The New York Times dissects the claim by Jeff Michael of UOP that Lehman Brothers deceived Stockton when it sold it a $125 million pension obligation bond.
“A recording of the Stockton City Council meeting where Lehman recommended the pension obligation bond shows that members sensed there was a catch, but they had trouble nailing down what it was.
“I don’t understand the bond market,” one said as he struggled with the projections showing that Stockton could never pay down its debt to Calpers …”
I viewed the same council meeting for this column. It was clear the council didn’t understand the risk it was taking. Mark Moses, the city’s CFO, obviously approved of the deal, and Gordon Palmer, the city manager, sat there passively, like wallpaper, tacitly consenting. In other words, the council relied on staff, and staff blew it.
Probably outfits like Lehman Brothers liked flying business class into the boondocks to harvest the dumb money. There are about $64 billion in pension obligation bonds out there now. Most are in the red.
But does that mean Lehman Brothers is the major culprit? They bear a measure of responsibility, yes, just as a used car salesman bears a measure of responsibility if he sells you a lemon. But a smart car buyer would have taken the car to a mechanic for an opinion, discovered the risks and backed off the deal.
Ascribing blame to Lehman Brothers assumes the city of Stockton was too unwitting to wake up and smell the lemon. I don’t believe city executives paid six figures should be led like lambs to the slaughter. But firing people for incompetence in Stockton was like saying no to perpetual raises. It just wasn’t done.