of thing. well, you know, the problem with that and, again, it has to do with the application of law and the regulatory oversight. you look in communities of color and low-income communities, you know, the credit unions say, oh, we didn't do very much of that maltease santa lending. well, they didn't do much in lmi to begin with. they disproportionately lagged banks which seems kind of crazy. and what are they doing now? i don't know if people realize this. they're on capitol hill right now pushing to create a line of credit available to the credit union industry. so forget the cooperative membership model, they're now trying to, you know, put themselves in the position of actually having access to the fed window or where they're expecting this line of credit, clearly from the taxpayers, to compete further with the banks without having an obligation like banks to serve safely and soundly low-income communities

and not even paying corporate taxes. i mean, that's an extra benefit credit unions get. i went off on a tangent, but i think it's relevant to the point you're making. .. >> while ralph is coming up, let

me comment, i think all of us advocated with then ofayo, to not allow the fm's to use their purchases of subprime mortgage-backed securities, to make their affordable housing listenyo chose not to listen to to us -- >> we're going to leave the remainder of this recorded event, to examine last year's near collapse of the financial services industry. that's former california treasurer phil angelides, echairs the commission. bill thomas is co-chair of california. witnesses today include top executives from gold pan sacks, j.p. morgan chase, morgan stanley and bank of america. an all day hearing, live coverage here on c-span2. >> my fellow commissioners, i'm grateful to all of our witnesses for giving us their testimony and sharing their wisdom.

we've been given a critical mission. one that goes far beyond any party or even policy agenda. to conduct a full and fair inquiry in to what brought america's financial system to its knees. we're after the truth, the hard facts, because it's our job to provide an unbiased accounting of the actions that led to devastating economic consequences for so many american families. we'll follow the evidence, wherever it leads, we'll use our subpoena power as needed, and if we find wrongdoing, we will refer it to the proper authorities. that's what the american people want. that's what they deserve of. and that's what this commission is going to give them. some already speak of the financial crisis, in the past tense, as some kind of historical event. the truth is, it is still here. and still very real. 26 million americans are

unemployed, or can't find full-time work, or have given up even looking for jobs. over two million families have lost their homes to foreclosure, in the last three years. millions more have a very legitimate fear that they will. retirement accounts and life savings have been swept away, vanished, like some day trade gone bad. people are angry. they have a right to be. the fact is that wall street is enjoying record profits and bonuses in the wake of receiving trillions of dollars in government assistance, while so many families are struggling to stay afloat. has only heightened the sense of confusion. i see this commission as a proxy for the american people. their highs, their ears and possibly also their voice. this forum may be the only opportunity to have their questions asked and answered. this forum may be our last best chance to take stock of what

really happened, so that we can learn from it, and restore faith in hour economic system. if we ignore history, we're doomed to bail it out again, and so we expect our witnesses before us to be forth right, we need candor about the past so we can face the future. today's hearing is the beginning, not the end of the we have. we'll take testimony from hundreds of individuals. witnesses called to testify today are likely to come before us again as this investigation and inquiry unfolds. those who haven't yet been asked to appear should be confident of this. we intend to thoroughly question individuals and institutions relevant to our inquiry. let me close with this thought. my father grew up in the great depression, like so many of his generation, he was shaped by sacrifice, hardened by economic hardship and war, keenly aware of the financial recklessness that made his life and the life of so many others so much harder than it needed to be.

his generation learned the lessons of financial disaster, so that the country could avoid it for decades. let us learn the lessons of our time, let us be diligent and thoughtful today, so that our financial and economic system can fully rebound, and enrich and sustain americans for the years to come. mr. thomas? >> thank you very much, mr. chairman. i'd ask unanimous consent that my written statement be made a part of the record. and i just want to thank all of the commissioners, we've been doing a lot of that 7/8th of the iceberg under water, and people are not going to see the 1/8 that you usually see above water. i think all of us are conscious of the fact that these hearings, not withstanding the drama of the hearings, is not the fundamental work that is before us. it is, as you've indicated, asking the questions, the

american people would like answered. and doing it in a way in which we increase the understanding, the comprehension, of what happened. obviously, for the purpose of not having it happen again. thank you, chairman. >> thank you, mr. vice chairman. and now, we will go to the witnesses on our first panel. let me safe, it will be the common and customary practice of this commission in public hearing to swear witnesses in terms of their testimony, so this is not unusual, and with that, though, i would like to ask each of the witnesses to be sworn and i'd like to ask that you stand so we may swear you in, as is said, the common practice. do you solemnly swear or affirm under the penalty of perjury, that the testimony you're about to provide the commission will be the truth, the whole truth and nothing but the truth to the best of your knowledge?

thank you so very much. now, gentlemen, thank you very much for being here today. we appreciate you coming here, we appreciate you sharing your views with us. i should tell everyone here, that each of the witnesses today has submitted written testimony, which will be available on our web site, which is fcic.gov. it is also, i believe, available in the room today. we have asked each of the panelists to make opening statements of no more than 10 minutes. and so i think we'd like to proceed with that. i will signal you when there is one minute to go, so that you can wrap up. and so, let's do this then. i think with that, i'd like to start with mr. blankfein, we're going to go in alphabetical order. mr. blankfein, please proceed. >> thank you chairman angelides, vice chairman thomas and members of the commission. thank you for the opportunity to

contribute to the commission's work to understand the causes of the financial crisis. gold pan sacks was established 141 years ago. we are an institutional focused firm, providing investment banking, market making, and investment management services to corporations, institutions, governments, and high net worth individuals. as an underwriter, we help our clients access equity in debt capital markets, in order to grow their businesses. as an adviser, we assess and facilitate strategic options for mergers and acquisitions. we provide the necessarily quid it's, as market makers, to ensure that buyers and sellers can complete their transactions and securities markets can function efficiently. and as an asset manager, we help public and private pension funds, corporations, not for profit organizations and high net worth individuals plan, manage, and invest their

financial assets for the long term. to begin on a more general point, any examination of the financial crisis should sit out with an understanding of some of the global, economic, and financial dynamics of the last two decades. the growth in the amount of foreign capital, 10 years of low, long-term interest rates, and other factors coalesced over many years to create a sustained period of cheap credit, and excess liquidity. this in turn generated a desire to find new investment opportunities with high err returns. -- higher returns. many of the best were thought to be in residential housing. one contributing factor to the attractiveness of the housing market was public policies active support of the expansion of homeownership, recognizings societial benefits. for our industry, it is important to reflect on some of the lessons learned and mistakes made over the course of the crisis.

at the top of my list, are the rationalizations that we made to justify that the downward pricing of risk was different. while we recognize that credit standards were loosening, we rationalized the reasons with arguments such as the emerging markets were growing more rapidly, the risk litigants were better, there was more than enough liquidity in the system. a systemic lack of skepticism was equally true with respect to credit ratings. rather than undertake their own analysis, too many financial institutions relied on the rating agencies to do the central work of risk analysis. another failure of risk management concerned the fact that risk models, particularly those predicated on historical data, were too often allowed to substitute for judgment. next, size mattered. whether you owned $5 billion or $50 billion, of supposedly no risk super senior debt in a cdo,

the likelihood of loss rate would appear to be the same, but the consequences of the miscalculation were obviously much bigger if you had a $50 billion exposure. third, risk monitoring failed to capture the risk inherent in offbalance sheet activities, such as structured investment vehicles or siv's. it seems clear now that financial institutions, with large offbalance sheet exposure, didn't appreciate the full magnitude of the economic risks they were exposed to. equally worrying, their counter parties were unaware of the full extent of those vehicles, and therefore could not accurately assess the risk of doing business. fourth, assets at certain institutions weren't valued at their fair market value. the price at which willing buyers and sellers transact. one consequence was that losses weren't seen early enough, so risks weren't curtailed. a second consequence was that

bank balance sheets became suspect, as a result, lending between counterparties froze. fifth, financial institutions simply didn't have enough capital to meet the extraordinary market environment that arose of after a long period of benign conditions. lastly, the role we play in the capital markets is to support economic growth. some of the activities we undertook contributed to the prevailing mood at the time. we didn't know it then, or even today, with it actually crossed over into bubble territory. but we lent money out too cheaply and certain loans, without the traditional safeguards. we didn't recognize early enough, that risk was being mispriced. we may have had too many liquid investments, particularly in real estate, an we were too concentrated in certain areas, namely leveraged loans. given the competitive focus on maintaining market share, we didn't see as clearly as i would have hoped the excesses, so we

didn't raise a hand and ask whether some of those trends and practices that became commonplace really served the financial systems interests. going forward, i hope that one of the improvements made will be the creation of a mechanism by which the industry and regulators can step back, try to assess if market have gone too far, and consider what needs to be done. in light of these lessons, it is important to consider principles for our industry, and for policymakers, as we move towards reform. risk and control functions need to be completely independent from the business units. and clarity as to whom risk and control managers report is crucial to maintaining that independence. to increase overall transparency and help ensure that book value really means book value, regulators should require that all assets across a large financial institution with pa capital markets business be accounted for in a fair value basis. also, all of the exposures of

the financial institution should be reflected through its p & l. in this vein, valuation and capital standards across risky assets, regardless of the form or local entity in which they are held, must be consistent. one of the largest stresses placed on goldman sachs was the height of the possibility that we were managing risk in the same way other institutions, which were severely hampered or later failed, had managed their risks. getting the market to recognize that our andhat our reported capital levels were accurate was one of our most significant challenges. without question, direct government support was critical in stabilizing the financial system, and we benefited from it. the system clearly needs to be structured so that in the future, private capital, rather than government capital, is used to stabilize troubled firms promptly before a crisis takes homed. the two mechanisms that seem to hold the most promise for

addressing this goal and addressing too big to fail, are ongoing stress tests, which are made public, and contingent capital, possibly triggered by failing a stress tells. these two elements can also be the core of a strong, but flexible resolution authority. certainly, enhanced capital requirements in general, will reduce systemic risk, but we should not overlook liquidity. if a significant portion of an institutions assets are impaired and illiquid and its funding is relying on short-term borrowing, low leverage will not be much comfort. regulators should lay out standards that emphasize prudence and the need for longer term maturity, depending on the assets being funded. institutions should also be required to carry a significant amount of cash at all times, ensuring against extreme events. lastly, i want to briefly discuss our frm's experience during 2008 and 2009. while we certainly had to deal with our share of challenges during the financial crisis, goldman sachs was profitable in

2008. as i look back to the beginning and throughout the course of the crisis, we couldn't anticipate its extent. we didn't know at any moment of if asset prices would deteriorate further or had to climb too much and would snap back. having to fair value our pay sets on a daily basis and see the results of that marking in our p & l, forced us to cut risk, regardless of market or individual views, estimates, or expectations. throughout 2007, we were committed to republic duesing certain of our risk exposures, even though we sold at prices in the market, including at times ourselves. thought were irrational or temporary. after the fact, it is easy to be convinced that the signs were visible and compelling. in hindsight, events look not only predictable, but sometimes look like they were obvious or known. the truth is, that no one knows what is going to happen, and that recognition defined our approach to risk management.

we believe key attributes of our strategy, culture and processes were valuated during the -- validated during the extraordinary events. but they have also prompted change within our firm. over the last 18 months, our balance sheet has been reduced by a quarter, while our capital has increased by over a half. the tier one capital ratio has gern rated 314% through earnings offerings. our pool of liquidity was relatively high at the on set of the crisis, but we carry a great deal more cash on our balance sheet than ever before to deal with contingencies. while we believe our farm has produced a strong relationship, we have announced additional forms in this area. we outlined specific compensation principles. consistent with those principles, in december, we announced that the firm's entire management committee will receive 100% of the

discretionary compensation in the form of shares hat risk, which cannot be sold for five years. in addition, we announced that the five year holding period on shares at risk, includes an enhanced recapture provision, that will permit the firm to recapture the shares in cases where the employee engaged in materially improper risk analysis, or failed sufficiently to raise concerns about risk. finally, our shareholders will have an advisory vote on the firm's compensation principles, and the compensations of its named executive officers at the firm's annual meeting of shareholders in 2010. once again, we appreciate the opportunity to assist the commission in your critical role and i look forward to your questions. thank you. >> thank you very much. thank you so much. mr. dimon. >> chairman angelides, vice chairman thomas -- >> if you touch the button on your mic and move the mic fairly close to you, because they're very distant sensitive. thank you. >> chairman angelides, vice chairman thomas and members of the commission, my name is jamie dimon, and i'm chairman and

chief executive officer of jp morgan chase and company. i appreciate the invitation to aprevious before you today. if we are to learn from this crisis moving forward, we must be brutally honest about the causes and develop a realistic understanding of them that is not overly simplistic. the fcic's contribution to this debate is critical and i hope my participation will further the commission's goals. i would like to start by touching on some of the factors i believe led to the financial crisis. of course, much has been said and much more will be written on the topic, my comments are summary in nature. as we know all too well, new and poorly underwritten mortgage products, help deal housing price appreciation, excessive speculation and far higher credit losses. when the housing bubble burst, it exposed serious flaws in mortgage underwriting, and losses flowed from the train, from the chain, from mortgages to securitizations, to derivatives based on these products. excessive leverage by many u.s. investment banks, foreign banks, commercial banks and even consumers pervaded the system.

this included hedge funds, private equity firms, banks and non-banks, using offbalance sheet vehicles. there are also several structur risks and imbalances that grew in the leadup to the crisis. there was an overreliance on short-term financing to support a liquid long-term assets an over time, certain financing terms became too lax. another factor in the crisis was clearly a regulatory system. i want to be clear, i do not blame the regulators. while they obviously have a critical role to play, the responsibility for company's actions rest solely on the company's management, but we should have had also look to see what could hbey system. we have known that our system is poorly organized, with overlapping responsibilities. -- authority they needed to address the failure of large global financial companies. much of the mortgage business was not regulated or lacked uniform treatment. bosell2 capital standards allowed too much leverage in investment banks and other terms and did not incorporate

liquidity at all. the extraordinary growth and high leverage of the gsc's also added to the risk. we also learned that our system's many embedded cyclical biases, a number of which proved harmful in times of economic stress. loan loss reserving technologies, caused firm to be at their lowest level, when high provisioning might be needed the most. when all is said and done, i believe it will be found macro economic factors will have been underlying some of the -- will have been some of the fundamental underlying cause of the crisis. huge trade and fancy imbalances cause large distortions in interest rates an consumption. as for jm morgan chase, the last year is the most challenging period in our history. i'm immensely proud of of the way we serve our customers through this difficult time. throughout the financial crisis, we never posted a quarterly loss, we served as a safe haven

for deposits, we worked closely with the federal government and womaned an active lender. i would like to describe some of the business practices. if we weren't doing these things right going into the crisis, it would have been too late to start once the crisis began. jp morgan chase did not unduly leverage our capital or rely on low quality capital. we've always used conservative accounting, built up loan losses and we always believed in maintaining a fortress balance sheet. we continually stress test our capital liquidity to ensure that we can withstand a wide range of highly unlikely but still possible negligent scenarios. we did not build p our structured finance business, large participants in the asset backed market, we avoided large risky positions on structured cdl's, we avoid the short-term funding of assets. in addition, we essentially stayed away from sponsor sids and minimum highed our financing of them -- minimum highed our financing of them.

even before 2005, we recognized that credit losses were extremely low and we decided not to work for higher risk, less tested loan products. in particular, we did not write payment option arms. as i've said before, we did make mistakes an there are a number of things we could have done better. first, we should have been more diligent when negotiating and structuring commitment letters, for leveraged loan transactions. in response, we have tightened our lending standards. second, the underlying standards in our mortgage business should have been higher. we have substantially enhanced our mortgage underwriting standards, essentially returning to traditional 80% loan to value ratios and requiring borrowers to document their income. we've also closed down almost all of the business originated by mortgage brokers, where credit losses have generally been over two times worse than the business we originate ourselves. even so, we remained relatively strong throughout the crisis, so much so, when called upon -- we were called upon to take action to stabilize the system. over the weekend of march 15,

2008, the federal government asked us to assist in preventing baird stearns from going bankrupt before the opening of the asian market on monday morning. on september 25, we acquired the deposits, assets and certainly liabilities of washington mutual from the fdic. later, we learn we were the only bank prepared to act immediately, following the largest bank failure in u.s. history. in addition, we continue to lend and support our client's financing throughout the crisis. over the course of the last year, we've provided more than $800 billion in direct lending and capital raising for investor and corporate clients. for example, we helped provide state and local governments financing to cover cash flow shortfalls. we are the only institution agreed to lend california $1.5 billion in its time in need and even though small business loan demand has been down, we have maintained our building levels to small bills. in november of last year, we planned to increase lending to a total of $10 billion this year. for the millions of americans feeling the effects of this crisis, we're doing everything that we can to help them meet

their mortgage obligations. in 2009, we offered approximately 600,000 new trial loan modifications to struggling homeowners, through their own program, as well as through participation, government programs, like the u.s. making home affordable initiative. our capabilities, size and diversity of business have been essential to withstanding the crisis and emerging as a stronger firm. it is the present position to acquire baird stearns and washington mutual. some have suggested that size alone or the combination of investment banking and commercial banking caused a crisis, we disagree. if you consider the institutions that failed during the crisis, some of the largest and most consequencial standards were mortgage companies, thrifts and insurance companies. our economy needs financial institutions of all sizes, business models and areas of expertise to promote economic stability, job creation and customer service. america's largest companies operate around the world and employ millions of people. these firms need banking partners to operate globally, offer full range of services and

provide financing in billions of dollars. but let me be clear, no institution, including our own, should be too big to fail. we need a regulatory system that provides largest financial firms to be allowed to fail in a way that dolls not put taxpayers or the broader economy at risk. shareholders, management and unsecured creditors should bear the full cost of fail iewrm. the great strength of any organization, indeed our country, lies in hour ability to face problems, to learn from our experiences and to make necessary change. i would like to thank the commission for their contribution to this process and for identifying the causes of the crisis. we stand ready to assist the commission in any way that we can. thank you for the opportunity to testify before you to have had. >> -- before you today. >> thank you very much, mr. dimon. >> chairman angelides, vice chairman thomas, distinguished commissioners, my name is john mack, i'm the chairman of morgan stanley. also served as morgan stanley's c.e.o. from june of 2005 to 2009

and i'm pleased to have the opportunity to address you today. the past two years have been unlike anything high seen in my 40 years in financial service. unprecedented, illinois liquidity wall street saw the fall of two franchises and the consolidation of others. we saw credit markets seized, competitive landscape remay have had and vast governmental intervention, in the financial sector. and the consequences are obviously spread far beyond wall street. millions of americans today are struggling to find work. they've lost homes, they've watched their retirements evaporate, their savings. i believe the financial crisis exposed fundamental flaws in our financial system. there's no doubt that we, as an industry, made mistakes. in retrospect, it's clear that many terms are too highly leveraged. they took on too much risk, and they didn't have sufficient resources to manage those risks effectively in a rapidly changing environment. the financial crisis also made clear that regulators simply

didn't have the visibility, tools, or authority to protect the stability of the financial system as a whole. let me briefly walk you through what happened from morgan stanley's viewpoint and our response to the crisis. als the commission knowles, the entire financial service industry balances hit by a series of macro shocks, that began with the steep decline in u.s. and world state prices in 2007. morgan stanley like many of its peers, experienced related losses related to the collateralized debt obligations, backed by residential mortgage loans and we moved -- this is a powerful wakeup call for this firm and we moved quickly and aggressively to adapt our business to the rapidly changing environment. we cut leverage, we strengthened risk management, we raised private capital and dramatically reduced our balance sheet. we increased total average liquidity by 46% and we entered

the fall of 2008 with $170 billion in cash on our balance sheet. thanks to these prudent steps, we're in better position than some of our peers to weather the worst financial storm. we did not do everything right. when lehman brothers collapsed in early september of 2008, it sparked a severe crisis of confidence. we experienced a classic run on the bank. as the entire investment banking business model came under siege, morgan stanley and other financial institutions experienced huge swings and spreads tied to our debt and sharp drops in our shares price. causing further depletion of cash resources. in an effort to stem the panic, morgan stanley moved up the announcements of its strong third quarter earnings to september 16, but our stock remained under heavy pressure. it lost nearly a quarter of its value the following day, falling

from 28.7 to 21.75. despite the strong results, it continued to trade low and finally traded as low as $6.71. this crisis of of confidence in the market, had a chain reaction to the broader economy, as lower prices for financial assets undermine confidence, and led to lower prices throughout the rest of the economy. this period was marked by rampant rumors and speculation, by management team, like those of my peers here, worked around the clock to address these rumors and provide investors, clients, and employees accurate information. we also worked closely with our regulators, to keep the -- keep them informed and achieve the right result for the market, and the economy. our position began to stabilize after mitsubishi agreed to invest $9 billion in our firm as part of a broader strategic alliance. morgan stanley also converted to a bank holding company, providing direct oversight and access to the federal reserve.

the u.s. government announced its tarp investment a short while later, which also helped stabilize the broader market. and the s.e.c. instituted a temporary ban on financial stocks. morgan stanley appreciates the many steps the government took to prevent the collapse of the financial system and the support provided by american taxpayers. i believe every firm in the strife in the broader financial markets as a whole benefited from this support. as you know, morgan stanley as since repaid our tarp funds, providing taxpayers at 20% annualized return on that investment. we learned an important lesson from 2008 crisis and have adapted our business to help prevent something like this from happening again. one of the clearest lessons with it, many firms simply carried too much leverage. as i mentioned, morgan stanley moved aggressively, beginning in 2007, to reduce leverage, cutting it in half, from 33 times at the end of 2007, to 16 times by the third quarter of

2009. we raised a total of $14 billion in capital from private sources, maintaining one of the highest tier one capital ratios. we've also taken a number of steps to diversify our revenue and funding sources, including through an expansion of our wealth management business and extending maturities on our debt. we have made important changes, systemic changes to our business practices, including scaling back proprietary trading. morgan stanley also devoted significant resources over the last two years to further strengthen our risk management policies, and procedures. this included naming a new risk officer early in 2008 and adding about 100 more people to the risk management process. we have enacted changes to how we pay our employees an ensure that compensation is linked even more closely to performance and does not encourage excessive risk taking. we were the first major u.s. bank to enact a claw back, for a

portion of year end compensation in 2008, one that exceeded tarp requirements. we have since ve strengthened ts provision further, so we can claw back compensation, if investment or trading positions produce subsequent losses. we've also enacted a multiyear performance plan, that make senior executives compensation contingent on reaching certain three year performance goals and we're increasing a portion of year end compensation, that's deferred to all employees. finally, as c.e.o., i recommend to the board that i receive no bonus in 2009, because of the unprecedented environment in which we're operating and the government's extraordinary financial support to our industry. this was the third year in a row that i recommended no bonus to my board. morgan stanley is also doing its part to get our economy moving generally. we are working with businesses to raise capital to invest in job growth.

we're working with families to modify mortgages we service, so families can stay in their homes. by the end of november 2009, morgan stanley's loan service and subsidiary had active modifications in place for over 46% of borrowers, who are eligible fortunately the administration's home modification program. this is the highest percentage that any service participate in that program. we believe this is business imperative and public important. the financial crisis laid failure of risk management, around the industry and around the world. regulators simply don't have the tools or the authority to protect the stability of the financial system as a homeowner. that's why i believe we need a systemic risk regulator with the ability to ensure that excessive risk taking never again jeopardizes the entire financing system. we cannot and should not take risk out of the system.

that's what drives the engine of our capitalist economy. no firm should be considered too big to fail. the complexity of the financial markets, financial products, exploded in recent years, but it's clear that regulation and oversight have not kept pace. while many of these complex products were designed to spread out risk, they've often had jules the opposite effect. -- just the opposite effect. obscuring where and to what degree that risk was concentrated. regulators and investors need to have a fuller and clearer picture of the risk posed by increasingly complex products. as well as their true value. we should also aim to make more financing products fungible to ensure they can be transferred from one exchange or electronic trading system to another. i believe we need to establish a federally regulated clearly house for derivatives or requiring reporting to a central

depository. this will create competitive markets in futures an derivatives, which would benefit investors and the industry as a whole. finally, today's financial markets are global and interconnected. our regulatory regime needs to be as well. the osmoles work with countries across the global to coordinate and synchronize risk. at organize man stanley, we're grateful to everything the federal government and the american taxpayer did to support our industry, and to help bring stability back to the markets. we recognize our industry has much to do and to regain the trust and confidence of taxpayers, investors, and public officials. thank you for. >> thank you, mr. mack. mr. moynihan. >> thank you, chairman angelides, vice chairman thomas an other members of the commission. i welcome the opportunity to help provide some information on the important matters you're investigating. as you know, i assumed my role as c.e.o. of bank of america on january 1 and prior to that time, i ran the consumer areas of the company. in leading our consumer

business, i had firsthand knowledge and recognition of hardships many hard working families and small businesses experienced across america. together, the financial services companies are like the leaders and regulators, must continue to work to understand what occurred in the financial crisis and apply these lessons, simply dolls not happen again. -- does not happen again. over the course of the crisis, we as an industry created a lot of -- this commission's work is important, because the lessons are not going to be simple. this crisis had a multitude of causes that are not easily summarized. it is important that we understand the breadth of the cause, so we can learn the right lessons and apply the appropriate policy to recommend difficult them form the future. we have seen in our view, four crises unfold. a capital mortgage crisis, a global credit crisis and a severe global recession. the mortgage crisis originated with a dramatic expansion in the availability of mortgage credit, through subprime lending and

aggressive mortgage terms, even in prime products. this led to a greater debt burden for consumers. lenders, prompted by lower interest rates, rapidly rising home prices, and large amounts of capital available, make credit available to borrowers who could not previously qualify for mortgage. or extended more credit to a borrower who could or perhaps would not be able to handle. the national policy expands american homeownership is also popular, and created tail winds. no one involved in the housing system, lenders, rating agencies, investors, insurers, consumers, regulators and policymakers foresaw a dramatic an rapid depreciation in home prices. when a nation did experience this rapid depreciation in home prices, the first experienced since the great depression, many of these loans became very unfavorable. and the option of refinancing disappeared, leading to defaults. the second crisis came when investment banks in the capital markets area. investment banks not only had underwritten mortgages, but

obtained significant amounts of the risk by providing back judgment liquidity -- backup liquidity. the risk of these assets spread. this happened when an insurer guaranteed the mortgages or structured investment vehicle bought the mortgage securities and half of the money market funds who purchased the commercial papers from those vehicles. third, the stress of the financial crisis began to spread beyond the investment banks and mortgages to other fixed income products in the lower market participants. this destabilized the financial institutions and non-financial institutions that had little to do with the u.s. or the mortgage market. without government intervention, to restore liquidity to capital markets, the risk of global economic collapse is very real. the final crisis and perhaps the most daunting, is that we have a severe economic recession going on. some would say that the financial crisis caused a recession, the experts will analyze that for the coming years, to sustain the exact cause of a relationship. but one thing is clear.

the u.s. economic growth in the first decade of the century was funded in mart by home price appreciation, an ability of homeowners to access the equity in their homes to use for spending. in addition, home mortgage and home equity financing helped drive residential construction activities, which contributed to the economic expansion. the history of the past economic cycle and this cycle shows that an economic expansion built on excessive debt or leverage went into recession, no matter what triggers it and this one surely did. this crisis taught us very valuable lessons. let me highlight a few of those. first, a clear assessment of the borrower's ability to underrate the loan. second, capital is important. the leverage of investment banks and other market participants was untenable. while the leverage requirements for bank holding company may have been better, banks and others should and undoubtedly

hold more capital going forward. third, liquidity is the key. liquidity allows an institution to meet margin calls, fund redemptions or pay deposits without having to sell liquid assets and fourth, current accounting rules need to be revived. current rules require banks it reduce reserves, and set aside loan losses, reduce reserves against loan losses in good times and build them in bad times. in addition, market to market accounting can become disjointed when there's no proehl market from any products. before closing, let me say a few words about compensation. at bank of america, our compensation guidelines are set by our board of directors. the goal of any compensation program and the program of bank of america is to attract an retain the talent we need to make the businesses profitable. in 2008, our company actually earned more than 4 billion dollars. but that was far short of what we believe we should have done for our shareholders. my predecessor and c.e.o., many of the top leaders in the company myself included, received a bonus for 2008.

for the executives at the next level down, our bonuses were cut more than 80%. our 2009 compensation pools have not been finalized. we anticipate that compensation levels will be higher than they were in 2008, but certainly not back to the precrisis levels. we have implemented many different programs, including claw backs and greater deferrals that you've seen to have referenced in other places. all of our activities comply with the work that we've done through the various regimes, the tarp regimes, pay master fine berg and others. we have understand the anger felt by many citizens, because institutions that receive federal investments 15 months ago are recovering especially in the investment banking trading errors. in response to that criticism, i would make a few points. first at bank of america, we are grateful form the taxpayer assistance we have received. i am pleased to report that we've paid back 100% of the funds, $45 billion, along with nearly $3 billion in dividends an other payments to taxpayers. second, the vast majority of our

employees played no role in the economic crisis or losses. they've worked hard during this crisis to help their customers and clients and they extend more than three quarters of a trillion dollars in the fourth quarter of 2009. third, while some employees were asked to leave the company over the past couple of years, we believe our 300,000 employees are a valuable parliament of our future and we need to pay them competitively so we can keep them to pay hour clients. in conclusion, i want all of you and the american people to know that i fully understand and appreciate the gravity of the crisis that we are now just coming through. we are grateful for the courage shown by government leaders to take bold unprecedented action to preserve the system. but most of all, we as managers have to run our companies never to let this happen again. thank you for your time. and i welcome any questions you might have. >> thank you very much, mr. moynihan. thank you very much, all of you,

for your thoughtful statements. we are now going to move to questions, and we have got a lot of ground to cover, so i'm going to ask that you be as obviously incisive and compelling as possible, but brief, succinct, direct answers. i'll start the questioning today and what i'd like to do is i'd like to start by asking some questions about specific types of business practices, and risk management practices that may have contributed to the financial crisis, as a way of making this tangible and real, and i want to pick up on your comment, mr. dimon here. i would like to be brutally honest. mr. blankfein, i'm going to start my questioning with you today and i want to actually pick up on your comment and your testimony, about the fact that there were -- and i think i'm paraphrasing this correctly, that there were financial products and practices that may have served no essentially good or productive purpose in the financial system. recently, you've made a few comments and i'd like to just read you a couple of quotes. you saved, in november of last

year, listen. there was a lot of negligent behavior and proper bad behavior, that has to be fixed and sorted through. we don't take ourselves out of that. i include ourselves in that. you also said, we participated in things that were clearly wrong and we have reasons to regret and apologize for them. what i'd like to ask you, is can you tell me very specifically, what are the two most significant instances of negligent and proper and bad behavior in which your firm engaged and for which you would apologize? >> that's a vote -- oh, i receive. receive -- see. the biggest -- and i refer to this in my oral testimony, just now. i think we in our behavior, got up, got caught up in, and this is the general market, got caught up in and participated and therefore contributed to elements of fraud in the market. so for example, in leveraged finance, which was our biggest

ex poles you're, we are a top service provider to the private equity world. we are a -- we are a top mergers and acquisition firm in connection with rendering that advice. for mergers and acquisitions. we help finance those transactions. increasingly, those transactions took on higher and higher leverage, which they could not have, but for the willingness of financiers to participate in that and we were a major financier and moreover, we held those positions for too long. too much concentration on the books. we sold them down and if you go through ma continuum of people who have had these positions, i don't think relative to our size, we had more than we should have had and therefore, we had -- and you go back and look at them, too much leverage in transactions, and too much concentration remained from that leverage on our books. >> ok. would you characterize, looking

back on this now and obviously hindsight is 20/20, but would you look back on some of the financial as negligent or improper? >> again, in the context of the world that we were in, and when you use terms like that, i always think about standards of behavior and in the context, i think those were very typical behaviors. in the context that we were in. >> let me ask you, have you done any kind of internal investigation, kind of large sweep of your activities, and is that -- what did you find, and is that something that we could have? >> room not -- you know, if we have something, of course, we will identify it for you and we will have it. i'm not referring to a specific -- i'm referring to the fact that we look at our risks, and we look at our positions, and the tensions and crisis area, we looked at the -- that our balance sheet and the amount oof illiquid positions.

>> if you look at the practices, the mistakes that occurred, we would like to have that, review it. obviously, your attorneys will want to review it before, but perhaps so we can follow up. let me move on now. let me talk about, you know, the issue of conflicts comes up in many respects in the marketplace. it comes up in compensation, it comes up in trading practices, and i want to ask you about a very specific instance as a way of getting to how things worked and how things might be changing in the future. based on the review of public documents, as you know, your firm sold a significant amount of subprime mortgage related securities. and it appears, at least according to public documents and other reports, that you may have simultaneously betted against the securities you sold to clients. according to the reports, you sold about $40 billion in 2006 2006-2007. in december of 2006, you came to the conclusion, the mortgage market was heading south and

began to reduce your own positions. many of the securities that you sold to institutional investors, other folks, went bad within months of issuance. now, one expert instruct toured financing said the -- in structured financing said shorting customers because they believe they are going to default is the most kin calmics use of credit information that i have seen. do you believe that was a proper legal ethical practice and would the firm continue to do that practice or do you believe that's the kind of practice that undermines confidence in the marketplace? >> well, the way it's -- let me -- the short answer is, this is the practice of a market maker, and i would like to explain this. but the answer is, i do think that the behavior is improper. you know, we regret the consequence that people have lost money, in it, but i just want to explain, and this is very important and i appreciate the opportunity to do this, because there's so much press

swirling around this, i really need to explain. in hour market making -- our market making function, we are a principal. we represent the other side of what people want to do. we are not a fiduciary, we are not an agent. of course, we have an obligation to fully disclose what an instrument is, and to be honest in our dealings. but we are not managing somebody else's money. when we sell something, as a principle, which is what we are as a market make are, the next minute, that -- maker, the next minute that high temperature will have gone up, in which case we will wish we hadn't sold it that minute, or it will go down, in which case we'll be glad we did, for our own p & l and sorry for the person who bought it. in most cases, the person who came to us, came to us for the exposure they wanted to have. >> mr. blankfein, you were actually creating the securities

and let me tell you someone who has been in business half my career, the notion that i would make a transaction with you and then the person with whom i made that transaction would then bet that that transaction would blow up, my question is you weren't purely a broker, your taking subprime product, packaging it up and selling it under your label, correct? >> let me be clear. we were not a broker at all. >> you were a principal. >> we're a principal. it wasn't as if we were creating product, that product existed necessarily, and we were shorting it. the act of selling it reduced our risk. let me be clear -- >> the act of selling, i can understand how -- my point was, you had a view of the market, as you continued to sell the securities. i guess one of the questions i'd ask you is, how do you go to the -- the rating agencies, with whom i dealt with a lot as treasurer, and how do you persuade them to give the highest rating, tri aasa a,

statement -- -- >> if you had looked into goldman sachs, we were not controlling our risk. when you have listen to the testimony that's come by, the biggest problem that institutions had was the accumulation of risk. we weren't working, a market maker doesn't manage its risk profile. because it likes housing or doesn't like housing. those are separate. we have various pockets of -- excuse me. we have various pockets of goldman sachs that, like a position or don't like. what we do is risk management. because we had this risk, because we were accumulating positions, which by the way, we acquired from clients, who want to sell them to us, we have to go out ourselves and provide and source the other side of the transactions, so that we can manage our risk. these are all exercises in risk

management. >> well, i'm just going to be blunt with you. it sounds to me a little bit like selling a car with faulty brakes and buying an insurance policy on the buyer of those carls. it doesn't seem to me that that's a practice that in expires confidence. >> every purchaser of an -- [inaudible] is an institution, probably professional only investors, dedicated in most cases to this business. >> representing pension funds who have the life savings of police officers, teachers -- >> these are the professional investors who want this exposure. let me ask you. in the current market today, things are swirling -- >> let's move on. >> i think these are important mat terms. i think this is one of the most critical questions revolving around here. >> then i have a question to follow up on this. >> no, i understand. we are sitting here today, with people commenting in the press, jean, the equity market is being

driven by more bubbles, because of the liquidity end. others are saying the equity market is right and we're in the recovery. no one really knows yet people are coming to us as a market maker. i want exposure to the equity market. i don't want exposure to the equity market. we are dealing. we have to make sure the products do what the products say, that they're honest, that they're disclosure and there are laws. but we are dealing, we are an institutional firm and this is the highest part of the institutional market. even today, by the way, people are coming to us for exposure to these very instruments. not at 100 cents on the dollar, but 8 cents on the dollar, because they think it's going to be worth 12 cents, and other people are saying it because they think at 8 cents, it's going to go to 4 cents. that's what a market is and our role as a market maker -- >> i do know what a market is, but i want to ask you this question. did you always disclose, to every investor, that in fact, you were taking the contrary

positions, or just yes or no, is that consistently disclosed? >> we were selling as a principal. when we sold, we were selling something that we had owned. >> let me ask you one final question. >> they owned it and we didn't. >> met me ask you one final question on this topic very quickly, in terms as a principal. which is in september 2004, the f.b.i., head of the criminal division, warned that mortgage fraud was so rampant in this country, that it was a potential, quote unquote, epidemic, and that if unchecked, it would result in a crisis as big as the s & l crisis. did you take any specific steps in the wake of that 2004 crisis to evaluate the mortgages that you were selling in the marketplace? if you don't -- >> we were not an originator of mortgage. we did -- we are audited and reviewed and subject. and we have due diligence practices that we think were

robust, and so, the answer is, people can examine what our due diligence processes were, but as i sit here, i have no reason to think they weren't robust. >> ok. let me -- >> would i do more now? >> listen, there's no after required information that wouldn't change my behavior in some respect. anyone who says i wouldn't change a thing i think is crazy. knowing now what happened, whatever we did, whatever the standards of the time were, it didn't work out well. of course i'd go back and wish we had gone whatever it took not to be in the position that we find ourselves. >> let me ask one very quick set of questions about risk. in your testimony, and in fact, written and today, you spoke about your risk management rooted in accountability. and today, you talked about of course, none of us november where things are going, so we have to prudently plan for risk. and i think, you know, you make the point that you had profitability in 2008, but i want to press you a little on

this, because i think it goes to maybe the overall context of risk as it was perceived and hopefully won't be perceived again. at your firm, you tripled your assets from 403 billion to 1.1 trillion dlarls. -- $1.1 trillion. your leveraged ratio, when measured against tangible equity was 26-1. but some analyst's measures, 32-1 against common tangible common equity. you've even made the observation, a couple of folks here about the dependence on short-term liquidity, which exacerbates that and then as a balance sheet matter, there was extensive hedging, because of the capacity or the risk profile of the assets you held. in the end of the day, and i'm going to press you on this, it seems to me that you survived with extraordinary government assistance. there was $10 billion in tarp

funds, $13.9 billion as a counter party, via the aig bailout. by your own form 10k, you said that you issued $28 billion in debt guaranteed by the fdic, which you could not have done in the market but for that. you were given access to the fed and the ability to borrow next to nothing. you became the bank holding company over the weekend. you had access to talf, you benefited from a ban on short selling, which you initially opposed, which mr. mack had advocated and you got some relief from mark to market rules, which i understand you were assiduous about marking the market. when you look at the amount of leverage that you have and you do look at your rapid growth, do you really believe that your risk management, in the big picture, was sufficient to have allowed you to survive but for that government assistance which i laid out? >> well, there's a lot of predicates to that we have. the fact of the matter is, we were much leveraged now, so you could take that as a vote that

we wish we were less leveraged then, but when you look at the leverage of companies and people are throwing out 30-1 or 40-1, our high watermark was actually a fraction of that, which was kind of small, a lot of that included cash on our balance sheet. i think we did a very good, as a matter of fact, we had tremendous liquidity through the period, but there was systemic events going on. if you're asking me, what would have happened, but for the considerable government intervention, i would safe, we were in, it was a more nervous position than we would have wanted in. we never anticipated the government help. we haven't relying on those mechanisms. when you think of that extraordinary week of a lehman brothers, which was the most hard and tense week there was, that weekend when we became a bank holding company, the next day, we capitalized ourselves in part private live, with warren buffett, and the day after that,

we did a capital raise for 5.3 billion dollars. we had access to the capital markets and we could have made it more and we weren't relying on that government help. that government tarp legislation came about three weeks later. that being said, do i -- i don't know, i can't stand here and tell you what would have happened and i know for sure, no one else knows either. i felt good about it, but we were going to bed every night with morris being than any responsible manager should want to have either for our business or for the system as a whole. risk, not certainty. even after the tarp was done rules were implemented, did that exempt us from risk? no. as you point out, there's still risk today. but the question doesn't have to turn on would you have gone under but for, would you have made. the fact is the world was unsafe. the government regulators,

taxpayers, took extraordinary measures to reduce intolerable level of risk to a much more tolerable level of risk and that we all should be appreciative of. :

>> after 10 to nine years in the context where we were, look, how would you look at the risk of a hurricane? the season after we had four hurricanes on the east coast which is absolutely extraordinary, versus the year before, rates got very low for risk premium on the east coast in the united states. that year after four hurricanes, everyone's nerves, rates went up spectacularly, they are lower again that is the risk of four hurricanes in a different in your those times? >> i want to say that. having sat on the board, acts of god will exempt. these were acts of men and women. >> i'm just saying -- >> you were in control. >> i sit here, raising capital, clearly, we are much less leverage now, consequently i wish we were much less leverage than even though we're much less

leverage than others and win cash on a balance sheet and we could better them under those circumstances. but if you're asking me what i do something differently, knowing what i know now, with respect to the capitation? how could you not? of course. >> i want to put it in context of the level of risk and the level of the assistants because this is something i think no one would want to repeat again. let's now move to questions from other commissioners. i'm going to stop at this moment, and move to vice-chairman thomas. thank you very, very much. thank you. >> thank you, mr. chairman. i think context is important. you mentioned earthquakes and how familiar we are in california with our? ear can you talk about context. i think as we conduct these hearings and talk about the problems that were encountered at how close we came to a

catastrophe that, right now, in haiti by one of those acts of god, there is an enormous catastrophe. there are thousands of people, and i think the number of deaths will shock a lot of people if you've never been to haiti or port-au-prince in terms of the living conditions. that were there, subject to. deathtraps available. i think the general question that everybody wants to ask him and you said at four different ways, and i will put it in the over all, overarching way, that if you knew then what you know now, what would you have done differently? that may or may not help us as we go forward, but i said at the beginning that what we've been doing is a lot like an iceberg, we can only see one eighth of an it. seven eighths of it is underwater. as it comes toward you.

you've been kind to come and we have a lot to measures to want to lot of questions. mr. chairman, i want to ask of these witnesses, and it will be applying to all of the witnesses, that we have very limited opportunity at this time to ask questions. we would very much like to submit written questions to you, and we see those answers. the other thing, this commission is also subject to, if you knew then what you know now, would you ask different questions. we are only around for most of this year. we have to conclude our work by the end of the year. you start with fact finding, we begin coming to conclusions, you collect those conclusions, and we will publish our findings after the end of this year.

but the questions that we would ask now perhaps wouldn't be as insightful or appropriate or useful as questions we would ask three months from now, four months from now, based upon our also informing ourselves. so i would like to request in terms of submitting written questions to the applicable during the entire time that we operate. as the chairman said, you may or may not return to us, what i do hope you would be willing to be available, notwithstanding not being available in person, to continue to assist us in our job of trying to explain to the american people what happened. is that something that's acceptable to you gentlemen? >> yes. >> yes. >> thank you. and in trying to form questions, i know there are a lot of people who want to be in one of these coveted chairs in terms of an opportunity to ask a question, and i'm sure there are those in

the room representing the media. and, i think we have an excellent example in this morning's "new york times," and it was also in yesterday's "new york times," of people who, if they don't own, they have available, who decided they would ask their own set of questions. mr. chairman, my questions to begin with will be those that were submitted by "the new york times," and we would ask you to answer those, in writing. and then, in fact, give everyone in america, mr. chairman, the opportunity to be in that same position. and i think it's most appropriate to tell anyone who's listening, watching, or hopefully, will read anything about this hearing today, that

the opportunity to submit written questions to who it is that you wish that question to be submitted, is an opportunity that odd to be available to all americans. and so mr. chairman i take this opportunity to say anyone who wants to write me, bill thomas, f. cic.gov and submit a question, we will do the best we can to get you the answer. more portly, the broader -- the greater number of people who ask and the broader question the question, no matter how trivial in terms of some pundits point of view, it's a question for the american people want answered and i think that will be part of our job over this year to answer those questions. so we may be back to you, not with our questions, but with questions that have been supplied to us by people who, perhaps, thought that some of

the answers -- some of the questions we're going to hear today were not the ones they would have asked. mr. chairman, this is relatively unusual because usually we will close the record after a period of time. given the job we have, and the time in which we need to do it, i would ask unanimous consent, mr. chairman, that every hearing in this record remain open, with questions submitted either during the hearing or submitted to us. i would kind of like to channel it to those that are submitted to us because if we open it up, every editorial every day will be a list of questions that just came up, but we can handle that as well. our job fundamentally, charged by congress, was to get to the bottom of what happened. but most importantly, explain it in a way that the american people can understand it. we have assets with you

gentlemen in front of us. we will have additional assets. we need to utilize all the resources available to produce the document which we hope will assist americans in understanding what happened. primarily, for the purposes you indicated to know what we should have done had we known now, what we knew then. and our job by the end of this year, to be smarter, to ask the best questions we can, but to rely primarily, mr. chairman, on every american's opportunity to sit, figuratively, in this seat and ask the question they would have asked. and that should be agreed to by everyone, and i will then begin channeling those questions that come to us, and obviously as i said, the first questions on

page 27 of this morning's "new york times." thank you, mr. chairman. >> i will now call on the commissioners for questioning. i'm going to start with ms. murren. >> thank you, mr. chairman. my first question is to mr. blankfein. a question to you about aig. could you talk a little bit about when the governments courted and g. and enable them to close out your exposures to risk at aig? did anyone ask you at any point to take anything less than $0.100 on the dollar? >> i never got a request myself about taking less. it didn't come up in any conversation that i can recall. subsequently, somebody in my

organization who is going back and forth with -- this is after the aig, a couple of months later at the time when they were closing out a portfolio, i think donis maiden lane three. told me that he got a question to the effect that at least contained the inference that he drew, would you be willing to take less. and he said he couldn't answer that question now. himself at his level. and even said, it never came back up to him. and as i said it never came back up to me. >> did he further the question of the chain of command at your firm at any point? >> i think he -- i can say i didn't get it. i didn't get it. he might have told his boss. >> could we talk of it about your interactions with the

regulators, in particular, when you think back on the events of 2007, 2008, there are obviously a lot of people that participate in risk management that are either internal or external at your firm. there are regulars, internal auditors, they are your extra auditors that they are your committees on your board. at any point did any of those entities or individuals raise the issue of the quality of the assets on your balance sheet or of the leverage that you had at any point during 2007 or later? >> were a market to market firm. and we have businesses, important businesses that we have distressed business. we have businesses that specifically go out and buy distressed assets. but they are marked correctly. so our auditors wouldn't say i like this assay, i don't like that as a. all our auditors would say is, is this asset appropriately marked and we engage in them.

and i think i talked to the augurs each time and they tell me we do a very, very good job. we know mark and. we go out, the best we can, get extra benchmarks and go out and test the marks. so it's not a matter of, we will today, today, we will go out and if a client came to us and wanted to sell us a very distressed portfolio, lehman brothers or anything like that, we would have a bid for it. that's our role in the market, and buy it so they can get off their balance sheet. we would have it on our ballot sheet but it has to be marked greatly. that's the real issue. isn't marked correctly? >> it sounds like you have quite a bit of discussion in that regard, and it doesn't sound like there was a lot of challenge to the kind of march are making. >> i'm sorry. there are huge challenge in our organization. we spent a lot of time. >> i was renting outside of your organization, specifically your auditors or regulated. >> no, they go over our books

and records. is a very, very long process that they not only on a theme marks, they audit the process by which to get the marks. and they test them. >> do you think in light of what's occurred, that they were doing a great job? >> i think they did, you know, again, i'm living within -- i'm answering within the scope of my knowledge, i don't engage with the audit process against a summer or i talk to the audit partner and i'm a member of the board so i receive at there. so there are limits to what i can tell you. that we are quite satisfied. we are satisfied with our auditor otherwise we wouldn't have been. >> and the regulators as well? >> well, we went through an evolution of our regulators. obviously we were regulated during the period we were regulated by the sec as our primary regular. that was an institution that came in with the last few years,

we had one main regular. that regulator of courses switched when we became a bank holding company, which would have been in the fall of 2008. >> but it is their responsibility, and mike read, to help you determine what risks you may or may not be undertaking as a firm is outright? >> i would say hello to determine what risk. i think of it as they surveilled us, and we in the first instance would try to do something. were always disclosing to them ongoing process, not that they would do something, look at it and engage them as an open book. this is the intention of process, to be engaged. but then they look and very critically, if they didn't like it, they wouldn't let us doit, or would stop us. that's the role. >> theirs should be more civilians in that regard and more supervision of the kinds of activities that are undertaken by investment banks? >> well, first of all there is -- there's been a clear

demarcation between the sociology of our regulation before and after becoming a bank holding company. so before the wood the sec, which was kind of knew as a potential regular. i say the regulation of the fed is a lot more, you know, a lot more apparent, and everyday dozens of people from the new york fed come to work in our building, not as employs of goldman sachs, but employs -- this is their place were they do business and they come in and they do every part of our business. they look at papers, processes, procedures. so it's different that our regulation is different now. >> so is there a yes in there, that there should be more regulation, more supervision? >> well, there should have been more than there was in september under the old regime. and right now, given that we are still catching up, this is our first year under the bed, i

can't assert that. it's not enough. it feels much different and it feels like a lot of regulation, and appropriate a lot. i can't say now that it's not enough. >> what things do you feel they have changed from a regular tour standpoint, they are improving? >> i think we have a very, very tough regulator. i can't say whether they improve because to us, it's a new regulator. not necessary to everybody on this panel here because again, we exceeded to this regulated as a result of becoming a bank holding company, in septembe september 2008. >> thank you. i have one final question, mr. chairman. i was struck actually buy, you mentioned several times that your behavior either individually or as a corporation was really within the context of what is considered standard for the times. and given that we are now in

2010 and we have unemployment at very high rates, foreclosures are high, many people are really suffering right now, given that these are the standards of the times, could you please comment on your compensation? and that of your senior executives. >> first as to the -- what i meant to convey is i'm not sure, again, i haven't surveyed what the standards of the time were. but let me say, and people will go back and test this i'm sure and look, i know the standards of times were different than what we are now. so the way i was asked that question, how do you rate yourself in terms of negligence of what you should have done, i'm just saying it would have to be compared to what the standards were. though standards, when you look back in hindsight, should have been elevated. and by the way, that could also be another source of incorrectness. maybe we should have been a part of those who elevated those behaviors.

but that's what i meant to convey. i wasn't saying those were fine. i'm saying you asking what the standards were again. that's how we measure ourselves in terms of what we were thinking. now, you asked me a question. >> thank you for clarifying that, but the question i'm asking relates to where this country is economically, and also i notice that in your 2007 annual report that account that is listed as one of your firm's core values. how can you reconcile these things given what's going on in the country economically? and do you feel that your compensation adequately reflect your firm's behaviors, what the standards of the times are? and do you think you have a compensation structure in place that will hopefully reward people for taking a longer-term view as opposed to maximizing their short-term auditability? >> you know, commissioner, the last compensation we did, which was in 2008, we haven't announced any -- are

compensation, year end, we announce our results for the year. next week. but i think in 2008, which was a cycle which we already went through in the heart of this -- in this downturn. we took our firmwide compensation down, and this includes people whose compensation is hard to take down, because they are secretaries and staff of our overall compensation went down 50%, about 50%, which was in line -- which was in line with our performance. the senior most people in the firm were down 80%. that group. and the named executive officers, myself, the ceo, vice chairman, the cfo, bonuses were down one of%.

we took noblest and i think given the circumstances, that was quite appropriate. and so that as far as our structure, we have always had our work, and if you look at the user overcompensation, compensation, the compensation always correlated with the results of the firm. as it did last year, as it did last year. and that's something that emanates -- we been a firm for 141 years but it's over the last 10 years that we've been a public company. we've been a partnership. where clearly everyone in the firm had all their wealth, all their achaemenid compensations, stayed in the firm virtually, until they retired. and everybody got paid in an ownership interest in the firm. and most of our people, all the senior people get the predominant amount of the compensation in chairs and that's been true for years and we just even ratcheted that up to the point where our senior committee is only getting

shares. >> it's an interesting point you raise about the change in your structure, because there are some who would say now as a public company that there is more of an incentive to take excessive risks because it is no longer a partnership structure, and thereby the risk is shared by your shareholders, not so much necessarily the partners in the firm. and also, just i believe if i'm not mistaken, that your compensation was not done as a percentage of your revenues last year. so two-part question. >> i think the firm's compensation was down in accordance with the revenues. i didn't say in excess of revenues. i said it was -- there's an exceptionally close correlation. >> and a partnership structure? >> and the partnership structure, we still have the people in the firm, the partners, get paid a lot other compensation is in chairs. most of the senior people, most, of the compensation of senior

people is in chairs. and they have to hold -- i am obligated to hold 75 percent of those until retirement. actually post transaction with warren buffett. 90%. so i would say the people of goldman sachs have the results, have correlated with the success of the firm. >> thank you for answering my questions. >> mr. thomas has a follow-up on his target very quickly picked. >> did i understand in terms of your answer that you are now providing compensation in part in chairs the? >> we always. >> you always didn't. >> as a public company when we had shared. prior to having shares, partners only got paid in interest that they had to keep in the firm. except for a stipend effect. >> mr. dimon, in terms of the question that was asked mr. blankfein, could you give us a

before and after if there's been a change in the compensation structure had you change your competition after the quote unquote downturn to require some equity time prior to receiving -- >> recently you saw the g-20 and the federal reserve and a lot of people abroad, compensation principles, which we generally agree with. but we have always had the following principles. senior people get paid a lot other compensation in stock. it's generally been 50 to 75%, higher for me. we have to maintain ownership of that stock, 75 percent of it as long as you are part of the senior management committee. you had certain callbacks. is been risk adjustment so we look at the amount of risk you are taking before you pay that compensation. and we don't have things like

special change or control parishes, special severance packages. things like that. >> mr. mack? >> we've always paid a large portion of our compensation and equity. we have increased it for the most senior people up to 75%, which they have to hold that the only thing you have done, sir, is we put a clawback provision in the. so some of the bonus we will have access to, up to three years, if the trade turns bad, we will be able to go in and take that back. that's been the big change. >> mr. moynihan, you have a new position but you are not new, so you can tell me to. >> we've had a tradition of pain in stock like mr. mack said in our firm also for this year. we've instituted callbacks that are match the duration of the risk so something summary does it we can look at two years and that should clawback against their competition. >> that means that's an ongoing change, not just what is your?

>> is part of our compensation scheme. >> thank you. thank you, mr. chairman. >> senator graham? >> thank you, mr. chairman. my questions go to the issue of incentives. incentives are the things that are intended to shape or direct behavior and performance. we've talked some about the form in which those incentives are taking. i'm interested in what our the underlying goals of those incentives. mr. mack, you said that you closely linked compensation to performance. what are the primary elements of performance, to which the compensation is late? >> well number one, i think the first right here we look at is clearly profitability. as you go from profitability, if you go into the sales and trading area which most of these

question are focused on, is how much risk they take to have that profitable performance. how much interface they have with other senior members of a sales and trading operation to make sure communication is what it should be. we also look at the interface that ourselves and others have with our clients and what kind of interface is that. and most important, one of the things that we look at is how do our risk managers, and these are risk takers, how do they interface with our risk management team? these are people who report directly to me, do not report to sales and trading, but oversee the sound is an safety of the kind of risk we do take. and under that, we have put a lot more resources, commissioner, into that process, and put a number of people to work in creating models to make sure we can monitor that risk.

so if you go to risk management as an example, you say to yourself, clearly given what we've been through in the last few years, that individual needs to be paid who runs risk management, not on profitability, but needs to be paid on safety and soundness. is he or she doing there job to make sure that we are not taking excessive risk, that we have liquidity in our risk positions. so when you say how do you pay, you need to go to department by department or so many departments, if they are supported, let's take the i.t. function, what we're doing a lot of work, especially now that we report to the federal reserve, in building our models and building the ability to measure the kind of risk we take on our balance sheet. so that they differently, but they are paid on what do they produce and how quickly they get it online, and doesn't work. but broadly speaking, each group within the firm has certain goals, depending on whether they are support services, marketing

services, risk management services, or trading services. and then again, we could go into investment banking, how we look at each one of our bankers. >> from your answer i got the impression that in the risk area, for instance, that most of the measures of performance are a process. do you then go back and assess whether that process actually resulted but in greater or lesser risk, and that those outcome measures become part of performance of? >> we definitely go back. one of the things we done recently, sir, is create a separate risk committee of the board where risk management report to them. risk management, we do look at those process that we do evaluate them, but more important, those are decisions that are almost instantaneous. so as soon as a new risk comes on the books, is the responsibility of risk management to analyze the impact

it would have on our the value at risk. how much risk are we taking, are the liquid? so the answer to you is yes. >> i guess my question is, your testimony and the testimony of your other colleagues this morning, some of those decisions by virtue of time have been shown to have been excessively risky and with the financial system, putting the financial system in the shape that it is. have those actual outcomes of the risk analysis, or particularly where they were determined to have untoward outcomes, did they become part of the performance evaluation? >> they did, but again, as the chairman said, we will be brutally honest. there's no question that we have not put enough resources into

our risk management system. >> do any of you and your performance standards include aspects that are external to your own firm, that one of the justifications for your role as an intermediary is that, for instance, you are wise people in determining how to allocate resources to the benefit of the overall economy of the country? do those kinds of consideratio considerations, how much have your decision-makers contributed to economic growth, job creation, those things that affect the general economy, are they part of the performance measurement? >> well, clearly given what we've been through, and the pain that homeowners are going through, and the people losing their homes, we've been very direct in our mortgage area to make sure, and i think i gave a

statistic that we're about 44 percent with all of our mortgages that we hold, renegotiate the payments. in that aspect, the answer is yes. but when you look at some of the automobile companies who we have loans to, you know, those loans are made based on how much risk we're taking. we know those automobile companies or other industrial companies need loans, but we also have a fiduciary responsibility to make sure that we have done our due diligence. and it's not the same social push as we do in home loans in our mortgage facilities. >> in terms of evaluating, and maybe ie will turn this question to mr. moynihan, as among potential sources of investment for growth, how do you then

relate those judgments as to the compensation of the executives and other personnel responsible for making those decisions? for instance, there is concern that maybe an excessive amount of capital was placed in the housing market to the detriment of other areas of the economy. is that a factor that is considered in your performance evaluation? >> i think the specific factor i would say no, no, sir. but in terms of general how we built our financial plans and how we think about how we do our business, we make allegations of capital, and then one of the goals of executives or a person working to make that financial plan, and so it directly factors in. specifically we don't, someone to individual performs into a broader social question of how to allocate capital and financial system.

>> how, in retrospect looking back over the last decade, how effective do you think your performance standards have been an and compensation that they have generated to achieving goals of your institution, and broader economy? >> i'd say that, like my colleagues, we could do a better job of outlining really in some areas of the timeframe of which risk and be taken on by decision today that could come true or not down the road. we've also do that through the whole of equity and clawbacks that we had in other areas like credit cards. but that is one of the changes we've made in the incentive plans as we have 22009 and 10 and will continue to hold that because i think we learned a lesson in the last over years that the nature of the

underwriting passionate it takes time to get was a decision made today comes to. so we are trying to address that, sir. >> well, one last question, the mr. blankfein. your firm about 10 years ago changed from being a partnership to a publicly held corporation, and now changed again to a bank holding company. how have your approaches to performance evaluation change, or have they as you have changed the structure of goldman sachs and? >> i think, only to the public of it, i think we stayed at tried to keep the partnership ethic. so for example, there are elements of our compensation scheme that might be a little difference and supercold chances are history, might not suit everyone. so for example, no one at goldman sachs gets paid solely out of his or her own

performance. not traitors, not salespeople. everyone gets paid partly on the basis of the firm as a whole. their business unit, and of course we take account of their own performance, but the object force is to keep going with that spirit of partnership and cooperation, and teamwork. and also by the way, an incentive for everyone to surveilled everyone else around him or her. because we make everyone go responsible for each other that would be a distinguished element of our structure, that wouldn't be but in terms of looking at it and scrutiny, it's pretty, we try to keep it. the big change was is not becoming a partnership that is becoming a much bigger global company, still call the partners, partners of goldman sachs and staff in beijing and far-flung places, where as 20 years ago, clustered around some american cities and maybe london, maybe tokyo.

>> just one last question. has the percentage of your total revenue, which is distributed and compensation, to your partners changed as the legal status of goldman sachs has changed? >> in the status situation, in the old regime, everything that was left over belong to the partners that they would have effectively the shareholders. but i will say in the 10 years or so as a public company, we have been, started out and said to the world that we will start looking at the beginning of every year like it would be about 50% and is just largely can't lower. largely gone four for the good reason that our revenues have often gone higher. so you didn't need to pay as much. in the overall effort of what to do, one of the problems that i think, you know, we have is what we do a lot for the economy isn't that visible as an

investment banker but we help allocate capital, we raise, we put copies together. we launch new businesses by raising capital in the process, but it really doesn't interface a lot. it doesn't interface in half with the people who we want to understand what our role is in the system. and so recently, we embarked on a program which called the 10000 small businesses to try to get goldman sachs to apply itself to that issue to deal with something that's on a dimension, that is close to what is needed at the current moment. >> i'd like to move this along. thank you very much, senator graham. i'm going to ask one follow-up question to mr. mack with respect to the senator's questions. just very simply, what's the pay structure and amounts for risk managers versus traitors? was the kind of racial? >> well, i would say that we've been very clear, especially in 2008 when we change our at risk manager. that happen to be a gentleman with many years ago was a

traitor. he can make the same kind of money that our best trader can make. >> but that has not been historic. >> or store, that's correct. >> thank you then much. thank you. >> i want to pick up on that aspic was a little more broadly of the whole panel. each of you in your testimony talked about problems of managing risk and excessive risk. mr. blankfein talk about risk that talked about why jaws across the economy. mr. dimon talk to our compensation practices and his judges about aggressive underwriting standards. mr. mack talks about not having sufficient resources to manage those risks. each of the institutions you represent are publicly traded that they have a lot of committees, boards. they have internal auditors. so my question is, what is it about this traditional structure that failed us? why is it that the risks that you have identified were not

uncovered in the moment? what specifically has each of you done in addition to what you discussed to change your risk management practices since the crisis? lets you start with mr. blankfein. >> i think if i had to say one thing in specific, and a lot -- we focus a lot of effort on risk management and our senior risk managers, including our named executive officers is our risk managers, so at the highest level of the further i think one thing that we constantly learn from every crisis, 98, tech, this one, of course which is a different than level, is the need for more stress test. very often in our business we go through the analytical process of what could go wrong versus what is the probability of that going wrong. and therefore, tend to discount the consequences too much. what a stress test does is says

don't tell me that this is unlikely. what if it did happen, but it's not going to. what if it did. what i learned after so many years in the market is given enough time, not everything can happen, but everything will happen. and therefore, implementation of more stress test. spirit you've done that as a from. >> constantly. >> are these a century of the type that we saw the treasury conduct? >> it's different that you read in the paper some anxiety over whether the emerging markets are having a bubble. so we look at that. you may read in the paper we may feel the swelling up, see the pricing of some assets, and it's far on the horizon because we are quite positive in our research. but we said okay, what if, what are the effects, what are exposures to those places, what are our exposure to those places that have exposures to those places. and they go through a process of going around and assembling

okay, assume this happens and we constantly are doing those kind of things, which both helpless to avoid problems but also tells us what to do if something happened that it will be the first time we considered it. >> and stress test process would be audited in the usual fashion. >> a lot of this has to do with our own internal risk committee functions. this is an ongoing work. >> mr. dimon? >> i say if you do everything right in business you're going to make mistakes and you really have to look at the continuum, how many, how big. even if you're right, makes him come hopefully they will be small and won't be threatening to beat your institution or anybody else. the process is very adverse. you have a separate pricing for. internal audit, extra on and reviewed by the figure i think would have a chance to look at those things you would be pretty impressed with the diligence behind some of that process.

as a company we did some stress testing because history tells you that things go bad in the markets and you have to be prepared. that should never be a surprise, and you don't know exactly what's going to bet or exactly what direction it's going to come from. when you look at a business, we look at a whole balanced scorecard. so it's not, if you are not financially successful, you feel. so it is obviously a part of doing business but it is not the most important thing pics of you running, are you building a great company for the future, will you be proud of it, is it sustainable, are you building better system, better people, better training? we look at the whole thing. and is never driven by one metric. i think you get -- make mistakes by doing that. looking back, i also think as a business you have to look at what you did right, what you did wrong. if you are not continually an analyzing, you will not get better. so the biggest mistakes we made in mortgage underwriting, somehow we just missed that home

prices don't go up forever, and it's not sufficient to have stated income. >> if you have been -- you have been doing stress test prior to the crisis. did you do a stress test that showed following? >> no. we stress almost everything else but we didn't say home prices going down 40%. and it's now part of the stress test. >> okay. thank you. mr. mack, you've answered about beefing up, there are other things you would like to, the traditional system failed to. >> just add a couple of things. our head risk manager sits right by the ceo, our new ceo on the floor so that is a real link with risk management and the most senior person in it for. the other thing i want to comment on, and this goes to commissioner earlier, to mr. blankfein. i think with the federal reserve as our lead regular, the amount of focus and scrutiny that we get on risk, not just outright

risk, but the systems around risk models, how we test the models, even the point everyone to make an acquisition or make a major move, they are involved and asked certain questions that is very new, in my 40 years, with this new regular. so i would say that i would give high marks to our regulator in how come i don't want to use the word interested, how diligent they are in our risk and how we manage risk. >> mr. moynihan? >> i think much like my colleagues we have an independent risk management function. we thought we missed i think is similar to what mr. dimon said, which is if you think about it, as we support the broad economy and what we do so yes, we have investment banking, a large one now, but the mistakes we made, the most loss in credit cards and mortgages, that was just where we kept originating prime, prime assets in too deep in the

economy and we didn't do the kind of testing saying what if housing goes down 40% and test what your thought would be, be respective of the probability of just how you protect your from. i think that's probably the best lesson we've learned out of this crisis and we will apply it. when you look at on the commercial lending side, we either saw that and 89, 91, and we practiced that. we didn't have those kind of practices. i will say we will continue to intimate that. >> so you have stress test a look at commercial real estate and the concerns that are out there now? >> we have. but as you said earlier, the work that was done last year about this time to put in stress test, things like that, we've always had a view of commercial real estate really through the hard knocks taken in the late '80s and step to be very diligent about what could happen. i do think the consumer side had ever seen this kind of recession, and that led us down a path that we've learned from. spent a lot of this revolves

around housing, and i want to pick on something in your testimony, mr. blankfein, we said almost all of the losses that financial institutions sustain over the course of the christ is thus far have revolves around a bad lending practices, particularly and real estate. can you tell us exactly what those bad lending practices are, offer top of your head what are the things that are bad? >> in the consumer area, and there are people here who have consumer businesses, originati origination, jamie referred to date income without taz and i'm sure he can pick up that and talk about the consumer side. on the more corporate side, i would say it had to do with the leverage, and it had to do with terms, covenants, conditions. but markets got more competitive. there was a sense that the world had a lot of liquidity, and so

the commodity of money got less cares, and people paid less attention to it that and as a consequence, people were living to support transactions which is a business we are very firmly with, that had more multiples of debt for the equity, and the conditions that apply to the covenants, the maintenance, the things that allowed a lender to intervene in the company became more and more lax. and so you could anything less. so that lack of rigor on the transactional side i think had its counterpart in the consumer side, and in the commercial inside, which others here others here are more fully with. >> were you aware of this at the time? did you see the stand is going down, and if so, how did you highlight this in your risk management? >> in all honesty, we did -- you cannot miss the fact that the covenants are getting a little at her, and that the leverage is getting bigger.

with the benefit of hindsight, i wish i were any position of having to explain it. but at the time, i know we all rationalized the way a lot of people come other people had rationalized. gosh, the world is getting wealthier, technology has done things, things are more efficient, interest, there is no inflation, these businesses are going to do well. and i think we talked much as a lot of the world did, talked yourself into a place of complacency, which we should not have got ourselves into, and which of course after these events, will not happen again in my lifetime as far as i'm concerned. >> mr. chairman, i would like to extend an additional three minutes to the commissioner for his question, if he is interested. >> thank you, if i could. i would like to follow up with another piece of your testimony were you said something to the effect that essentially too many institutions outsource their risk management to the credit rating agencies. and ask you specifically, did

goldman sachs do that, did it test the rating agencies ratings, did you look at products that were rated highly and two internal scrubs and what was your experience in that area? you've highlighted in your testimony have gold and look at that. >> i think we did some out -- i can think, i would like to talk to the places where we're scruples and scrubbed ourselves. i think there were instances where we also deferred, not necessarily you were the only judgment, it was our judgment. just the same way you can't blame a regulator, and we wouldn't. we can't really blame a regular for just, credit agencies that's our decision to bet the consequences of. but i would say i would be more complacent when i saw something had aaa that if it had a aa or aa that had a single a. so to that extent i also must've

been different. >> i would just like to ask mr. dimon to go back to the mortgage underwriting and whose observations how many, how so many bad mortgages could be written in the united states and the decline in living standards. >> is really not a mystery. kind of surprising. hi y. lt, 80% loan-to-value love. with proper appraisals that went 85%, 90, 95, 100, even higher than that. the second is in the old days you have to verify your income, she attacked a truck or a paste of. and make sure the income was there, and there was more and more reliant on fica scores and people say i earned this. the third is that it went lower and lower input appeared so it calls up alt-a. more credit and you never saw losses in these new products because home prices were going to. before making money, and in addition to this, i think it's also true there was some bad product and some bad actors in

excess speculation. >> can you talk specifically about the bad actors and bad products? >> option arms were not a great product that i think some certain alt-a products were not great product that i think there was some unscrupulous mortgage salesmen, mortgage brokers, and you know, some people were missile. far too many people buying second and third homes using these things as opposed to the place to live. >> thank you, mr. chairman. >> just a quick follow-up on my time. and that is, that i mentioned earlier in september of 2004, the fbi made a clear warning about the level of fraud in the market place. mr. dimon, you indicated in your written test for, i think again today, that you excised most, i thought it was all but i heard most mortgage brokers from -- broker originated lending from your practice, and you see

default ratio two to three times. just very quickly, yes or no vote for the balance, did any of you excised broker originated mortgages from what you are securitizing, packaging and selling to the market? >> no, we are securitizing. >> no. >> no, not that i'm aware of the spirit did you not have the data? >> we were late in the process of securitizing product, and the only way -- we did sampling and testing, but we did not excise anyone after the fact that scum out that we're getting us faulty data. >> we did have the right, mr. chairman, when we found faulty data or faulty mortgages to put them back to their originated. we did that. >> okay. i'll leave it there. thank you. let's now move on. thank you very much, gentlemen. let's move on now to mr. georgiou.

>> gentlemen, i'm a strong believer in the strength of the market system. and although regulation of the financial services industry is proper, and necessary, despite their best efforts, government regulators often lack the resources and expertise to monitor adequately activities that create undue systemic risk. so it is important for us to focus on creating market mechanisms that reduce the likelihood that risk-taking practices will get out of hand and threaten the stability of the financial system. expert commentators have suggested that the crippling financial crisis was at least partially caused by inadequate accountability of those responsible for the creation of financial instruments, for the consequences of their action, because they lack quote skin in the game. the investment bankers who undertake the fiduciary duty to conduct due diligence on the integrity of the security, the lawyers who draft the prospectuses, the account to audit the financial study

issuer, and the rating agencies that rate the safety of the security are paid their fees all in cash from the proceeds of the sale. and thereafter, suffer no consequence whether the security succeeds or fails. this system places the burden of loss exclusively on the purchasers, often pension and retirement funds investing on behalf of citizens who worked a lifetime, legitimately expecting that there will be legitimate resources available. it has been suggested that this lack of accountability could be remedied if all the firms and individuals involved in the creation of financial instruments had to, quote, each of their own cooking. requiring for example that their fees be taken not in cash, but insignificant part in the securities they created, which they would be required to hold until maturity unhedged. so they bodmer issued, that was to pay 7% interest per year for five years, then pay the kaplan doesn't, the originators would

receive their compensation on the same basis. if the investment banker who led the underwriting was entitled to 1 million-dollar bonus, he or she would receive the million dollars worth of securities yielding 70000 per year in income for the five years receiving a million in cash at the end of the 50. if the security fail to perform as represented, just like the investors, the originators would lose their income and the expected principal amount of the bonus. alternatively, some have suggested that investors should have input for 18 to 30 months during which time if the security fail to perform, investors would be entitled to a refund. requiring the issuer and the underwriting investment bank to buy back the financial instrument. the suggestions are in no way intended to punish the responsible individuals, but rather to improve the quality of the diligence they exercise in the origination of the security. knowing that their financial future, just like that other purchasing investors, is tied to

the success or failure of the security to perform as they represent it will perform. and i would ask each of you whether you think that the volume created of your liquid toxic securities that contributed significantly to the global financial crisis could have been materially reduced by some such mechanism of placing financial responsibility where it belongs on those who originate financial instruments. and i would respectfully request that you attempt to answer, not as leaders of four of the world's most prominent financial institutions focused on maximizing your firm's profits, but just like the commissioners on this panel, as americans struggling to identify the root causes of this devastating financial crisis. and potential remedies to avoid its repetition. mr. mack? . .

>> successful transaction. but as an industry point of view, you know, if i'm paid in stocks or i'm paid in bonds, that would not be an issue. i like that idea. but i think it would create some issues with investors. >> i'm not sure i understand that point. maybe you could -- >> well, let's say we have the next apple computer company, whatever it may be. we do the underwriting. instead of getting paid in cash, we get a certain amount of stock. the stock was hugely successful, went up dramatically. i think people would want to

make sure they have access to invest in stocks like that or bonds that also do well. the sec in the past has been pretty clear that when we distribute securities, especially when they go up, we do not hold any securities back. they're all distributed to investors. so i think there could be a debate about should we be paid in equity, or should we be paid in fixed income instruments? >> right. but you're customarily paid as a percentage of the issue when you, when you engage in an underwriting, so why couldn't that percentage of the issue simply be, in significant part, in the securities themselves which would permit you to the benefit substantially were it to rise, but would also permit you to lose substantially if it went down just like the investors did? >> again, i would welcome that the. i think you would have to give us some leeway because markets are volatile. if markets are to go down, some

way of hedging that, other than that -- >> the problem is that the hedge itself undermines the whole notion of the concept which is to place responsibility on you, the underwriter, the originator, the party that has the greatest access to the information for the success or failure ultimately of the security just like the investor. >> but if you are a very large underwriter of either new issues of fix thed income, and we've just gone through a record week of issuance in a corporate market, you would very quickly fill up our balance sheet and have us in a situation that would curtail our business. it could be a shorter period of holding the securities, that may work. but again, i'm not opposed to it. >> or it might require more capital raising on your part to expand your business. >> possibly, but we've raised a lot of capital and have very high tier sr. ratios. it could. the other part about a put back to us, you mentioned if the

security does not perform. again, there is a short period of time oftentimes if there is information that comes out right after a new issue has been priced, there are times that new information comes back, and there is a put back. but to extend that over a long period of time is putting all of the risk on the underwriters, and some of you, some of you broadly here might think that's the right way to do it, but that would curtail our business dramatically and, i think, hurt the capital markets in the united states and also on a global basis. >> mr. blank blankfein, could you comment on any mechanism to put on the originators some responsibility for -- >> look, i think it would be hard to organize. directionally trying to put more onus on the issuers, on the originators is probably a good idea. some of these elements, you know, you can go back and forth on. i think the way the origination

and syndication process is designed we're not supposed to be in conflict, we're not supposed to have a stake in it. in other words, if we were going to originate a security and we were going to end up with some of it, we would have an incentive to have that security sold at a lower price than the higher price. a lot of securities laws are decan signed to make us not -- designed to make us not have a conflict with the client that's originating. but that's neither here nor there. the overall theme is, should there be some skin in the game? that could be a theme worth pursuing. the issues that john mack up, clogging up balance sheets, having a conflict with your clients because now all of a sudden, you know, not just someone trying to find the right price between a seller of a security, the person who needs the capital, and the investing public, you're now a member of the investing public and so that's -- you know, those things would have to be sorted through. the other point that he made earlier, how effective is that

in terms of influence of behavior, in this whole, in this process most of the problem wasn't, in my opinion, the cynicism of companies which held these positions even though they knew they were toxic and motivation. they didn't know they were toxic. why else would some of these balance sheets of some of these companies have many tens of billions of dollars of these securities? they were, it was a failure of risk management, i think, more than a failure of incentive. that's just my, you know -- >> right. but wouldn't -- >> mr. georgiou? >> yes? >> twenty seconds. >> but wouldn't the originating entities be in a better position to know whether these security cans had the possibility of becoming toxic? for example, if you, i mean, as you evaluated some of the cdos that you created, wouldn't you be in a better position to know whether they were likely to fail? >> again, you should be in terms of your knowledge, you should be in a good place both places.

in terms of incentive, yank -- i can't think of a bigger incentive than creating it on your balance sheet. they had that and -- >> let me ask just one question. some of you talked about clawback provisions. have any of you actually utilized your clawback provisions? and i wondered whether each of you since i don't have time to hear your answers, i wonder whether each of you would undertake to advise us in writing of whether you've actually applied the clawbacks to people within your firms without naming the particular person, but how much money you clawed back from them, what percentage of their compensation it was, and if you could provide that in writing, we'd appreciate it very much. >> terrific. we're going to now take a, literally, five-minute break if that would be desirable. let's get on back and get on with our business. [inaudible conversations]

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>> well, at least with me it's zero. all right? so i'm not taking a bonus. so let me just talk about -- >> [inaudible] >> well, look, i have to run a company. we've had a record revenue year. i've got to keep people in place. if you go back and you look historically or look in the last year during the all the turmoil, a number of people have left not just morgan stanley, goldman sachs, other companies to go either to other banks or to private equity, so there's still

a very big market out there of demand for talented people, so we have to find the balance between what's prudent to run your business, at the same time being responsible to what's going on in the economy. and i think with a lot of this compensation being changed from cash to equity over five years, six years and also most of us have put in clawbacks where there is some transaction that loses money the next following year after being paid that you have the right to take that money back. so i think by and large firms are trying to respond to that. >> do you think that balance -- [inaudible] >> well, you know, again, i think we're in an environment so difficult you can never strike the perfect balance. but the effort to do that everyone is very focused on doing that. >> [inaudible] resistance to write down the principal of mortgages to keep homeowners in their loans, especially since a lot of the

modifications aren't working out as well as a lot of people thought. >> in our case we have a very small mortgage origination company, and i think we have restructured -- i think is it 46% or # 4%? >> 44%. >> 44% to keep people in their homes so there's a real effort to do that. i can't comment on the bigger companies, i don't know what they're doing, but there is an effort to do that. >> [inaudible] >> are there? >> modifications as part of the program. >> so we are making progress on that. >> i mean, there's been reports that a lot of those trial modifications are not going on to become permanent and aren't necessarily going to keep people from going into foreclosure. >> well, look, you've gotta start somewhere. we started, i think we've been aggressive on it, and we want to be very sensitive going forward. if it makes sense to extend it, we'll try to do it. but we need to be responsive. >> as of now you're not agreeing to write down principal? >> well, i think the most important thing is to try to

redo -- you want to let your hand rest? it's beginning to shake. [laughter] we've tried to be very responsive, and we'll continue to work with the homeowners to keep them in their homes. all right? you guys are forcing me to go take a break. i was going to stay here and talk to my guys. thank you. >> what are you doing after you step down from morgan stanley? >> i'm no longer the chairman, i'm the ceo. if the i can help this committee or any of the regulators in some of the issues that i see, i'll be happy to do that. >> do you think other ceos should not take bonuses like you didn't? >> i think people have to make up their own minds. i don't know. >> [inaudible] >> well, this is just the first, this is the first meeting. i think a lot of people are going to end up coming here. i think this is the first -- [inaudible] so thank you. [inaudible conversations]

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mr. vice chairman, we're going to roll forward now. okay? mr. thompson. >> thank you, mr. chairman. >> mic on? >> thank you, mr. chairman. i'd like to take the discussion, if i might, back to the causes of the financial crisis. and as i reviewed the written testimony of several of you, particularly mr. blankfein, you said there were products that were created that served no purpose. what were those products, why did they get created, why weren't they regulated better, to what extent did those products that had no purpose contribute to this the problem? >> i'm not sure i -- i think i was at that point i think i was talking, maybe i was talking about sieves or those off balance sheet. i think that there was regarded as a, as a kind of an arbitrage,

if you will, to have a company or a trust that invested in longer-term assets and financed itself short in the commercial paper market. and that is, that is a mistake that is as old as financial markets to make, that that liquidity would be there and, ultimately, those risks contained in the assets that were acquired weren't -- and the vehicle was structured in a way to keep the risks off the balance sheet. but when they blew up, they suddenly came onto the balance sheet of institutions and created a lot of uncertainty as to to the the solvency of the institutions that sponsored them. >> so we saw a collapse a few years ago of an organization that took down an awful lot of people and collapsed two companies, enron and anderson, where underneath that the were a set of instruments that were off-balance sheet advanced

items. >> yes. >> and many, many statutory changes were made to govern organizations to make sure that they didn't do things like that again. how could that have occurred in such a massive scale this time? >> i think in my written testimony when i cited that issue about off-balance sheet risks, i said post-enron that is amazing was the line i used because, not because these things haven't happened before where people had risks that they weren't showing, which, by the way, creates two problems. one, whether you have profits and losses in your own business, and two, an uncertainty in the people who deal with you about whether you're solvent or anybody in the world is solvent which froze the system. i think it's quite, it's quite a big lapse that that happened. we as a mark to market firm because of our remember remembe-

regimen, if we make a commitment before it's even a security, we have to mark that commitment to market, and so our regimen that we were always under wouldn't have allowed us to do that, but it created a lot of problems for some of the big banks and sponsoring institutions and for everybody else. because not only in the end did it affect them, but it created this wave over the financial markets where there was insecurity about whether anybody could be trusted. >> while it certainly would suggest that risk management might have lapsed, it also might suggest that corporate governance lapsed just a bit in terms of the interactions between the audit committee and the board and the veracity, if you will, of the work that was being done to determine exactly what the quality of the book was. so to what extent does financial innovation and the regulator or even organization's ability to

keep up really put this economy at risk? >> well, i think there's always -- the answer is, it does, and the question is what is -- how do you, how do you moderate the risk or how do you cover the risk or how do you, you know, let's apply the word excessive to prudence instead of excessive risk. how do you take such prudence that you can allow for risk, but you build safeguards and conditions and liquidity and a lot of capital around it because you don't want to -- it's the age-old problem. you don't want to fail to innovate on the one hand, and on the other hand you don't want to bear the consequences of innovation that goes poorly. so that is a balance that has to be reached, and you'd like to reach the best balance, again, before the 100-year storm, not the day after the 100-year storm. but that, i think, is going to be one of the most important uses of the information that's gleaned from this, from the work of this commission is how do we

reset the balance. but also making sure we don't go so far that we so delever the system, if you will, or so take no risk that we lose a lot of the engines that drive growth in the economy? it's a challenge. >> so, mr. mack, how would you suggest going forward we think about innovation and managing the risk? because you've seen a great deal in your time. >> commissioner, i think it, in many ways, is very simple. i think the regulators in the industry have to focus on complexity. instruments today can be so complex that even though let's assume i am a salesperson at morgan stanley and you run a pension fund insurance company. you and i understand what you're buying. and then a year later you move

up, i move over to a different role, someone else takes your job. how difficult is it to get into the structure of that instrument? now, clearly, people are qualified and smart enough to do that, the question is, does it happen? and i've said this to chairman bernanke, and i've also said it to barney frank when i visited with him. i think we do need to look at complexity. it continues to jump higher and higher and, of course, with innovation and computers and very smart people you can continue to make it complex. so i think one of the things that the regulatory framework needs to focus on is complexity. >> so can the regulatory framework adapt or adjust fast enough given the pace of innovation in the industry? >> well, i think, again, i've said it and my colleagues on this panel have said it, we do need a regulator who has more resources and more, a bigger

budget to focus on that and attract people into that arena to focus on it. but, yes, they can do that the. but it needs, again, we have many different regulators. i would like to see some consolidation do, i would like to see kind of a head regulator not just here in the u.s., but tied to other regulators across the world in a global economy. and i think if you had the superregulator, and, again, it's a new experience for morgan stanley to be reporting to the fed, but i've got to tell you the amount of questions we're asked and mr. blankfein said earlier that every day people from the fed are in his building, the same at morgan stanley. i find that very helpful, it's a great check and balance, and certain things we say we can do, they say let us tell you how you're going to look at it. now rethink it. >> there's the old adage that if it sounds like too good an idea, maybe it is. and perhaps some of this oversight is management's responsibility, not necessarily

that of the regulator. so, mr. dimon, to what extent would you put the onus on you and your management team, not defer that necessarily to the regulator? >> well, i think i started my opening statements by saying i blame the management teams 100% and no one else. that does not mean we shouldn't look at gaps in the regulatory system. if i was the regulator, i would say there should be no gaps in the system, there should be more authority to deal with certain types of more complex situations, new products should always be reviewed and aged. but i don't think it's unique to financial services. new products have problems. and, you know, give it a little bit of time before people leverage up on it. so i think it's really the responsibility of committees, and i think most of these things could actually be fixed pretty quickly in a thoughtful way, you know, as you go through your work and you see where, you know, all the flaws were. one of the surprising things about all these things,

mortgages,sieves, derivatives, they were all known. they were not a secret out there. no one put it all together. there was no systemic regulator trying to look around the corner and say, well, if a money market fund has a problem, that's going to cause a problem for x. it's not a mystery or surprise we have a crisis every five years. my daughter called me from the school one day and said, dad, what's a financial crisis? and without trying to be funny, i said something that happens every 5-7 years. we shouldn't be surprised, but we have to do a better job looking forward, no regulatory gaps, better disciplines in some of the companies, eliminate some of the off-balance sheet stuff that helped eliminate some of the problems. >> [inaudible] >> one more. on a longer-term basis, some say that our country has had more of its human capital diverted to financial engineering as opposed to mechanical engineering or electrical engineering or

engineering of real products that, over time, really make the economy competitive. to what extent has the compensation structure of the industry attracted away the true raw human capital and made this economy weaker amidst perspective of delivering real products and services into the marketplace? >> that's me? >> yeah. >> you know, i think probably a lot of talent has gone to financial services. i think almost macroeconomics, how talent moves and why it moves, i don't think. i know a lot of very talented people who -- my prepare has a ph.d. in physics, and he would never get involved in something so mundane as trading. different stroke for different folks, but i think you will see a change over time. the talent will go into other fields. you have seen it, you've seen it with the googles and technology, so i think that'll continue. the trend will probably reverse

at one point. >> okay, thank you. >> great, thank you. mr. thomas. >> could i ask a quick follow-up question in terms of the complexity? >> yes. >> there's more and more drive with documents that the public deals with in terms of trying to put them in plain english to a certain extent so that you can understand them. i know sometimes it's, it's difficult to put it in simple terms, but don't all of them focus on who gets what when and how? and you can permeate that any way you want to, but there are some fundamentals that don't have to be there. i mean, if i said i hate you, you get it. if i said i have extremely strong feelings of animosity, some folks may not. now, maybe the blow has been softened by that, but the fundamentals are the same.

to what extent can you folks, even from a pr point of view, talk about simplification so that people can understand, or is it kind of an agreement that you're going to have a fraternity which gets paid highly and has the jargon? we run into that a lot in government. i used to run into it a lot in government can in which jargon was used to reduce the number of people they had to interact with. is that the case in terms of some of the complexity that you find now? you get paid more for 10 pages than you do -- 100 pages than you do for one. >> no, that is not. it's more the engineering and structuring and derivatives in the synthetic products. it's not about 100 pages instead of one page. certain products answer certain questions or problems that someone's trying to solve for,

so all of us are lucky to have very smart people, and if there is a problem that asset manager has or a pension fund and you try to work with them to solve that problem as a result -- >> is each one unique, or can you run to a standardized structure on those quote-unquote problems? it's something about who gets what when and how? >> it's a combination. one of my colleagues used the word earlier, bespoke. some of these products are tailored for specific problems, but others can be used across many different fields of investing. >> and bespoke always costs more than the general. thank you, mr. chairman. >> thank you. mr. hennessey. >> thank you, mr. chairman. i want to focus on the too big to fail question and just a comment on the selection of the panelists. i think it's interesting that we're talking about risk management with the four firms that survived, whether that was

because of your risk management practices, but i'm much more interested in hearing about risk management practices at lehman and bear stearns and fannie mae and freddie mac, the firms that actually failed to manage their risks and went under. but i think the american people probably really don't care about risk management practices at home depot or caterpillar or even the biggest firms like walmart and chevron because if those firms fail, they go under, and they go away, and their competitors swoop in. but i think that a lot of the policy problems and a lot of the public blowback comes because there was, at a minimum, a perception within the government that we could not allow the largest financial firms to fail because of the broader consequences for the economy. so what i want to do is, first, i want to focus on the perception of the too big to the fail question, and it's a question for each of you on both investors and on managers and your board members. and that is in the fall of 2008

do you believe that investors that were investing in your firms were pricing in the possibility that the government might come in and provide assistance, that the government might decide that your firm was too big and too interconnected to fail? and then the related question is as you talked with other firm managers and with your board members, did the possibility of the government coming in and rescuing your firm or preventing your firm from failing enter into those discussions? i'm much less interested in whether your firm was likely to fail than whether you think investors thought your firm was likely to fail and whether you were discussing with others, well, if things get really bad, we can always count on the government to step in. and it's a question for each of the four of you. since we've been starting from my left the whole time, why don't we start from my right and work our way leftward. >> i think in terms of discussions, again, i wasn't party to those discussions, but

i think as mr. blankfein said earlier, in the darkest days all of us had to go to bed thinking if this thing doesn't stop, what could happen. and we all were very concerned at that time. i think if you look at spreads in our debt and from, say, august of 'o 8 and into the first quarter of 2009, you'll see that they widened out dramatically and, therefore, the investors would take a position that they were requiring substantially different yield multiples that they required prior to the time the crisis really hit in earnest. and if you look at preferred stocks and yields, you'd see the same. the yields reached at least in some cases as high as 0%. so i think the -- 30%. what they individually did you'd have to ask -- you could get panels of investors, but during those tough times i don't think any of us in the industry didn't think about the ramifications of what could happen if the, if the

liquidity and stuff was not at least restore inside the system in some regard. >> i think afterlehman was allowed to fail that no investor, at least in morgan stanley was thinking that we were too big to fail. as a result, the stock traded at one point down to there are 6.71. if they had a view that was not the case, the stock would have never gotten that low. so i think lehman sent a wake-up call to any investor out there that the government was here to help you and would get you through this crisis. at the board level, it was never discussed. it was never discussed. if we get into where the japanese were not going to put the money that they invested with us, would we be bailed out by the government? it was never discussed, never thought about. >> you raise a very interesting question because at no point before the crisis did, did the market price these firms like they're too big to fail. all you have to do is --

>> mr. dimon, would you move the microphone closer to you? >> i can't move it any closer, but i'll sit up here. i'm saying at no point in the market before the problem started were these firms priced like they were too big to fail. if you look at what people lent money to at the firms, no, they were priced like any other country. even after things started failing and the government -- and, remember, they did allow firms to fail like lehman, but there was virtual failures in wachovia, bear stearns, even after they let things fail, that was true, and even after the government did the stress test and said they don't want these things to fail, the market still priced them like they could fail. at our board level we never had a conversation that would rely on government to do anything. >> we never had -- i don't recall any internal conversation among the employees or with the board about what we would do if we would, if we would fail.

i'd say on the too big to fail issue i agree about the sequence. nobody in our company entertained government intervention, and certainly, and certainly we didn't behave that way. we're shareholders, we work for the shareholders, the equity. even in the context of a too big to the fail if you take bear stearns that was, quote, rescued, the equity failed. and we worked for the shareholders and all of the people in the firm are shareholders, and that's how we think internally of what constitutes a failure. so for our purposes they rescued the debt and can the equity goes. that's as much of a failure as anything could possibly be. external i think everybody contemplated that the equity could go to zero. because that was the pattern. and, in fact, it's an interesting -- and i would say on the debt after the government, after you saw the too big to fail noise came out

which only came out after lehman, not before, you could see debt spreads contract a bit. but it's interesting because every, there's always unintended consequences. our shares didn't go down to the lows until, for us, after buffett, after the -- we did our capital raise the week after it became a bank-holding company at 123. we went down to a low under 50. that was, that was after we got capitalized privately and after the t.a.r.p. got passed. because at that point people external to the firm started thinking, they'll be quick on the trigger, the debt will get saved, perhaps, and maybe the equity will get crushed. maybe we'll get into the scenario of a kind of a bear stearns. and so we were -- in other words, that put some pressure on the equity of our shares which, again, didn't went through, went

to those lows after the, after the government inserted money into the firms. >> okay. thank you. related question and why don't we go this direction now, the capital purchase program and the stress tests drew a line between the 19 or 20 largest firms and everybody else. do you think that drawing that line has changed that perception in the market? do you think that investors now believe, well, because my firm was a part of the capital purchase program, because they were a part of the stress test thes, because the federal government clearly stepped in and saved at a minimum the financial service and, in fact, certain specific firms that there is an implicit put option in those, in the value of your firm and those other 15, 16 firms? >> and, by the way, i'm just going to say there's two minutes so if answers can be can brief. >> yes. that feeling -- i would say we

don't behave that way, but that sentiment is in the eye of the person who you ask, and maybe some people think like that. i think, by the way, post-lehman which, by the way, was obviously allowed to fail, and these conversations and the debates in congress and the tock thetic reaction to rescuing these firms, i think that's gone a long way to unravel the idea that the government won't let a big institution fail. and away from the context of a big systemic risk like we had where it was critical, i think any one of these, a firm can fail now in the context that we're in now a lot more easily than it could of at that moment. >> okay. then let me ask a different but related question which is do you believe that if one of your three countercan parts here -- counterparts here, if one of the three messed up and that firm failed tomorrow, do you believe that policymakers would step in and prevent that firm from failing? >> i think tomorrow in the context of this environment at

some level the government would intervene. i don't think, i don't think the equity holders, the shareholders or the employees who own shares would find any relief from that. but there would be something done because of the fragility of the system today, i believe. >> okay. >> a year ago, year and a half ago maybe not, a year from now maybe not. >> okay. quickly. i believe mr. dimon mentioned support of resolution authority, some sort of winddown authority. the rest of you, views on -- is that important -- >> mr. chairman, i'd yield the gentleman three additional minutes to be able to pursue the line of questioning. >> yes. i think similar to the mr. dimon's comments, i believe the resolution is key so that we don't have it left to people's speculation as to what might happen as have been an fdic process for years and years and years. >> we agree with that also. >> we don't want to, we would

like not to have the too big to fail context prevail. >> okay. but on the specific question of should legislation incorporate some form of resolution authority -- >> yes. i'm sorry, yes. >> okay. >> then can you explain to me the difference in views? i was in the administration, and, clearly, there was a view that there were systemically important financial institutions. we now hear the secretary of the treasury, we hear the chairman of the fed, we hear other people talk about systemically important financial institutions, a higher level of regulation, a higher standard for preventing them from failure. pupil my, that is because -- presumably, i know past policymakers and i believe current policymakers believe we cannot allow your firms to fail. what is the gap then between your perceptions that you describe from 2008 and the perceptions of the policymakers? mr. mack?

>> again, and i think mr. blankfein said it correctly, somewhere in the future -- i don't know if it's one year or two years -- clearly, any of these institutions could fail. i think given how fragile the markets are and not just here, on a global basis, i think that's an issue. so as you go forward and when i say go forward i'm not just talking about the u.s. economy, i'm talking about the global economy. everything is interlinked. and some of the problems, you know, if it could just be isolated to the u.s., you could probably get there faster in pulling away this idea of a safety net. but, unfortunately, it's more complicated than that, and i think that regulators or leaders either in the fed or the treasury have more insight to what the global problems are and the risks on a global basis. and as they work through it and there are a number of meetings going on now as you know trying

to figure out what is the right template to have, i think down the road that this safety net that many believe, and i believe at least in this particular time frame is in place, i think that will evaporate and will not be needed. but there's a tremendous amount of work that needs to be done. what we all have learned and not just through the crisis, these markets are connected around the world. and some event in one part of the world can have huge impact on here in america or what we do here impacts somewhere else. but it's going to the take a lot of work and due diligence to come up with the right framework where we can remove the safety net, but i'm convinced that will happen. >> just an observation -- >> time, mr. hennessey. >> just 15 seconds. there is a significant difference between an increase in the perception that your firm will fail and whether or not a put option exists. they may both be the case.

it may be the case that your spreads increase significantly after lehman failed, but there might still be investors still might be price anything the risk, the possibility that the government would step in the and rescue your firm. thank you. >> thank you, mr. hennessey. mr. wallison. >> thank you, mr. chairman. i'd like to focus on a couple of things that, a few things for all of you that relate specifically to what caused the financial crisis. the newspapers have covered this somewhat, but i'd like to get it in the record -- >> excuse me, mr. wallison, would you pull that mic down and then pull it up? i know it's hard, but it allows us to hear you. >> i got it. mr. blankfein, i'd like to start with you and incidentally, i'd like to say we ws always envied you bs because you always went first.

[laughter] but in this case i don't think it's something to envy, and i've now recognized the downside to being a b. but in any event, let me start with you. the newspapers have covered this quite a lot, but i'd like to get it in the record, as i said. if aig had been allowed to fail, what would have been the consequences for goldman and why? >> you know, this is an issue, a subject that, obviously, we hear a lot about. so much about it, by the way, that we've put an explanation on our web site where it sat for a couple of months as to what happened. but we had transactions outstanding with aig. because of the protocols of our risk management, we had margin arrangements with them -- >> these are credit default swaps you're talking about. >> credit default swaps. the positions over time eroded with the result that they owed us a lot of money. they owed us and paid, literally, gave us the cash in

our possession with respect to the mark-to-market -- i'm sorry -- >> go ahead, finish. >> with respect to the, with respect to the difference we held the cash. during the dependency of this period and through '08, we were very, and we were marking to market as is our regimen, and we were probably one of the most aggressive markers to market because that's our regimen. and we called them for more margin, and they became very slow in giving margins such that there was a gap. as a result of our protocol which doesn't allow us to take more than a certain amount of risk, we went out and bought our own protection against their credit such that the combination of literally the cash we had and the credit derivatives we had from other big financial institutions with whom we also had margin arrangements. so we had the cash for them effectively cover what would have been the loss. >>½ the total the coverage that you had?

>> we had on the exposure of about -- and, again, these numbers are more specific and available, so i'll do the best we can -- are about $10e billion of -- 10 billion of exposure against which we had, i believe, about $7 and a half billion of cash, literally cash, and $2 and a half billion of credit protection. now, maybe that cash is marketable securities, but cash-like. >> what were these credit default swaps covering or -- >> against default by aig to my best -- >> no, not the ones you bought, but the ones that aig was originally covering, what kind of assets were they? were they, were they what people call toxic assets? were they cdos? >> they were -- >> mortgage-backed securities? >> again, i think they were a lot of assets, and some of the business with aig was with other parts of aig and included

another thing. but to the point, i think the main part of it were cdo-like pools of securities. >> okay. so you were holding such as investments. these were not -- >> actually, we had and, again, i don't want to get too far over the tech technicality -- >> but you'll answer these in writing afterwards? >> yes. but they were, i believe we had given protection to the another counterparty and acquired that protection from aig. so in effect we had no real kind of equity risk, but we did have a credit risk to aig because we were required to perform on one side -- >> sure. >> and we needed them to -- >> so you hedged yourself with aig, is that what you're saying? >> correct. >> okay. the -- since goldman was regulated by the sec which, i think, began in about 2004, your

leverage increased substantially from 2004 until about 2008. why would leverage increase after you became regulated by the sec? >> you know, i don't have -- the way we did leverage, the way we looked at leverage under our regulatory regime there was a notion of adjusted leverage which was, which didn't rate every asset the same way. so, for example, right now we sit here with a balance sheet of about $880 billion, but about $170 billion of that is cash. but it's on our balance sheet. so we assign a very low risk to that. and the regulation assigned a low risk. so we had notions of our metric was an adjusted test. the federal reserve for bank holding companies has a gross leverage test which, again, i don't want to misspeak, but i'm

not -- we never really focused on, and even at this moment i don't think is as important as the risk adjusted leverage test. because how, how much capital do you have to have against cash? >> i fully agree. but the leverage tests have been published in the newspapers -- not tests, but leverage numbers have been published in the newspapers, people are under the impression that the investment banks became very highly leveraged after the sec began to regulate them, and i'm trying to get at -- >> i'll have to get to you what our leverage was at each time, but the investment banks as a gross term there was comments, and i read some of the materials, 40, 60 times leveraged. i think the high water mark of our leverage which we never sat at, i think, was in the mid 20s, ever, as a high water mark, for example. >> all right. but in consistent temples, though -- terms, though, what you were leveraged before the sec began to regulate you -- >> today we sit here literally on a gross basis with about half

of our high water mark. >> okay, thank you. and, mr. mack, would you answer the same question, and that is, at least there have been reports that the investment banks became much more highly leveraged after the sec took over regulation in about 2004 and imposed because l ii regulations -- basel ii regulations. could you respond why that happened or if it didn't happen, see if you can explain why these allegations are out there. >> i think it happened, but i don't think it was tied to the oversight of the sec. i think you had a robust period of interest rates and a consistency move on the up side so people took more and more risks, but i don't see the connection. we'll be more than happy to go back and look through files and talk to my general counsel and try to give you a more specific answer, but i'm not aware that was a trigger point for more leverage. >> back to you, mr. blankfein.

when was goldman, in your knowledge, first alerted to the fact that there were serious problems with subprime mortgages? >> i would have to look -- as goldman sachs i wasn't at all focused on it until it started getting into the press. >> again, i'm going back to the newspaper reports that goldman was early in recognizing the dangers here and began at that point to the sell short no. >> -- in order to protect itself. was that not -- >> let me be clear. first of all, we had research which we'll make available that showed goldman sachs -- i mean, published research to the world that showed we were very negative on the housing markets, i believe, going back way before '07 and '06. our movement in the sub, in the,

you know, mortgage market was, for us, a matter of hedging and managing our risk. because as a sindh cay to have of product, we were usually in a position of finding ourselves long much like the banks that have had big, big problems in accumulated tens of billions. our risk management protocols required us to try to sell down those positions or else stop being of service to the clients who wanted to syndicate their pools of loans. and so we were always, we were driving ourselves from a point of view of let's moderate our risk. people using the word going short, what we were trying to do was get closer to home because we were for the most part had long, almost like every other financial institution, would have had a lot of this stuff. we were always trying to get back into a risk limit. >> okay, thanks very much. mr. dimon?

you said that residential mortgages were, quote, poorly underwritten. and i think you implied that one of the reasons was that there was so much money around and losses were not being suffered. but -- and that is probably true. but were there any other reasons that traditional mortgage standards such as an 80% loan to l value ratio and so forth were eliminated, eroded over time in this period of the 2000s up until the mortgage meltdown? >> mr. chairman, i'd yield the commissioner three additional minutes. >> oh, my goodness. okay. time does go fast. go ahead do. >> so, you know, i think the standards eroded over a listening period of time, and -- long period of time, and the losses were masked by the fact that home prices were going up. >> right. >> and i think the whole

industry, you know, all of us just eroded those losses. i think economists will look at the low rates helped few a little bit and maybe helped fuel a lot of housing speculation. and, you know, i've always looked at fannie mae and freddie mac as being with part of the issue in how they grew over time. i don't blame them for the bad behavior of our underwriter banks, but i do think they were part of the problem for the whole industry taken as a whole. >> uh-huh. let me ask a question of mr. moynihan in my very limited time now available. the, what is, in your view, proprietary trading, and was bank of america -- that is the bank and not the holding company -- do engaged in that activity? >> the, the rules of a federal

bank, national bank are such that, well, flip it around. we conduct our securities activities in a securities companies much like our -- >> that's an affiliate, that's not the bank. >> it's owned by a holding company. >> right. >> yes. proprietary trading is one of those things you lear a lot -- hear a lot of talk about and you can try to define, but i think when you you have -- offset a position you can say that's proprietary, but it's actually managing a risk. i think one of the challenges out there about the ideas of regulating proprietary trading inside a bank holding company are going to be what is proprietary and what's crust her-driven? so if we help a middle market company cap, we have to then offset that because for the same reasons we can't carry one side of the trade, we have to offset that. proprietary in that it is offsetting that trade and us

engaged as a counterparty, but at the end of the day it demands risk so that we can provide that middle market customer with a fixed rate to run their business. and i think that's going to be the challenge, and i think with good engagement by our firm and other colleagues and the industry, we can try to be more specific, but it is a very difficult can task. >> well, i'm just trying to get at one question, and that is, is this, is there a trading business, a proprietary trading business in the bank rather than the holding company? ..

>> you collectively held over the counter derivatives positions of more than $230 trillion in net notional amount. your positions consists of more than one-third of the world market in the over-the-counter derivatives. mr. blankfein, in your written testimony you have stated that standardized derivatives should be exchanged traded and cleared through a central clearing house. you further state this will go more to enhance prices and reduce systemic risk than any specific rule or regulation.

i would like to ask your opinion of the role that over-the-counter derivatives played in causing or contributing to the financial crisis. >> i think you may have different opinions about this, but i would say that the aspects of the over-the-counter derivatives market was a very, very big concern and a big worry, so much so that a lot of the institutions, all of the institutions here, i believe, are working very, very hard to make sure that things would settle, that things would clear, and that we started the process of creating these clearing houses well in advance of this particular crisis and really glad that we did. highly publicized step the federal reserve of new york created a program to get people to make sure that confirms were done well. that was a very big concern. as it turns sell my belief is that the e derivatives market

functioned actually pretty well under the circumstances. now, the risk that may have been imbedded, to the extent that they had credit in them, people made bad credit decisions. some of those decisions were taking derivatives. some were taking security. but actually works better. one a think we have a right to expect. i think it was that it works well. so for example, fannie, freddie, lehman, all had big events with deeds numbers as of offsetting, but clearly people are taking risks. they settled and cleared. in the benefit of hindsight those that means people were able to hedge their risk, lay