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Richard Fuld - Lehman Brothers Bankruptcy Testimony (Enhanced Audio) — Transcript

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0:00Thank you very much Mr. Fuld.
0:03Without objection the chair and the
0:06ranking member will control 10 minutes
0:08which they can use or reserve and use at
0:11a subsequent time.
0:13Hearing no objection that will be the
0:14order.
0:16Chair will uh
0:18recognize himself.
0:20Mr. Fuld uh
0:22The committee our committee requested
0:24all the documents relating to your
0:26salary, bonuses, and stock sales
0:29and the committee staff put together a
0:30chart which I hope will come up on the
0:33screen. Uh this chart um
0:37uh will show your compensation for the
0:39last 8 years. It shows your base salary,
0:42your cash bonuses, and your stock sales.
0:45In 2000 you received over uh $52
0:48million. In 2001 that increased to $98
0:52million. It dipped for a few years and
0:55then in 2005 you took home $89 million.
0:59In 2006 you made a huge stock sale and
1:02you received over $100 million in that
1:05year alone. Are these figures basically
1:07accurate?
1:13Sir, if those are the
1:15documents that we provided to you uh I
1:18would assume they are. Okay.
1:20The the bottom line is that since 2000
1:23you've taken home more than $480
1:26million. That's almost half a billion
1:28dollars.
1:29And that's difficult to comprehend for a
1:31lot of people. Your company is now
1:34bankrupt, our economy is in a state of
1:36crisis
1:37but you get to keep $480 million.
1:39dollars.
1:40I I have a very basic question for you.
1:43Is this fair?
1:50Mr. Chairman
1:52your first question was about the slide.
1:55Are those numbers
1:56accurate?
1:58They are accurate the way you have
2:01put them up on that slide.
2:07But
2:09I believe your number of cash and salary
2:12bonuses are accurate.
2:16The option exercises
2:19uh
2:20the way you have them portrayed here I
2:22believe
2:24represent the full option without the
2:27strike price.
2:30Uh and the only reason I exercised those
2:33options was because they came due at
2:35maturity.
2:37And if I had not exercised those I would
2:40have lost it.
2:43There was that stock sale.
2:46Well, I I will I'll leave the I'll leave
2:48the record open for you to give me any
2:51changes in that uh list.
2:53say to
2:53But basically didn't you take home
2:55around
2:564 to $500 million is
3:00the head of uh Lehman Brothers for uh
3:03the last um
3:04since 2000 to now?
3:07The majority of my stocks uh came
3:11uh excuse me, the majority of my of my
3:13compensation came in stock.
3:16The vast majority of the stock
3:19that I got
3:22I still owned at the point
3:25of our filing. The stock is in addition
3:27to the numbers that I've uh
3:30indicated because those were your salary
3:33and your bonuses.
3:35Now uh you had bonuses and in addition
3:38to that you had some stock sales. You've
3:40lost some money of the stock that you've
3:42received as compensation which you
3:44received as compensation on top of these
3:46other figures. So you've been able to
3:49pocket close to half a million dollars
3:51and my question to you as a lot of
3:53people ask is that fair for the CEO of a
3:56company that's now bankrupt to have made
3:58that kind of money? It's just
4:00unimaginable to so many people.
4:02Uh
4:05I would say to you the 500 number is not
4:07accurate.
4:08I would say to you that although it's
4:11still
4:13a large number uh
4:16I think for the years that you're
4:18talking about here I believe my cash
4:20compensation
4:22uh was close to 60 million which you
4:24have indicated here
4:25and I believe the amount that I took out
4:27of the company over and above that was
4:32I believe a little bit less than 250
4:34million. Still a large number though.
4:36Still a large amount amount of money.
4:38You have a $14 million oceanfront home
4:40in Florida. You have a summer vacation
4:42home in Sun Valley, Idaho. Yet you and
4:45your wife have an art collection filled
4:46with million dollar paintings. Your
4:48former president Joe Gregory used to
4:50travel to work in his own private
4:52helicopter. I guess people um
4:57wonder
4:59if you made all this money by taking
5:00risks with other people's money.
5:03I
5:05You could have done other things. You
5:08had high leverage
5:1030 to 1 and higher. Um you didn't pay
5:14out billions of dollars in dividends and
5:16you didn't have to pay out these
5:17millions of dollars in dividends and
5:19bonuses. You could have saved some of
5:21these funds for lean times but you
5:22didn't.
5:25Do you think it's fair and do you have
5:28any recommendations on fundamental
5:30reforms that would bring a new approach
5:32to executive compensation? Because it
5:34seems that the system worked for you
5:38but it didn't seem to work for the rest
5:41of the country and the taxpayers who now
5:43have to pay up to $700 billion to bail
5:46out our economy.
5:48It It can't We can't continue to have a
5:50system where Wall Street executives
5:52privatize all the gains
5:54and then socialize the losses.
5:56Accountability needs to be a two-way
5:58street. Do you disagree with that and do
6:01you have any recommendations of what we
6:02ought to be doing in this area?
6:05Mr. Chairman, we had a compensation
6:07committee
6:09uh
6:10that spent a tremendous amount of time
6:14uh making sure that the interests of the
6:19executives and the employees were
6:21aligned with shareholders.
6:23Uh
6:24my employees owned close to a 30%
6:28of our company.
6:30And that was because
6:32we wanted them to think, act and behave
6:37like shareholders.
6:39When the company did well
6:42we did well.
6:44When the company did not do well, sir
6:47we did not do well.
6:48Well, Mr. Fuld there seems to be a
6:49breakdown because you did very well when
6:52the company was doing well and you did
6:54very well when the company wasn't doing
6:55well and now your shareholders who owned
6:58your company have nothing.
7:00They've been wiped out. I'm going to
7:02reserve the balance of my time and we're
7:04going to go on to other members. Uh Mr.
7:06Shayes.
7:06Uh if you
7:07yield me 2 minutes
7:10Gentleman's
7:11Mr. Fuld, I I'd like to ask you first
7:13who um
7:15who appoints the compensation committee?
7:24The compensation committee uh
7:29is now appointed by the corporate
7:31governance committee
7:34uh of the board.
7:35But but but did you have a a major role
7:37in appointing the compensation
7:38committee?
7:44I believe I had more of a role
7:47uh in the early or mid-90s.
7:51Uh clearly less of a role these last
7:53number of years.
7:55And then finally of the 10 million
7:57shares
7:58uh that you had had in the company
8:00that's what you have right now, 10
8:02million shares?
8:03Uh no.
8:04Uh
8:08I don't have the exact amount. I think
8:09it's closer to 8 million shares and that
8:12does not include uh the options that
8:16expired worthless.
8:18Well, actually they haven't expired
8:21that
8:22are still there with a longer term
8:24vesting
8:26but with a much higher strike price than
8:28obviously where the stock is today.
8:30Thank you. Thank you, Mr. Chairman.
8:34Uh thank you, Mr. Shayes. I want to
8:36recognize Ms. Maloney for 5 minutes.
8:39Thank thank you, Mr. Chairman.
8:42We We are in a financial crisis and uh
8:45we lost four major investment banks in
8:48in uh a week and taxpayers have been
8:51called upon to assume a potential $1.7
8:55billion
8:56in taxpayer liability to backstop our
9:00financial institutions.
9:02During this um hearing today we've seen
9:05a long list of examples of deregulation
9:09and we've heard about the net capital
9:11rule which was eliminated so that Lehman
9:14and other investment banks could ramp up
9:16their leverage to very dangerous high
9:19levels putting their institutions at
9:21risk.
9:22And for almost 30 years this rule kept
9:26investment banks from taking on debt
9:28more than 12 times the value of the
9:30bank's investments. Firms were required
9:33to stop trading if their debt exceeded
9:35that ratio. As a result most investment
9:37banks did not take on excessive debt.
9:41Yet this uh report in the New York Times
9:43and I'd like a permission to have it
9:45referenced or put in the record. Without
9:47objection. Last Friday called the agency
9:4904 rule that banks pile up new debt and
9:53many people feel that this was a major
9:55cause of the crisis and they reference a
9:58meeting in April
9:59of 2004.
10:01And I'd like to ask you, were you at
10:03that meeting? Did you lobby for this
10:06change? Why did Lehman want to increase
10:09its leverage? And in hindsight, do you
10:11think the SEC rule
10:14that changing this SEC rule was
10:16appropriate for protecting safety and
10:19soundness, the stability of our markets
10:21and and taxpayers' money?
10:25Congresswoman, I was not
10:29at that meeting, I believe, in 2004.
10:33Uh
10:36and I do not recall if any other of my
10:40people were there.
10:42Uh
10:44I had a chance to, while I was sitting
10:48in the
10:50waiting room,
10:52uh I saw
10:55I would assume almost all of the first
10:58panel.
11:00The
11:02information about
11:05leverage,
11:07uh
11:08I think has been grossly misunderstood.
11:12There are two numbers, one is gross
11:14leverage and one is net leverage.
11:18Gross leverage includes
11:22and excuse me if I get technical, if I
11:24get too technical, please stop me.
11:26Uh
11:28close to half of our balance sheet, if
11:30not more, was what we called the matched
11:33book.
11:34Uh the matched book was
11:37predominantly government securities and
11:39agencies
11:41that we took on our balance sheet
11:44to finance for our clients.
11:48We were one of the
11:51top
11:52US Treasury government traders and
11:55financers, meaning
11:57uh financing the US government debt, and
12:00we supplied a tremendous amount of
12:02liquidity to institutional investors
12:06uh that owned
12:08US government debt
12:10and agencies.
12:12At times, that was as high as 300 to
12:16probably more, 300 billion dollars.
12:20I heard some of the earlier remarks
12:23about
12:24uh if you lost three or four percent of
12:27that, uh
12:31for the matched book, you do not look
12:32those are government securities. So, the
12:35real number, the effective number,
12:37is net leverage.
12:43So, did you did you uh did you lobby for
12:46this capital rule change and do you
12:48think it it contributed to the financial
12:50instability and loss of safety and
12:52soundness in financial institutions such
12:54as your own that allowed this increased
12:56leverage?
12:59I myself did not lobby
13:02for the increased leverage. Did did uh
13:04Lehman Brothers lobby for it?
13:06I'm not aware of that.
13:09I I I would uh like to ask you, now that
13:12we have the opportunity of looking back
13:16and and and we want to look forward on
13:18what needs to be done. If you had to
13:20give government advice on how we could
13:24strengthen the safety and soundness of
13:26our institutions and the accountability
13:28and transparency
13:30uh that all of us want, what would you
13:32recommend
13:35to change the system?
13:40In my written testimony,
13:43uh I spoke about the need
13:47for additional regulation
13:50uh and new regulation
13:53because when the original regulations
13:55were written,
13:57it was a very different environment.
14:00I believe there were 10 million shares a
14:03day traded and today they're close to 5
14:05billion shares traded.
14:08The electronic connectivity today,
14:12uh
14:13not only within this country, but
14:17country to country.
14:19Investors today,
14:22given that electronic connectivity, have
14:24the right to move their money to the
14:26highest returning asset.
14:28And money moves very quickly and freely.
14:31So, it's not just about regulation
14:34within the US.
14:36I believe it's also about more of a
14:38matrix regulation that is more global
14:41in nature.
14:44I would focus also on
14:49capital requirements.
14:52Capital requirements, meaning
14:55more capital for
14:58less liquid assets
15:04and
15:05a more robust
15:08understanding of
15:11mark to market,
15:12which I believe is
15:15one of the pillars of the new plan,
15:18mark to market during periods of stress,
15:21uh create one set of numbers
15:24and obviously in a
15:26functioning
15:27non-credit crisis environment, produce
15:30another set of numbers.
15:32Thank you, Mr. Chairman.
15:33Uh
15:34your rec- your
15:36prepared statement, which has these
15:37recommendations, are in the record and
15:39we want to move on to other questions.
15:41Did you want to add one last point?
15:44Yes, please.
15:46Uh
15:47and the other
15:48uh is
15:51uh
15:52something that I strongly believe in is
15:55the creation of what I would call a
15:57master netting
15:59system,
16:01uh where all
16:03capital market counterparties
16:06uh download each night all their
16:08transactions
16:10to one local
16:12uh spot,
16:15first in the US and then eventually,
16:18hopefully, make that be global.
16:20That's about all transactions and
16:23trades.
16:24It's about positions. It's about
16:27capital. It's about leverage.
16:29Excuse me.
16:31And it would give whatever regulator is
16:33then in control of that master netting
16:35system a complete view
16:38of
16:40the financial landscape,
16:43the available capital to each and every
16:45asset class,
16:48flexibility
16:50within those asset classes and
16:52vulnerability
16:54within those asset classes and
16:55vulnerability of one institution
16:58versus
16:59the next.
17:01Uh
17:02what I am proposing is clearly
17:05expensive,
17:07costly,
17:09but by comparison to the unprecedented
17:13regulation this Congress has just
17:16passed,
17:17uh
17:19it is a fraction and I believe money
17:22well spent.
17:23Thank you.
17:24Uh Mr. Mica, 5 minutes.
17:29Thank you, uh
17:31thank you.
17:32Mr. Chairman and uh
17:35looking at uh
17:37by your first your comment, uh
17:39on uh
17:42Lehman Brothers uh primarily dealing in
17:44some
17:46most for most of its history and
17:48Sir, I apologize. I cannot hear you. I'm
17:49sorry.
17:51Can you hear me now? Yes, thank you.
17:53As again, you when you opened your
17:55statement, you said that Lehman Brothers
17:57and it's was around for what, 150 years,
17:59uh
18:00uh dealt in some pretty uh
18:03hard assets and some uh
18:05secure investments. Uh you've been
18:08around a while. What what
18:10uh turned the corner for you to get into
18:13some of the more speculative uh ventures
18:17prime and some of the other um again,
18:20riskier investments?
18:24As I said in my
18:27verbal
18:29testimony, uh our participation in the
18:33in the mortgage related businesses
18:35uh was clearly a natural for us given
18:39our dominance in fixed income.
18:45That was something that went back a
18:46number of years.
18:49Uh
18:51And even as I listened, as I say, to the
18:54panel before me,
18:56uh they correctly pointed out that this
18:58was a goal of the government
19:01to provide
19:03funding
19:05uh and mortgages to a number of people
19:09that typically
19:10uh
19:13would not or could not
19:15have received a mortgage.
19:16And one of your big well, one of the big
19:19packagers, or the competitor, so to
19:21speak, was Fannie Mae, which was deep
19:23into this.
19:25And uh you were you were dealing in some
19:28of the paper, I think, uh for secondary
19:30markets and other uh
19:33securitized mortgage paper
19:35uh to to basically package it, make
19:38money off it. Is that right? Yes, sir.
19:41Okay.
19:42Uh
19:43what
19:44what was Lehman Brothers' exposure to
19:46the debt of Fannie Mae and Freddie Mac
19:49and what role did their collapse play in
19:52uh precipitating some of your financial
19:55troubles?
19:59It what it didn't matter you Our
20:01exposure to both Fannie Mae and Freddie
20:04Mac was de minimus, sir.
20:06Okay, but their collapse did that help
20:09precipitate any problems with your firm?
20:14It certainly set the stage
20:17for
20:18an environment
20:20as I talked about
20:22loss of confidence and
20:25credit crisis mentality
20:27that permeated our market. Clearly set
20:31set the stage
20:33for
20:35investors losing confidence
20:38counterparties asking for
20:41additional collateral
20:44and
20:46clearly an environment
20:48that
20:51lost liquidity.
20:52I noticed
20:53Which is the lifeblood of the capital
20:55market system.
20:56I noticed
20:57some questions were asked about your
21:00political
21:02participation. I pulled Lehman Brothers
21:04contribution contribution to
21:07federal candidates for for the last 10
21:10years. Fortunately, I didn't find my
21:11name there, but
21:13not like some of the other
21:15members of Congress.
21:17I added some of this up. It's about
21:19$300,000
21:21that you gave to influence uh
21:24uh
21:25members of Congress. I also got uh
21:28your personal which wasn't much.
21:31You probably bet a little bit too much
21:32on Hillary, too. Be
21:34uh but uh
21:36This is this is pretty much the extent
21:38of your financial contributions.
21:42I members of Congress to lobby.
21:45I believe that that was
21:48uh
21:50a result of Lehman's PAC. Right. Which
21:53was not corporate monies. Right. Right.
21:56I'm just telling you
21:58wait till you hear this one. uh
22:00It
22:01If you haven't discovered your role,
22:03you're the villain today. So, you got to
22:05act like the villain here.
22:07But uh
22:08uh
22:09Guess what
22:10Fannie Mae did in the same period of
22:12time. $175
22:15million
22:16in lobbying contracts over 10 years.
22:20Does that surprise you?
22:22You were out lobbied.
22:25Uh it sounds like other rather than just
22:27some greed on Wall Street, we had a
22:29little greed in Washington.
22:32uh
22:33What would you say to that?
22:39I think that's more of a matter for your
22:41committee, sir.
22:43Gentleman's time has expired. Thank you.
22:46Uh we now go to Mr. Cummings. Thank you
22:48very much, Mr. Chairman. Um
22:50Mr. Fuld Fuld, I I really appreciate
22:52that you began your
22:54testimony by taking
22:56full responsibility for the company's
22:58downfall which occurred
23:00on your watch.
23:02But there are some concerns that I want
23:04to to get to.
23:05Um as you know, the American taxpayer,
23:07many of them our constituents uh
23:11just
23:12we just passed legislation
23:15giving $700 billion to rescue Wall
23:18Street.
23:19Um
23:20One complaint I've heard over and over
23:21again from my constituents was that
23:24there seems to be a complete lack of
23:25accountability.
23:27They see Wall Street executives like you
23:30walking away with millions of dollars.
23:32And it's very interesting when you were
23:33talking about the chart that Mr. Waxman
23:35was
23:36showed you on the board, you said that
23:38it was inaccurate. Uh but I'm going to
23:40discount it for you. And instead of 448
23:45million over 8 years, let's say 350. How
23:47about that? 350. Is that okay? Can we
23:50discount it a little bit? You said it
23:52was not accurate. What would you say is
23:54accurate? I'd say that's closer, sir.
23:56Okay.
23:57I want to ask you about one of the
23:59emails obtained by the committee. On
24:01June 9th, 2008 a former top Lehman
24:05executive, can you hear me okay? Yes,
24:06sir.
24:07Benoit D'Angelin sent an email to Hugh
24:11McGee
24:12who was the global head of investment
24:14banking at Lehman.
24:15The email says that many bankers have
24:17been calling in the last few days and
24:20the mood has become truly awful.
24:23It warns that and I quote
24:26all the hard work we have put in could
24:28unravel very quickly. End of quote. And
24:32it offers the following advice. It says
24:34some senior managers
24:36have to be much less arrogant
24:38and internally admit
24:41that major mistakes have been made. We
24:45can't continue to say we are great and
24:48the market doesn't understand. End of
24:50quote. Mr. McGee forwarded this email to
24:53you on the same day and explained that
24:56it was representative representative of
24:58many others.
25:00When you read the email, and this is
25:01interesting, what was your action
25:03reaction? I'm just curious. I'm sorry,
25:05sir. What was the date of that? I'm
25:06sorry. Uh that would be June 9th, 2008.
25:10You you remember that email?
25:14I do not
25:15Well, let me let me try to refresh your
25:16recollection a little bit. So, let me
25:18tell you what you did since you don't
25:19remember the email.
25:21Here's what happened. You you didn't
25:23take any res personal responsibility.
25:25Instead
25:27uh
25:283 days later, Mr. Fuld, on June 12th you
25:32fired Erin Callan, your chief financial
25:35officer
25:36and Joseph Gregory, your chief operating
25:39officer.
25:40But you know but you you you stayed on
25:43and admitted no mistakes.
25:45You were CEO. Why didn't you take
25:47responsibility like to today? You said
25:49you took full responsibility. Why don't
25:51you take responsibility for Lehman's
25:53mistakes? Why did you continue to say
25:55quote we are great and the market
25:58doesn't understand?
26:00In your testimony today, right here,
26:02right now, you continue to deflect
26:04personal responsibility. You cite what
26:07you call a litany of reasons for
26:09Lehman's bankruptcy. Mr. Fuld, I want
26:11you to I want to ask you about your
26:13personal responsibility since you've
26:14taken it.
26:15Do you agree that Lehman took on
26:17excessive leverage under your
26:19leadership? Please answer yes or no.
26:29It's not that easy. I will tell you to
26:31say to you
26:33our leverage at times was higher.
26:35Uh but as we entered this more difficult
26:38market over this last year
26:40uh we continued to bring our leverage
26:42down so that even at the point
26:46Congressman
26:47on September
26:4910th
26:51when we announced our third quarter
26:54results
26:57we had grossly reduced our balance sheet
27:01by close to 200 billion
27:03specifically around residential
27:05mortgages and commercial real estate and
27:08leveraged loans. Mr. Fuld Mr. Fuld, I've
27:10only got I've got about less than a
27:12minute. I got to get this question in. I
27:13assume your answer is no. I'm just
27:15giving you the benefit of doubt.
27:17At the end of the day
27:19we worked hard. Our leverage was way
27:21down.
27:22All right, let me ask you my next Sorry,
27:24sir. One of the best leverage ratios on
27:26the street and our tier one capital was
27:28one of the highest. So, you feel you
27:30feel comfortable with with with that
27:32that what you did. Is that right? That's
27:34not one of the things that you said
27:35you're Yes, sir. Okay, fine. Do you
27:37regret spending $10 billion in Lehman's
27:40cash reserves on bonuses, stock
27:43dividends, and stock buybacks as your
27:46firm faced the liquidity crisis?
27:49Do you regret that now?
27:53I heard some of that while I was in the
27:55other room. I think that is a
27:56misunderstanding which I'd like to clear
27:58up.
28:00Well, let me go back to Go ahead. You go
28:02ahead. I'm sorry. Cuz it's important
28:03that this committee
28:05understands
28:07exactly what that was.
28:10When I talked about my employees owning
28:13close to 30%
28:17what's typical of Wall Street is you
28:19take a percentage
28:20of your revenues
28:22and you pay your people.
28:25We asked our employees to take a big
28:28percentage of their compensation
28:32in stock.
28:35And so what that 10 billion was
28:38we had close to 19 billion of revenues
28:42what most of that 10 billion was
28:45was compensation to our employees
28:48that they received in stock
28:51with a 5-year forward vest.
28:54So, they didn't get that stock until 5
28:56years which aligned our interests our
28:59being employees with the interest of
29:01shareholders.
29:04To avoid dilution
29:07because we took that 10 billion
29:11gave it to the employees in stock
29:14we had to take the 10 billion
29:17that they didn't get
29:19and go back into the open marketplace
29:21and buy back that stock so that we did
29:23not dilute
29:25our shareholders.
29:27And we did it each and every year. From
29:30where you sit
29:31it looks like we just
29:34spent an extra 10 billion. That is not,
29:37sir, what we did.
29:40Thank you very much, Mr. Chairman.
29:42Sounds like though and I'm yield myself
29:45time here that you were trying to not to
29:48dilute the payment to those employees
29:51while you were in a liquidity crisis.
29:53Wouldn't it have made more sense to use
29:55that money
29:57to pay off
29:58the debts that you were
30:00uh uh
30:02that were heavily on your shoulders at
30:03that point and you knew that you were in
30:05a difficult situation?
30:08At that time at the end of the year last
30:10year
30:16I didn't believe that we had that
30:17problem. You didn't believe you had a
30:19liquidity problem. And we did not have a
30:21liquidity problem at the end of last
30:23year. We had just completed
30:25a record year.
30:28Uh none of which by the way came from
30:31mortgages.
30:33And we paid our people
30:36fairly in what we thought was
30:38competitive
30:40with the rest of the street.
30:42Okay, I I accept your answer that you
30:44didn't think you had a liquidity problem
30:45so you were trying to make sure your
30:47employees were fully compensated. Yes,
30:49sir. Okay, thanks.
30:50Um Mr. Turner.
30:54Thank you, Mr. Chairman.
30:56Mr. Fuld, in looking at your written
30:57testimony, um you say ultimately what
31:00happened to Lehman Brothers was caused
31:02by a lack of of confidence.
31:05Um I have a different view and I have a
31:07couple questions for you about
31:10what really comes down to as we're
31:11hearing that the subprime crisis, the
31:13predatory lending crisis, the mortgage
31:15foreclosure crisis.
31:17Now, you said you listened to the first
31:18panel
31:19um and their testimony. I'm going to
31:21summarize it briefly for you.
31:22most of it, but yes, sir. They said that
31:23there was a period of easy credit that
31:26housing prices were escalating and then
31:28declined that there was securitization
31:30of mortgages, that houses became like
31:32ATMs where people withdrew their equity,
31:35and excessive CEO compensation.
31:38That's not necessarily our experience in
31:39Ohio.
31:40I'm sorry, that's not what
31:41That is not necessarily our experience
31:42in Ohio.
31:44In In 2001, my community held a series
31:46of hearings on then subprime lending,
31:49predatory lending at the behest of uh
31:51City Commissioner Dean Lovelace and we
31:54found that in many instances what we
31:56were seeing in the escalation of
31:58foreclosures was a result of
32:01inflated property values at the time of
32:03loan origination.
32:05In fact, we then turned to the Miami
32:07Valley Fair Housing Center in our
32:08community, an agency that was helping
32:10people who were in the foreclosure
32:13crisis and Jim McCarthy from their
32:14reports that over 90% of the people that
32:17they were dealing with were actually
32:18refinances and that many of them had
32:21issues of the original value of the
32:25property at the time of refinancing
32:27uh where the the property values were
32:29inflated. Now,
32:31clearly we're in a period now of of
32:33decline or or slow growth in some areas,
32:35which is compounding the problem.
32:38Um but I think that people are getting
32:39off too easy when we say that that
32:41declining property values are the
32:43problem and I want to tell you what what
32:45um
32:45my concern here is.
32:47I believe that if you issue a loan at
32:49origination where the loan value exceeds
32:53the property value
32:55and that you then issue securities based
32:57upon that loan
32:59and you don't disclose that gap that
33:01existed at loan origination
33:03that you are in fact, I believe,
33:06stealing.
33:08I believe that we're in this series of
33:10situations where people aren't
33:11disclosing that at loan origination, in
33:13fact, there was already a gap between
33:15value and loan amount and that the
33:17declining house values really just
33:19emphasize it and and can compound it.
33:23So, I have two questions for you.
33:25The first is
33:26do you believe that if mortgage-backed
33:28securities are issued and they do not
33:31disclose at origination that the
33:33original loan amount exceeds the
33:35property value that it's stealing?
33:38And secondly, would you please describe
33:40Lehman Brothers' role in both issuing
33:43subprime loans and mortgage-backed
33:46securities?
33:50I do not believe that any of the
33:52original mortgage
33:54securitizers
33:56uh
33:59knowingly
34:03at the point of origination
34:07would have taken
34:08a mortgage
34:10whose value was in excess of the value
34:14of the home.
34:16I find that very difficult
34:20to either understand or believe.
34:21it And if it occurred?
34:30If it If it If it did occur,
34:32uh
34:33I would say it was
34:37lack of understanding of
34:40what the real value was.
34:42Uh
34:44But I don't think
34:46I can't talk for the world in general,
34:47clearly.
34:49Um
34:50But highly unlikely that anybody would
34:52do that purposely.
34:54Then could you go to the role of of your
34:55company in actually issuing original
34:58loans and then mortgage-backed
34:59securities?
35:02We We actually owned
35:05a number of
35:06originate what we called origination
35:08platforms
35:10uh but those were more wholesale
35:12where we went around to individual
35:15groups or companies of brokers
35:17uh that did in fact originate loans
35:20uh when we bought them.
35:22Uh we changed management.
35:26We changed underwriting standards to
35:29make them much more restrictive
35:32uh to improve the quality of the loans
35:34that we did in fact
35:36originate.
35:41So, that those loans that we did then
35:44put into securitized form
35:47uh
35:49would be solid investments for
35:51investors. So, then would it be your
35:53testimony that none of those original
35:55loans that were issued by your company
35:57exceeded the property value at
35:59origination?
36:01Congressman, in all fairness, I did not
36:02review
36:04each and every loan. I must tell you the
36:06truth on that. I did not.
36:08And it would be a misstatement for me to
36:10say that
36:13Cuz I thought I had heard you say that
36:14no one would would do that and and I I
36:16can tell
36:16nobody that the experience in Ohio is
36:18that is exactly what was being done.
36:20I would say no one would do it
36:21knowingly.
36:21top of the organization, I I really
36:23wanted to get your perspective of how
36:24something like that could be happening.
36:26As I go through neighborhoods in Ohio
36:27and see abandoned house after abandoned
36:29house where so many times the American
36:32dream of having a home had been stolen
36:34from people in refinancing where they
36:36did not understand the transaction they
36:37were in and where the value at
36:39origination was inflated making them
36:41captive to the house ultimately leading
36:43to foreclosure.
36:46Let me clarify that if I can. I said
36:47nobody would knowingly do that.
36:50Thank you, Mr. Chairman.
36:52Uh Mr. Kucinich.
36:54Thank you. I want to associate myself
36:56with the remarks and questions of my
36:58colleague from Ohio. Uh Mr. Fuld
37:01uh I have here a copy of a memo uh from
37:05April 12th, 2008 that you
37:08uh sent It's an email that you sent to
37:10Thomas Russo. It says you just finished
37:13the Paulson dinner. Uh you
37:15uh this is a memo Did you Did you have
37:18dinner with Mr. Paulson back in April?
37:23I very easily could have, sir. Okay,
37:24well, this memo references it. Did you
37:26Did you
37:27believe I don't believe it was just the
37:28two of us. Uh but did you Did you meet
37:31with him?
37:33You're asking me specifically on that
37:35date? Did Did you Did you talk to Mr.
37:37Paulson on a regular basis?
37:41We had a number of conversations.
37:42Okay, now, would you tell me this memo
37:45says that uh Mr. Paul uh that you sent
37:48to your colleagues said, "We have a huge
37:50brand with Treasury."
37:53Speaking of Treasury, "Loved our capital
37:56raise."
38:05Do you feel at any time in this process
38:08that Mr. Paulson
38:10misled you?
38:17I'm I'm sorry, sir. At
38:19in response to this date Do you feel at
38:22any time in these conversations, we have
38:24your telephone logs
38:26that you were misled
38:28by the Treasury Secretary?
38:33No, sir, I do not. And do you feel then,
38:35you know, on September 10th, you had a
38:37conference call with your investors.
38:40During the conference call, your
38:41investors were told no new capital would
38:44be needed
38:46that uh Lehman's real estate uh
38:49investment property uh in investments
38:51were properly valued.
38:53Five days later, you filed for
38:55bankruptcy.
38:58Did you mislead your investors? And I
39:00remind you, sir, you're under oath.
39:03No, sir.
39:04We did not mislead our investors.
39:08Uh and to the best of my ability
39:13at the time, given the information that
39:15I had
39:16we made disclosures that we fully
39:19believed were accurate. Well, I I I
39:21would I would like to go back to
39:23something here. You know, you you have a
39:25memo here where you say that uh Mr. that
39:29Secretary Paulson wanted to implement
39:31minimum capital standards, leverage
39:33standards, and liquidity standards.
39:35These seem to be some of the things that
39:37got your company in so much trouble.
39:39Now, did he Did he ever tell you in all
39:42the conversations you had with him that
39:44he decided not to implement any of the
39:46proposals he discussed with you last
39:49April? And does any part of you feel
39:52that you were double-crossed by the
39:53secretary and he was playing you off
39:56against let's say Goldman Sachs?
40:02I would sincerely hope that was not the
40:03case.
40:06And what about these
40:08things that he said to you about minimum
40:10capital standards, leverage standards,
40:12liquidity standards? Did he ever tell
40:14you he decided not to implement any of
40:16those things? You talked to him on a
40:17regular basis. What can you tell this
40:19subcommittee to enlighten us about where
40:22Secretary Paulson was and you as the
40:24head of Lehman Brothers, did you rely on
40:27anything that he told you that could
40:29have put Lehman Brothers down?
40:34We instituted ourselves
40:38our own
40:40plan for reducing leverage,
40:42our own plan
40:44for increasing liquidity,
40:47and I will note that on September 10th,
40:53uh when we pre-announced our earnings,
40:56we had 41 billion dollars
41:00of excess liquidity.
41:02Well, let me ask you this. When did you
41:03know that JP Morgan was going to make a
41:06five billion-dollar collateral call?
41:08When did you first know about that?
41:12I know that they had had conversations
41:14with our treasury people. When? Uh
41:20I'm not sure of the date, but I was it
41:22was
41:23Mr. Chairman, uh
41:24if I may. Thank you, sir. You're not
41:26sure. Uh Mr. Chairman,
41:28uh this is a central question here
41:29because with JP Morgan, you know, making
41:32a five billion-dollar collateral call,
41:36and uh and on September 10th, they were
41:39telling investors they didn't have any
41:41more need for capital, that the real
41:43estate invest investment were properly
41:46valued. This puts us in a position where
41:48one of two things is possible. Either
41:51they were lying to their investors
41:55or
41:56they were misled
41:58by Secretary Paulson as to what could be
42:01done to help you because after that uh
42:04five-billion-dollar cap collateral call,
42:07uh that's what led directly
42:10to uh Lehman Brothers going down. Isn't
42:12that correct? Didn't you go down right
42:14after you understood that that they were
42:17not going to remove that collateral
42:18call?
42:20When you say collateral call, that's not
42:22the same thing as a margin call.
42:25I'm talking about a collateral call. No,
42:27I know.
42:29But the collateral call
42:32was not to meet
42:36uh a deficit
42:38in
42:40collateral that they were holding
42:43to offset
42:44risk.
42:47The collateral call,
42:50I believe was because as as our clearing
42:52bank,
42:54uh
42:57they just asked for additional
42:58collateral to continue to
43:02to clear for us. Thank you. Thank you,
43:04Mr. Chairman. Thank you, Mr. Fuld.
43:05Gentleman's time has expired. Um Mr.
43:08Tierney.
43:10Uh excuse me, also
43:12I should I should clarify also, sir,
43:15uh
43:18I didn't mean to cut you off there. I
43:22This is probably a subject for for
43:25litigation and it's probably appropriate
43:28that I
43:29leave it to that.
43:33I believe the creditors and JP Morgan
43:36are
43:37having a conversation.
43:39Mr. Tierney. Indeed.
43:41Thank you.
43:44Mr. Fuld, thank you for joining us here
43:46this afternoon.
43:47Just before Lehman went into bankruptcy,
43:50you were in conversations with the
43:52Korean
43:53Development Bank, uh which I believe is
43:55a South Korean lender. Uh what amount of
43:58money were you looking for them to
43:59contribute to Lehman?
44:07Congressman, our conversations with
44:10KDB as as one of
44:15uh five banks in a consortium
44:19uh
44:20stretched over a number
44:23of months. Okay, can you tell me the the
44:26amount that you're looking for from from
44:27the consortium?
44:30It wasn't so much that we were looking
44:32from them.
44:34Uh their original proposal
44:37was they wanted to buy in the open
44:40market
44:42uh
44:45close to 50%
44:48of our stock.
44:51And uh it was not about giving us new
44:53capital. They wanted to buy close to
44:5650%.
44:58Uh and was that type of arrangement
45:00something that you were looking for at
45:01that time?
45:04I would have welcomed that transaction.
45:06Yes, sir. Okay.
45:07Now, at about that time and looking for
45:10that kind of transaction,
45:12you knew uh because you had known for
45:14some time that you were already in a
45:16precarious situation. And I say that
45:17because there were reports that as far
45:19back as
45:20Christmas in 2006,
45:22uh that you were telling people that you
45:24had a cautious outlook for the year
45:25ahead. Uh the next month in January, uh
45:28when you were at Davos at the World
45:30Economic Forum, you were reportedly
45:31telling people that you were really
45:32worried about the risk inherent in the
45:35property valuations and excess leverage
45:37and the rise in oil and and commodity
45:39prices.
45:40Uh is that be fair to say that you were
45:42of that that mind around January of
45:442007?
45:46I was clearly focused on oil. Yes, sir.
45:48Then I I think we go back to the
45:50situation knowing that you were in that
45:52stage of mind in December of 2007 at the
45:55end of that year, um there were payments
45:58made out both cash and stock bonuses
46:01uh to your employees. Uh and they
46:04totaled about 4.9 billion dollars. So,
46:06is there any thought given at that point
46:07in time to say to your employees, this
46:09isn't the time to be handing out 4.9
46:11billion dollars in cash. We've got a
46:13liquidity issue here. Uh we've been
46:15seeing it coming for all year long and
46:17we're going to keep that money in the
46:19company liquidity for the benefit of our
46:20shareholders, for the benefit of the
46:21public with whom we deal, and for the
46:23economy.
46:25At the end of
46:272007,
46:29uh I did not believe at the time that we
46:33had a liquidity problem.
46:36Uh
46:37and
46:39our most important assets
46:42uh
46:44in the firm are clearly our employees.
46:48Uh
46:50They are the ones that
46:52touch the clients every day and do
46:54business every day. I understand. I'm a
46:56little shocked that I mean, a lot of
46:57other people thought that you had a very
46:59precarious position at the end of 2007.
47:01You thought everything was fine?
47:03We had just completed a record year,
47:05sir.
47:07And you Well, I can
47:08All right.
47:09If you want to I do you want to cover
47:10that for a second? The record year that
47:12you just completed and the reports on
47:14that had some
47:15according to one account, had some uh
47:18rather aggressive and bizarre accounting
47:20practices on that. And they list out
47:22four or five things that they thought
47:24were strange. You You listed a 722
47:26million-dollar paper profit on level
47:28three equity holdings. It's stock that
47:30doesn't trade publicly. There aren't
47:32liquid markets out there. You claimed a
47:349% profit on them. Uh at the same time,
47:37Standard & Poor's index on publicly
47:39traded stocks fell by 10%.
47:41That was what made you
47:43seem to have a record year. One of your
47:45short sellers was a David Einhorn uh
47:47said that he was told uh by your chief
47:49financial officer that 400 to 600
47:53million dollars came from writing up the
47:54value of electric generating plants in
47:56India. He thought the value was
47:58somewhere around 65 million, not 400 to
48:01600 million.
48:02He also said Lehman showed some 600
48:04million dollars of profit uh because of
48:07the decline in the market value of your
48:08own debt obligations.
48:10And sort of similarly that to the fact
48:12of it permissible accounting, surely
48:13enough, but it's like the house the
48:15profit that you make when your house is
48:17foreclosed for a value that's lower than
48:18your mortgage.
48:19And lastly, said another 176 million
48:21dollars uh was on your books by almost
48:24doubling to uh some 365 million dollars
48:26the value ascribed to certain mortgage
48:29servicing rights. In other words, the
48:31value you get paid for servicing
48:33mortgage holders' collection of payments
48:34and doing the paperwork, which is sort
48:36of tricky things to value. So, I know
48:39that at the end of the year, maybe your
48:40books look like uh they were good, but
48:42if those are the reasons for that, uh
48:44then I think it's questionable why 4.9
48:46billion dollars is going out to the
48:47employees in bonuses, cash and stock,
48:50and why you're spending another four
48:51billion dollars buying some of that
48:53back. Uh and I think one of your
48:55investors here today clearly said he was
48:56horrified to find out that you were
48:58doing that. And that's that's why I
49:00raised the question. Thank you, Mr.
49:01Chairman.
49:02I would just note uh Mr. Fuld that in
49:04January of 2008, there was a
49:06presentation to your board
49:10uh on which you served
49:12by uh Eric uh Er- Eric Felter, and he
49:16said very few of the top financial
49:17insurers have been able to escape damage
49:20from the subprime fallout, and a small
49:23number of investors accounting for a
49:25large portion of demand liq- liquidity
49:28can disappear quite fast. So, I just
49:31want that to be on the record. Uh we'd
49:34now go to um
49:36Ms. Watson.
49:38Thank you so much, and Mr. Fuld, we are
49:41so pleased that you're willing to come
49:44and sit on the hot seat and uh admit
49:49that uh you take full responsibility. We
49:52heard from the first uh panel's view on
49:55what caused this financial crisis, and
49:58one key factor was deregulation
50:01or inadequate regulation of big
50:05financial entities like yours, Lehman
50:07Brothers.
50:08I'd like to get your view on this topic
50:11because as a publicly owned
50:13broker-dealer investment bank
50:16Lehman was subject to a number of SEC
50:20uh regulations. The company was required
50:23to report important financial
50:25information to shareholders and you were
50:28required to meet the basic SEC
50:31requirements to make sure that you were
50:34adequately capitalized. Is that correct?
50:39Yes, Congresswoman.
50:41And in your written statement, you
50:42explained that the SEC and Fed conducted
50:45oversight of your balance sheet. As you
50:47stated they were privy to everything
50:50that was happening. Is that correct?
50:52Yes, Congresswoman.
50:55But Mr. Fuld, uh Lehman Brothers went
50:57bankrupt. Your investors and your
51:00creditors lost hundreds of billions of
51:03dollars and the failure has had a
51:06widespread
51:08impact for the rest of the economy.
51:11Would you agree that the current
51:12regulatory framework and the way they
51:15were implemented in your case failed?
51:20Are you asking specifically about the
51:22SEC? Yeah.
51:25The regulatory framework.
51:27Specifically about the SEC.
51:30Yes. Cuz I had said in my written
51:33testimony
51:34uh
51:35that I thought the overall regulatory
51:39system had to be redone.
51:41But specifically
51:42agree that they failed. But specifically
51:44to the SEC
51:45uh
51:48we had extensive dealings
51:51with the SEC.
51:53Uh
51:54they actually had
51:56dedicated and knowledgeable
51:59people
52:01actually in our firm
52:03overseeing a number of our daily
52:05activities.
52:08Uh
52:09I went to them
52:12our firm went to them
52:14uh
52:15specifically talking about naked short
52:18selling.
52:19Uh
52:20They were constructive and positive.
52:22Uh we went to them
52:25with an idea
52:26of creating something that we call
52:28Spinco.
52:30Spinco was
52:32the
52:35was a was a new independent
52:38entity
52:39into which Lehman
52:42would place
52:45some number of
52:48commercial real estate assets
52:51along with
52:54a piece of capital
52:56and then spin that
52:59which means give that to our
53:01shareholders
53:03uh which we believed
53:05uh
53:06would have created true
53:09shareholder value
53:11over a longer period of time.
53:14Uh
53:15this actually
53:16was a model
53:18that I believe
53:19Yeah. could have been very helpful and
53:22instructive. Yeah, I'm watching uh our
53:25time is there. So uh let me just say
53:28that uh we've learned how Lehman
53:31Brothers relied
53:33on an unregulated bond rating agency
53:36whose conflict of interest gave them
53:40every incentive to rate your company's
53:43risky bonds as safe investments.
53:46We've heard how housing and banking
53:48regulators failed to curb the predatory
53:52lending abuses in the subprime market
53:55and we've heard about how the net
53:57capital rule was implemented so Lehman
53:59and other investment banks could ramp up
54:01their leverage to dangerously high
54:04levels, and we heard that the F uh EC is
54:07underfunded
54:09uh understaffed and led by a chairman
54:11who either was unable or unwilling to
54:14enforce even the basic uh laws on the
54:17books. Do you think this deregulation
54:20and lack of oversight contributed to the
54:24meltdown on Wall Street?
54:27I cannot talk to what
54:30Do you think it contributed? My time is
54:32almost up. To the meltdown on Wall
54:34Street. I cannot talk to what the SEC
54:37did with the other firms.
54:38think it contributed? Or are you wholly
54:41and solely responsible?
54:44I actually
54:45on Wall Street. I actually gave the SEC
54:48high marks for trying to be
54:49constructive.
54:50Here's my bottom line question. If all
54:53the things I just uh spoke of
54:56uh you think were just fine and worked
54:59like they should, the regulations then
55:01it's your total responsibility
55:03for the failure of Lehman Brothers. In
55:06retrospect, in retrospect, it's easy
55:10to go back
55:10Yes, no.
55:12Yes, no.
55:14My time is up.
55:18If you're asking If you're asking me, do
55:20I do I
55:20is up with Mr. Fuld. I I'd like to
55:23be permitted to answer the question?
55:24Thank you, sir. Uh if you're asking me
55:28did the regulatory framework
55:31uh
55:33contribute to or the lack of regulatory
55:36framework contribute to where we are
55:37today I would say yes, and that's why I
55:40think we need to redo
55:42you. Thank you. That's the answer I was
55:43trying to get.
55:44That's why I think we need to redo the
55:45regulatory framework.
55:47Thank you, Mr. Watson. Mr. Higgins.
55:50Thank you, Mr. Chairman. Um Mr. Fuld, uh
55:53there appears to be
55:55uh inconsistencies between your public
55:57statements
55:59and the private information you were
56:01receiving internally. Uh let me read you
56:03some of these uh inconsistencies and ask
56:05you to respond.
56:06In January of this year, Eric Felder,
56:09one of your top executives, made a
56:10presentation to you and the Board of
56:11Directors.
56:13He talked about the company's finances
56:15and observed that, quote, very few of
56:17the top financial issuers I'm sorry, I
56:20didn't hear that.
56:21I'm sorry. After After Felder, I didn't
56:23hear that. Yeah. He talked about the
56:25company's finances. He He observed that,
56:28quote, very few of the top financial
56:31issuers have been able to escape damage
56:34from the subprime fallout, end of quote.
56:37He then warned you explicitly that in
56:39the current environment, quote,
56:40liquidity can disappear quite fast. But
56:44that's not what you were telling the
56:45public.
56:46In December of 2007, in a press release,
56:49you said, quote, our global franchise
56:51and brand have never been stronger.
56:53My question is why didn't you say
56:55publicly what you were being told
56:57internally that you had to be careful
57:00because your liquidity could disappear
57:02quickly which was, in fact, what
57:05happened?
57:09Mr. Felder's presentation was when,
57:11January you said?
57:14December of 2007.
57:18January. January. 2007.
57:19Correct. Uh Of this year.
57:22We actually listened very carefully
57:24to Mr. Felder.
57:26Uh and I believe the record book will
57:28show
57:29that
57:31we reduced our balance sheet, we reduced
57:33our leverage, we raised capital
57:35we increased liquidity.
57:39So we did listen.
57:42Let me show you another internal
57:43document. Uh this document
57:46uh
57:48is a document that your attorneys
57:49produced to the committee.
57:51It's from June of 2008
57:536 months later.
57:55This is a set of talking points
57:57describing what happened over the past
57:58year and why your company posted record
58:01billion-dollar losses. This is an
58:03internal document that was never made
58:05public. And it seems to admit the truth
58:07about what was going on. It asks, this
58:10is your internal document why did we
58:12allow ourselves to be so exposed? And
58:14then it spells out the reasons. Quote,
58:16conditions clearly not sustainable
58:20saw warning signs, did not move early
58:23fast enough, not enough discipline in
58:25our capital allocation. But that's not
58:28what you told the public that month.
58:30Here's what you said during an earnings
58:32call with investors on June 16th.
58:35Let me discuss our current asset
58:38valuation on those remaining positions.
58:41I am the one who ultimately signs off
58:43and I'm comfortable with our valuations
58:45at the end of our second quarter.
58:47Because we have always had rigorous
58:49internal process, our capital and
58:52liquidity positions have never been
58:54stronger.
58:55Mr. Fuld
58:56I don't see how you could say that. Your
58:58internal document said that conditions
59:00are clearly not sustainable and that you
59:03did not move early or fast enough. But
59:05you told the public Lehman had never
59:07been in a stronger position. How do you
59:09reconcile your public statements
59:12with the company's internal assessments?
59:15Was this my document?
59:19These are documents that your attorneys
59:22provided the committee.
59:25I didn't mean that. Is this my document?
59:27Is this Is this Is this a presentation
59:29that I gave?
59:33These are documents internally that went
59:36past your desk when the past 6 months.
59:39This document does not look familiar to
59:41me.
59:42Uh
59:45And if it was an internal document, uh
59:48it was
59:51I really can't speak to that because I
59:52this document is not familiar to me.
59:55Yeah.
59:56Well,
59:57these documents were made But if you
1:00:00tell me it's mine, I believe you. Okay.
1:00:03And ultimately, you're responsible.
1:00:05And this uh inconsistency with public
1:00:09statements made conveying a strong
1:00:12position and internal documents showing
1:00:15a direct contrast to that assertion, I
1:00:18think is very troubling with respect to
1:00:20the issue of trust and confidence.
1:00:33Give me the road.
1:00:39According to your lawyers,
1:00:40looking very carefully at this. that you
1:00:42either wrote or reviewed.
1:00:54I am looking at this very carefully, so
1:00:56this does not look like my document. Nor
1:00:58does it look like a speech that I gave,
1:01:00nor does it look like anything that I
1:01:02reviewed.
1:01:04These are your documents.
1:01:06Excuse me, sir.
1:01:08These are your documents.
1:01:09Gentleman's time has expired.
1:01:12Uh
1:01:15The uh Mr. Shay, you wish to yield 2
1:01:17minutes to uh
1:01:19Okay, to Mr. Mica.
1:01:22Let me get down to uh some of the heart
1:01:23of this. Um
1:01:26It uh
1:01:27said I guess a lot of the collapse
1:01:30occurred on the 9th and 10th of
1:01:32September. Um
1:01:34Uh you were trying to find $5 to back up
1:01:37your transactions. Uh
1:01:39I recommend everybody the Wall Street
1:01:41Journal today. They did an excellent
1:01:43job, better than the committee,
1:01:45of going through some of the public and
1:01:47and private uh statements. Uh
1:01:50I would I wouldn't necessarily pay for
1:01:52it. Maybe you could get it online. It's
1:01:54two bucks. Uh
1:01:55But uh it does outline what you were
1:01:57going through. One is um
1:02:00Uh
1:02:01JP Morgan asked you for the $5 billion.
1:02:05Uh Lehman executives claimed that they
1:02:08had a restructuring plan.
1:02:10And then you had discussions uh that
1:02:12night. You wanted to go into a
1:02:14conference call. Your counsel said not
1:02:16to go into a council call. Maybe you
1:02:18could tell us about that.
1:02:20But on the 10th uh however, you told
1:02:23investors, "We are on the right track to
1:02:25put these
1:02:27uh last two quarters behind us." Now,
1:02:30people want to know if you defrauded
1:02:32investors. I mean, I'm going to be blunt
1:02:34here. By coming out and saying that as
1:02:36opposed to what happened on the 9th and
1:02:39you
1:02:40you knew or were told you weren't going
1:02:42to get the money.
1:02:46As I said before, I'm not
1:02:49I'm not really sure when that
1:02:50conversation
1:02:51you had to know at some point you
1:02:53weren't going to get the $5 billion. I
1:02:55mean, the Korea the attempt to get the
1:02:57money from Korea was
1:02:58I thought you were talking about JP
1:03:00Morgan. I apologize.
1:03:01you were trying to get money uh well, JP
1:03:03Morgan wanted the money and you were
1:03:05trying to find the bit five three to
1:03:07five billion, right? To keep the ship
1:03:09afloat. Two very different things.
1:03:12Very different things.
1:03:13Well, this is on the 9th. Well, JP
1:03:15Morgan, as I said before in answering
1:03:17one of the other On the 9th of
1:03:19September, you needed $5 to keep the
1:03:22ship afloat. You were told and your
1:03:24counsel told
1:03:26uh well, uh also advised you not to to
1:03:29go ahead with the conference call to
1:03:31disclose this internally. Uh but you
1:03:34came out on the 10th and said, "We are
1:03:36on the right track to put these last two
1:03:39quarters behind us." That's what you
1:03:41said. Again, I'm I'm just reporting
1:03:43Correct.
1:03:44Uh
1:03:49In our September 10th
1:03:52analyst
1:03:53call,
1:03:55uh
1:03:57I firmly believed that we put the last
1:04:00two quarters behind us.
1:04:02We had done a tremendous amount.
1:04:05I don't want to go through the whole
1:04:06thing all over again, but
1:04:07lowered our leverage, raised capital.
1:04:10Uh
1:04:12You heard it all before, so I'm not
1:04:13going to I'm not going to go through it
1:04:14again.
1:04:15You were you told the night before you
1:04:17weren't going to get uh be able to cook
1:04:18the deal?
1:04:21I I I don't I don't know I don't know
1:04:22what that refers to.
1:04:24What Getting the money to keep the
1:04:26Lehman ship afloat.
1:04:30What we said it's on on September 10th
1:04:32was that we had adequate capital.
1:04:36Uh
1:04:37We talked about a plan
1:04:39that involved
1:04:43spinning off those commercial real
1:04:44estate assets.
1:04:46And that we were going to have to put
1:04:48capital into that.
1:04:50On the call, people talked about how you
1:04:52going to fill that.
1:04:55We talked about
1:04:57the sale
1:04:59potential sale of IMD
1:05:01either all or some,
1:05:04which would have created 3 billion of
1:05:06tangible
1:05:08equity. I think if you go back and look
1:05:10at the third quarter announcement,
1:05:12you'll see that.
1:05:13Uh possibly more if we had sold it for a
1:05:16higher price.
1:05:19We had plans at the time to go to some
1:05:21of our preferred holders
1:05:24and convert some of those preferreds to
1:05:26equity.
1:05:28Uh
1:05:29because we had to
1:05:32pre-release
1:05:33uh because of the rumors
1:05:36about our company,
1:05:38uh we didn't
1:05:40obviously have a chance to complete some
1:05:42of those plans.
1:05:44We didn't know how much capital
1:05:46we were going to need
1:05:48to equitize Spinco. We didn't know
1:05:53how much of the commercial real estate
1:05:55assets would be sold.
1:05:57But that was all 3 months out.
1:06:01On that Wednesday, we had $41 billion.
1:06:05We had plenty of capital
1:06:07to operate.
1:06:09All conversations about additional
1:06:11capital
1:06:13were about
1:06:15what we were going to do
1:06:19when we took capital and put it into the
1:06:21new Spinco. That was all 3 months out.
1:06:25And that was obvious to shareholders.
1:06:28That's what we were talking about. And
1:06:30there were number of questions from
1:06:32analysts at that time
1:06:34uh
1:06:36about that.
1:06:38So, there was
1:06:39there was disclosure about where we
1:06:41were.
1:06:43And I believe understanding.
1:06:45And there certainly was no attempt to
1:06:47mislead anyone.
1:06:49Again, before the committee under oath,
1:06:52uh
1:06:53the night before I uh September 10th
1:06:56when you made that statement,
1:06:58uh
1:06:59did you in fact know that you weren't
1:07:01going to get the estimated three to five
1:07:03billion dollars to keep the ship afloat?
1:07:09Congressman, again I say I'm sorry.
1:07:11Those are two very different numbers.
1:07:14One is additional collateral for our
1:07:17clearing bank.
1:07:19Now, I got 2 minutes. I I
1:07:21I I
1:07:22I know you're looking for an answer
1:07:24here.
1:07:26That is not capital.
1:07:28That is collateral.
1:07:30Two very different things.
1:07:32We believed we were going to
1:07:34raise
1:07:37quote that $5 billion
1:07:39by either selling all or part of
1:07:43investment management.
1:07:46Or the sheer fact that we were going to
1:07:49spin those assets off, then we didn't
1:07:52need that much capital.
1:07:54The $5 billion
1:07:56was additional collateral that JP Morgan
1:07:59was asking for.
1:08:01Gentleman's time has expired. I chair
1:08:04now recognize Ms. McCollum.
1:08:06I miss Did I answer that though for you,
1:08:07sir? Mr. Chair, point of personal
1:08:09privilege.
1:08:10Yes. How would I go about yielding to
1:08:13the gentleman from Tennessee so he can
1:08:14make a flight? I I'm sorry. I didn't
1:08:16hear what you
1:08:16How would I go about allowing time for
1:08:19the gentleman from Tennessee to go ahead
1:08:20of me so he can uh catch a plane? Oh,
1:08:23well, then why don't I just recognize
1:08:24him now?
1:08:28Thank you, Chair. Um
1:08:30Mr. Fuld, in your testimony on page
1:08:33eight, you say, "What happened to Lehman
1:08:35Brothers could have happened to any firm
1:08:36on Wall Street."
1:08:38And almost did happen to others.
1:08:42But it didn't happen to the others.
1:08:44There's a difference.
1:08:46And you cite many factors in your
1:08:48testimony
1:08:49about how it could have been different,
1:08:51you know, if regulators had behaved
1:08:52differently or
1:08:54different things had happened. What
1:08:56could you have done differently
1:08:57personally
1:08:59that might have changed the fate of
1:09:00Lehman Brothers?
1:09:04With the benefit of hindsight, sir,
1:09:07uh going back a couple of years,
1:09:11I would have made some changes to
1:09:14how we looked at and thought about
1:09:17our mortgage origination businesses,
1:09:20uh
1:09:22our commercial real estate business,
1:09:25uh and probably our leveraged loan
1:09:27business. Those were three of the areas
1:09:29that
1:09:32that over the second and third quarter
1:09:34created
1:09:35some losses.
1:09:36Uh,
1:09:38and I believe in my verbal testimony I
1:09:40said, given the opportunity to look
1:09:43back, I would have done things
1:09:44differently.
1:09:46Uh,
1:09:48should I close those businesses down
1:09:51uh, then?
1:09:55I think people would have looked at me
1:09:56and said that's
1:09:59irrational to have done that.
1:10:01Uh,
1:10:05but knowing what I know today,
1:10:08uh,
1:10:10that clearly could have been a smart
1:10:12move.
1:10:14But given the information that I had,
1:10:20that's not the decision I made.
1:10:23Well, that was decisions you could have
1:10:25made 2 or 3 years ago given your book of
1:10:27business in 2007 and 2008.
1:10:31Were there decisions you could have made
1:10:33to have changed the destiny of Lehman
1:10:35Brothers just in the immediate past? Uh,
1:10:38we did make aggressive decisions to
1:10:41close some of the mortgage origination
1:10:43businesses.
1:10:45Uh,
1:10:47we had substantial hedges on our
1:10:49residential mortgage positions.
1:10:53Uh,
1:10:57in retrospect, I think we were slower on
1:10:59commercial real estate.
1:11:05I, like a number of other people,
1:11:07thought
1:11:10the mortgage crisis was contained to
1:11:12residential mortgages.
1:11:14There were a number of people,
1:11:16uh,
1:11:17many experts included, uh, that also
1:11:21thought that.
1:11:24Uh,
1:11:32and I was wrong.
1:11:34And looking looking back now at that
1:11:35information,
1:11:37uh,
1:11:41I thought it was contained. We thought
1:11:43it was contained.
1:11:45Uh,
1:11:46and experts thought it was contained.
1:11:49You mentioned being, quote, slow on
1:11:51commercial real estate.
1:11:53Does that mean uh, correctly valuing the
1:11:55portfolio of commercial real estate
1:11:57properties? No, sir. It does not mean of
1:11:59anything about valuation.
1:12:01It means about
1:12:05how quickly
1:12:07uh,
1:12:08we thought about disposing those assets.
1:12:12And I think the record book will show
1:12:14that we went from 50 billion
1:12:17of those assets to 30 billion keeping
1:12:19the remaining I shouldn't say keeping,
1:12:20but ending up with 30 billion
1:12:23that eventually would go into either 30
1:12:26or less depending on how much
1:12:28of the remaining 30 we sold in the
1:12:30fourth quarter, that remaining piece
1:12:32going to Spinco to be spun to our
1:12:34shareholders,
1:12:36which we firmly believed had real value.
1:12:40You had a committee, the finance and
1:12:42risk management committee, which I
1:12:43believe was chaired by
1:12:45the once legendary Henry Kaufman.
1:12:48Uh, a previous panel said that this
1:12:50committee only met twice a year
1:12:53in 2007
1:12:55and 2006. Were they giving you advice on
1:12:58these long-term strategic directions?
1:13:02Uh, let me just clarify one thing if I
1:13:03may. Uh, I believe they did meet twice
1:13:062007, but they met four times this year
1:13:09so far. Well,
1:13:11it's over now, so it's four times this
1:13:13year. Were they giving you advice on
1:13:15changing strategic direction for the
1:13:17firm?
1:13:18We talked about assets, uh, and not just
1:13:21at the risk, uh,
1:13:22and finance committees. We talked about
1:13:24it at the board.
1:13:25Uh, we talked about how we were bringing
1:13:27down our exposures
1:13:29on on residential and on and on
1:13:32commercial and on leverage loans and
1:13:35almost at each and every board meeting,
1:13:37uh, whether it was a risk committee or a
1:13:39finance committee,
1:13:40uh, we talked about it. Uh, it was
1:13:42clearly a subject,
1:13:44uh, on everybody's mind. Uh, keep in
1:13:47mind that this was a board that did have
1:13:50a lot of
1:13:51uh,
1:13:52financial experience. This was a strong
1:13:55independent board. I was the only
1:13:57uh,
1:14:00Lehman person on the board.
1:14:02Uh,
1:14:07these people some of these people ran
1:14:09ran banks, IBM,
1:14:12uh, other companies, Celanese. Uh, these
1:14:15were
1:14:16these were experienced people.
1:14:19And they had never any
1:14:25reservations
1:14:27about
1:14:30giving me advice
1:14:32uh, and having a view about
1:14:35the markets.
1:14:37Thank you, Mr. Cooper.
1:14:39Time has expired. Mr. McCollum.
1:14:43Thank you, Mr. Chair. And I thank the
1:14:45committee for allowing Mr. Cooper to
1:14:47move forward. Uh, my constituents in
1:14:49Minnesota understand that you don't have
1:14:51to do something illegal to do something
1:14:53wrong.
1:14:55Imperfect federal regulation isn't a
1:14:58license for unethical behavior,
1:15:00especially when it puts taxpayers at
1:15:01risk.
1:15:03Our in our current regulatory framework,
1:15:06there's a gray space between legal
1:15:07activity and illegal activity. And in
1:15:10that space, financial firms can make a
1:15:12choice to either obey the letter of the
1:15:13law
1:15:14but not to honor the spirit of the law.
1:15:1812 years ago, when you've been with the
1:15:20firm for 42 years according to your
1:15:22testimony,
1:15:23Lehman Brothers Holding Inc. sent a vice
1:15:25president to California to check out
1:15:27First Alliance Mortgage.
1:15:29Lehman was thinking about tapping into
1:15:31First Alliance Mortgage uh,
1:15:33lucrative business of making subprime
1:15:35loans.
1:15:37The vice president uh, Eric Heberlig
1:15:40wrote in a memo describing First
1:15:41Alliance as a financial sweatshop
1:15:45specializing in high-pressure sales for
1:15:47people who are in a weak state.
1:15:50First Alliance, he said, the employees,
1:15:53and I quote,
1:15:55leave the their ethics at the door.
1:15:59The big Wall Street investment bank,
1:16:01that was Lehman Brothers, decided First
1:16:03Alliance wasn't breaking any laws and
1:16:05Lehman went on to be
1:16:07uh, the lending mortgage company and you
1:16:08did about uh,
1:16:10$500 million
1:16:12worth
1:16:13worth of sales and more than uh, $700
1:16:16million worth of bonds. In other words,
1:16:19Lehman Brothers
1:16:20is an example of how Wall Street's money
1:16:22and experience
1:16:25could have been used to prevent us being
1:16:29in this subprime mortgage history. We
1:16:33should learn from it.
1:16:36You uh, in your statement, and I quote
1:16:38from it on page five, you said, "We did
1:16:40everything we could to protect the
1:16:42firm." And so I go back to this memo
1:16:45uh, that Mr. Bishop had up and ask you
1:16:48if you agree with the spirit of the
1:16:49memo.
1:16:51Why did we allow ourselves to be so
1:16:53exposed? Did you answer ask those
1:16:55questions?
1:16:56Um, did you
1:16:58reflect that conditions were clearly not
1:17:00sustainable?
1:17:02Did you see warning signs?
1:17:04Did you move fast enough?
1:17:07And I ask that because of two things
1:17:09that have come to my attention.
1:17:12That the Federal Bureau of
1:17:13Investigations has launched uh,
1:17:15preliminary inquiries as to whether or
1:17:17not Lehman or its executives committed
1:17:19fraud by misrepresenting the firm's
1:17:21condition to investors. So sir, I want
1:17:24to ask you some questions.
1:17:25On September 10th, 5 days before your
1:17:29bankruptcy filing, you and your chief
1:17:31financial officer,
1:17:33Ian Lowitt, held a conference for a
1:17:36conference call for investors. According
1:17:38to the Wall Street Journal, you were
1:17:40advised by your bankers not to hold this
1:17:42call because there were too many open
1:17:44questions.
1:17:46It's my understanding that at the time
1:17:48you did make the call
1:17:49and that you were frantically trying to
1:17:51raise capital either through new
1:17:53investors or selling off assets.
1:17:55So when you and Mr. Lowitt spoke to your
1:17:57investors and you said that you did not
1:18:00need more capital.
1:18:03And that Mr. Lowitt said to investors
1:18:05when asked whether Lehman would need to
1:18:06raise $4 billion, quote,
1:18:09I'm I'm paraphrasing, "We don't feel
1:18:12that we need to raise that extra amount.
1:18:15Our capital position at the moment is
1:18:17strong." So sir, is this accurate? Were
1:18:20you told not to hold the call?
1:18:22Were you trying to raise capital during
1:18:24the week before you filed bankruptcy?
1:18:27And is it an accurate statement that
1:18:29your capital position was strong on
1:18:32September 10th?
1:18:34It is correct that our capital position
1:18:36on September 10th was strong.
1:18:42Did anyone
1:18:44tell you, advise you, against holding
1:18:47the conference call I referred to?
1:18:51That should be a yes or no, sir.
1:18:54Well, you're asking me did anyone I mean
1:18:56I I
1:19:01So that's a pretty big call that was
1:19:03made 5 days before you filing bankruptcy
1:19:05and your chief financial officer was
1:19:07present on the call. I ask you, did any
1:19:10of your outside bankers or other
1:19:12advisers warn you against making holding
1:19:14this call?
1:19:21I had some
1:19:24I had so many conversations. I would
1:19:26never say to you that no one
1:19:28Well, maybe sir, maybe you'll remember.
1:19:31Were you trying to raise capital during
1:19:34the week before you went bankrupt?
1:19:37The week before
1:19:41two weeks before
1:19:42three weeks before.
1:19:45Sir, I asked you a week before.
1:19:47I I'm just asking you for the week
1:19:49before, sir.
1:19:49yes
1:19:50You're saying yes to all. And when you
1:19:52were raising that capital, no one in
1:19:54your no one in your firm
1:19:55I'd like to finish because there's a
1:19:56different piece to that.
1:19:58What we were looking to do
1:20:01was to raise capital
1:20:03after
1:20:05we completed
1:20:07You were raising capital. Excuse me,
1:20:09please.
1:20:11After we completed the spin-off
1:20:15which would probably have been January
1:20:18after we had
1:20:19completed the spin-off
1:20:21of the commercial real estate assets.
1:20:24On September 10th
1:20:26we had a strong capital position.
1:20:28We were trying to anticipate
1:20:31how much capital
1:20:33we were going to put into Spinco
1:20:37how much capital we were going to use
1:20:40we were trying to anticipate
1:20:43how much
1:20:44we would sell
1:20:46the investment management division for.
1:20:50So, there were a number of moving pieces
1:20:53but on September 10th
1:20:55given the business that we had
1:20:58we had sufficient and strong capital and
1:21:03liquidity.
1:21:04Thank you, Mr. Fuld. Thank you, Mr.
1:21:05McCollum. Mr. Van Hollen, you're
1:21:06recognized for 5 minutes. Uh thank you,
1:21:09um Mr. Chairman. Uh Mr. Fuld, you said
1:21:11earlier in your testimony that at Lehman
1:21:14Brothers, when things were going well,
1:21:16then people would do well, and when
1:21:17things weren't going so well, then
1:21:19people would have cutbacks. And I have
1:21:22to say that I think people looking in
1:21:24have concluded based on the compensation
1:21:26structure that when things went well,
1:21:28people did really well and when things
1:21:31didn't go well, they still did uh very
1:21:34well. And I'd like to call your
1:21:35attention uh to a memo uh that was
1:21:39written on September 11th, 2008, uh just
1:21:434 days before Lehman Brothers uh
1:21:45declared uh bankruptcy. And I hope
1:21:47someone can uh provide you with a copy
1:21:49of of the memo. Uh it's a proposal uh
1:21:52from the compensation uh committee. Uh
1:21:55you're CC'd on the on the memo. Uh and
1:21:59it talks about compensation for two
1:22:01employees uh of Lehman Brothers. Uh one
1:22:05was Andy Morton. Uh I assume you
1:22:07recognize that name. I do, sir. He was
1:22:10he was the previous global head of fixed
1:22:12uh income. Uh it said the document here
1:22:15says he was involuntarily
1:22:17uh terminated. Uh the memo here proposes
1:22:21to give him an additional $2 million
1:22:24uh cash payment. Uh the other official
1:22:27mentioned in the memo uh is Benoit
1:22:29Sauvage. I assume you know him as well.
1:22:32Is that right?
1:22:32indeed, sir. Uh who used to be Lehman's
1:22:34chief operating officer of Europe and
1:22:36the Middle East until he was terminated.
1:22:37He was also according to this memo,
1:22:40involuntarily terminated. And yet this
1:22:42memo proposes to give him a $16 million
1:22:46uh cash payment. Again, just days before
1:22:49Lehman Brothers uh declared bankruptcy.
1:22:51These are two individuals who have been
1:22:53involuntarily terminated. I think the
1:22:55normal sort of parlance is fired. Uh and
1:22:58yet uh they are being given combined
1:23:01about $20 million uh uh in additional
1:23:04compensation despite the obvious poor
1:23:06performance at this point, which nobody
1:23:08can deny. Uh and I ask you, is that is
1:23:11that appropriate? I mean we're we're
1:23:13here having this conversation with you
1:23:15and and the American people. Is that
1:23:16appropriate that 4 days before Lehman
1:23:18Brothers declared bankruptcy uh that two
1:23:22individuals who have certainly been part
1:23:24of the decision-making that led to the
1:23:25decline would be given uh $20 million in
1:23:29additional compensation?
1:23:35There were two pieces to that, clearly
1:23:36Andy Morton and Benoit Sauvage.
1:23:39Uh
1:23:41Andy Morton was given
1:23:44I think it's $2 million.
1:23:46Yes. Uh
1:23:51and we felt that that was
1:23:54or more importantly, compensation
1:23:56committee felt
1:23:57that that was appropriate uh for his
1:24:01years of service.
1:24:03The $16 million
1:24:07$16.2 million
1:24:10was not a severance
1:24:13payment.
1:24:15This uh the $16.2 million
1:24:18was a contractual obligation
1:24:22that the firm had made
1:24:25uh to Mr. Sauvage.
1:24:28Uh
1:24:29I forget when it was, but it was earlier
1:24:31in the year
1:24:33and
1:24:37that that that contract said
1:24:42that
1:24:44at any time
1:24:46if terminated
1:24:48uh
1:24:49he was due
1:24:54the items of the contract. So, that's
1:24:57that's what that was. That was not a
1:24:58severance payment, sir.
1:24:59Regardless regardless of his
1:25:00performance, he would be due that amount
1:25:02of money, is what you're saying.
1:25:04Unless it was
1:25:05unless it was fired for cause.
1:25:06Let me let me let me ask you this. Uh
1:25:08you would agree uh would you not that uh
1:25:11you you people can make decisions that
1:25:13in the short term maximize profits and
1:25:16bonuses but are bad decisions for the
1:25:19long term.
1:25:20Is I mean there there are decisions that
1:25:22can maximize short-term profits, but
1:25:24people would also agree that they might
1:25:25not be the best long-term interests of a
1:25:27company. Isn't that right?
1:25:29If you're referring to this gentleman
1:25:30No, I'm just referring as a general
1:25:32proposition. You would agree that there
1:25:33are times when you can maximize
1:25:35short-term profits, but if you looked at
1:25:36over the longer term people would agree
1:25:39that it was not a good long-term
1:25:40decision. You would agree that there are
1:25:41some decisions that fall into that
1:25:43category.
1:25:44Certainly not by design, but in
1:25:46retrospect, clearly sometimes
1:25:48let me ask you with respect to
1:25:49clawbacks. And I'm not talking about
1:25:51anything with respect to Lehman
1:25:53Brothers, but just as a proposition
1:25:55wouldn't you agree that it's appropriate
1:25:57that if somebody makes a decision uh
1:25:59that raises short-term profits and
1:26:01therefore bonuses
1:26:03and that but then it's later shown that
1:26:05those same decisions resulted in harm to
1:26:08the company that on behalf of the
1:26:11shareholders and certainly in cases
1:26:12where the public is now involved that
1:26:15shareholders or the public should be
1:26:16able to go back in and get a clawback
1:26:19and take those bonuses or additional
1:26:21payments back that are proven with the
1:26:23benefit of hindsight to have been bad
1:26:25decisions for a company and the
1:26:27shareholders. That was actually one of
1:26:29the things I spoke about when I said
1:26:31interesting way to go go forward
1:26:34is a long-dated compensation system.
1:26:37Uh in our case, that's exactly what we
1:26:40had. We had a long-dated compensation
1:26:44system.
1:26:45Uh look, I am not proud of the fact
1:26:49that I lost that much money.
1:26:52But it does show
1:26:54that the system
1:26:56our compensation system did work.
1:27:01I left 10 million shares
1:27:03plus a whole number of options.
1:27:05I say I'm not proud of that.
1:27:08But when the firm did not do well
1:27:11I was probably the single largest
1:27:13individual
1:27:14shareholder. I don't expect you to feel
1:27:16sorry for me. I don't mean that. That's
1:27:18not my point. My point though is that
1:27:22the system worked.
1:27:24I let me Mr. Chairman, I could. I mean
1:27:26you're you're now referring to shares
1:27:28that you owned, of which
1:27:31obviously when the company went
1:27:33bankrupt, went down. I'm also referring
1:27:35to bonus payments that may have been
1:27:37made in previous years to executives,
1:27:40including yourself, when now that the
1:27:42company to have provisions to protect
1:27:44shareholders not just to clearly when
1:27:47your the shares go down, the value of
1:27:49the company goes down the share value.
1:27:50But wouldn't it make sense to have
1:27:51clawback provisions with respect to
1:27:53bonus payments, cash payments, so that
1:27:56the shareholders could recover those
1:27:58monies that were bonuses for what
1:28:00clearly proved to be bad decisions. If
1:28:02you could answer that briefly, Mr. Fuld,
1:28:03then we'll move on.
1:28:05I'm sorry, sir.
1:28:05If you want to answer that briefly, you
1:28:06may, but we we have to move on. Our
1:28:08compensation system was specifically set
1:28:10up to even even for me in 19 I excuse
1:28:14me, in uh in uh 2007.
1:28:1785% of my compensation was in stock.
1:28:20I lost that.
1:28:22All stock that I got for the last 5
1:28:24years,
1:28:26I lost that.
1:28:27Actually, compensation that I received
1:28:32back from 1997,
1:28:34'8, and '9,
1:28:38I went to the compensation committee
1:28:41and said, "I believe we should extend
1:28:45the vesting
1:28:47on this.
1:28:48I could have gotten it
1:28:507 years ago.
1:28:52I went to the compensation committee and
1:28:54said, "This should be extended to a
1:28:5610-year vest."
1:28:58I lost all of that.
1:29:01I'd like also for this committee to know
1:29:04that
1:29:05before the end of our second quarter
1:29:09I went to my board
1:29:11and I said
1:29:13"I think we're going to have a tough
1:29:14quarter."
1:29:16We were talking about how we were going
1:29:18to
1:29:21pay the troops, as I called it.
1:29:23I said, "I want you to take me out of
1:29:26it."
1:29:27I believe, given this performance,
1:29:30my recommendation to you
1:29:32is that I do not get a bonus.
1:29:36I'd like this committee also to know
1:29:39I got no severance.
1:29:42I got no golden parachute.
1:29:44I had no contract.
1:29:47I never asked for a contract.
1:29:51I never sold my shares.
1:29:55That's why I had 10 million.
1:29:57Cuz I believed in this company.
1:30:01I believe that this company, and that's
1:30:03why I said,
1:30:05"I'm glad I got these last two quarters
1:30:06behind us."
1:30:08I believe we're on the right track.
1:30:11I could have sold that stock.
1:30:14I did not.
1:30:15Cuz I firmly believed
1:30:17that we were going to return back to
1:30:19profitability
1:30:21and get back on the road. Thank you, Mr.
1:30:23Fuld. Thank you, Mr. Van Hollen. Mr.
1:30:25Sabanes, you're recognized 5 minutes. Uh
1:30:28thank you, Mr. Chairman.
1:30:29I believe that you believed in this
1:30:32company.
1:30:33But I also believe that your
1:30:36um belief in the company
1:30:39at a certain stage began to cloud
1:30:42your judgment.
1:30:43And
1:30:46let me ask you this first off. When you
1:30:48say to the public,
1:30:50"Our capital and liquidity positions
1:30:52have never been stronger."
1:30:54That is intended to convey the overall
1:30:57strength of the firm
1:31:00and the company, is it not?
1:31:03In other words,
1:31:04you you can't assert that a company is
1:31:06not strong if you're asserting that its
1:31:08capital and liquidity positions are
1:31:11strong. Our capital position was strong.
1:31:14Our liquidity position was strong. We
1:31:16had completed a whole number
1:31:19of things that we did to protect the
1:31:21firm. So, the firm was strong is what
1:31:24you were intending to communicate with a
1:31:26statement like
1:31:27We had
1:31:28I'll go through it again with you if you
1:31:29like, sir. But we we reduced our
1:31:32leverage, our tier one
1:31:34Was the firm strong? Was that the
1:31:35intended communication
1:31:38in saying, "Our capital and liquidity
1:31:40positions
1:31:41have never been stronger." It was to
1:31:43convey that the firm was strong. Right?
1:31:47My message
1:31:48that's what it was intended
1:31:51to convey. And I think the problem that
1:31:53we've had here
1:31:55is that statements of this kind,
1:31:58um at the time they were made,
1:32:01were simply
1:32:03implausible. So, it then raises a
1:32:04question
1:32:06of whether your perspective on the
1:32:09health of the firm
1:32:11was
1:32:12clouded,
1:32:14um or whether there was something else
1:32:15going on. Now, I'm going to leave that
1:32:17aside cuz I want to move to a different
1:32:19question. You talked about how
1:32:22uh Lehman got into the
1:32:25originating business.
1:32:28Um
1:32:30and
1:32:31I gathered did business with a number of
1:32:34originators. Uh First Alliance uh was
1:32:38one, for example.
1:32:40Uh for some period of time before you
1:32:43then actually took an equity stake in
1:32:45those
1:32:46in those businesses. Is that correct?
1:32:50Uh we took an equity stake in uh BNC
1:32:53Mortgage and also Aurora
1:32:56uh group in uh Europe called Elk. Yes,
1:32:59sir, we did. But those were firms that
1:33:01you were companies that you've been
1:33:03doing business with for some period of
1:33:05time before you then took the next step
1:33:07of
1:33:09of uh
1:33:10uh taking an equity position.
1:33:13I mean, you you you did some business
1:33:15with them, so you knew how they
1:33:16operated.
1:33:17We did some business with them.
1:33:18You then said earlier
1:33:19that at the time you bought them,
1:33:22you changed management, changed
1:33:25underwriting standards, and took other
1:33:27actions designed to
1:33:30um
1:33:31pull back on the very risky nature of
1:33:34the way they were conducting business,
1:33:36which I respect, although there's some
1:33:38evidence that the practice has continued
1:33:40nonetheless.
1:33:42Um and I guess that's an admission by
1:33:45Lehman
1:33:47that the standards that were being used
1:33:49up to that point, in other words, by
1:33:50those companies when you were doing
1:33:52business with them but had not yet
1:33:53bought into them, were not adequate
1:33:56standards. Now, your
1:33:59um one of your vice presidents, this was
1:34:01mentioned briefly,
1:34:03uh went to California to to kick the
1:34:06tires on First Alliance and came back
1:34:09with a memo
1:34:10saying these sorts of things.
1:34:13First Alliance is a financial sweatshop
1:34:16specializing in high-pressure sales for
1:34:18people who were in a weak state. And let
1:34:21me just mention,
1:34:22my primary concern with all of this,
1:34:26and Lehman's an example, it's not the
1:34:28only uh example, it's an example, is
1:34:31that what was happening
1:34:33was the thirst for more originated loans
1:34:37upon which you could build an empire of
1:34:39derivatives and slice and dice up the
1:34:42chain to make more money. The thirst for
1:34:44those
1:34:45got pushed down the chain
1:34:48and encouraged people to look the other
1:34:51way in terms of standard conventional um
1:34:55underwriting uh standards and so forth.
1:34:58Uh which then created a culture and
1:35:00atmosphere in which predatory lending
1:35:02could flourish. And I think that's what
1:35:04ended up happening uh to the detriment
1:35:07of of of millions of homeowners across
1:35:09this country. So, sweatshop was one
1:35:11description. He said First Alliance was
1:35:14the quote used car salesman of blemish
1:35:16credit lending.
1:35:18They made loans where the borrower had
1:35:19no real capacity for repayment. And at
1:35:22First Alliance, it is a requirement to
1:35:24leave your ethics at the door. And in
1:35:27spite of this,
1:35:28uh Lehman went ahead, invested in the
1:35:31company, and there's other evidence. I
1:35:33may run out of time cuz I want you to
1:35:35respond to this. There's other evidence
1:35:37that these sorts of practices and ethics
1:35:40uh continued even after First Alliance
1:35:43was purchased or you took some kind of
1:35:45ownership stake uh in First Alliance.
1:35:47How could you
1:35:49consort with this kind of an operation
1:35:52uh given how lax those those uh
1:35:55standards were?
1:36:02I'm not sure if we took an equity stake
1:36:04in First Alliance, but that doesn't
1:36:05answer your question at all.
1:36:07Uh
1:36:10we actually spent some time with First
1:36:12Alliance.
1:36:13Uh
1:36:14I believe that was in the mid-'90s,
1:36:17and I think in the late '90s we
1:36:21extended financing
1:36:23to them. And we worked with them to
1:36:25change underwriting standards.
1:36:28Uh
1:36:30in the case of the ones that we bought
1:36:33after BNC and and Aurora,
1:36:37uh we acted more as a conduit.
1:36:40That means we went to them and bought
1:36:42their production.
1:36:45And their their their production of
1:36:47mortgages.
1:36:49And in that,
1:36:53we began to understand
1:36:56their business practice.
1:36:59Our name became associated
1:37:02with them.
1:37:04We realized the best way to handle that
1:37:08was to buy them.
1:37:10If our name was going to be associated
1:37:12with them, buy them,
1:37:14change the management, and change the
1:37:16underwriting standards. And that is what
1:37:18we did, and that is why we did it.
1:37:22Thank you, Mr. Chairman. There's some
1:37:23evidence that it didn't change, but I'll
1:37:25accept that answer. Thank you.
1:37:26Gentleman's time has expired. Mr. Welch.
1:37:29Uh thank you,
1:37:29Before you before you start your
1:37:30questions, um I want to just for
1:37:33uh housekeeping purposes ask unanimous
1:37:35consent that all the documents that have
1:37:36been referred to in this hearing be made
1:37:38part of the record.
1:37:39I didn't have a chance to ask questions.
1:37:40And we'll and we'll certainly leave the
1:37:41record open for for questions from
1:37:43members for written responses.
1:37:45Without objection, that'll be the order.
1:37:47Mr. Welch. Uh thank you thank you, Mr.
1:37:49Chairman. Mr. Fuld, thank you for being
1:37:50here today. Uh
1:37:52this is a tragedy unfolding all across
1:37:54America, and we're only beginning to
1:37:55feel the pain.
1:37:56Uh and I know you sit here as the chief
1:37:58executive uh of a company that has a
1:38:00proud history, 158 years, did some
1:38:03tremendous things, and I've known some
1:38:05employees at your company, and they're
1:38:06terrific. And 28,000 employees now don't
1:38:10work at Lehman Brothers. Uh you had
1:38:12accounts 700 billion dollars, I guess,
1:38:13and uh I'm not going to be cheap about
1:38:15your
1:38:16your salary here, but I want to ask a
1:38:19couple of questions.
1:38:21Number one, it seems that Wall Street uh
1:38:24and Lehman along with others turned what
1:38:26was a basic simple transaction that was
1:38:30a step in reaching the American dream,
1:38:33and that is
1:38:34a family buying a house and me being
1:38:37able to do that by borrowing money on a
1:38:38mortgage. And it was a straight-out
1:38:40transaction oftentimes between a
1:38:42neighbor who was a community banker
1:38:44and a just wide-eyed young couple
1:38:47oftentimes uh being able to afford their
1:38:50first house.
1:38:51That
1:38:52got to be turned into a commodity. It
1:38:55got
1:38:57put on steroids with these uh subprime
1:38:59mortgages. It then got securitized.
1:39:02And as long as the real estate values in
1:39:06this country were going up, uh fueled by
1:39:09low-cost credit, it was a house of cards
1:39:12that would stand until the first whiff
1:39:15of a downturn.
1:39:17In retrospect,
1:39:18do you believe
1:39:20that this process of securitization, of
1:39:23easy credit, of convincing people who
1:39:25couldn't afford a mortgage, particularly
1:39:27when
1:39:28the rates were re-triggered,
1:39:31was
1:39:32a house of cards that was bound to fail
1:39:35in retrospect?
1:39:39Seeing it as I as I see it now,
1:39:42uh
1:39:45Is that Is that a yes?
1:39:48I'm not I'm not sure I would say it was
1:39:50it was a house of cards. It was
1:39:52uh
1:39:54Well, I I'll go
1:39:54None of us ever expected housing prices
1:39:57to decline with the depth and violence
1:40:00that it did. Right. So, you mean what I
1:40:02understand the problem you had is that
1:40:05you didn't get out fast enough and
1:40:06delever fast enough and the market went
1:40:08faster than you were able to make the
1:40:10the adjustment.
1:40:10Actually,
1:40:11You know, it's
1:40:12Actually, Congressman, that was not the
1:40:13case. Residential mortgages
1:40:16were not our problem
1:40:17at the end.
1:40:19Let me ask you a couple of questions.
1:40:20Thank you. I I don't mean to interrupt,
1:40:21but I only have 5 minutes. I want to ask
1:40:23you a little bit about AIG. I mean,
1:40:25there was a whole series of of of
1:40:27bailouts. And then, uh Mr. Paulson made
1:40:30the decision
1:40:31uh that when it came to Lehman, there
1:40:33was going to be no governmental
1:40:34assistance. So, in fact, Lehman Brothers
1:40:37was treated differently than some other
1:40:39financial industry giants that were in
1:40:42similar circumstances.
1:40:44And obviously, the Treasury Secretary
1:40:46made a decision for reasons that uh he
1:40:49can explain.
1:40:50But let me ask you this. Uh
1:40:53My understanding is that you did have
1:40:54pretty regular contact, telephone
1:40:56contact with Mr. Paulson, and probably
1:40:58uh some individual meetings.
1:41:01And the decision and I also understand
1:41:03from reports in the New York Times that
1:41:05uh Goldman Sachs, in fact, was a major
1:41:08trading partner of AIG about $20 billion
1:41:11on the other side of contracts.
1:41:14Did you have any concerns that there may
1:41:17be some
1:41:18uh arbitrary reasons why Lehman
1:41:21Brothers, facing similar predicaments as
1:41:23AIG, was allowed to fail, whereas AIG
1:41:26was the beneficiary of an $85 billion
1:41:29uh bailout uh sponsored by the Treasury
1:41:32Department? Well, I clearly would love
1:41:34to have been part of the group that got
1:41:38Do you have any Well, do you have any
1:41:40views on that or any thoughts on that?
1:41:42Why you were allowed to fail, you Lehman
1:41:44Brothers were allowed to fail, and AIG
1:41:45was bailed out?
1:41:50That was a de- That was a decision that
1:41:52was made that Sunday afternoon and
1:41:54night.
1:41:54I know that. I'm just wondering And I
1:41:56was not there. You got to be wondering.
1:41:58You're the head of this company. You
1:41:59want to keep it going. I understand from
1:42:01you, everybody knew you were dedicated
1:42:03to the survival of Lehman.
1:42:04Until the day they put me in the ground,
1:42:08Exactly.
1:42:09I will wonder.
1:42:11And you got an email, as I understand
1:42:12it, from from
1:42:14uh someone in your office, Mr. Humphrey,
1:42:16I think, uh about the Jared Weiss
1:42:18situation,
1:42:19uh
1:42:20and telling you that Mr. Weiss had
1:42:22stopped by and commented, "In just a few
1:42:24weeks on the buy side, it's very clear
1:42:26that GS Goldman Sachs is driving the bus
1:42:29with the hedge fund cabal and greatly
1:42:32influencing downside momentum Lehman and
1:42:34others." Thought it was worth passing
1:42:36on.
1:42:37What was the meaning of that as you
1:42:40understood it? This was from a
1:42:41a a a business associate ally of yours,
1:42:44correct?
1:42:45By the way, I don't blame you for asking
1:42:46the question. That's what we're asking.
1:42:59What Mr. Weiss was talking about was
1:43:02that
1:43:03uh
1:43:03evident obviously that uh
1:43:06Goldman Sachs was involved with
1:43:09the hedge fund
1:43:11community uh
1:43:15Well, that's the short selling, right?
1:43:17Greatly influencing the downside
1:43:19momentum
1:43:21of Lehman and others.
1:43:23And that refers to short selling. I I
1:43:26have I have no proof of that at all. No,
1:43:29I underst- Well, let me I'll just ask
1:43:30you your opinion. Do you think that
1:43:32there was any
1:43:33justified reason why Lehman was treated
1:43:36one way, namely allowed to fail,
1:43:38and uh AIG, uh just as an other example,
1:43:43uh was given $85 billion in taxpayer
1:43:45assistance to bail it out?
1:43:54I do not know why we were the only one.
1:43:57Is there any rational business reason
1:43:59why there would be a distinction made
1:44:01between the predicament that Lehman
1:44:03faced and the predicament that AIG
1:44:05faced?
1:44:10I actually I must tell you
1:44:13Sunday night,
1:44:15or more importantly, that weekend,
1:44:17we walked into that weekend,
1:44:20uh I firmly believed we were going to do
1:44:22a transaction.
1:44:24Uh
1:44:26I don't know this for a fact, but I
1:44:28think that Lehman and Merrill Lynch were
1:44:29in the same position on Friday night.
1:44:33Uh
1:44:34and
1:44:36they did a transaction with Bank of
1:44:39America.
1:44:40Uh
1:44:41we were went down the road with
1:44:43Barclays. That transaction, although I
1:44:45believe
1:44:47we were very close, never got
1:44:48consummated.
1:44:52Well, I thank you, and uh
1:44:54you know, I feel bad, I know you do, for
1:44:56the for those folks at Lehman, and uh
1:44:59you investors and shareholders.
1:45:00Let me just Let me just speak to that
1:45:02for a second, because
1:45:06you know, we talk about
1:45:09what happened to Lehman, and we talk
1:45:11about
1:45:18whose fault, and
1:45:19why wasn't I on it, and
1:45:23my employees,
1:45:26my shareholders, creditors,
1:45:29clients have taken a huge amount of
1:45:33pain.
1:45:38And again, not that anybody on this
1:45:39committee cares about this,
1:45:46but I wake up every single night
1:45:51thinking,
1:45:52"What could I have done differently?"
1:45:54And it's been going on.
1:45:56"What could I have done differently?
1:45:58In certain conversations, what could I
1:46:00have said?
1:46:02What should I have done?"
1:46:05And I have searched myself
1:46:07every single night.
1:46:13And I come back to
1:46:17at the time,
1:46:18and that's why I said this in the
1:46:20beginning,
1:46:21the time I made those decisions,
1:46:23I made those decisions with the
1:46:25information that I had.
1:46:27Having said all that,
1:46:29I can look right at you and say,
1:46:32"This is a pain
1:46:34that will stay with me for the rest of
1:46:36my life,
1:46:38regardless of what comes out of this
1:46:40committee,
1:46:42regardless of what comes out of when the
1:46:45when the record book
1:46:46gets finally written."
1:46:51That's That's all. Thank you, Mr. Welch.
1:46:53Mr. Shays.
1:46:55Thank you very much, Mr. Chairman. Mr.
1:46:56Fuld, thank you. I know it's been a a
1:46:58long day, and uh
1:47:00uh but we're coming to a close. I would
1:47:02um I have a variety of questions, and
1:47:04let's see how well we can get through
1:47:06them.
1:47:07Uh first off, what we're doing is we're
1:47:09trying to see what happened.
1:47:11We're trying to see who is responsible,
1:47:14uh and to determine
1:47:16uh
1:47:17who was responsible, and that includes
1:47:19Congress. Ultimately, it must.
1:47:22Um
1:47:22and and what being responsible means.
1:47:25So, I'm going to end my question, and
1:47:27I'll tell you now by telling having you
1:47:29tell me the significance of the fact
1:47:32that you say, "Take full
1:47:33responsibility." That's going to be my
1:47:34last question.
1:47:36Uh but I need to know what that means,
1:47:38and I don't want it now, cuz I want to
1:47:40ask a few other questions.
1:47:43And and then we're going to look at what
1:47:44do we do to change the systemic the
1:47:47system. And we are the Oversight
1:47:50Committee. I'm also on the Financial
1:47:51Service Committee that will come up with
1:47:54solutions. Now, we had Enron and
1:47:55WorldCom, and every part of the system
1:47:56broke down. The directors didn't direct,
1:47:58the managers didn't manage, the
1:48:00employees didn't speak out, one spoke
1:48:02out privately, didn't speak out
1:48:03publicly, the law firm was uh
1:48:06uh duplicitous and uh and part of the
1:48:09problem. The accounting firm uh was part
1:48:11of the problem. Uh you had the rating
1:48:14agencies, everybody. Every part of the
1:48:16system failed. So, we passed
1:48:17Sarbanes-Oxley.
1:48:19Uh and
1:48:20amazingly, uh
1:48:22Fannie and Freddie were not under that,
1:48:24because they're not under the '33 and
1:48:26'34 Act. Therefore, they weren't under
1:48:27Sarbanes-Oxley.
1:48:29So, um
1:48:30two huge organizations
1:48:32were never under the very system we put
1:48:35in place with Sarbanes-Oxley, much less
1:48:37all the other laws that were required.
1:48:39But that's That's just a footnote. Um
1:48:42what I want you to speak to is uh uh the
1:48:45highly leveraged It It strikes me that
1:48:49Wall Street was incredibly blasé about
1:48:52risk, including yourself.
1:48:54Uh that um
1:48:56that 30 to 1 uh you didn't leave
1:49:00yourself enough to deal with the
1:49:02potential run on a bank.
1:49:05And that when you gave these bonuses, uh
1:49:08you just made it less likely that you
1:49:10would have the kind of reserves you
1:49:12needed, which strikes me obviously in
1:49:14hindsight is reckless, but people were
1:49:16saying as we were going through the
1:49:18system, we have too much leveraging. I
1:49:23kind of responded, well, you know, the
1:49:26hedge fund folks will tell me
1:49:28you know what? It's the really wealthy
1:49:31people and they can absorb the risk.
1:49:34They know what the risk is. They know
1:49:36it's huge leveraging, but what we know
1:49:38now is Wall Street can bring down Main
1:49:41Street.
1:49:42And uh frankly, I'm going to tell you
1:49:44it's a little scary.
1:49:46Because um we don't even know
1:49:49uh all the folks that have been impacted
1:49:51by Lehman Brothers going down.
1:49:53I mean, we know stockholders,
1:49:55shareholders,
1:49:56clearly employees, but all the different
1:49:58folks who had uh resources held by your
1:50:01company. So, what I want you to do is
1:50:04speak about risk. Why did we get into
1:50:07this position of of having such high
1:50:10leverage? And and um was it just too
1:50:14easy to make money that way? And and so
1:50:16we just said the risk be damned?
1:50:21We certainly did not say risk be damned.
1:50:26I believe Lehman Brothers had a robust
1:50:29risk process.
1:50:31As far as the leverage, and I spoke
1:50:32about it earlier,
1:50:36there's a very big difference between
1:50:37the 30 times and where we were uh when
1:50:42we finished
1:50:43in the third quarter at 10 and 1/2. A
1:50:46big
1:50:47A big piece of what that 30 was
1:50:50again was the match book, which was
1:50:52governments and agencies. So, that
1:50:54should not be
1:50:56considered uh
1:51:00as an additional piece of
1:51:03risky leverage.
1:51:07And again, I will say
1:51:10that on September 10th, we finished with
1:51:14the best or one of the best leverage
1:51:17ratios on the street and one of the best
1:51:19tier one capital ratios on the street.
1:51:22And even to your question, that's how
1:51:25that's how I viewed the company and
1:51:27that's why I viewed it
1:51:29as strong, Mr. Congressman.
1:51:31Uh
1:51:34I mean, those those those were the
1:51:36metrics.
1:51:39Those were the metrics that the
1:51:40regulators used. Those were the metrics
1:51:43that all of us in the industry used. And
1:51:46ours were one of the best.
1:51:48Let me ask you about the rating
1:51:49agencies. What kind of relationship do
1:51:52you have with the rating agencies? Uh
1:51:55you end up having to pay them to
1:51:57determine
1:51:59uh your value.
1:52:01They uh
1:52:02Describe Describe to me, do you have any
1:52:05financial relationship with the rating
1:52:07agencies? Yes, sir, we do. Okay, and
1:52:09tell me that relationship.
1:52:15On securitizations, for example, we go
1:52:17to them
1:52:18with
1:52:20the components of a potential
1:52:23securitized deal,
1:52:28the mortgages,
1:52:31valuation,
1:52:33loan to value, Right.
1:52:35geography,
1:52:35And and and you pay them for that.
1:52:39Uh
1:52:39They charge us a fee for a rating.
1:52:42And how can we feel comfortable
1:52:45that the very people who are paying them
1:52:48are the very people they're evaluating?
1:52:52That was one of the things on my list of
1:52:54things that should be included in
1:52:56hopefully tomorrow's reform. Let me just
1:52:59uh quickly go to executive compensation.
1:53:02I mean, this is the largest irritant,
1:53:04frankly, to the general public. And
1:53:08when I got my MBA at NYU, I read a book
1:53:11The 5,000
1:53:13uh people who run America or The 1,000,
1:53:15I forgot what it was, but it was the
1:53:17people who run a company or on the board
1:53:19of three other companies or two other
1:53:21companies. So, they help decide the
1:53:23compensation of someone else and someone
1:53:25else helps decide the compensation of
1:53:27them. Do you really feel comfortable
1:53:30that the compensation committee can
1:53:33uh
1:53:34objectively evaluate
1:53:37what you and others should get when in
1:53:39fact you have some real say in who they
1:53:42are and uh
1:53:45well, I don't need to say more.
1:53:48There were There was nothing shy about
1:53:51my
1:53:52or the firm's
1:53:54more importantly, the firm's or the
1:53:55board's compensation committee.
1:53:59They had
1:54:01access to
1:54:03uh
1:54:06outside experts and they used it.
1:54:09They had access to
1:54:11uh other firms
1:54:14uh competitive data.
1:54:17Uh they were independent.
1:54:23Just want to make one comment to that.
1:54:26And I find I find no redeeming I was not
1:54:30on that board
1:54:32uh or
1:54:33on that group.
1:54:34it to those of us on the outside it
1:54:36seems a little screwed up. Um and it
1:54:39doesn't seem to us objective and and
1:54:41that's my closing comment and I
1:54:44appreciate you being here today. Thank
1:54:46you. Thank you, Mr. Shayz. Mr. Sarbanes
1:54:49wanted additional time and the chair
1:54:50still has additional time, so yield you
1:54:532 minutes. Um really, this is just to to
1:54:56add something to the record, Mr.
1:54:58Chairman, getting back to the First
1:55:00Alliance
1:55:01issue because you talked about how
1:55:04uh once you took an equity stake in it
1:55:06and the evidence is that you did do
1:55:08that, that you put new management, that
1:55:10the practices ceased, and so forth. Uh
1:55:14but the record is that
1:55:16even after you'd put a hundreds of
1:55:18millions of dollars in there,
1:55:20uh Mr. Hibbert, the same vice president
1:55:23who'd warned you about these practices
1:55:25before,
1:55:26indicated that First Alliance was still
1:55:28violating the Truth in Lending Act.
1:55:31In 2000, First Alliance went bankrupt.
1:55:34In 2002, the Federal Trade Commission
1:55:37charged First Alliance with
1:55:38systematically cheating elderly
1:55:41homeowners.
1:55:43The next year, more than 7,500
1:55:45homeowners sued Lehman and First
1:55:47Alliance for these same tactics.
1:55:51Where most lenders were charging fees of
1:55:53one or two points for a loan, your
1:55:55company was charging 25 points. The jury
1:55:58delivered a $50 million verdict against
1:56:01First Alliance and specifically found
1:56:03that Lehman Brothers
1:56:05quote substantially assisted First
1:56:07Alliance in perpetrating the fraud
1:56:10uh end quote. And in light of that, it's
1:56:12just difficult to conclude that Lehman
1:56:15didn't know uh what was going on in
1:56:18terms of this subprime um activity and I
1:56:21just wanted to add that to the record,
1:56:24Mr. Chair. Thank you.
1:56:27Uh gentleman's statement is part of the
1:56:29record. Mr. Rainford, we've completed
1:56:33the questioning by the members, but I
1:56:34want to thank you for being here.
1:56:37Uh I know this wasn't easy for you to be
1:56:39here
1:56:40and I uh
1:56:42accept the fact that you are still
1:56:45haunted every night as you said by the
1:56:48the wonder the wonder wondering whether
1:56:51you could have done something different,
1:56:53uh whether this could have had a
1:56:54different ending.
1:56:56Uh but I must say that statement you
1:56:58made that the system works because you
1:57:02lost the value of some of your shares
1:57:05really doesn't sound right to me.
1:57:07Because the system
1:57:09that you lived under
1:57:11gave you a very very generous reward
1:57:14when your company was highly leveraged
1:57:16and and everything was going up. And
1:57:19that's the American way.
1:57:21But when the leverage
1:57:23meant that you were taking huge losses,
1:57:26when the values were not holding up, you
1:57:29still got substantial compensation. And
1:57:33I just
1:57:34say that most Americans
1:57:36don't understand.
1:57:38Even if you
1:57:39we thought you made $500 million.
1:57:42You say you only made around $350
1:57:44million. That
1:57:45That just seems to me an incredible
1:57:47amount of money.
1:57:49Uh
1:57:51We We've held hearings on executive
1:57:53compensation and we found some conflicts
1:57:55of interest with these
1:57:56compensation committees. We're going to
1:57:58hold a hearing on the ratings,
1:58:00the groups that do the ratings for these
1:58:02bonds because we think that that ought
1:58:05to be explored more fully.
1:58:07But if you walked away with even $350
1:58:10million and
1:58:11your shareholders got nothing
1:58:14and the taxpayers have a system now
1:58:16where we put up $700 million
1:58:18and the American people are looking to
1:58:20see
1:58:22are they going to come out of this? This
1:58:24is another
1:58:25day with a deep loss on Wall Street.
1:58:29We We're just completely battered by the
1:58:32the failure of our economic system as it
1:58:35as shown up on
1:58:36the Dow and
1:58:38the ability to get credit.
1:58:41So, something is just not right to say
1:58:43that the system worked as it should.
1:58:46That system didn't seem to be the system
1:58:49that makes sense
1:58:51and I still think that we've got to look
1:58:53for ways to change it.
1:58:55Mr. Shayz, you want to make any closing
1:58:56comments?
1:58:57Just to say that I look forward to the
1:58:58next four hearings and I I hope that we
1:59:01do get right in the thick of Fannie Mae
1:59:03and Freddie Mac. Thank you. What I
1:59:05didn't hear from you, Mr. Fuld, was
1:59:07you took responsibility for the
1:59:08decisions you made.
1:59:10In retrospect, you think you should have
1:59:12done some things different, but you
1:59:14don't seem to acknowledge that you did
1:59:16anything wrong.
1:59:19And that I think is also troubling to
1:59:20me.
1:59:21Thank you very much for being here. That
1:59:23concludes our hearing for today, and we
1:59:25stand adjourned.

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