Permanent Subcommittee on Investigation’s 2011 report on the financial crisis.

Lehman, who was never accused of wrongdoing in the sales of subprime mortgage products, was grilled about this period at his nomination hearing in Hartford in February.

“Any suggestion that I knew a product was going to be worthless and subsequently sold it to a client is completely and wholly untrue,” he said at the hearing. Reducing Goldman’s exposure to subprime mortgages was prudent risk management, he said. And, he said in an interview, that Goldman provided as much information as it had on prices in a volatile market.

“I’ve always conducted myself honestly and transparently and acted in good faith with all my dealings at Goldman Sachs,” Lehman said.

He was confirmed by a vote of 28 to 8.

‘Perfect Guy’

Lehman, known at Goldman as a convener and connector, is the “perfect guy” to bring Democrats and Republicans, business and labor together and sell the governor’s vision, said Susie Scher, global head of Goldman Sachs Financing Group.

“He’s a guy who can sit in the middle of disparate folks with differing objectives and bring them together because they all like and respect him,” she said.

Lamont is counting on Lehman’s Wall Street connections to produce results. Former clients Brookfield Properties and Centerbridge Partners are considering investments in Connecticut, according to Lehman.

Though it enjoys a highly educated population -- with the fourth-highest share of residents with bachelor’s degrees -- Connecticut lacks thriving metropolitan centers. General Electric Co. cited Boston’s “diverse and technologically fluent-talent” as the main reason for leaving its suburban campus in Fairfield. Aetna Inc.‘s former CEO Mark Bertolini told the New York Times that it was hard to recruit people working in the “knowledge economy” to Hartford.

One way Lehman wants to boost cities is by focusing economic development incentives in low-income areas known as Opportunity Zones. Twenty-nine of the state’s 72 zones are in its four biggest cities. The program, included in the Republican tax overhaul, has been controversial because some incentives have gone to developers in affluent areas.

State Subsidies

He also wants to change how Connecticut attracts business. He doesn’t want to dangle billions of dollars in state aid upfront. That’s how cities and state usually operate, and it’s been criticized as overly generous to business with questionable results.

Connecticut, for instance, has awarded $500 million in incentives since 2011 to companies including hedge-fund giant Bridgewater Associates and Walt Disney Co.’s ESPN. About 4,100 new jobs were produced so far but at a whopping cost of $122,000 per job, according to a state report.

Instead, Lehman hopes to present to lawmakers next year a strategy that would reward businesses in targeted industries, such as financial services, life sciences and renewable energy, in the years after they create jobs.

Businesses that add at least 25 eligible jobs at a certain wage would be reimbursed 25% of the state income tax paid by the added employees as long as they stayed in place. Businesses in opportunity zones would be eligible for rebates of 50% of added income tax collection.

“We’re not investing in the companies, the burden is on you to create jobs,” he said. “This is a less risky, lower cost way to attract business.”

‘Pretty Myopic’

Some experts aren’t so sure Lehman’s plan would work. The incentives are not only relatively small but companies prefer to get their tax breaks or other aid before they create the jobs, said Timothy Bartik, senior economist at the Upjohn Institute in Kalamazoo, Michigan and an expert on incentive programs.

“There’s a lot of evidence that companies are pretty myopic at how they look at things,” Bartik said.

Bucking Republican orthodoxy, Lehman said that cutting taxes isn’t the key to boosting the state economy. Connecticut has excellent schools and access to quality health care, which come at a price. Rather, after a series of tax increases in recent years, businesses and residents want a stable tax and budget policy, he said.

“If we don’t provide tax certainty,” Lehman said, “then we’re not going to attract that investment.”

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net, Larry Reibstein, Anne Reifenberg

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