undertaken, the risky investments were not included in those stress tests. >> we didn't find it was deliberately included but the stress tests were not the most significant problem and turned out to be the most significant problem. it would account for $4 billion with loss of the item. and there were potential losses. the greatest problem, was not being taken. >> that was stated, to get out of the way. >> to some extent true. i yield back. >> i have to tell you your

testimony has been outstanding. anyone who could work on twenty-five million e-mails, i didn't look at them myself. and to be able to sell directly recall as much as you have today and help us getting the complications of this thing. >> some valuable insight into any time you want to fix the system or have regulatory reform. so this will help us. it is one of the clearest

pictures in lack of regulation and i don't mean the loss. the lack of regulators and forcing regulations. also conveying to -- to the general public even though it is their duty to protect investors. it would be very valuable to determine what to do. >> we are all hopeful that we will get through this. thank you very much.

[silence] >> we have the final panel and

our first witness will be mr. richard fold, chief executive officer of lehman brothers. >> members of the house committee -- >> turn on your microphone. is very light on? >> is that better? i apologize. ranking members of the house committee, you have invited me here to address a number of public policy issues raised by the lehman brothers bankruptcy report filed by the examiner. i have given much thought to the financial crisis that forced

lehman brothers into bankruptcy. the regulator monitors the financial markets for systemic risk. this regulator should have actual experience and a true understanding of the business of financial institutions for risk-management. the new regulator should still have access on a regular basis. from all market participants. and capital requirements, liquidity and other metrics. the job of the new regulator can only be done with the creation and utilization of the mark to market capability that has the responsibility for determining valuations on all assets, commitments, loans and structures. as to the fed and sec, officials were physically present, seeing everything in real time, monitoring and reviewing daily

activities of risk-management and marked to market processes. after an extended investigation the examiner recently published a lengthy report stating his views. despite misconceptions about the real-estate mortgage asset evaluation, liquidity and risk-management the examiner found no breach of duty by anyone with respect to any of these. the examiner took issue with the repo 105 transactions. the examiner's report distorted the relevant facts and the press distorted the examiner's report with the result that lehman and its people have been unfairly vilified. i have no recollection whatsoever of hearing anything about or seeing

transactions. what i will say is based on what i have recently learned. i oversaw global organization of 28,000 people with hundreds of business products and more than 40 countries spread over five confidence. my responsibility was to create an infrastructure through processes auld designed to ensure the firm's's business was conducted in compliance with the applicable standards and regulations. there has been a lot of misinformation. among the worst was the completely erroneous report on the front page of major newspapers claiming lehman brothers used it to remove toxic assets from its balance sheet. that simply was not true. according to the examiner virtually all of the transactions involved highly liquid securities, most of them

government securities. some newspapers that got it wrong were fair minded enough to print a correction. another piece of misinformation was a transaction used to hide lehman brothers assets. that was simply not true. transactions were sales as mandated by accounting rule 140. another misperception was repo 105 transactions contributed to lehman's bankruptcy. that is totally untrue. lehman was forced into bankruptcy amid one of the most turbulent periods in our economic history which culminated in a catastrophic crisis of confidence and a run on the bank. that almost brought down a number of other financial institutions that were saved in the form of additional capital and fundamental changes to rules and regulations governing banks and investment banks.

the examiner himself acknowledges the transactions were not inherently improper. they invented those transactions with the outside auditor and properly accounted for those transactions. these were modeled on fast 140. the accounting authorities wrote rules which expressly provided for them, described and dedicated how they should be counted for. lehman brothers's written accounting policies inc. those rules. they should be reviewed at policy and supported application of the relevant rules. that rule mandated a sale.

lehman brothers should not be criticized for applicable accounting standards. my job was to put together a process with obligations to make accurate public disclosures. i had hundreds of people with finance, risk, to ensure we did comply with all of our obligations. and auditing financial statements, and sec filings. a rigorous certification for annual involving hundreds of people who had firsthand knowledge dating business, and responsibility to review the firm's sec disclosures before

they were filed. and mandatory meeting chaired by the chief legal officer including me and 30 other senior officers with responsibility for all parts of lehman. i relied on a certification process because it showed those with granular knowledge believed the sec filings were complete and accurate. i in never signed an sec filing unless it was first approved by the chief legal officer. in conclusion, given all that has been said by would like to add that i am very much aware we had a firm. the next day we did not. a lot of people got hurt by that. and i have to live with that. thank you, mr. chairman.

>> mr. thomas crookshake, former member of the board of directors and chair of lehman brothers. >> i would like to thank -- [talking over each other] >> can you hear me now? sorry. i would like to thank the committee for inviting me. a disastrous impact on the company, its employees, investors and even on our country and its economy. as director of the firm, lehman brothers's collapse weighs on me each and every day.

it is vital that we learn from it. the day lehman filed for bankruptcy with the darkest and my career. looking back i am sure there are things lehman brothers could have done differently. what may seem crystal clear today was more than three years ago. even after bear stearns nearly collapsed in march of 2008 the treasury secretary stated that the worst was likely behind us. if lee he and other financial leaders had been right. the examiner found there are no color for claims against the independent directors in connection with our work on behalf of the company. this conclusion comports with our own belief that we did our best through the greatest

financial tsunami since the great depression. between 2007 and lehman's banker defiling reconvened on more than 80 occasions. we received detailed reports on management and important issues. board meetings were an active of fair if we probe management and demanded and received detailed, cogent answers. one thing we spent a lot of time discussing with the board was brisk. as directors we took great comfort regarding lehman brothers's extensive management system. in performing its oversight role lehman brothers's board of directors relied on the expertise of a variety of outstanding outside professionals. at no time during our numerous

discussions throughout 2007/2008 did they raise any red flags regarding lehman's's risk-management or evaluations. as a board of directors we have confidence in what we understood to be the close working relationship with government regulators. even before the financial crisis, lehman brothers subject itself to the scrutiny of the sec. lehman continued to work intimately in the new york fed with the financial crisis deepening. and took numerous steps to adjust to the worsening economic climate. they should downie some prime mortgage lending unit, substantially reduced mortgage exposure by many billions of dollars, raised more than $15 billion in new capital and pursued a number of strategic alternatives in order to

stabilize the firm. the examiner's report raised questions about certain transactions. his examiner concluded this issue was never brought to the attention of the board. if there were any questions about lehman's accountant or disclosures, auditors would have raised it. i would have expected them to do so. they did not. now i am not so presumptuous as to say i know precisely why lehman collapsed. there were many contributing factors including the firm's real-estate exposure which was exacerbated by rules from applying mark to market accounting. the short sellers who were fueling rumors, training of short-term credit market and the confidence of lehman led to a run on the bank. i was dismayed when the sec, new

york said essentially told the board lehman brothers needed to file for bankruptcy. i do not understand why the government did not help finance the sale of lehman to barkley's as it did in the case of bear stearns or expand access to the primary credit facility like it did for other major investment banks or expedite lehman's conversion to a bank holding company as was done for goldman sachs and morgan stanley. there may be reasonable explanations for all of these but i do not know what they are. we cannot rewrite history. had the government acted to stabilize lehman brothers so it could have been sold our country's financial crisis might not have been nearly as severe and widespread. my thanks to the committee for the opportunity to speak with you today. i may not have the knowledge and

expertise of the other witnesses before you, i am happy to address any questions you may have. >> thank you. we will hear from mr. william black, associate professor of economics and law of kansas city school of law. >> you asked earlier for a stern regulator, you have one in front of you. we need to be blunt. you haven't heard much bluntness in hours of testimony. we stopped a crisis before it became a crisis in 1991 by supervisory actions. we did it so effectively set people forgot it existed even though it caused several hundred million dollars in losses but none to the taxpayers. we did it by pre-emptive litigation and supervision.

we broke a raging epidemic of accounting control fraud without new legislation in the period 1984-1986. legislation would have been helpful but we didn't get it. we were able to stop that because we didn't simply continue business as usual. lehman's failure is a story in large part of fraud and it is fraud that begins at the absolute latest in 2001. that is with their sub prime and liars loan operation. lehman was a leading purveyor of flyers loans in the world. for most of this decade. studies on lawyers loans showed incidents of fraud of 90%. lehman's sold this to the world

with warranties that there was no such fraud. if you want to know why we have a global crisis, in large part it is before you but hasn't been discussed today amazingly. financial institution leaders are not engaged in a risk when they engage in liar's loans. wires loans will cause a failure. they lose money. the only way to make money is to deceive others by selling bad paper and that will eventually lead to liability and failure as well. win people cheat you cannot as a regulator continue business as usual. they go into a different category and you must act completely differently as a regulator. we have gotten sad excuses.

we are told there are 24 people in the comprehensive program. who decided how many there would be in their comprehensive program? to say we only had 24 people is not to create an excuse but to give a criminal negligence -- you are a federal employee. in the context of the fdic, timothy geithner testified this pushed the financial system to the brink of collapse but ben bernanke testified we sent two people to be on site. we sent 50 credit people to the largest savings-and-loan in america. we have a lot less staff. we forced out the ceo and we did that not through regulation but

because of our leverage as creditors. compared to the federal home loan bank of san francisco, incomprehensible greater leverage in the fed and it was not used. let's start with the repos. we have known that this is a common scam in which every major bank that was approached by enron agreed to help deceive creditors and investors by doing these transactions. so what happened? there was up proposal to stop it. it was an interagency effort. they came out with something

pathetic in 2006 and stalled its implementation but it is meaningless. we have known for a decade that these are fraud. we have known for decades how to stop them. of the major regulatory agencies were complicity in that statement in destroying it. we have a self-fulfilling policy of regulatory failure because of the leadership in this era. we have the federal reserve bank of new york finding this is three card monte. what would you do as a regulator if you new that one of the largest enterprises in the world when the nation is on the brink of collapse is engaged in fraud would you continue business as usual? that is what was done. they met a lot. they say if we only had a

nuclear stick. sounds pretty good stick to use if you are on the brink of collapse in as a system but that is not what the fed has to do. the fed is a central bank. central banks for centuries have gone red of the heads of financial institutions. the bank of england does it with a luncheon. the board of directors are insulated. they don't say no. they are set down. the head of the bank of england says we have lost confidence in the ceo of your enterprise. we believe mr. jones would be an effective replacement and by 4:00 that they mr. jones is running the place. he has a mandate today mr. jone running the place. he has a mandate to clean up the

problems. the exposure of the american people to wallace grew by hundreds of millions of dollars. or a was pumping out $3 billion a month in liar's loans. losses on those are running roughly 50% to $0.85 on the dollar. it is critical not to do business as usual, to change. we heard from timothy geithner and ben bernanke we couldn't deal with these lenders because we had no authority over them. the fed had unique authority since 1994 to regulate all mortgage lenders. they finally used it in 2008. they could have stopped our raw. they could have stopped the sub prime unit that was really a liar sloan place as well as time

went by. thank you very much. >> our last witness, should reiterate we asked our witnesses to confine themselves to five minutes. the former senior vice president of lehman brothers. >> thank you for inviting -- >> pull that little closer to you. >> mr. chairman, ranking members, thank you for inviting me here today, questions about my story. i provided a written statement. i will definitely come under 5 minutes and i can even brief an oral statement. many people don't know me. i was born and educated in the united kingdom. i have a graduate degree from

the university in scotland. in 1977 i joined the london office in the u.k.. i was transferred in 1981 to the new york office. i have three account qualifications, one of which is certified public accounting in the state of new york. i specialize in financial service companies and i attained the position of principle and specialize in financing products and security lending and specialized in international security and u.s. trust banks. i made my career out of understanding internal control, identifying issues, figuring out potential resolving issues. that is what i did for a living.

i was a professional whistle-blower. my business transaction, you fix it. i rarely reduced my issue resolution to writing. might joined lehman brothers as they went public in 1994. i was hired in. i was approach because of my skills at as an issue identifier resolve for an equity finance. i became global product controller equity finance in 1994. i held my final position twice which was the global product comptroller of the global balance sheet, global financial controller of the firm balance sheet and global legal entities.

there were a number of issues over the years. at the end of 2007, beginning of 2008 i have my normal load of issues discussed regularly with my peers, my boss. those included all the items of my may 16th letter which i will get to in a second and issues in the second e-mail talked about earlier. my personal issues were not being addressed at all in 2008. other issues are not being addressed. very little communication between people senior to i and myself. some pacification as to why these issues are not being resolved. on may 16th which was two weeks before the end of the second

quarter, i delivered my letter. i will give a time line what happened. may 16th was a friday. on monday i sat down with my chief risk officer and discuss the letter. on wednesday i sat down with a general counsel and head of internal audit to discuss the letter. on thursday somebody came into my office and signed me on the spot without notification. i stayed --..

i'll keep going. the repo onesie referred issue was included in there. i mentioned that outside my domain. that led to an issue in june 10. on june 12 i met firmest mr. young for the first time and those of the general counsel of lehman brothers anand of internal order. at one point, the general counsel and had a total blast. i was left alone with pantheon, two partners. they said i have a loyalty to them. i said if lehman brothers is not going to address this comment hayford dismissed me e-mail

through my attorney. they were having nothing to do with my issues on other people's issues. so i told the contents of the e-mail -- i didn't have the e-mail with me to tanzania, which is what they were repo when the pipe and a couple other issues. there was an order committee the next day. i think we next -- the only other point of note is on 960 or the examiner's report. there's reference to a presentation to the audit committee about my may 16 mother, some of the points. it does not have any content of the e-mail and it. i was not asked to give any and parent or apprehension to the committee. sorry about overrun my time. i'll accept any questions. thank you through >> thank you very much, mr. lee. i'm going to take my five minutes to start with.

i thought were the first two witnesses started it was going to be a boring session. i wondered why we didn't provide baseball bats. it seems to be material disagreement as to whether there's any responsibility at lehman or whether or not any rules or regulations were violated. certainly that's obviously a conclusion we draw from the latter two witnesses. let me just simply try and classify your testimony. as i heard to testify, he did nothing wrong. he performed to the standard you'd expect from the chief executive officer. in the termination of lehman brothers was just something that happened. is the relatively correct your

testament? >> i wish it were that easy. >> i didn't hear you take any responsibility. >> i have testified before, where at that time i said, both in my written and oral, that i take full responsibility for the -- for the decisions that i made. and all i can say to you is that i made those decisions, i had the information at the time, but i thought it was accurate, and with death may be prudent

decision. >> what caused the demise of lehman brothers? >> a number of factors. >> what are they? been like a little bit of history. i'm not going to go back a whole 150 years if that's not appropriate. lehman started a public company in the t. 94. we were predominantly a fixed income house. we grew over time and inequity capability at a strong investment capability built to europe, built out of asia. we eventually built up to an organization that had 20,000 people, hundreds and hundreds of business points and products, as

i type it out, 40 countries, five continents. >> i'm not sure i understand. you got too large, is that the point you're making? >> no. i think there were other organizations that were larger than ours. >> what happened? can you tell us a singly white lehman brothers built? >> there were a number of initiatives that we undertook as we grew. please understand that in the last five years of our operationworld record years. we've gone from an organization that went from net income of about 100 million to americanization of the 400 billion. we went to an organization that equity of about a billion to about 28.5 billion.

we have been known for strong risk management. we had been known for when in doubt, fall back into the right thing. we have been known for strong culture. i'm trying to put in place both the pieces of what were the basis upon which we made decisions. you're asking me specifically, where did we go wrong? >> very simply. what caused your demise? i mean, i don't think it's hard for -- did you overinvested w-whiskey obligations? did you have a less than adequate staff hired? there's got to be some fundamental reasons. i can agree will give us one cost. don't give me an advertisement of 25 years -- >> mr. chairman, i didn't mean to do that. was trying to live foundation for the mentality for which we were coming.

>> you heard the testimony earlier that you had research funds, that were inadequate because they were pledged into different categories. >> that we had what? i'm sorry. >> you a capital reserve funds, but they in fact had been placed in different directions so they weren't adequate and should not been exposed on your balance sheet as a reflection in the standard of equity that you have. is that true or not true? >> i'm not sure of what she meant by that. >> there was testimony earlier i think i.d. examiner that one instantiate $2 billion on the books in another instance $5 billion a book coming neither what should've been on the books because they were in comment another transaction. >> we built a strong acquitted the base from the mid-20th,

30's to low 40's. read a series series of stress tests with the said. i went personally to all three of those. not once did i hear any feed back that led me to believe that we were deficient. >> how about the day when they told you you have to go down. you mean, no one ever told you were insufficient or you didn't realize you could cover your obligations on that famous sunday? >> there was a facility in place, where lehman had access to the federal reserve buried window. >> so you are looking for a bailout? >> i did not say that. >> when you're looking for at the federal reserve access to funds come you can't get that, what was your pathology to stay in business and where were you

going to get the sufficient collateral to do so? >> may meaning for foreseen that was my facility had them in place. we have never needed it. we have not used it. we finance ourselves that friday night. when the fed open the window to additional for all but thanks for additional collateral, we'll turn to each other and said we are fine, we will get through this. we then learned that window was denied to us. >> wasn't quite correct was it because obviously went down. >> the window was closed to us. >> did you falsely go down? were you able to survive in the federal government force to go into bankruptcy and subway? >> i can just tell you the facts. the facts are that --

>> my time is expired so i'm going to pass along to my friend from alabama. >> but me ask unanimous consent? >> unfortunately we don't have all afternoon for an answer. i was hoping i'd get an answer for my question. gentleman from alabama. >> before my time starts, if you will, could we have additional three minutes on our side, too. i'd like to -- >> to make up for that. >> i'll divide a minute and a half. a minute between the three gentlemen that are here presently on this site are thank you, mr. chairman. my first question, or faster block, both secretary baker and chairman bernanke in answer to my question about the federal reserve and the federal reserve new york to require lehman to correct its material misrepresentation on the grounds

that they said they didn't because they were lehman's primary right delayed her. do you find that explanation convincing? [inaudible] junior mike kahn. >> no, i think i have a word for word, that secretary gates are set this push the financial system to the brink of collapse. i don't follow businesses normals when i was a regulator would not have been. i insist that the problem be fixed. and the fed had astonishingly large leverage, all the leverage that it needed if it had exerted it and of course chairman bernanke was the one who should have been exerted in it. >> and they ignored his -- what the examiners, as i think correctly set on the material misrepresentation on the grounds that they weren't acting in a

regulatory capacity. is it ever appropriate for a government regulator to look the other way because he's not the regulatory -- the regulator. >> it's worse than that. we have a duty as regulators. we swear an oath to protect. we have a duty to make a referral to the securities and exchange commission when we find any evidence of securities fraud. we always said that as regulators. and we have a duty to make criminal referrals. i didn't hear anything about criminal referrals except from the bankruptcy examiner. >> were also a creditor and an account or party and an agency of the u.s. government in the tax years. >> well, that makes it even more bizarre. we have a staff of the federal home loan bank, a far smaller

place of safety going to their credit files. if we were going to take exposure to something like lehman, which was fastened or complicated and not for more problems, we would have -- the equivalent staff would be sending 300 people from the federal reserve bank of new york. instead, they did a pretense that nothing squares you do you can't believe that the whole global system is about to come down and then say well sorry, we can't do anything and we won't try. >> the big examiner excited secretary geithner's fear that if lehman tried to reduce its leverage by selling assets to markets would have discovered error in the mark them as assets. in other words, markets would have discovered they were grossly overvalued. what do you make of secretary geithner's remarks about the air in the assets i didn't disclose that to the public.

>> he was asked it twice and didn't answer either time. >> i asked him once. >> yeah, but another person brought it up. he didn't respond either time. it is the most obvious reason why the fed wouldn't require honesty and accounting because honesty and accounting would have shown that the problem was not liquidity at lehman. that was the symptom of the underlying problem that it was massively insolvent, which is of course what the bankruptcy examiner commented to someone when he said the liabilities are grossly in excess. and those are secretary geithner's own words. that's not any of us creating hypothetical. >> thank you. mr. fuld, did you ever in 2008, ever mentioned oversight by the sec or the fed in an effort to convey the impression that lehman was found or in good financial shape?

>> to better mention it? >> gaffe. as a reason why people should consider if lehman is financially sound? >> i don't recall that i did. >> okay, what he and resort them in his book, too big to fail, quote to see jim cramer, i'm on the board of the federal reserve of new york, why would i be lying to you? they see everything. and you explaining to him that y'all were soundbites and decided, the new york fed and the sec are in there every day, watching everything we're doing and we're financially sound. is that which you -- what did you mean by this statement they see everything. >> i don't recall that statement specifically, but on all fairness the fed of the treasury were on premises. they saw liquidity, they saw capital positions, they saw market to market processes and i

believe they saw everything that we were doing real-time. >> yes, and i could agree that would convey a sense of confidence by them but at least you're doing things right here did they ever question what you were doing? the sec or the fed asked you to do something different, ever asked you to change anything you are doing for safety and so miss reasons? >> not that i'm aware of, but i do recall conversations with the sec more so with president geithner, where we talked about potential capital providers and potential structures. i believe i discussed with him the vast number of people without we had conversations about additional capital, potential investors, about a

structure for commercial real estate. and i actually thought those conversations were strong and protect it. >> did he lead you to believe that they might interject n. to lehman or bail you out as they've done to to bear stearns? >> no. >> final question is this, you said you were on the yours of new york. if you said that to mr. cramer, and you don't recall the conversation about, is that what you're saying? >> i do recall having lunch with him, but not that, specifically, no. >> if you did say that, what would you be sure to convey that you are the board of directors of the new york fed? >> as i think about it now, my conversation -- i don't know. you've asked me questions on trying trying to answer that.

if they had something to say, they would've set it to me. >> who? >> if the fed had something to say to me regarding our position or condition that needed to be correct date, modified or changed, i had enough conversations with fed officials that they would've set it to me. and that is why, at the third quarter, and my announcements, i actually said i believed these last two quarters are behind us. >> okay, that's fair enough. >> the chair recognizes mr. feinstein. >> thank you. i want to pick up on something that mr. black said. i apologize i had to be elsewhere. it was a very important point. reference to the fact that mimic the 94, this congress passed the homeowners equity protection act that was actually largely led to

my predecessor as the senior democrat, john lafalce who was not the chairman of the time, chairman gonzalez was the chairman of democrat security, but the bill was passed in 1994 and it was an explicitly ignored by mr. greenspan. and that's really very important because there's been a lot of discussion about what happened when we had the subprime mortgages. and as mr. black also notice, the federal reserve 14 years later used that authority and that's important to note because the authority that mr. patnaik used to regulate subprime mortgages was exactly what mr. greenspan had. it wasn't the authority was deficient. but with mr. bernanke invoked in 2008 was exactly the same statutory that mr. greenspan refused to use. that's important because on this debate from a party to think it's an important one, but the

federal reserve is responsible for the housing bubble because it failed to deflate the entire economy or that it allowed interest rates to be set by other considerations. frankly, i was in support of those decisions. i think you have an effect added to an employment to do with housing bubble would've been excess. the site have an alternative and i appreciate mr. black making it clear. there was a way to do with the subprime problem other than deflating the whole economy over straining growth, to be more neutral and the whole economy. there was the use of specific authority that was given by the congress in 1994 to mr. greenspan and there were efforts to get it used. my colleagues, john wilco is now presiding to mr. watt working with the senate responsible in north carolina who identified this early. first we tried to get mr. greenspan to use the authority, when there was an effort in the congress, specifically to mandate what

didn't happen but we were frustrated, it became an ideological dispute. we were then in the minority. in 2007, when congress again changed hands, we did pass such a bill in the fall of 2007 to mandate what the fed had been permitted to do, but didn't do. the bill did not pass in the senate. there was a phrase from the recorders wordprocessor this at the bill did not pass the senate. she only had one key to get that printed. it says on the time. but the federal reserve, to its credit, then i did. in part to know, we deal with the consumer agency. people did at point of access taken by the agency inaction by the federal reserve came after this committee have initiated

some action on the whole house. but i did want to just tank mr. black for that point. let me now just one question to mr. lee. when you raise these issues, what was the general -- the response you got? >> from within lehman? >> yes. >> annoyance. from anderson young, they knew it. >> they knew it, but were they supportive? did they say gas, but that's okay. today defended? what did anderson young said? >> he certainly didn't support it. on the repo 105 issue, they knew about it. they did not appear to note the number was so large. it had risen from 25 in sometime 2072 over 30 by 1130, 2009 at the end of that quarter.

>> let me ask you. to the stump there was any ambiguity, did you think the fast-paced subsequent revisions have improved the situation? >> i can't really comment on that. i mean, 140 needs to be killed. >> they have replaced it. i guess there's a certain historical sense of justice and not lehman brothers went to the united kingdom to get their opinions and so the united kingdom sent you back to get even. so at least you've sort of made us a little bit more whole vis-à-vis the united kingdom in this. thank you, mr. chairman. >> thank you. the chair recognizes the gentleman from california. >> all referred to the gentleman from texas, mr. hunter ling. >> thank you, mr. chairman. mr. fuld, i assume you are here for mr. lucas' testimony earlier? yes or no.

>> i did hear a good piece of it yes, sir. >> on page three of his testimony, he represents that lehman represented to the sec and writing that his firm wide risk appetite was a quote writing constraint on its risk-taking that could not be exceeded under any circumstance, but management did not observe the limits. do you agree or disagree with that assertion? >> we set up risk appetite with a lower-level hurdle that 80% to 10%. that was the level below which we were not allowed to go as an internal standard. >> but what did you represent to the sec? >> what we represented to the sec was that given our -- well

actually the same thing, but given our level of revenues -- let me explain first what risk appetite was if i may just to put it in context. i don't mean to be too technical, but it's important that you understand it. rask appetite with the amount the firm could lose in a year and still pay all of his expenses and create an after-tax our early of 8% to 10%. >> i understand that. here's the bottom line and my time is limited. mr. lucas said lehman made representation to the sec that they were binding the limits, get the limits were bleached. do you agree with that assertion? >> the binding was a percent to 10%.

our risk appetite was sent at 4 billion. it changed. had we incite lost 4 billion, that would triggered a 12% to 12.5% are we. so the risk appetite was set with a huge crush on. >> i understand that. it's just a simple question. do you agree or disagree with the assertion. >> the assertion was that a percent or 10%, were not supposed to go below that. internal standard. >> from age four of mr. lucas testimony, they have a fast trust in program to see whether they could have a hypothetical or low stress scenarios. lehman didn't include many of its riskiest assets in this test dressing such as commercial real estate. simple question, do you agree or disagree with that assertion? >> was the case until a, i

believe, until the end of 2007. good day today marking of commercial real estate with a commercial exercise, but then again, that was the risk committee and executive committee said regardless of that, we will include commercial real estate because it's becoming more and important part of -- >> at some point it was included. is that what you're saying mr. fuld? at some point you're saying the commercial real estate was added to the stress test? development getting from you? >> yes, sir. >> let's talk about the repo 105 transactions. mr. bartlett date is the former president and ceo of lehman, is that correct? >> yes, sir. so he would've answered to you. i assume you were there

contemporaneously, served at the same time, that's correct? >> yes. >> are you familiar with the e-mail exchange between himself and a mr. lee, not the mr. lee at the panel, to exhibit seven, if we could get it up on the chart, where we have mr. lee asking bart good i'm not sure you're the mayor was one of five but it's a net balance sheet in our government's business around the world. answer from former president clo, i'm very aware it is another drug we are on. are you familiar with this e-mail exchange, mr. fuld? >> yes, sir, iem. >> do you have an opinion which are former president and ceo meant i is another drug we are on? >> no, i do not. that e-mail was not to me. it was not part of an exchange. as i said before, i clearly was not aware of repo 105.

>> how about mr. michael mcgarvey. i'm led to believe who is a senior member of lehman's finance group. were you familiar with the show moment? michael mccarthy. you're unfamiliar with this person? had an e-mail exchange with another lehman employee. ..

>> were your employees hiding this from you? >> if they were not. >> then why would you not know about this? did they not know about it? >> there was nothing about hiding. these transactions were failed

transactions of government securities that occurred on the government trading desk. let me try to put this in some context. >> please do. >> on any given day, lehman dol. on any given 0lç?yb>r[,wwjday, ,bet $100 billion of government. /÷v government dealers in the world. that is 50 to $100 billion a day. there is no reason why i would have known about a sale of government. there's no reason i would have

known about these repos 105 transactions. there was nothing wrong with them. as ceo, i ran more of a what do i really need to be focused on mentality. i was focused on less liquid assets, residential, will leverage loans. i was not focused on the most highly liquid securities, i was not focused on government securities, day to day that could vary between 50, and $100 billion a day. my focus was about what happened to our capital. governments rarely impacted our capital. over the two years of 2007/2008

lehman wrote down $25 billion that were essentially tied to less liquid assets. that was my focus. >> that was what impact and your capital. was the fact -- your firm was offloading assets to cover up how overleveraged it is. was that not important to you at all? >> those were sold. they were gone. on any given day another 50 could be sold. >> $50 billion may not seem a lot to wall street but should a ceo not be aware of such

transactions? >> $50 billion is a lot. it is always a lot. i do not want to leave the impression that $50 million is an insignificant number. and less liquid assets, they were up or down, $100 billion of governments. that was not my focus. >> should it have been your focus? >> i wasn't involved in those transactions. >> you were the ceo? >> i was very much the ceo. >> should you have been focused on what you know now? >> what i know now, a thorough

process around this. as i have come to understand this, there was nothing wrong with the repo 105 transactions. >> you said there was nothing wrong with what happened at lehman brothers. >> that is a different question. >> answer that question for me if you will. >> which goes back to the earlier question of what we did wrong. what we did wrong as i believe we did not understand -- one asset class to the next. i take responsibility for this. i did not see the violence of

this crisis. i believe early on we had too much commercial real-estate. i believe we corrected that. we went from $50 billion down to $32 billion. we corrected our residential positions. we went from 30 some odd down to 17 and corrected our loan positions from 45 down to less than 10. we raise capital. >> i am about out of time. mistakes were made? >> judgments made regarding the market, yes. >> i hope ceos of other companies, would that be a worthwhile goal here? >> yes, it would.

>> i want to turn to an argument made earlier by the chairman of the committee, in the policies of the fed on inflation could have been offset by the regulatory oversight, proper regulatory oversight and perhaps that is true but it was ben bernanke who argued for setting the fed funds rate in 2002 and a negative level below inflation. fed fund rate for four years running was a negative. the argument that congress was making at the time to put everybody in a home, regardless of whether they had means for a

down payment, we had the types of overleveraging that also introduced that on top of the bubble. i would make the observation that running negative interest rates for four years running doesn't help unemployment. in fact, it guarantees that when the bubble burst there is going to be much higher unemployment because you made money so she that basically you misallocated capital. you sent the mark of the wrong signal and misallocated capital and it is important at some point that that be understood as one of the contributors of this besides the kind of malfeasance in addition to the malfeasance we are talking about that occurred. as for the board rooms, i want to go into a couple questions

here. given this ongoing presence, i will ask mr. fuld of the fed and the sec mentioned in your testimony and the fact that your much smaller competitor, bear stearns, was far less interconnected, receive government assistance just months prior to your situation. were you working under the assumption that lehman brothers would be bailed out? >> i was not. >> or a similar arrangement as to what happened with bear stearns, the diamond deal, under the assumption that might not happen in your situation? >> i was not. >> in your view these bailouts do not create a moral hazard that at least in your instance creates -- created the anticipation that you might get

the same workout as other companies? okay. with respect to the firm's you did business with your creditors and your counterparts, do you believe there was the presumption that lehman brothers should be treated as just another counterparty or do you think they assumed that there might be the government behind it? >> you have touched on a very interesting piece which i would like to talk to. there were two claims at the end of september 15th after lehman brothers. there was a huge capital hold. some said $30 billion and some say some other numbers. one thing the examiner's report pointed out was as you went for

different asset classes there were some reasonableness, at the end of the day it was somewhere between an immaterial difference between 500,000,001,000,000,007 round off to what would lower our equity from 28-1/2 to 26. world believed we had a capital hold. for those who thought it was feared he this is important. >> it is important and we have your answer for the record. what i think the world believes is that once we have done bailouts we will do future bailouts. i thought it was a very bad precedent but i will go back to the nobel prize in 1974 by explaining exactly how government intervention in these cases helped cause this cycle in

the economy. i don't see why people can't understand why running interest rates that are negative for four years 0 and failing to control the overleveraging and congress's culpability in terms of allowing further leveraging wouldn't have this impact. i don't want to see if the ceos a bailout at the expense of the tax payers and this legislation under underlying legislation is the wrong approach to prevent it. i yield back. >> the chair recognizes himself for five minutes. i understand you are direct competitors with fannie and freddie and you bought mortgages and sold securities based on those. you did not have a dual mission. your only mission was making

money, not making money and affording affordable housing. you word just about making money. there was no affordable housing goals for lehman brothers. the head wasn't setting affordable housing goals. you were just under requirement to your shareholders to make profits. isn't that right? >> i believe all of this had a clear minded view that the administration wanted everybody in the industry to extend themselves to fulfill the american dream. >> you spoke earlier. >> and about how much you grew largely with result of your residential real-estate market. >> we did in the early years.

and buying some prime mortgages. and selling security. >> not the way you are voting but the best of the weekend before did impact us. >> your participation in the sub prime market, you were competitors with them. >> sometimes we were competitors and sold into the conduit. we were a client and a competitor. >> you said in response to unquestioned that you never expected a bailout. that is different from other accoun

accounts. secretary paulson's accounts, of the published accounts say that you assumed until the end of the weekend that you would be rescued and mr. valukas, what he said about what could have been done earlier that would have made the collapse less catastrophic to the entire economy and there was an opportunity to sell part of lehman to a korean firm, sell half of it to a chinese bank. there were discussions about asset management units that never happened. mr. fuld and mr. cruikshank, what do we have to do to impress upon ceos and boards of

directors that they will be allowed to fail and they will not be rescued? >> let me go first because you mentioned the first. we got to that fateful weekend looking at asset valuations. we had strong capital. we have lost $30 billion of liquidity in two days. we had no collateral. we get plenty of collateralized evidence by the fact that i met monday, we put up $50 billion of collateral to get a loan from the federal reserve bank all of which was paid back 100% so we had collateral. we had capital. we did not need a capital bailout. we needed a liquidity bridge so that we could consummate the

sale to a potential buyer. that is what we needed. or we needed the window to be extended to us as it was extended to the other investment banks that sunday night. to be even more clear, when we heard that the bank was being opened, the federal reserve window was being opened that sunday night, we all said we are fine, we are going to get this done. we heard it is not open to us specifically. >> that isn't at all responsive to my question. >> what can we do to conveyed to boards of directors that they are going to be allowed to fail? there is no safety net. ceos will lose their job, shareholders will lose everything, creditors will not

get paid, taxpayers are not on the hook. what do we need to do to convince you that is what the future holds? >> i was convinced at the time that there would not be a bailout. don't misinterpret my statement because what i was saying is i think we could have avoided a lot of disruption by putting into place what they say they don't have. some of these actions would have gotten us to a much softer landing. i am not talking about a bailout. right up to the end, the flak received by the fed and the treasury that it would be highly unlikely they would want to do that again.

>> the chair recognizes mr. -- whoy? mr. land. >> thank you. good afternoon to you gentlemen. mr cruikshank 11, to follow-up your remarks, do you believe there were corporate governance failures at lehman brothers? >> our government procedures were very good. i stated in my statement that i believe the major problems with lehman were just what i said. if you will remember, in 2006 we had years of profitable real estate operations in this

country. real-estate was thought to be pretty much built edged. and market was going up. we had record earnings. we were getting bigger. the business decision was made to expand our proprietary investments and part of that ths one of our major problems obviously. the other thing was an investment bank cannot continue to exist once confidence is lost and there is a run on the bank. that occurred for a lot of reasons, some of which i have also outlined. >> is your opinion that you did not think you would be bailed out simply because there had been a bailout earlier in the year regarding another entity? >> i would not have counted on that. >> thank you.

mr. lee, in your opinion, lehman brothers executives at lehman brothers hiding the true nature of the firm's the global balance sheet from the sec or the federal reserve or both -- >> on the basis of disclosure the answer is yes. >> could you elaborate on that? >> i am not an accounting financial disclosure expert but the knowledge i have gained over the years i think the public will be misled as to true love ridge -- coverage of lehman brothers at least during fiscal 2008. >> secretary timothy geithner and chairman ben bernanke have excuse the failure of the fed,

to correct its -- on the grounds they were not regulators. do you find that explanation convincing and is it appropriate for governmental regulator on the grounds regular order -- acting in a regulatory capacity? >> it is never correct. you have a responsibility, if the fed does not have rules mandating its employees make referrals to the sec, they change that today. they require those kinds of referrals. it was hit with complete -- this with the quotation from the report from the federal reserve bank of new york official. how we men records liquidity is between the sec and the world. we have no responsibility. to deal with the violation of

law that was found. >> you indicate in march of 2008 the sec and the fed conducted regular daily oversight of lehman brothers. you have answered to members of the committee regarding this, do you think management was given a false sense of security the government might ultimately bail you out? >> i don't believe that to be the case. >> i yield back the balance of my time. >> i do believe fraud is important because the american public would like to know if fraud was committed. you indicated you think fraud was committed. is this with reference to the repo 105?

i would like to focus on that. >> explain to us how you contend that fraud was committed with rico 105? >> the valukas examination report shows and several things were quoted in this hearing that the purpose of the transactions was to produce an artificially deflated idea of the exposure, the leverage of the corporation. that is important. it is material to security investors. if you deliberately create a deceptive representation that is material to investors, that is actually a felony. >> are you of the opinion this was committed at lehman's with a

105? >> repeatedly. >> mr. lee, you indicated you delivered a message. you didn't say what it was. are you indicating to us that you were trying to tell the auditors that something improper prius was taking place? >> i delivered my may 16th letter by hand. i've verbalized what was in e-mails. >> let's talk about the content. were you trying to indicate that something improper was taking place? >> in my mind yes. >> were you trying to indicate that this act could be harmful to investors? >> that was underlying it, yes. >> did you ever have an

opportunity to communicate this? >> what does this mean? >> the fact that there was something improper that may harm investors with reference to repo 105. >> all my knowledge is well-known and other factors were well-known. >> how they became well known. did you tell some specific person or did you give it to someone in writing that the repo 1 05s were in some way improprietous and may harm investors? >> only one stage in writing but for years -- >> is the answer yes? >> i did. >> did you convey this to the audit committee? >> i never -- >> did you convey it to an auditor? >> i did. to two auditors. >> did you receive a response

with reference to what you conveyed? >> no, i did not. >> there was nothing said to you after you passed this off? >> there was just acknowledgment that they knew about the issue. they didn't know the amount. >> you heard mr. black. he used the term fraud. are you of the opinion that there was fraud? >> i can't comment. >> mr. black, i have enough time to come back to you. in your opinion based on what you said, you think there's not only fraud in the civil sense but also fraud in the penal cents. is this a correct statement? >> yes. the elements are the same. just a higher burden of proving in establishing those elements. there is set criminal fraud as well. >> have you conveyed with your

sharing with us and all the information to some authority that has the authority to investigate fraud? >> if you are familiar with my ridings i do this on a weekly basis. >> we have a record we are trying to establish. >> it is in my prepared testimony. >> have you received a response with reference to what you call to the attention of these authorities? >> the sec has never contacted me about any of the things i have attempted to learn the sec about. >> you took evidence of fraud. >> i didn't take them in secret letter to them. the foll