Richard Fuld - Lehman Brothers Bankruptcy Testimony (Enhanced Audio)

thank you very much mr. Fuld without objection the chair and the ranking member will control 10 minutes which they can use or reserve and use at a subsequent time hearing no objection that'll be the order chair will recognize himself mr. Fuld the committee our committee requested all the documents relating to your salary bonuses and stock sales and the committee staff put together a chart which I hope will come up on the screen this chart will show your compensation for the last eight years it shows your base salary your cash bonuses and your stock sales in 2000 you received over 52 million dollars in 2001 that increased the 98 million dollars it dipped for a few years and then in 2005 you took home 89 million dollars in 2006 you made a huge stock sale and you received over a hundred million dollars in that year alone are these figures basically accurate sort of those are the documents that we provided to you I would assume they are okay but the bottom line is that since 2000 you've taken home more than four hundred and eighty million dollars that's almost half a billion dollars and that's difficult to comprehend for a lot of people your company is now bankrupt our economy is in a state of crisis but you got to keep 480 million dollars I have a very basic question for you is this fair mr. chairman your first question was about this slide are those numbers accurate they are accurate the way you have put them up on that slide but I believe your number of cash and salary bonuses are accurate the option exercises the way you have them portrayed here I believe represent a full option without the strike price and the only reason I exercise those options was because they came to it maturity I have not exercised those I would have lost it there was that stock sale well I'll leave that I'll leave the record open for you to give me any changes in that list I would say but basically didn't you take home around four to five hundred million dollars is the head of C Lehman Brothers for the last since 2002 now the majority of my stocks Uruk aim should be the majority month of my compensation came in stock the vast majority of the stock that I got I still owned at the point of our filing the stock is in addition to the numbers that I've indicated because those were your salary and your bonuses now you had bonuses and in addition to that you had some stock sales you've lost some money of the stock that you've received as compensation which you've received as compensation on top of these other figures so you've been able to pocket close to half a million dollars and my question to you there's a lot of people ask is that fair for the CEO of a company that's now bankrupt to have made that kind of money it's just unimaginable to so many people I would say to you the 500 number is not accurate I would say to you that although it's still a large number I think for the years that you're talking about here I believe my cash compensation was close to 60 million which you have indicated here and I believe the amount that I took out of the company over and above that was I believe a little bit less than 250 million still a large number there's still a large money a lot of money you have a 14 million dollar oceanfront home in Florida you have a summer vacation home in Sun Valley Idaho yet you and your wife have an art collection filled with million-dollar paintings your former president Joe Gregory used to travel to work in his own private helicopter I guess people wonder if you made all this money by taking risks with other people's money I you could have done other things you had high leverage 30 to one then higher you didn't pay out billions of dollars in dividends and you didn't have to pay out these millions of dollars in dividends and bonuses you could have saved some of these funds for the lean times but you didn't do you think it's fair and do you have any recommendations on fundamental reforms that would bring the new approach to executive compensation because it seems that the system worked for you but it didn't seem to work for the rest of the country and the taxpayers that now have to pay up to seven hundred billion dollars to bail out our economy it can't can we can't continue to have a system where Wall Street executives privatize all the gains and then socialize the losses accountability needs to be a two-way street do you disagree with that and do you have any recommendations of what we ought to be doing in this area mr. chairman we had a compensation committee that had spent a tremendous amount of time making sure that the interests of the executives and the employees were aligned with shareholders my employees owned close to a thirty percent of our company and that was because we wanted them to think act and behave like shareholders when the company did well we did well when the company did not do well sir we did not do well well mr. falled there seems to be a breakdown because you did very well when the company was doing well and you did very well when the company wasn't doing well and now your shareholders who owned your company have nothing they've been wiped out I'm gonna reserve the balance of my time and we're gonna go on to other members mr. Shaye's if you yield me two minutes gentlemen's misfold I'd like to ask you first who who appoints the compensation committee the Compensation Committee is now appointed by the corporate governance committee of the board but but did you have a major role in appointing the compensation committee I believe I had more of a role in the early or mid 90s clearly less of a role these last number of years and then finally of the 10 million shares that you had had in the company that's what you have right now 10 main shares no I don't have the exact amount I think is closer to 8 million shares and that does not include the options that expired worthless well actually they haven't expired that are still there with a longer term vesting but with a much higher strike price than obviously where the stock is today thank you thanks Jim Thank You mr. Shaye's I want to recognize miss Maloney for five minutes thank Thank You mr. chairman we are in a financial crisis and we lost four major investment banks and in a week and taxpayers have been called upon to assume a potential 1.7 billion dollars in taxpayer liability to backstop our financial institutions during this hearing today we've seen a long list of examples of deregulation and we've heard about the net capital rule which was eliminated so that Lehman and other investment banks could ramp up their leverage to very dangerous high levels putting their institutions at risk and for almost 30 years this rule kept investment banks from taking on debt more than 12 times the value of the bank's investments firms were required to stop trading if their debt exceeded that ratio as a result most investment banks did not take on excessive debt yet this report in the New York Times and I'd like a permission to have it referenced or put in the record without objection last Friday called the agency o4 rule at banks pile up new debt and many people feel that this was a major cause of the crisis and they reference a meeting in April of 2004 and I'd like to ask you were you at that meeting did you lobby for this change why did Lehman want to increase its leverage and in hindsight do you think the SEC rule that changing this SEC rule was appropriate for protecting safety and soundness the stability of our markets and and taxpayers money congresswoman I was not at that meeting I believe in 2004 and I do not recall if any other of my people were there I had a chance to while I was sitting in the waiting room I saw I would assume almost all of the first panel the information about leverage I think has been grossly misunderstood there are two numbers one is gross leverage and one is net leverage gross leverage includes excuse me if I get technical if I get too technical please stop me close to half of our balance sheet if not more was what we called the matched book the match book was predominantly government securities and agencies that we took on our balance sheet to finance for our clients we were one of the top US Treasury government traders and financers meaning financing the US government debt and we supplied a tremendous amount of liquidity to institutional investors that owned US government debt and agencies at times that was as high as 300 - probably more three hundred billion dollars I heard some of the earlier remarks about if he lost three or four percent of that for the match book you do not look those are government securities so the real number the effective number is net leverage so did you did you did you lobby for this Capitol rule change and do you think it contributed to the financial instability and loss of safety and soundness and financial institutions such as your own that allowed this increased leverage I myself did not lobby for the increased leverage did the Lehman Brothers lobby for it I'm not aware of that III would like to ask you now that we have the opportunity of looking back and and and we want to look forward on what needs to be done if you had to give government advice on how we could strengthen the safety and soundness of our institutions and the accountability and transparency that all of us want what would you recommend to change the system in my written testimony I spoke about the need for additional regulation and new regulation because when the original regulations were written it was a very different environment I believe there were 10 million shares a day traded and today they're close to 5 billion shares traded the electronic connectivity today not only within this country but country to country investors today given that electronic connectivity have the right to move their money to the highest returning asset and money moves very quickly and freely so it's not just about regulation within the US I believe it's also about more of a matrix regulation that is more global in nature I would focus also on capital requirements capital of requirements meaning more capital for less liquid assets and a more robust understanding of mark-to-market which I believe is one of the pillars of the new plan mark-to-market during periods of stress create one set of numbers and obviously in a functioning non credit crisis environment purchase another set of numbers then erect your prepared statement which has these recommendations are in the record and we want to move on to other questions that you want to add one last point yes please and the other is so I mean I strongly believe it is the creation of what I would call a master netting system where all capital market counterparties download each night all their transactions to one local spot first in the US and then eventually hopefully make that be global that's about all transactions and trades it's about positions it's about capital it's about leverage excuse me and we give whatever regulator is then in control of that master netting system a complete view of the financial landscape the available capital to each and every asset class flexibility within those asset classes and vulnerability within those asset classes and vulnerability of one institution versus the next what I am proposing is clearly expensive constantly but by comparison to the unprecedented regulation that this Congress has just passed it is a fraction and I believe money well spent Thank You mr. mica five minutes thank you Thank You mr. chairman and looking at by your first year comment i'm layman brothers primarily dealing in some most for most of its history yes or i apologize i cannot hear you i'm sorry can you hear me now yes again you when you opened your statement you said that lehman brothers and this was around for 150 years delta and some pretty hard assets and some secure investments you've been around a while what what turned the corner for you to get into some of the more speculative ventures like sub-prime and some of the other again riskier investments as I said in my verbal testimony our participation in the in the mortgage related businesses was clearly a natural for us given our dominance and fixed income that was something that went back a number of years and even as I listened as I say to the panel before me they correctly pointed out that this was a goal of the government to provide funding and mortgages to a number of people that typically [Music] would not or could not have received the more than one of your big him well one of the big packagers or the competitor so to speak was Fannie Mae which was deep into this and you were you were dealing in some of the paper I think for secondary markets another securitized mortgage paper to basically package it make money off it it is that right yes sir okay well what was layman Brothers exposure to the dead of Fannie Mae and Freddie Mac and what role did their collapse have to play in precipitating some of your financial troubles didn't matter our exposure to both Fannie Mae and Freddie Mac was de minimis or okay about their collapse did that help precipitate any problems with your firm it certainly set the stage for an environment as I talked about loss of confidence and credit crisis mentality that permeated our market clearly set set the stage for investors losing confidence counterparties asking for additional collateral and clearly an environment that lost liquidity I noticed which is the lifeblood of the capital of market system I noticed some questions were asked about your political participation I polled Lehman Brothers contribution contributions to federal candidates for the last ten years fortunately I didn't find my name there but it's not like some of the other members of Congress I added some of this up it's about three hundred thousand dollars that you gave to influence members of Congress now I also got your personal which wasn't much you probably bent a little bit too much on Hillary to think but this is this is pretty much the extent of your financial contributions hi members of Congress I believe that that was a result of LeMans pact right which was not corporate monies right all right I'm just telling no but where do you hear this one and yeah if you haven't discovered your role you're the villain today so you got to act like the villain here but guess what Fannie Mae did in the same period of time a hundred and seventy five million dollars in lobbying contracts over ten years does that surprise you you were out lobbied so it sounds like other rather than just some greed on Wall Street we had a little greed in Washington what would you say to that I think that's more of a matter for your committee sir thank you we now go to mr. Cummings thank you very much mr. chairman mr. fella folder I really appreciate that you began your testimony by taking full responsibility for the company's downfall which occurred on your watch but there are some concerns that I want to get to as you know the American taxpayer many of them our constituents just we just passed legislation giving seven hundred billion dollars to rescue Wall Street one complaint I've heard over and over again from my constituents was that there seems to be a complete lack of accountability they see Wall Street executives like you walking away with millions of dollars and it's very interesting when you were talking about the chart that mr. Waxman was so join the board you said that it was inaccurate but I'm gonna discount it for you and instead of 448 million over 8 years let's say 350 how about that 350 is that okay so we discounted a little bit you said it was not accurate what would you say is accurate I'd say that's closer sir okay I want to ask you about one of the emails obtained by the Committee on June 9th 2008 a former top Lehman executive can you hear me okay yes sir but no the Anglin sent an email to Hume Magee who was the global head of investment banking and Lehman the email says that many bankers have been calling in the last few days and the mood has become truly awful it warns that and I quote all the hard work we have put in could unravel very quickly end of quote and it offers the following advice it says some senior managers have to be much less arrogant and internally admit that major mistakes have been made we can't continue to say we are great and the market doesn't understand and of quote mr. McGee forwarded this email to you on the same day and explained that it was representatives representative of many others when you read the email and this is interesting what was your actual reaction I'm just curious I'm sorry sir what was the date of that I'm sorry that would be June 9 2008 you remember that email I do not oh let me let me try to refresh your recollection a little bit so let me tell you what you did says you don't remember the email here's what happened you didn't take any responsibility instead three days later mr. fold on June 12th you fired Aaron Allen your chief financial officer and Joseph Gregory your chief operating officer but you know but you you stayed on and admitted no mistakes you were CEO why didn't you take responsibility like today you said you took forest why do you take responsibility for Lehman's mistakes why did you continue to say quote we are great and the market doesn't understand in your testimony today right here right now you continue to deflect personal responsibility you cite what you call a litany of reasons for Lehman's bankruptcy mr. Fuld I want you to I want to ask you about your personal responsibility since you've taken it do you agree that Lehman took on excessive leverage under your leadership please answer yes or no it's not that easy I will say it say to you our leverage at times was higher but as we entered this more difficult market over this last year we continued to bring our leverage down so that even at the point congressman on September 10th when we announced our third quarter results we had grossly reduced our balance sheet by close to 200 billion specifically around residential mortgages and commercial real estate and leverage loaned mr. Fogg mr. Feld I've only got I've got about a less than a minute I gotta get this question in I assume your answers no I'm just giving you the benefit of doubt at the end of the day we work hard our leverage was way down sorry sir one of the best leverage ratios on the street and our tier 1 capital was one of the highest so you feel you feel comfortable with with that that what you did is that right that's not one of the things that you said your yes sir okay fine do you regret spending 10 billion dollars in lemons cash reserves on bonuses stock dividends and stock buybacks as your firm face the quiddity crisis do you regret that now I heard some of that while I was in the other room I think that is a misunderstanding which I'd like to clear up well let me go back to because it's important that this committee understands exactly what that was when I talked about my employees owning close to 30% what's typical of Wall Street is you take a percentage of your revenues and you pay your people we asked our employees to take a big percentage of their compensation in stock and so what that 10 billion was we had close to 19 billion of revenues what most of that 10 billion was was compensation to our employees that they received in stock with a five-year forward vest so they didn't get that stock until 5 years which aligned our interests are being employees with the interest of shareholders to avoid dilution because we took that 10 billion gave it to the employees in stock we had to take the 10 billion that they didn't get and go back into the open marketplace and buy back that stock so that we did not dilute our shareholders and we did it each and every year from where you sit it looks like we just spent an extra 10 billion that is not sir what we did thank you very much mr. chairman it sounds like though yield myself time here that you were trying to not to dilute the payment to those employees while you were in a liquidity crisis wouldn't it have made more sense to use that money to pay off the debts that you were mahem early on your shoulders at that point and you knew that you were in difficult situation at that time at the end of the year last year I didn't believe that we had that problem you didn't believe you had a liquidity problem and we did not have a liquidity problem at the end of last year we had just completed a record year none of which by the way came from mortgages and we paid our people fairly and what we thought was competitive with the rest of the street okay I accept your answer that you didn't think you had a liquidity problem so you were trying to make sure your employees were fully compensated yes sir okay thanks Thank You mr. chairman I'm just folding looking at your written testimony you say ultimately what happened to Lehman Brothers was caused by a lack of confidence I have a different view and I have a couple questions for you about what really comes down to as we're hearing that the subprime crisis the predatory lending crisis the mortgage foreclosure crisis now you said you listened to the first panel and their testimony I'm going to summarize I heard I heard most of it but yes sir they said that there was a period of easy credit that housing prices were escalating and then declined that there was securitization of mortgages that houses became like ATMs where people were drew their equity and excess of CEO compensation that's not necessarily our experience in Ohio sorry that's not what it is not necessarily our experience in Ohio in 2001 my community held a series of hearings on then subprime lending predatory lending at the behest of city commissioner Dean Lovelace and we found that in many instances what we were seeing in the escalation of foreclosures was a result of inflated property values at the time of loan origination in fact we then turned to the Miami Valley Fair Housing Center in our community an agency that was helping people who were in the foreclosure crisis and Jim McCarthy from there reports that over 90% of the people that they were dealing with were actually refinances and that many of them had issues of the original value of the property at the time of refinancing where the the property values were inflated now clearly we are in a period now of decline or slow growth in some areas which is compounding the problem but I think that people are getting off too easy when we say that like that declining property values are the problem and I want to tell you what like my concern here is I believe that if you issue a loan at origination where the loan value exceeds the property value and that you then issue securities based upon that loan and you don't disclose that gap that existed at loan origination that you are in fact I believe stealing I believe that we're in this series of situations where people aren't disclosing that at loan origination in fact there was already a gap between value and loan amount and that the declining house values really just emphasize it and and getting compounded so I have two questions for you the first is do you believe that if mortgage-backed securities are issued and they do not disclose at origination that the original loan amount exceeds the property value that it's stealing and secondly would you please describe lehman brothers role in both issuing subprime loans and mortgages act securities i do not believe that any of the original mortgage securitizers knowingly at the point of origination would have taken a mortgage whose value was an excess of the value of the home I find that very difficult to either understand or believe it and if it occurred if it if it if it did occur I would say it was lack of understanding of what the real value was but I don't think I can't talk for the world in general clearly but highly unlikely that anybody would do that purposely then could you go to the role of your company and actually issuing original loans and then mortgage-backed securities we we actually owned a number of originated what we called origination platforms but those were more wholesale where we went around to individual groups or companies of brokers that did in fact originate loans when we bought them we changed management we changed underwriting standards to make them much more restrictive to improve the quality of the loans that we did in fact originated so that those loans that we did then put into securitized form would be solid investments for investors so there would it be your testimony that none of those original loans that were issued by your company exceeded the property value at origination congressman in all fairness I did not review each and every loan I must tell you the truth on that I did not and it would be a misstatement for me to say that I thought I had heard you say that no one would would do that and and I said nobody the experience in Ohio is that is exactly what was being done I would say no one would do so at the top of the organization I really wanted to get your perspective of how something like that could be happening as I go through neighborhoods in Ohio and see abandoned house after abandoned house where so many times the American dream of having a home have been stolen from people in refinancing where they did not understand the transaction they were in and where the value at origination was inflated making them cap to the house ultimately leading to foreclosure let me clarify that if I can I said nobody would knowingly do that Thank You mr. mr. Kucinich thank you I want to associate myself with the remarks and questions of like colleague from Ohio mr. fulled I have here a copy of a memo from April 12 2008 that you sent it's an email that you sent to Thomas Russo it says you just finished the Paulson dinner you this is a memo did you have dinner with mr. Paulson back in April I very easily could have served okay well this memo reference is that did you did you don't believe it I don't believe it was just the two of us all right but did you did you meet with him you're asking me specifically on that date did you did you talk to mr. Paulson on a regular basis we had a number of conversations say no would you tell me this memo says that mr. Paul that you've said to your colleague said we have a huge brand with Treasury speaking of Treasury loved our capital raised do you feel at any time in this process that mr. Paulson misled you I'm sorry sir at in response to this day Dean do you feel at anytime in these conversations we have your telephone logs that you were misled by the Treasury secretary no sir I do not and do you feel then you know on September 10th you had a conference call with your investors during the conference called your investors were told no new capital would be needed that Lehman's real estate investment property investments were properly valued five days later you filed for bankruptcy did you mislead your investors and I remind you sir you're under oath no sir we did not mislead our investors and to the best of my ability at the time given the information that I had we made disclosures that we fully believed were accurate well I should and I should back to something here you know you you have a memo here where you say that mr. secretary Paulson wanted to implement minimum capital standards leverage standards and liquidity standards they seem to be some of the things that got your company in so much trouble now did he did he ever tell you at all the conversations you had with him that he decided not to implement any of the proposals he discussed with you last April and does any part of you feel that you were double-crossed by the secretary and he was playing you off against let's say Goldman Sachs I wasn't certainly hoped that was not the case and what about these things that he said to you about minimum capital standards leverage standards liquidity standards did he ever tell you decided not to implement any of those things you talked to him on a regular basis what can you tell this subcommittee to enlighten us about where secretary Paulson was and you as the head of Lehman Brothers did you rely on anything that he told you that could have put layman brothers down we instituted ourselves our own plan for reducing leverage our own plan for increasing liquidity and I will note that on September 10th when we pre announced our earnings we had 41 billion dollars of excess liquidity well let me ask you this when did you know that JP Morgan was going to make a five billion dollar collateral call when did you first know about that I know that they had had conversations with our Treasury people when I'm not sure of the day you know there was mr. chairman it was like if I may thank you sir you're not sure mr. chairman this is a central question here because with JP Morgan you know making a five billion dollar collateral call and and on September 10th they were telling investors they didn't have any more needs for capital that the real estate and invest investment were properly valued this puts us at a position where one of two things is possible either they were lying to their investors or they were misled by secretary Paulson as to what could be done to help you because after that five billion dollar cap a collateral call that's what led directly to Lehman Brothers going down isn't that correct didn't you go down right after you understood that that they were not going to remove that collateral call when you say collateral call that's not the same thing as a margin call I'm talking about a collateral Clause no I know but the collateral call was not to meet a deficit in collateral that they were holding to offset risk a collateral call I believe was because as as our clearing Bank they just asked for additional collateral to continue to deliver for us thank you Thank You mr. chairman thank you mr. Fulton gentleman's time has expired mr. Tierney excuse me also whoa I should I should clarify also sir I didn't mean to cut you off there I this is probably a subject for for litigation and it's probably appropriate that I leave it to them I believe the creditors and JP Morgan are having a conversation mr. Tierney indeed Thank You mr. full thank you for joining us here this afternoon just before Lehman went into bankruptcy you were in conversations with the Korean Development Bank which I believe is a South Korean lender what amount of money were you looking for them to contribute to Lehman congressman our conversations with KDB as as one of five banks in a consortium stretched over a number of months they could you tell me the the amount that you were looking for from the consortium it wasn't so much that we were looking from them their original proposal was they wanted to buy in the open market [Music] close to 50% of our stock and it was not about giving us new capital they wanted to buy close to 50% it was that type of the range of something that you were looking for at that time I would have welcomed that transaction yes sir now at about that time when looking for that kind of transaction you knew because you had known for some time that you were already in a precarious situation and I say that because there were reports that as far back is Christmas in 2006 that you were telling people that you had a cautious outlook for the year ahead the next month in January and when you were at Davos at the World Economic Forum you'll reportedly telling people that you were really worried about the risk inherent and the property valuations and excess leverage and the rise in oil and commodity prices does that be fair to say that you were of that that mind around January of 2007 I was clearly focused on oil yes sir then I think we go back to the situation knowing that you were in that stage of mine in December of 2007 at the end of that year there were payments made out both cash and stock bonuses to your employees and they total about four point nine billion dollars so is there any thought given at that point in time to say to your employees this isn't the time to be handing out four point nine billion dollars in cash we've got a liquidity issue here that we can see it coming from all year long and we're gonna keep that money in the company liquidity for the benefit of our shareholders for the benefit of the public with whom we deal and for the economy at the end of 2007 I did not believe at the time that we had a liquidity problem and our most important assets in the firm are clearly our employees they are the ones that touch the clients everyday and do business every day I understand I'm a little shy I mean a lot of other people thought that you had a very precarious position at the end of 2007 you thought everything was fine we had just completed a record here sir and you like the want to cover that for a second the record year that you just completed and the reports on that had some according to one account in some rather aggressive and bizarre accounting practices well that they list out four or five things that they thought were strange you listed a 722 million dollar paper profit on level three equity holdings the stock that doesn't trade publicly there aren't liquid markets out there you claimed the nine percent profit on them at the same time standard Poor's index on publicly traded stocks fell by 10 percent that was what major seemly had a record year what are you short sellers was that David Einhorn said that he was told by your chief financial officer that for two hundred six hundred million dollars came from writing up the value of electric generating plants in India he thought the value is somewhere around 65 million not four hundred to six hundred million it also said Lehman shows some six hundred million dollars of profit because of the decline in the market value of your own debt obligations and sort of similarly that to the fact of permissible accounting surely enough but it's like the house the profit that you make when your house is foreclosed for a value that's lower than your mortgage and lastly said another hundred and seventy six million dollars was on your books by almost doubling to some three hundred sixty five million dollars the value ascribed to certain mortgage servicing rights in other words the value get paid for servicing mortgage holders collection of payments and doing their paperwork which is sort of tricky things to value so I know that at the end of the year maybe your books look like they were good but if those are the reasons for that then I think it's question well why four point nine billion dollars is going out to the employees and bonuses cash and stock then why you're spending another four billion dollars buying some of that back and I think one of your investors here today very clearly said he was horrified to find out that you were doing that and that's that's why I raised the question Thank You mr. chairman I would just note mister fold that in January of 2008 there was a presentation to your board on which you serve by Eric Eric Eric filter and he said very few of the top financial insurers have been able to escape damage from the subprime fallout and a small number of investors accounting for a large portion of demand the liquidity can disappear quite fast so I just want that to be on the record would now go to miss Watson thank you so much Anna mr. Foggs we are so pleased that you're willing to come and sit on the hot seat and admit that you take full responsibility we heard from the first our panel's view on what caused this financial crisis and one key factor was deregulation are inadequate regulation a big financial entities like yours Lehman Brothers I'd like to get your view on this topic because as a publicly owned Broker Dealer investment bank Lehman was subject to a number of SEC regulations the company was required to report important financial information to shareholders and you were required to meet the basic SEC requirements to make sure that you are adequately capitalized is that correct there's congressman and in your written statement you explained that the SEC and Fed conducted oversight of your balance sheet as you stated they were privy to everything that was happening is that correct yes congressman but mr. fogg our lehman brothers went bankrupt your investors and your creditors lost hundreds of billions of dollars and the failure has had a widespread impact for the rest of the economy would you agree that the current regulatory framework and the way they were implemented in your case failed are you asking specifically about the SEC yeah the regulatory framework specifically about the SEC yes because I had said in my written testimony that I thought the overall regulatory system had to be redone but still agree that they felt but specifically to the SEC we had extensive dealings with the SEC they actually had dedicated and knowledgeable people actually in our firm overseeing a number of our daily activities I went to them our firm went to them specifically talking about naked short-selling they were constructive and positive we went to them with an idea of creating something that we call spin Co spin Co was the was it wasn't new independent entity into which Lehman would place some number of commercial real estate assets along with a piece of capital and then spin that which means give that to our shareholders which we believed would have created true shareholder value over a longer period of time this actually was a model that I believe yeah could have been very helpful and instructive yeah I'm watching our time of their so let me just say that we've learned how Lehman Brothers relied on an unregulated bond rating agency whose conflict of interests gave them every incentive to rate your company's risky bonds as safe investments we've heard how housing and banking regulators fell to curb the predatory lending abuses in the supreme market and we've heard about how the net capital rule was implemented so laymen and other investment banks could ramp up their leverage to dangerously high levels and we heard that the F EC is underfunded understaffed and led by a chairman who either was unable or unwilling to enforce even the basic laws on the books do you think this deregulation and lack of oversight contributed to the meltdown on Wall Street I cannot talk to what do you think it contributed in my time is almost up to the meltdown on Wall Street I cannot talk to what the SEC did with the other firm do you think it contributed or are you wholly and solely responsible I heard a meltdown on Wall Street I actually gave the SEC high marks for trying oh my construct ok here's my bottom line question there are the things I just spoke of you think we're just fine and work like they should the regulations then it's your total responsibility for the failure of Lehman Brothers in retrospect in retrospect it's easy to go yes no yes no my time is up if you're asking me do I generally what time is up at mr. Fuld I'd like to tell you permitted to answer the question thank you sir if you're asking me did the regulatory framework contribute to or the lack of regulatory framework contribute to where we are today I would say yes and that's why I think we need to redo thank you thank you that's the answer that was Chinese that's why I think we need to redo the regular a framework Thank You mr. Watson mr. Higgins Thank You mr. chairman mr. Fuld there appears to be inconsistencies between your public statements and the private information you were receiving internally let me read you some of these inconsistencies and ask you to respond in January of this year Eric Felder one of your top executives made a presentation to you and the board of directors he talked about the company's finances and observed that quote very few of the top financial issuers in to escape that's right after after Felder I didn't hear that yeah he talked about the company's finances he is he observed that quote very few of the top financial issuers have been able to escape damage from the subprime fallout end of quote he then warned you explicitly that in the current environment quote liquidity can disappear quite fast but that's not what you were telling the public in December of 2007 in a press release you said quote our global franchise and brand have never been stronger my question is why didn't you say publicly what you were being told internally that you had to be careful because your liquidity could disappear quickly which was in fact what happened mr. Felder's presentation was when January you said December of 2007 January 2003 here we actually listened very carefully to mr. Felder and I believe the record book will show that we reduced our balance sheet we've reduced our leverage we raised capital we increased liquidity so we did listen let me show you another internal document this document is a document that your attorneys produced to the committee it's from June of 2008 six months later this is a set of talking points describing what happened over the past year and why your company did record billion dollar losses this is an internal document that was never made public and it seems to admit the truth about what was going on it asks this is your internal document why did we allow ourselves to be so exposed and then it spells out the reasons quote conditions clearly not sustainable saw warning signs did not move early fast enough not enough discipline in our capital allocation but that's not what you told the public that month here's what you said during an earnings call with investors on June 16th let me discuss our current asset valuation on those remaining positions I am the one who ultimately signs off and I'm comfortable with our valuations at the end of our second quarter because we have always had rigorous internal process our capital and liquidity positions have never been stronger mr. Fuld I don't see how you could say that your internal documents said their conditions are clearly not sustainable and that you did not move earlier fast enough but you told the public Lehman had never been in a stronger position how do you reconcile your public statements with the company's internal assessments was this my document these are documents that your attorneys provided the committee I didn't mean that is this my document is this some that says this a presentation that I gave these are documents internally that went past your desk in the past six months this document does not look familiar to me and if it was an internal document it was I really can't speak to that because I this document is not familiar to me yeah well these documents were made but if you told me it's mine I believe you okay and ultimately you're responsible and this inconsistency with public statements made conveying a strong position internal documents showing a direct contrast to that assertion I think is very troubling with respect to the issue of trust and confidence according to your lawyer I am looking very carefully at this that you'll either wrote or reviewed I'm looking at this very carefully so this does not look like my document nor does it look like a speech that I gave nor does it look like anything that I reviewed these are your documents thank you mister these are your documents gentleman's time has expired the mr. Shea you wish to yield two minutes to Webb let me get down to some of the heart of this it said I guess a lot of the collapse occurred on the 9th and 10th of September you were trying to find five billion dollars to back up your transactions I recommend everybody the Wall Street Journal today they did an excellent job better than the committee of going through some of the public and private statements I wouldn't necessarily pay for it maybe you could get it online it's two bucks but it does outline what you were going through one is that JP Morgan asks you for the five billion layman executives claim that they had a restructuring plan and then you had discussions that night you wanted to go into a conference call your counsel said not to go into a council call maybe you could tell us about that on the 10th however you told investors we are on the right track to put these last two quarters behind us now people want to know if you defrauded investors I mean I'm gonna be blunt here by coming out and saying that as opposed to what happened on the 9th and you you knew or we're told you weren't gonna get the money as I said before I'm not I'm not really sure when that conversation but you had to now at some point you weren't gonna get to five billion I mean the Korea the attempt to get the money from Korea well so I thought you were talking about JP Morgan I apologize but you were trying to get money well JP Morgan wanted the money and you were trying to find the three to five billion right to keep the ship afloat two very different things very different things well this is on the night well JPMorgan as I said before and answering one of the other I must change that September you needed five billion to keep the ship afloat you were told in your counsel told well also advise you not to to go ahead with the conference call to disclose this internally but you came out on the tenth and said we are on the right track to put these last two quarters behind us that's what you said again I'm just reported in our September 10th analysts call I firmly believed that we put the last two quarters behind us we had done a tremendous amount I don't wanna go through the whole thing all over again but lowered our leverage raise capital you heard already were you told the night before you weren't gonna get be able to cook the deal III don't know what that refers to what getting the money to keep the layman ship afloat what we said it's on September 10th was that we had adequate capital we talked about a plan that involved spinning off those commercial real estate assets and that we were going to have to put capital into that on the call people talked about how you going to fill that we talked about the sale potential sale of imd either all or some which would have created three billion of tangible equity I think if you go back and look at the third quarter announcement you'll see that possibly more if we had sold it for a higher price we had plans at the time to go to some of our preferred holders and convert some of those preferreds to equity because we had to pre-release because of the rumors about our company we didn't obviously have a chance to complete some of those plans we didn't know how much capital we were going to need to equities spin Co we didn't know how much of the commercial real estate assets would be sold but that was all three months out on that Wednesday we had 41 billion dollars we had plenty of capital to operate all conversations about additional capital were about what we were going to do when we took capital and put it into the new spin Co that was all three months out and that was obvious to shareholders that's what we were talking about and there were a number of questions from analysts at that time about that so there was there was disclosure about where we were and I believe understanding and there certainly was no attempt to just lead anyone again before the committee under oath the night before September 10th when you made that statement did you in fact know that you weren't going to get the estimated three to five billion dollars to keep the ship afloat congressman again I say I'm sorry those are two very different numbers one is additional collateral for our clearing Bank I know you're looking for an answer here that is not capital that is collateral two very different things we believed we were going to raise quote that five billion by either selling all or part of Investment Management or the sheer fact that we were going to spend those assets off then we didn't need that much capital the five billion was additional collateral that JP Morgan was asking for gentleman's time has expired chair now recognize mr. McCullum did I answer that though for you sir mr. chair point of personal privilege yes how would I go about yielding to the gentleman from Tennessee so he can make a flight I'm sorry to hear like how would I go about allowing time for the gentleman from Tennessee to go ahead of me so he cannot catch a plane oh well then why'd I just recognize him now thank the chair um mr. fold in your testimony on page eight you say what happened to Lehman Brothers could have happened to any firm on Wall Street and almost did happen to others but it didn't happen to the others there's a difference and you cite many factors in your testimony about how it could have been different you know if regulators had behaved differently or different things had happened what could you have done differently personally that might have changed the fate of Lehman Brothers would the benefit of hindsight sir going back a couple of years I would have made some changes to how we looked at and thought about our mortgage origination businesses our commercial real estate business and probably our leveraged loan business those were three of the areas that that over the second and third quarter created some losses and I believe in my verbal testimony I said give him the opportunity to look back I would have done things differently should I closed those businesses down then I think people would have looked at me and said that's irrational to have done that but knowing what I know today that clearly could have been a smart move but given the information that I had that's not the decision I made well that was decisions you could have made two or three years ago given your book of business in 2007 and 2008 were there decisions you could have made to have changed the destiny of Lehman Brothers just in the immediate past we did make aggressive decisions to close some of the mortgage origination businesses we had substantial hedges on our residential mortgage positions in retrospect I think we were slower on commercial real estate I like a number of other people thought the mortgage crisis was contained to residential mortgages there were a number of people many experts included that also thought that [Music] and I was wrong in 20mins looking back now at that information I thought it was contained we thought it was contained and experts thought it was contained you mentioned being quote slow on commercial real estate does that mean correctly valuing the portfolio of commercial real estate properties no sir does not mean of anything about valuation it means about how quickly we thought about disposing those assets and I think the record book will show that we went from 50 billion of those assets to 30 billion in keeping the Romanian I should say keeping but ending up with 30 billion that eventually would go into either 30 or less depending on how much of the remaining 30 we sold in the fourth quarter that remaining piece going to o to be spun to our shareholders which we firmly believed had real value you had a committee the finance and risk management committee which I believe was chaired by the once legendary henry kaufman a previous panel said that this committee only met twice a year in 2007 and 2006 were they giving you advice on these long term strategic directions let me clarify one thing if I made I believe they did meet twice 2007 but they met four times this year so far well it's over now so it's four times this year were they giving you advice on changing strategic direction for the firm we talked about assets and not just at the risk and Finance Committee's we talked about it the board we talked about how we were bringing down our exposures on on residential and on and on commercial and on leveraged loans almost at each and every board meeting whether it was a risk committee or a Finance Committee we talked about it was clearly a subject on everybody's mind keep in mind that this was a board that did have a lot of financial experience this was a strong independent board I was the only Lehman person on the board these people some of these people ran ran banks IBM other companies Celanese these were these were experienced people and they had never any reservations about giving me advice and having a view about the markets thank you mr. Cooper time has expired mr. Cohen Thank You mr. chair and I thank the committee for allowing mr. Cooper to move forward my constituents in Minnesota understand that you don't have to do something illegal to do something wrong in perfect federal regulation isn't a license for unethical behavior especially when it puts taxpayers at risk are in our current regulatory framework there's a gray space between legal activity and illegal activity in that space financial firms can make a choice to either obey the letter of the law but not to honor the spirit of the law 12 years ago and you've been with the firm for 42 years according to your testimony Lehman Brothers holding Inc sent a vice president to California to check out first Alliance mortgage Lehman was thinking about tapping into first Alliant mortgage lucrative business of making sub-prime loans the Vice President Eric Hebert wrote in a memo describing first alliance as a financial sweatshop specializing in high-pressure sales for people who are in a weak state first alliance he said the employees and quote leave the out there ethics at the door the big Wall Street investment bank that was Lehman Brothers decided first Alliance wasn't breaking any laws and Lehman went on to be the lending mortgage company and you did about five hundred million dollars worth of cells and more than seven hundred million dollars worth of bonds in other words Lehman Brothers is an example of how Wall Street's money and experience could have been used to prevent us being in this sub priced mortgage history we should learn from it you are in your statement and I quote from it on page five you said we did everything we could to protect the firm and so I go back to this memo that mr. Bishop had up and ask you if you agree with the spirit of the memo why did we allow ourselves to be so exposed to and should ask those questions did you reflect that conditions were clearly not sustainable did you see warning signs did you move fast enough and I asked that because of two things that have come to my attention that the Federal Bureau of Investigation's has launched preliminary inquiries as to whether or not Lehman Oryx is executives committed fraud by misrepresenting the firm's condition to investors so sir I want to ask you some questions on September 10th five days before your bankruptcy filing you and your chief financial officer Ian Lloyd held a conference for a conference call for investors according to The Wall Street Journal you were advised by your bankers not to hold this call because there were too many open questions it's my understanding that at the time you did make the call and that you were frantically trying to raise capital either through new investors or selling off assets so when you mr. lohit spoke to your investors and you said that you you did not need more capital and that mr. louis said to investors when asked whether lehman would need to is $4,000,000,000 quote I'm paraphrasing we don't feel that we need to raise that extra amount our capital position at the moment is strong so sir is this accurate were you told not to hold the call were you trying to raise capital during the week before you file bankruptcy and is it an accurate statement that your capital position was strong on September 10th it is correct that our capital position on September 10th was strong did anyone tell you advise you against holding the conference call every fir - that should be a yes or no sir well you're asking me did anyone in the I so that's a pretty big call that was made five days before a filing bankruptcy and your chief financial officer was present on the call I asked you do any of your outside bankers or other advisors warn you against making holding this call I had so many conversations I would never say to you that no one that I'm even sir maybe you'll remember were you trying to raise capital during the week before you went bankrupt the week before two weeks before three weeks before sir I am before I ask you for the week I'm saying yes to all they're saying yes to all yes when you were raising that capital no no no when you're no way to finish them I'd like to finish because there's a different piece to that what we were looking to do was to raise capital after we completed you were raising capital excuse me please after we completed the spin-off which would probably have been January after we had completed the spinoff of the commercial real estate assets on September 10th we had a strong capital position we were trying to anticipate how much capital we were going to put in to spin Co how much capital we were going to use we were trying to anticipate how much we would sell the investment management division for so there were a number of moving pieces but on September 10th given the business that we had we had sufficient and strong capital and liquidity thank you mr. Foyle Thank You mr. McCullum mr. Van Hollen you're recognized for five minutes Thank You mr. chairman mr. Fogg you said earlier in your testimony that Lehman Brothers when things were going well then people would do well and when things weren't going so well then people would have cutbacks and I have to say that I think people looking in have concluded based on the compensation structure that when things went well people did really well and when things didn't go well they still did very well and I'd like to call your attention to a memo that was written on September 11th 2008 just four days before Lehman Brothers declared bankruptcy and I hope someone can provide you with a copy of the memo it's a proposal from the Compensation Committee your cc'd on the on the memo and it talks about compensation for two employees of Lehman Brothers one was Andy Morton I assume you recognize that name I do sir he was he was the previous global head of fixed income it said the document here says he was involuntarily terminated the memo here proposes to give him an additional two million dollars a cash payment the other official mentioned in the memo is Benoit Slava ray I assume you know him as well as I do sir who used to be Lehman's chief operating officer of Europe in the Middle East until he was terminated he was also according to this memo involuntarily terminated yet this memo proposes to give him a 16 million dollar a cash payment again just days before Lehman Brothers declared bankruptcy these are two individuals who have been involuntarily terminated I think the normal sort of parlance is fired and yet they are being given combined about 20 million dollars in additional compensation despite the obvious poor performance at this point which nobody can deny and I ask you is that is that appropriate I mean I mean we're here having this conversation you and the American people is that appropriate that four days before Lehman Brothers declares bankruptcy that two individuals who have certainly been part of the decision-making that led to the decline would be given 20 million dollars in additional compensation there were two pieces to that clearly Andy Morton and Benoit sovereign Andy Morton was given I think it's two million yes [Music] and we felt that that was a more importantly compensation committee felt that that was appropriate for his years of service the 16 million 16 point two million was not a severance payment this the 16 point two million was a contractual obligation that the firm had made to mr. Sabri I forget what it was but it was earlier in the year and that kept that that contract said that at any time if terminated he was do the items of the contract so that's that's what that was that was not a severance payment so regardless regardless of his performance he would be due that amount of money so what you're saying unless it wasn't right lesson was fired for Columbia let me let me ask you this you would agree would you not that you you people can make decisions that in the short-term maximize profits and bonuses but our bad decisions for the long term is I mean there are decisions that can maximize short-term profits but people would also agree that they might not be the best long-term interests in the company isn't that right if you're referring to this gentleman oh I'm just referring to as a general proposition you would agree that there are times when you can maximize short-term profits but if you looked at over the longer term people would agree that it was not a good long-term decision you would agree that there's some decisions that fall into that category certainly not by design but in retrospect clearly okay sometimes yes let me ask you with respect to clawbacks and I'm not talking about anything with respect to Lehman Brothers but just as a proposition wouldn't you agree that it's appropriate that if somebody makes a decision that raises short-term profits and therefore bonuses and but then it's later shown that those same decisions resulted in harm to the company that on behalf of the shareholders and certainly in cases where the public is now involved that the shareholders or the public should be able to go back in and get a clawback and take those bonuses or additional payments back that are proven with the benefit of hindsight to have been bad decisions for a company and the shareholders that was actually one of the things I spoke about what I said interesting way to go go forward is a long dated compensation system in our case that's exactly what we had we had a long dated compensation system look I am NOT proud of the fact that I lost that much money but it does show that the system our compensation system did work I left 10 million shares plus a whole number of options I say I'm not proud of that but when the firm did not do well I was probably the single largest individual shareholder I don't expect you to feel sorry for me I don't mean that that's not my point my point though is that the system worked but let me mr. champ I could I mean you're now referring to shares that you own which obviously when the company went bankrupt went down I'm also referring to bonus payments that may have been made in previous years to executives including yourself when now that the company has gone bankrupt wouldn't it make sense to have provisions to protect shareholders not just to clearly when you're the shares go down the value of the company goes down the share value but wouldn't it make sense to have clawback provisions with respect to bonus payments cash payments so that the shareholders could recover those monies that were bonuses for what clearly proved to be bad decisions if you could answer that briefly mr. fule then we'll move on I'm sorry do any internet briefly you may but we have to move on our compensation system was specifically set up even even for me in nineteen scuse me in in 2007 85 percent of my compensation was in stock I lost that all stock that I got for the last five years I lost that actually compensation that I received back from nineteen ninety seven eight and nine I went to the Compensation Committee and said I believe we should extend the vesting on this I could have gotten it seven years ago I went to the Compensation Committee and said this should be extended to a ten-year vest I lost all of that I'd like also for this committee to know that before the end of our second quarter I went to my board and I said I think we're gonna have a tough quarter we were talking about how we were going to pay the troops as I called it I said I want you to take me out of it I believe given this performance my recommendation to you is that I do not get a bonus I like this committee also - no I got no severance I got no golden parachute I had no contract I never asked for a contract I never sold my shares that's why at ten million because I believed in this company I believed that this company and that's why I said I'm glad I got these last two quarters behind us I believe we're on the right track I could have sold that stock I did not because I firmly believed that we were going to return back to profitability and get back on the road Thank You mr. full thank you miss Van Hollen surveys you recognized five minutes Thank You mr. chairman I believed that you believed in this company but I also believe that your belief in the company at a certain stage began to cloud your judgment and let me ask you this first of all when you say to the public our capital liquidity positions have never been stronger that is intended to convey the overall strength of the firm and the company is it not in other words you can't assert that a company is not strong if you're asserting that its capital liquidity positions are strong a capital position was strong our liquidity position was strong we had completed a whole number of things that we did to protect the firm so the firm was strong is what you were intending to communicate with a statement like we had word I'll go through it again with utilizar but we reduced our leverage I was wrong was the firm strong was that the intended communication in saying our capital liquidity positions have never been stronger it was to convey that the firm was strong right my message well I'm not soon that's just what it was intended to convey and I think the problem that we've had here is that statements of this kind at the time they were made were simply implausible so then raises a question of whether your perspective when the health of the firm was clouded or whether there was something else going on now I'm gonna leave that aside because I want to move to a different question you talked about how Lehman got into the originating business and I gather did business with a number of originators first Alliance with one for example for some period of time before you then actually took an equity stake in those in those businesses is that correct we took an equity stake in BNC mortgage and also Aurora group and Europe called ELQ yes sir we did but those were firms that you or companies that you've been doing business with for some hear at a time before you then took the next step of of taking an equity position I mean you you you did some business with them so you knew how they operated we did some business you then said earlier that at the time you bought them you changed management changed underwriting standards and took other actions designed to pull back on the very risky nature of the way they were conducting business which I respect although there's some evidence that the practices continued nonetheless and I guess that's an admission by Lehman that the standards that were being used up to that point in other words by those companies when you were doing business with them but had not yet bought into them we're not adequate standards now you're one of your vice presidents this was mentioned briefly went to California to to kick the tires on first Alliance and came back with a memo saying these sorts of things first Alliance is a financial sweatshop specializing in high-pressure sales for people who are in a weak state and let me just mention my primary concern with all of this and Lehman's an example it's not the only example it's an example is that what was happening was the thirst for more originated loans upon which you could build an empire of derivatives and slice and dice up the chain to make more money the thirst for those got pushed down the chain and encourage people to look the other way in terms of standard conventional underwriting standards and so forth which then created a culture and atmosphere in which predatory lending could flourish and I think that's what ended up happening to the detriment of millions of homeowners across this country so sweatshop was one description he said first Alliance was the quote used-car salesman of blemished credit lending they made loans where the borrow had no real capacity for repayment and at first Alliance it is a requirement to leave your ethics at the door and in spite of this Lehman went ahead invested in the company and there's other evidence I may run out of time because I want you to respond to this there's other evidence of these sorts of practices and ethics continued even after first Alliance was purchased or you took some kind of ownership stake in first Alliance how could you consort with this kind of an operation given how lacks those those standards were I'm not sure if we took an equity stake in first alliance but that doesn't answer your question at all we actually spent some time with first Alliance I believe that was in the mid 90s and I think in the late 90s we extended financing to them and we worked with them to change underwriting standards in the case of the ones that we bought after BNC and and Aurora reacted more as a conduit that means we went to them and bought their production and their there their production of mortgages and in that we began to understand their business practice our name became associated with them we realize the best way to handle that was to buy them if our name was going to be associated with them buy them change the management and change the underwriting standards and that is what we did and that is why we did it Thank You mr. chairman there's some evidence that it didn't change but I'll accept that gentleman's time has expired mr. Welch thanks for you before you start your questions I want just for housekeeping purposes ask unanimous consent that all the documents that have been referred to in this hearing be made part of the and will and will certainly leave the record open for questions for members for written responses without objection that'll be the order mr. Welch thank you Thank You mr. chairman mr. full thank you for being here today this is a tragedy unfolding all across America and were only beginning to feel the pain and I know you sit here as a chief executive of a company that has a proud history hundred fifty eight years did some tremendous things and I've known some employees at your company and they're terrific and 28,000 employees now don't work at Lehman Brothers you had accounts seven hundred billion dollars I guess and I'm not gonna be chep about your your salary here but I want to ask a couple of questions number one it seems that Wall Street and Lehman along with others turned what was a basic simple transaction that was a step in reaching the American Dream and that is a family buying a house in being able to do that by borrowing money on a mortgage it was a straight out transaction oftentimes between a neighbor who is a community banker and a just wide-eyed young couple oftentimes being able to afford their first house that got to be turned into a commodity it got put on steroids with these subprime mortgages it then got securitized and as long as the real estate values in this country were going up fueled by low class credit it was a house of cards that would stand until the first whiff of a down to in retrospect do you believe that this process of securitization of easy credit of convincing people who couldn't afford a mortgage particularly when the rates were retry GERD was a house of cards that was bound to fail in retrospect seeing it as I as I see it now is that house that yes I'm not I'm not sure I would say it was a house of cards it was well none of us ever expected yeah housing prices to decline with the depth of violence that it did right so I mean what I understand the problem you had is that you didn't get out fast enough and deliver fast enough in the market went faster than you were able to make the th liens you know actually congressman that was not the case residential mortgages were not our problem at the end we have a couple of questions thank you I don't mean to interrupt but I only have five minutes I want to ask you a little bit about AIG I mean there was a whole series of bailouts and then mr. Paulson made the decision that when it came to Lehman there was gonna be no governmental assistance so in fact Lehman Brothers was treated differently than some other financial industry giants that were in similar circumstances and obviously the Treasury secretary made a decision for reasons that he can explain but let me ask you this my understanding is you did have pretty regular contact telephone contact with mr. Paulson and probably some individual meetings and the disown understand from reports in the New York Times that Goldman Sachs in fact was a major trading partner of AIG about twenty billion dollars on the other side of contracts did you have any concerns that there may be some arbitrary reasons why Lehman Brothers facing similar predicaments as AIG was allowed to fail whereas AIG was the beneficiary of an 85 billion dollar bailout sponsored by the Treasury Department well I clearly would love to have been part of the group that got do you have any well do you have any views on that or any thoughts on that why you were allowed to fail you Lehman Brothers were allowed to fail and AIG was bailed out that was a that was a decision that was made that Sunday afternoon and I I know that I'm just wondering and I was not there you gotta be wondering you're the head of this company you want to keep it going and I have understand from you everybody knew you were dedicated to the survival alone until the day they put me in the ground exactly I will wonder and you got an email as I understand it from from someone in your office mr. Humphrey I think about the Jarrett weight situation and telling you that mr. Wade had stopped by and commented in just a few weeks on the buy side it's very clear that gs Goldman Sachs is driving the bus with the hedge fund cabal and greatly influencing downside momentum Lehman and others thought it was worth passing on what was the meaning of that as you understood it this was from a person but a business associate ally of yours correct by the way I don't blame you for asking the question that's what we're asking what mr. Waite was talking about was that evident and obviously that Goldman Sachs was involved with the hedge fund community well that's the short selling right greatly influencing the downside momentum of Lehman and others in that refers to short selling I I have I have no proof of that at all no I understood well let me I'll just ask you your opinion do you think that there was any justified reason why Lehman was treated one way namely allowed to fail and AIG just as an other example was given eighty five billion dollars in taxpayer assistance to bail it out I do not know why we were the only one is their international business reason why there would be a distinction made between the predicament that Lehman faced in the predicament that AIG faced I actually I must tell you Sunday night were more importantly that weekend we walked into that weekend I firmly believed we were going to do a transaction I don't know this for a fact but I think the Lehman and Merrill Lynch were in the same position on Friday night and they did a transaction with Bank of America we were went down a road with Barclays that transaction of although I believe we were very close never got consummated well I thank you and you know I feel bad I know you do for the for those folks at Lehman and investors and shareholders let me just let me just speak to that for a second because you know we talk about what happened at Lehman and we talk about whose fault and why wasn't I on it and my employees my shareholders creditors clients have taken a huge amount of pain and again not that anybody on this committee cares about this but I wake up every single night thinking what could I have done differently and it's been going on what could I have done differently in certain conversations what could I have said what should I have done and I have searched myself every single night and I come back to at the time and that's why I said this in the beginning the time I made those decisions I made those decisions with the information that I had having said all that I can look right at you and say this is a pain that will stay with me for the rest of my life regardless of what comes out of this committee regardless of what comes out of when the when the record book gets finally written that's that's all thank you mr. Welch mr. Shaye's thank you very much mr. chairman mr. poll thank you I know it's been a long day and but we're coming to a close I would I have a variety of questions and let's see how well we can get through them first off what we're doing is we're trying to see what happened we're trying to see who is responsible and to determine who was responsible and that includes Congress ultimately it must and and what being responsible means so I'm gonna end my question and I'll tell you now by telling you having you tell the significance of the fact that you say take full responsibility that's gonna be my last question but I need to know what that means and I don't want it now because I want to ask a few other questions and and then we're gonna look at what do we do to change this systemic the system and we are the Oversight Committee I'm also on the Financial Service Committee that will come up with solutions that we had Enron and world come in every part of the system broke down the directors didn't direct the managers didn't manage the employees didn't speak out one spoke out privately didn't speak out publicly the law firm was duplicitous and and part of the problem the accounting firm was part of the problem you had the rating agencies everybody every part of the Simpson failed so we passed sarbanes-oxley and amazingly Fannie and Freddie were not under that because they're not under the 33 and 34 Act therefore they weren't under sarbanes-oxley so two huge organizations were never under the very system we put in place with sarbanes-oxley much less all the other laws that were required but that's that's just a footnote what I want you to speak to is a highly leveraged it strikes me that Wall Street was incredibly Bosnia about risk including yourself that that 30 to 1 you didn't leave yourself enough to deal with the potential run on a bank and that when you gave these bonuses you just made it less likely that you would have the kind of reserves you needed which strikes me obviously in hindsight is reckless but people were saying as we were going through the system we have too much leveraging I kind of responded well you know the hedge fund folks will tell me you know what it's the really wealthy people and they can absorb the risk they know what the risk is they know it's huge leveraging but what we know now is Wall Street can bring down Main Street and frankly I'm gonna tell you it's a little scary because we don't even know all the folks that have been impacted by Lehman Brothers going down I mean we know stockholders shareholders clearly employees but all the different folks who had resources held by your company so what I want you to do is speak about risk why did we get into this position of having such high leverage and and was it just too easy to make money that way and and so we just said the risk be damned we certainly did not say risk be damned I believe Lehman Brothers had a robust risk process as far as the leverage and I spoke about it earlier there's a very big difference between the 30 times and where we were when we finished in the third quarter of ten and a half a big peat a big piece of what that 30 was again was the matchbook which was governments and agencies so that should not be considered as an additional piece of risky leverage and again I will say that on September 10th we finished with the best or one of the best leverage ratios on the street and one of the best tier 1 capital ratios on the street and even to your question that's how that's how I viewed the company and that's why I viewed it as strong mr. congressman I mean those those those were the metrics those were the metrics that the regulator's used those were the metrics that all of us in the industry used and ours were one of the best let me ask you about the rating agencies what kind of relationship do you have with the rating agencies end up having to pay them to determine your value describe the mate bribe to me do you have any financial relationship with the rating agencies yes sir we do okay and tell me that relationship on securitizations for example we go to them with the components of a potential securities deal the mortgages valuation loan-to-value right geography and and and you pay them for that they charge us a fee for a rating and how can we feel comfortable that the very people are paying them or the very people they're evaluating that was one of the things on my list of things that should be included in hopefully tomorrow's reform let me just quickly go to executive compensation I mean this is the largest irritant frankly to the general public and when I got my MBA at NYU I read a book the 5,000 and the people who run AmeriCorps the 1,000 I forgot what it was but it was the people who run a company are on the board of three other companies or two other companies so they help decide the compensation of someone else and someone else helps decide the compensation of them do you really feel comfortable that the Compensation Committee can uh objectively evaluate you what you and others should get when in fact you have some real say and who they are and well I don't need to say more there was nothing shy about my or the firm's more importantly the firms or the board's compensation committee they had access to [Music] outside experts and they used it they had access to other firms competitive data they were independent and I find I find no Ramin I was not on that Ford I'm just saying it to those of us on the outside it seems a little screwed up and it doesn't seem to us objective and and that's my closing comment and I appreciate you being here today thank you thank you mr. Shaye's mr. sarbanes wanted additional time and the chair still has additional time so yield you two minutes really this is just to add something to the record mr. chairman getting back to the first Alliance issue because you talked about how once you took an equity stake in and the evidences that you did do that that you put new management that the practices ceased and so forth but the record is that even after you'd put up hundreds of millions of dollars in there mr. Hobart the same vice president who warned you about these practices before indicated that first alliance was still violating the Truth in Lending Act in 2000 first Alliance went bankrupt in 2002 the Federal Trade Commission charged first Alliance was systematically cheating elderly homeowners the next year more than 7,500 homeowners sued Lehman and first Alliance for these same tactics where most lenders were charging fees of one or two points for a loan your company was charging 25 points the jury delivered a 50 million dollar verdict against first alliance and specifically found that lehman brothers quote substantially assisted first alliance in perpetrating the fraud end quote and in light of that it's just difficult to conclude that Lehman didn't know what was going on in terms of this subprime activity and I just wanted to add that to the record mr. Chen thank you now the gentleman's statement is part of the record mr. Rothfeld we've completed the questioning by the members but I want to thank you for being here I know this wasn't easy for you to be here and I accept the fact that you are still haunted every night as you said by the the Wonder the wonder wondering whether you could have done something different whether this could have had a different ending but I must say that statement you made that the system works because you lost the value of some of your shares it really doesn't sound right to me because the system that you lived under gave you a very very generous reward when your company was highly leveraged and and everything was going up and that's the American Way but when the leverage meant that you were taking huge losses when the values were not holding up you still got substantial compensation and I just say that most Americans don't understand even if you we thought you made 500 million dollars you say you only made around 350 million dollars that just seems to me an incredible amount of money we've held hearings on executive compensation and we've found some conflicts of interest with these compensation committees we're going to hold a hearing on the ratings the groups that do the ratings for these bonds because we think that that ought to be explored more fully but if you walked away with even 350 million dollars your shareholders got nothing and the taxpayers have a system now where we put up 700 billion dollars and the American people are looking to see are they going to come out of this this is another day with a deep loss on Wall Street we're just completely battered by the the failure of our economic system as it has shown up on the Dow and the ability to get credit so something is just not right to say that the system worked as it should that system didn't seem to be a system that makes and I still think that we've got to look for ways to change it mr. Shaye's you want to make any closing comments just to say that I look forward to the next four hearings and I do hope that we do get right in the thick of Fannie Mae and Freddie Mac thank you what I didn't hear from you mr. full was you took responsibility for the decisions you made in retrospect you think you should have done some things different but you don't seem to acknowledge that you did anything wrong and that I think is also troubling to me thank you very much for being here that concludes our hearing for today we stand adjourned you

Channel: AmericanRhetoric.com

Views: 221,441

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Keywords: fuld lehman bankruptcy, fuld testimony, Richard Fuld testimony

Id: Mte6-u84Ehk

Length: 119min 53sec (7193 seconds)

Published: Sat Jan 06 2018