complete crisis and everyone is looking back saying, what happened? again, thanks for all your work on this as in all these conferences, dollar lot of people here, you're going to spend all week, i expect great outcomes. output. to impact on these challenges. i appreciate all the work that you all are doing. both deborah and i do. thank you. [applause] . .

>> have you had an opportunity to have feedback from the american red cross? i am working on the needs of the national guardsmen and reservists who are returning to rural america. i am struck by the extensive networking and a sturdy compact -- capacityçóç ófç thei] amerid cross affiliates and state chapters. >> i have not, but i will take your recommendation and get that. i heard a great deal about what to do this week, because deb spend some time with you this week.

the issues that surround our guard and reserve are particularly important and difficult,ç because they do -- members live throughout our country. it is a great strength of our country. there have been some guard units that have been incredibly innovative and how they attacked these very difficult challenges. but i will tell you last year, 2009, i was struck as we really tried -- we really dove into this suicide issue, and the heavy focus was on the army. and we were tracking month to month on the army. it was not until almost 2/3 of the way through the year that i asked the question, do these numbers include the guard? in fact, the ones we were tracking did not. the guard was tracking it, but we were not tracking it macro. and we are now.

and the efforts amongst the services, -- again, the senior leadership is working hard to understand and what is working best, but share those practices, and then it's been about as rapidly as possible. i have not seen anything from the red cross, but i would be happy to look into that. certainly, from just the tone -- your question itself, obviously, they are doing some great things and we need to make sure we are taking advantage of it. >> did you all have a brief on brainline.org? because it is the only comprehensive resource out there for traumatic brain injury. i visited their locations through weta, who has a history of very successful websites. this is not just a normal

website. one of the things they want to do is create an online university, so as our veterans leave the dod, the v>ax1ñçóçço out into communities, but the doctors who may not have had trainingw3 in traumatic brain injury or maybe have only seen one or two of four period of the year, and there may be of that trend in their area that has this, and also, the teachers who may have a child whose parent is suffering from this, they can go on brainline, and go through a curriculum so that there is some training and some understanding. because the child who may not be doing the work -- it is not because they do not want to, it is because they have a parent at home who is suffering through traumatic brain injury. same thing for person and their

job. people do not understand. so this brainline.org, if they get the funding, will be able to put this up online. it will be a wonderful resource for the moral -- more rural areas who do not have a level of any trauma center. >> let me comment on the d.o.d. aspect of what we're doing here. i have come to believe that we ought to seriously look at evaluating people's readiness to be discharged. too often, any military member knows this, when an individual gets within six months of their ets, it is how many days left. they focus on that number and that day, whether they are ready to go or not. and so for those who have been through these wars and been

through so much, leaders need to ask the question -- is sergeant jones ready to go? and if not, because in the long run it will be much better to ensure that he and his family or he by himself are actually ready to transition out into civilian society. from this a very structured environment, whether they loved or hated it, into an environment that they left years ago that is unstructured and in which they may have no support whatsoever. and i believe we need -- the outfit that does this pretty well our special forces. because the deal is you cannot leave until you ought -- we are ready to let you leave. if you want to be a special forces soldier. i think we need to think a lot more about that. that is a pretty steep hill, because you signed a contract. four years later, it comes up,

you are supposed to leave. you get focused on the contract is over. in the long run, if we can get that right, the individual and society will be much better off. we will be able to transition much more smoothly those individuals into the v.a. system. one of the things i have not asked is the v.a.'s view of who we are sending them and what we could have done better in preparing them for this transition. >>okw3 ó73good morning. i and a reservist. my question is -- because i have been on three deployments, and you come back and you might stay one day. then you are gone off the base. maybe there needs to be some kind of -- i am a deputy

sheriff, so maybe the police force in the areas, fire department, and also the hospital to have some kind of dod training regarding suicide prevention for what we deal with in the military. and then they can have a step- by-step construct of what to do for those people, especially the people they work with. you go back to your regular job and there is no one there to understand what you have been there. maybe some, because we have more than myself that are also in the military. but i think i need it -- i think there needs to be some kind of program around. >> that is a great suggestion. i understand exactly what you are saying. you speak to an issue that has been a challenge. you deploy, you come back, you are back at work in a week or two or however long it is, and you have very few individuals, maybe nine, then have your experience.

so that support mechanism is not there. it goes to the red cross idea, the guard and reserve idea, and i will take that back with meat and just ask the question to see where we are on that. -- i will take that back with me and just checked -- just ask the question. >> there was a platoon that was getting ready to deploy it and i found out you asked the wrong question. >> thank you. >> he asked if anyone had emotional problems. that is not what you are supposed to ask. how are you sleeping, apparently. he asked that, and there was a dead silence. michael as always stands and whites. finally, someone said, they had actually called to get some help. it took the person two sessions just to explain what they were doing, what their job was.

finally, he realized that this particular therapist was not going to be able to help at all, and so he turned to him -- the guy next to him that was sitting on the deck and said, this is who i go to for help now. but i think that happens to a lot of our military folks. they go out, and if someone does not understand what they have gone through, they spend a lot of time just trying to explain it the military and what it is like in the theater or what goes on with their families when they get back. i am not saying that outside there is cannot handle that, but not all of them have the training or the experience. so there is a lot of frustration in finding someone, that you do not have to spend three sessions trying to explain. and then maybe get to the problem at some point. >> thank you. [applause]

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> bank executives today talked about their actions leading up to the 2008 global financial crisis. they took questions from members of a commission created by congress. that is next on c-span. later, in other financial news, the sec announced a new enforcement tools to try to reduce financial fraud. after that, south carolina's attorney general discusses why you think health care legislation could be unconstitutional. >> american icons. three original documentaries from c-span, now available on dvd.

a unique journey through the homes of the three branches of american government. see the detail of the supreme court. go beyond the velvet ropes of public tours of the white house. and explore the history, art and architecture of the capitol building. "american icons," 3-disk dvd said. it is $24.95, plus shipping and handling. >> the first meeting of a commission appointed by congress to examine the events of last year's near collapse of the financial services industry. witnesses included executives from goldman sachs, morgan stanley and bank of america. the commission, made up of six democrats and four republicans is required to deliver a report to congress on tha. çformer house ways and means

committee chairman bill thomas is co-chairman. this first panel is three hours, 20 minutes. >> the meeting will come to order. there is a quorum present, so we will now proceed with this first of our public hearings. good morning to everyone in thank you for being here. i am honored to welcome you as hearings into the causes of the financial and economic crisis that has gripped this entire country. i thank the vice chairman thomas for his extraordinary cooperation and partnership. i applaud the dedication of my fellow commissioners, and i am grateful to all of our witnesses for giving us their

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

26 million americans are unemployed or cannot find full- time work or have a given up even looking for jobs. over 2 million families have lost their homes to foreclosure and 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 right to be. wall street is enjoying record profits and bonuses in the wake of retrieving -- receiving trillions of dollars in government assistance while families are struggling to stay afloat that has heightened the sense of confusion. i see this commission as a proxy for the american people. their eyes, their ears, and possibly also their voices. this may be the only opportunity to have their questions asked and answered. this format may be our last best chance to take stock of what

really happened so that we can learn from it and restore faith in our economic system. if we ignore history, we are doomed to bail it out again. so we expect our witnesses to be forthright. we need candor about the past so we can face the future. today's hearing is the beginning of the end of our questioning. we will hold hearings throughout the year and take testimony from hundreds of individuals. witnesses called to testify are likely to come before us again as this in great unfolds. those who have not yet been asked to appear should be confident of this -- we intend to 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 shipped by sacrifice, hard by economic hardship and war, keenly aware that financial recklessness that made his life

and the lives of so many others so much harder than it needed to be. his generation learned the lessons of financial disasters so the country could avoid it for decades. let us learn the lessons of our time. let us be diligent -- diligent and thoughtful today so that our financial and economic system can fully rebound and enrich and sustained americans for the years to come. mr. thomas? >> thank you very much, mr. chairman. i would ask unanimous consent that my written statement he made a part of the record. i just want to thank all of the commissioners. we have been doing a lot of that 7/8 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, notwithstanding the trauma of the hearings, is not the fundamental work that is before us. it is asking the questions the

american people would like answered into doing it in a way in which we increase the understanding, the comprehension of what happened. for the purpose of not having it happen again. thank you, chairman. >> thank you, mr. vice chairman. now we would go to the witnesses on our first panel. let me say that 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. with that, i would like to ask each witness to be sworn. and i would like to ask that you stand so that we mates were you in, as i said the common practice. do you solemnly swear or affirm on to the penalty of perjury that the testimony you are about to provide will be the truth,

the whole truth and nothing but the truth to the best of your knowledge? thank you so very much. gentlemen, thank you very much for being here today. we appreciate your coming here and 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 available in the room at today. we have asked each panelist to make opening statements of no more than 10 minutes. i think we would 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. with that, i would like to start in alphabetical order. mr. blankfein, please proceed. >> thank you.

thank you for the opportunity to contribute to the commission's work to understand the causes of the financial crisis. goldman sachs was established 141 years ago. we are an institutional-focused firm, providing investment- banking and investment management services to corporations, institutions, governments and high-net worth individuals. as an underwriter, we help our clients excess equity and debt capital markets to grow their businesses. as an adviser, we facilitates strategic options for mergers and acquisitions. we provide the necessary liquidity as market makers to help ensure that buyers and sellers can complete their transactions and securities markets can function efficiently. and, as an asset manager, we held public and private pension funds, corporations, nonprofit organizations and high-net worth individuals plan, manage and

invest their assets for the long term. to begin on a more general point, any examination of the financial crisis should set out with an understanding of some of the global economic and economic -- global economic and financial systems of the last decade. 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 returns. many of the best were thought to be in residential housing. one could shooting factor to the attractiveness of the housing market was public policies active support of the expansion of homeownership, recognizing the societal 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 the downward pricing of risk was different. while we recognize that credit standards were listening, we rationalize the reasons with arguments such as -- the emerging markets were growing more rapidly, the risk begins 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 rating agencies to do the central work of risk analysis. another failure of risk- management concerned the fact çthat risk models, particularly those predicated on historical data, were too often to it -- allowed to substitute for justice -- for judgement. next, size mattered.

the likelihood of loss rate would appear to be the same no matter what the size, but the consequences of a miscalculation were obviously a much bigger if you get a $50 billion exposure. risk monitoring it failed to capture the risk inherent in off-balance sheet activities such as siv's. financial institutions did not appreciate the full magnitude of the risks they were exposed to. their counterparties were unaware of the full extent of those vehicles and could not accurately assess the risk of doing business. fourth, assets at certain institutions were not valued at their fair market value. one consequence was that losses were not seen it early enough so weeks -- risks were not curtailed. çt(a second consequence was tht

bank balance sheets became suspect. as a result, lending between counterparties froze. fifth, financial institutions simply did not have enough capital to meet the extraordinary market and are meant that arose 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 of the time. we did not know it then or even today when it actually crossed over into a bubble territory. but we lend money out too cheaply and in certain loans without the traditional safeguards. we did not recognize early enough that risk was being misprized. we made too many liquid investments, particularly in real a state. and we were 20 concentrated in a leveraged loans. -- too concentrated in leveraged loans. we did not see as clearly as i

would have hoped the excesses' so we did not raise a hand and asked whether some of those trends and practices that became commonplace really served the financial institution's interests. i hope one of the improvements made would be the creation of a mechanism by which the industry can step back, try to assess if markets 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. clarity as to who risk and control managers' report is crucial to maintaining independence. to increase overall transparency and help ensure that book value really means book value, regulators should require all assets across a large financial institution with a capital markets business be accounted for on a fair value basis. also, all of the exposures of

financial institutions should be reflected through its pnl. valuation and capital standards across risky assets, regardless of the legal entity in which they are held, must be consistent. one of the largest dress is placed on goldman sachs and other firms during the height of the crisis was a possibility we were managing risks in the same way that other institutions which were hampered or later failed, had managed to their wrist -- risks. without question, direct government support was critical in stabilizing the financial system. we benefited from it. the system clearly needs to be structured so that in future, private capital, rather than government capital, is used to stabilize troubled firms problems before crisis takes hold. the two mechanisms that hold the

most promise for addressing this and addressing too big to fail our ongoing stress tests, which are made public, and contingent capital, possibly triggered by failing a stress test. these elements could be the core of a strong but flexible resolution authority. certainly, enhanced capital requirements in general reduces democrats. but we should not overlook liquidity. -- in general it will reduce the stress. if the funding is relying on short-term buying, low leverage will not be much comfort. regulators should lay out standards that recommend prudence and the need for a longer term maturity depending on the assets. institutions should be required to carry cash at all times, insuring against extreme events. i want to briefly discuss our firm's experience in 2008-2009. 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 could not have anticipated the extent. we did know at any moment that an asset price would deteriorate further or had declined too much and would snap back. having to fair value are assets on a dailyw3 basis and see the results of that marking in our pnl, forced us to cut risk. throughout 2007, we were committed to reducing certain of our risk exposures, even though we sold at prices in the market -- many in the market thought were irrational or temporary. after the fact, it was easy to be convinced the signs were compelling. in hindsight, the events were not only unpredictable but sometimes looked like they were more obvious. the truth is that no one knows what is. happened. and that recognition defined our

approach to risk management. we believe key attributes of our strategy and process these were validated during the extraordinary events. but they have also prompted a change within our firm. over the last 18ç months, our balance sheet has been reduced by 1/4, while our capital has increased by over half. our capital ratio has increased to 14.5%. our poll of liquidity was relatively higher at the onset 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 firm has produced a strong relationship between compensation and performance, we have announced additional reforms in this area. and our shareholders meeting last year, we outlined specific compensation principles. consistent with those principles, in december, we announced that the firm's entire management committee will receive 100% of their

shares at risk which cannot be sold for five years. we announced that the five-year holding period of shares of risk includes an enhanced recapture provision that will permit the firm -- [unintelligible] 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 çshareholders in 2010. we appreciate the opportunity to assist the commission in their critical role. i look forward to your questions. thank you. >> thank you so much. >> if you touched a button on your microphone and you move the microphone at fairly close to it because they are very distance sensitive. >> i am chairman and chief

executive officer of j.p. morgan chase and company. i appreciate the invitation to appear before you today. if we get to learn from this crisis, we must be honest about the causes and develop a realistic understanding of them that is not overly simplistic. ççyour contribution to this de is critical. i hope my participation will for the commission's goals. i want to start by touching on some of the factors i believe that led to the financial crisis. much has been said and much more be written on the topic. my comments are a summary in nature. as we know all too well, new and moç products helpedç fuel excessive speculation and fire -- far higher credit losses. çexcessive leverage by many u.. investment banks, foreign banks,

commercial banks and consumers pervaded the system. this included hedge funds, private equity firms, banks and nonbanks. there are alsoçç several structural risks in the lead up to the crisis. there was an over reliance on short-term financing. over time, certain financial terms became too lax. another factor in the crisis was our regulatory system. i want to be clear. i do not blame the regulators. they have a critical role to play. but the responsibility for a company's actions weren't -- rests on the company's management. we can see what could have been done better in the regulatory system. it is organized with overlapping responsibilities. [inaudible] xdçthey need toç address the e of large, global financial companies. much of the mortgage business was not regulated. capital standards allow too much leverage in investment banks.

the extraordinary growth and high leverage of the gsc's also added to the risk. a number of are cyclical biases proved harmful in times of stress. our reserves were at their lowest levels when the time when high provisioning might be needed the most. certain capital standards were pro-cyclical. and credit agencies required many financial institutions to raise more capital. i believe it will be found that macroeconomic factors will have an underlying at some of the -- the fundamental underlying cause of the crisis. because large distortions and interest rates and consumption. as for j.p. morgan chase, the last one. five years has been one of the most challenging periods in our company's history. throughout the financial crisis, we never posted a quarterly loss. we served as a safe haven for

depositors. we worked closely with the federal government. would remain an active l ender. if we were not doing these things right going into the crisis, it would've been too late to start once the crisis began. j.p. morgan chase did not undo the leverage for capital or rely on low-quality capital. we have used conservative accounting. we have built up strongest loan- loss reserves and remained high liquidity. -- maintained high liquidity. we did not build up our structural financial business. we deliberately avoided large, risky positions on structured cod's. do's. we did not rely heavily on wholesale funding. we stayed away from siv's.

before 2005, we recognized that credit losses were low. we did not write payment option arms. we did make mistakes. first, we should have been more diligent when negotiating and restructuring letters for letters indicating loan transactions. in response, we have tightened their oversight of loan commitments we made. the underwriting standards of our mortgage business should have been higher. we enhance our standards, essentially returning to traditional 80% alone it devalued ratios. all of the business originated by mortgage brokers. çeven so, we remained at relatively strong throughout the crisis. so much so, about when -- that when called upon to take actions to help stabilize this -- the

system. the federal government help us to assist in preventing bear stearns from going bankrupt on monday morning. on september 25,t( required the deposits, assets and liabilities of washington mutual from the fdic. we learned we were the only bank çprepared toú@zt immediately. in addition, we continued to lend and support our clients financially -- financing throughout the crisis. we provided more than $800 billion in direct lending and corporate clients. we provide state and local governmentsçç money. we're the only institution that agreed to lend california $1.5 billion in its time of need. we have maintained our lending levels to small business. we announced -- we announce that we will increase that lending to $10 billion this year. we are doing everything we can

to meet -- to help them meet their mortgage obligations. we offered a new trial, loan modifications. -- home loan modifications. our diversity of business have been essential to us for emerging as a stronger firm. some have suggested that size alone or the combination of investment banking and commercial banking caused the crisis. we disagree. if you consider the institutions that failed, some of the largest failures were stand-alone investment banks, mortgage companies, the thrifts and insurance companies. our economy needs financial institutions of all sizes to promote economic stability, job creation and customer service. america's largest companies operate around the world and employed millions of people. they need banking partners to

operate globally. but let me be clear. no institution, including our own, should be too big to fail. we need a regulatory system that provides for the largest financial services -- financial firms will be allowed to fail in a way that will not affect taxpayers. shareholders and unsecured creditors should bear the full cost of failure. it lies in our ability to face problems and learn from experience is and make necessary changes. i want to thank the commission for their contribution to this process. we stand ready to assist the commission in any way weekend. thank you for the opportunity to testify before you today. >> thank you very much. >> i am ready to go. distinguish commissioners, my name is john mack. i am the chairman of morgan stanley. i also served as morgan stanley's to eat -- ceo from

jean, 2005-2009. the past two years a ban on like anything i've seen in my 40 years of financial services -- the past two years havew3 been n like anything i've seen in my 40 years of financial services. we saw credit markets seas, the competitive landscapeç remodel. the consequences has spread far beyond wall street. millions of americans are struggling to find work. they have lost homes. they've watched their retirements revet -- evaporates and their savings. the financial crisis exposed fundamental flaws in our system. there is no doubt that we as an industry made a mistake. in retrospect, it is clear that many firms were too highly leveraged. they took on too much risk. they did not have sufficient resources to manage those risks and effectively. falthe financial crisis made clr

that regulators did not have the tools or authority to protect the stability of the financial system as a whole. let me briefly what you through what happenedç for morgan i]çstanley's view. in our response to the crisis. çthe entire financial services industry was hit by a series of shocks that began with a steep decline in u.s. real a state prices in 2007. morgan stanley experience is significant losses related to the decline in value of securities and collateralized debt obligations backed by residential mortgage loans. this was a powerful wake-up call for this firm. we moved quickly and aggressively to adapt our business into a rapidly changing environment. we caught leverage. we strength and risk-management. we raise private capital and dramatically reduce our balance sheet. we increased total average liquidity by 46%.

we entered the fall of 2008 with $170 billion in cash on our balance sheet. we were in a better position than some of our peers to wasn't -- whether the worst financial storm. we did not do everything right. when lehman brothers collapsed in its september, 2008, it sparked a crisis of confidence like many of our peers, we experienced a classic run of the bank. as the entire investment banking business model came under siege. morgan stanley experienced huge swings in spreads on the threat of false swaps tied to our debt and sharp drops to our share price. this led banks to request that firms post additional collateral. in an effort to stem the panic, morgan stanley moved up its announcement of its strong third quarter earnings to september 16. but our stock remained of her heavy pressure. it lost nearly 1/4 of its value

the following day, falling from 28.7 to 21.75. despite the strong results, it continued to trade lower and finally traded as low as $6.71. this crisis of confidence in the market fed a chain reaction to the broader economy, as lower prices for financial assets undermined confidence and lead to lower prices. this year was marked by rampant rumors and speculation. my management team worked around the clock to address these rumors and it -- provide investors and employees entered information. we also worked closely with our regulators to keep them informed and achieved the right result for the markets and the economy. our position began to stabilize after mitsubishi agreed to invest $9 billion in our firm is 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. the sec instituted a temporary ban on short and 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 industry benefited from the support. morgan stanley has since repaid are tarp funds, providing taxpayers a 20% annualized return on an 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 the many firms -- many firms simply carry too much leverage. morgan stanley moved aggressively to reduce leverage, cutting it in half from --q from

33 times at the end of 20 -- 2007 to 16 times by the third quarter of 2009. we raised a total of $14 billion in capital. we have also taken a number of steps to diversify our revenue and funding sources, including it 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 to further strengthen our risk management policies and procedures. including 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 and ensure that compensation is linked more closely to performance and does not encourage excessive risk- taking.

we were the first major u.s. bank to enact a call back for portion of your and compensation in 2008, one that exceeded tarp requirements. we have since strengthened this provision further so we can call that compensation for up to threeç years-- claw back compensation for up to three years. we have also developed a performance plan. we are increasing the portion of your-and compensation that is deferred to all employees. -- year-end compensation that is deferred to all employees. are recommended to the board that i received no bonus in 2009. qthis was a 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 again. we are working with businesses to raise capital to invest in

job growth. we are working to -- with families to modify mortgages so families can stay in their homes. the end of november, 2009, are long services subsidiary. modifications in place for 44% of borrowers who are over 60 days delinquent and eligible for the administration's call affordable modification program. this is the highest percentage of any service the participates in the program. we believe this is a business imperative and public important. the financial crisis laid bare the failures of risk-management in individual firms across the industry. it also made clear that regulators do not have the tools or the authority to protect the stability of the financial system. that is why i believe we need a systemic risk regulator with the ability to ensure that excessive risk-taking never again did jeopardize the entire financial system. we cannot take risks of the

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

efficient, effective and competitive markets it in futures and derivatives which would benefit investors and the industry. today's financial markets are global and interconnected. our regulator -- regulatory regime it needs to be as well the u.s. has to work with countries across the globe to coordinate and synchronize our risk. at morgan stanley, we are grateful for everything the federal government and the american taxpayer did to support ourç industry and to bring stability back into the market. our industry has much to do to regain the trust and confidence of taxpayers,w3 investors and public officials. thank you. >> thank you. >>w3 thank you. i welcome the opportunity to help provide some information on important matters you are investigating. çççi assumedç my role asçk of america on january 1. çin leading our consumer

business, i had a firsthand knowledge and a recognition of the hardships that many hard- working families and small businesses experience. together, the financial-services companies are like the leaders andç regulators -- they must continue to on this -- to work to understand what occurred so that does nt)happen again. çover the crisis, we caused a t of damage. it has affected main street. this commissions work is important because the lessons will not be simple. it had a multitude of causes that are not easily summarized. it is important that we understand the breadth of the causes of the we can understand the lessons and apply the proper policy to remedy them for the future. we have seen four crises unfold -- the mortgage prices, capital markets, a globalç credit cris, and a superior quote recession. the mortgage crisis originated with a dramatic expansion in the

availability of mortgage credit. 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, made credit available to borrowers who could not previously qualified. or extended more credit to a borrower who could or perhaps -- would not be able to handle. the national policy to expand i]american home ownership was ao popular in created tailwinds. no one involved in housing system,w3 lenders, rating agencies, investors, consumers, and policy-makers for saw the dramaticç depreciation of home prices. çwhen we did experienceç thise 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 in capital markets. investment banks have not only

underwritten mortgages, but they held interest in providing backup liquidity for market- related to equities print -- [unintelligible] ççit happened to money market funds to purchase commercial paper from those vehicles. the stress of the financial crisis began to spread to other fixed-income products. this to stabilize the financial institutions and -- that have little to do with the u.s. or mortgage market. the contagion was global. without government intervention to restore liquidity and capital markets, the risk of global economic collapse was very real. the final crisis and perhaps the most daunting is that we have a severe economic recession going on. some would say the eek financial crisis caused the recession appeared the experts will analyze that for the coming years to establish the exact cause of the relation.

one thing is clear. u.s. economic growth in the first decade of the century was funded in part by home price appreciation and the ability of homeowners to access the equity in their homes to use for spending. home mortgage and equity financing helped drive activities which continued -- contributed to the economic expansion. the history of past economic cycles shows that economic expansion build on excessive debt leverage will ended recession no matter what triggers it. this crisis has taught us some very valuable lessons. let me highlight a few of them in my written testimony. first, credit starts with -- starts and ends with sound underwriting. rating agencies or credit bureaus are no substitute for diligent risk analysis. second, capital is important the leverage of investment banks and other market purchase prints was untenable.

banks and other showed and will hold more capital going forward. liquidity is key. the quiddity allows an institution to meet margin calls, fund redemptions or pay deposits without having to sell liquid assets which could lead to further losses. current accounting rules need to be reviewed. rules ought -- require banks to reduce reserves in good times. -- reduce reserves against loan losses in good times and build them in bad times. market accounting can become disjointed when there is no real market for any products. let me say a few words about compensation. at bank of america, our compensation guidelines are set our board of directors. the compensation program is to attract and retain the talent we need to make the business is profitable. in 2008, our company earned more than $4 billion, but that was short of what we believe we should've done for our shareholders many of the top leaders -- many of the top

leaders in the company received a bonus for 2008. for the executives at the next level down, the bonuses were caught at 80%. we anticipate compensation levels will be higher than they were in 2008, but not back to pre-crisis levels. our activities comply but the work we've done to the various regimes, the tarp regime and the paymaster and others. we understand the anger felt by many citizens because institutions that received federal investments in 15 months ago are now recovering and are paying their employees, especially investment banking. as a response, i would make a few points. we are grateful for the taxpayer assistance were received. we have payback $45 billion, along with $3 billion in dividends and other payments to

taxpayers. çthe vast majority of our employees played no role in the economic crisis. they worked hard during this crisis to help their customers and clients and extended more than 3/4 of a trillion dollars in the fourth quarter leading up to 2009. xdweç believe are treated thoud employees are a valuable part of our future. we are grateful for the courage shown by government leaders to preserve the financial system. we support regulatory reform efforts designed to prevent any recurrence of this episode. we as managers want to make sure this never happens again. i welcome any questions you may have appeare. >> thank you very much for your

thoughtful statement. we will now move to questions. we have got a lot of ground to cover, so i will ask that you be as incisive and compelling as possible, but brief, sink direct answers. i will start the questioning today. i would like to start by asking some questions about specific types of business practice and risk-management practices that may have contributed to the crisis as a way of making this tangible and real. i want to pick up on your comment -- i would like to be brutally honest. mr. blankfien, i will start my questions with you today. i want to pick up on your testimony -- and i am paraphrasing this. there were financial products and practices that may have served no good and productive purposes in the financial system. recently, you have made a few comments. i would like to read you a

couple quote. you said in november, there was a lot of negligent behavior and proper bad behavior that has to be fixed and sorted through. we do not 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. can you tell me very specifically what are the two most significant instances of negligent and proper bad behavior in which her firm engaged and for which she would apologize? >> [buzz] >> that is a vote. >> i referred to this and are oral testimony. i think in our behavior, i think we got caught up in -- the general markets got caught up in and participated in and contributed toç elements of frh in the market.

in leveraged finance, which was our biggestçç exposure,ç we a top service provider to the private equity world. we are eight top mergers and acquisitions firm in connection -- we are a top mergers and acquisition firm. we helped finance those transactions. increasingly, those transactions took on higher and higher leverage, which they could not have that but for the willingness of finance years into participate in that. -- financiers to participate in that. we held that for too long. too much concentration in our books. people look at these positions -- relative to our size, we had more than we should of had. therefore, you go back and look at them, too much leverage in transactions into all much concentration remain from that leverage on our books. >> would you characterize,

looking back on this now, in hindsight is 20/20, went to look back as some of the sock -- some of the financing as negligent or improper? >> in the context of the world we were in, a and when you use terms like that, i always think aboutç standards of behavior ad the context. i think those were very typical behaviors. -- in the context we were in. >> let me ask you. have you done any kind of internal investigation, a large suite of your activities it? what did you find? is that something that we could have? >> if we have something, of course, we will identify it for you and you can have it. i am not referring to a specific. we look at our risks and our position and the tensions -- in a crisis area, we looked at our balance sheet and the amount of

illiquid positions on our balance sheet. >> if you have done an internal investigation to look at the mistakes that occurred, we would like to be able to have that and review it. your attorneys will want to review it before, but something we can follow up on. >> absolutely. >> let me meat -- let me talk about it -- the issue of conflicts comes up in many respects. in compensation, in trading practices, and i want ask you about the very specific instance. based on the review of public documents, as you know, your firm sold a significant amount of subprime mortgage-related securities. it appears, according to public documents and other reports, that you may have simultaneously batted against the securities he sold to clients. . .

we represent the other side of what people want to do. we're not fiduciary or an agent. we have an opposite turned -- we have the obligation, but we are not managing somebody else's money. when we sell something as the principal, that item will have gone up. we will wish that we have not sold at that minute or it will go down, in which will we be glad that we did. and feel sorry for the person that bought it. in most of these cases, the person who came to us came to us for the exposure that they were happy to have. >> mr. blankfein, you are creating these securities. the notion that i would make the

transaction with you and then the person with whom i made that transaction would know that that transaction would blow up, that is inimical to me. the package that and sell it under that label? >> we are not the broker at all. we are the principal. it wasn't that we were creating product, that the product existed and we were short- handed, we are actually selling it to reduce our risk. >> my point was that you are getting out of the market is to continue to sell the securities. i dealt with a lot of rating agencies as treasurer, had you persuade them to give you try to is at the highest rating when you have information that leads you to believe that the securities may fail? >> the predicate of your

question -- if you look into goldman sachs, we were not -- when you listen to the testimony, the biggest problem that institutions had with the accumulation of risk -- a market maker does not manage its profile like that. we have various pockets of goldman sachs that like the position or do not like the position. "we do is risk management. because we are accumulating positions, but by the way we acquired from clients we have to go out ourselves and provide and source the other end of the transaction. so we managed our risk. these are all exercises and risk management.

i>> its sounds to me like selling a car with faulty brakes and then buying an insurance policy on those buyers. >> this is an institution that professional-only investors dedicated to this business. >> representing the pension funds of police officers. >> i think that these are important matters. these are the most critical questions. >> i have follow up on this. >> we're sitting here today with people commenting on the press that the equity market is being driven by bubbles. others are saying that the

equity market is right. no one really knows. if people are coming to us and saying they want exposure to the equity market or i do not want exposure to the equity market. we say that there is honesty and disclosure. but we are an institutional firm, and this is the hardest part of the institutional market. even today people are coming to us for exposure to these instruments. eight cents on the dollar, because they think it will be worth twelve cents, and other people because they think that it could go to four cents. that is what the market is. >> i do know what the market is. i want to ask you this question. did you always this close to every investor that you are taking a contrary position? did you consistently disclose?

>> we were selling as the principal. we are selling something so that they owned it and we did not. >> in september 2004, the head of the fbi criminal division warned that mortgage fraud was so rampant in this country that it was an epidemic. did you take any specific steps in the wake of that 2004 prices to evaluate the mortgages that you were selling in the marketplace? >> we're not an originator of mortgages. we are audited and reviewed and subject and we had did due diligence. the answer is, people can

examine what our due diligence was we had no reason to think that they were not robust. there is no information that i ever had that would not change my behavior in some respect. knowing now what happened, what ever we did, what ever the standards of the time work, it did not work out well. of course i wish we will not done what it took to not be in the positions we find ourselves. >> let me ask you a question about risk. in your testimony you talked about being rooted in accountability. and none of us know where things are going so you have to prudently plan for risk. you had profit in 2008 but i won a question on this because it goes to the overall context of

rest, and hopefully it will not be perceived again. at your firm, you triple your assets to $1.10 trillion, a growth rate of 29% when gdp was growing at 23%. tangible equity was 6-1. it was 32-1 against tangible, common equity. and as a balance sheet matter, extensive hedging because of the significant leverage and the risk profile. at the end of the day, and i will press you on this, it seems to me that you survived with extraordinary government assistance, $10 billion in park money, a counterparty with the

aig bailout. in your room for wanting to takyour given access -- he becaa bank holding company of the weekend and had access to the top. --talf. you got some relief from mark to market rules. when you look at the amount of leverage that you had, and you look pitcher rapid growth, the you really believe that your risk management in the big picture was sufficient to allow you to survive but for that government assistance which i laid out? >> there is a long predicate to that question. we were much leverage to now. when you look at the leverage at

the company was in, our high as water mark was about small. a lot of that included cash on our balance sheets. i think we did a very good job in having liquidity through the period. you're asking me what would have happened without a considerable government intervention? i would say that it was a more nervous position than we would want it to be in spirit we never anticipated the government help. we were not relying on those mechanisms. about the extraordinary weeks after lehman brothers, which was the most tense week that there was. that is when we became a bank holding company. the next day we capitalized with warren buffett and the day after that we did a capital raise.

we have access to the capital markets and we were not relying on that government help. the tarp legislation came three weeks later. that being said, i do not know it and cannot sit here and tell you what would have happened. i know for sure that no one else knows either. i feel good about it but we were going to bed every night with more risk than any responsible manager would want to have, either on a business or for the system as a whole. risk, not certainty. even after the tarp was implemented, did that exacerbate the risk? no. but the question does not have to turn on which you have gone under but for? the world was unsafe, the government and regulator and taxpayers took extraordinary measures to reduce intolerable

levels of risk to a much more tolerable level of risk. and the reason the press this is not to make you say uncle. what was done differently and more regulated commercial banks, was extraordinary leverage. much of that money done overnight. i want to see whether there is a clear recognition that despite all the response on the fundamental basis, excessive risk was being taken, notwithstanding all the models that existed. >> as i said, looking now -- and everything is context-driven. i could not be more clear.

after nine years in the context where we were -- look, how would you look at the risk of a hurricane? this season after, we had four hurricanes on the east coast, absolutely extraordinary, the estop the year before. rates are very low for risk -- versus the year before. rates are very low risk. after the hurricanes, rates went up spectacularly. they are lower again. the risk before hurricane, is it any different? >> acts of god were exempt. these were acts of men and women. these were controllable. >> i sit here and read testimony to the effect of reducing our balance sheet, raising capital, and clearly we are much less leverage now, and consequently i which we were must let -- much less leveraged than. even though we were lower than

others and with cash and our balance sheets, we did better. but if you're asking me what i do something differently, knowing what i know now? how could you not? of course. >> i want to put into context the level of risk and the level of assistance. this is something i think no one would want repeated again. let's now move to questions from other commissioners. i'm going to stop at this moment. i will move to vice chairman thomas. >> thank you, mr. chairman. i think context is important. you mentioned earthquakes and how familiar we are in california with earthquakes. i think as we conduct these hearings and talk about the problems that were encountered and how close we came to a

catastrophe, the right now in haiti,f 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 never been to haiti, in terms of the living conditions that were there subject to the death traps available. i think the general question that everybody wants to ask, and you said it four different ways, and i will put it in the 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 have been doing is a lot like an iceberg. you can only see one eighth of it.

7/8 of it is under water and should go toward it. mr. chairman, i want to ask of these witnesses -- and it will be applied to all the witnesses -- that we have very limited opportunity to ask questions. we would like to submit written questions to you and receive those answers. the other thing, this commission is also subject to -- if you knew then what you know now, which you asked different questions? we're only around for most of this year. we have to conclude our work by the end of the year. obviously, you start with fact finding and began coming to conclusions in collect those coalitions, and we will publish our findings -- coming to cope

collusions -- coming to conclusions and collecting those conclusions, and we will publish our findings at the end there may be other questions that we might asked three or four months from now. in terms of submitting question, i wanted to be applicable to the time that we are operating. i do hope that you would be willing to be available, notwithstanding not being available in person, to continue to assist us and our job of trying to explain to the american people what happened. is that something that is acceptable to you gentlemen? >> yes. >> yes. >> thank you. i know that there are a lot of people who want to be one of these -- in these coveted chairs in terms of having an opportunity to ask a question.

those in the media in the room, i think we have an excellent example this morning in today's "new york times," and it was in yesterday's as well, of people who if they do not own they have of bailable eat by the barrel to decided that they would ask their own set -- if they do not own they have available ink by the barrel, who decided-their own set of questions. we would ask you answer those in the "new york times," in writing, and then give everybody an american, mr. chairman, the opportunity to be in that same position. i think it is most appropriate to tell anyone who is listening, watching, or hopefully will read anything about this hearing today, that the opportunity to

submit written questions, to his you wish that question to be submitted, it is an opportunity that ought to be available to all americans. to say anyone who wants to write me, bill thomas, fcic.gov we will do the best that we can give you the answer. the greater number of people who ask and the broader the question, no matter how trivial in terms of some pundits point of view, they are questions that the american people want answered and i think that will be part of our job over this year to answer those questions. we may be back to you now with our questions but with questions that have been supplied to us by people who perhaps -- some of the questions we're going to

hear today were not the ones that they would have asked. mr. chairman, this is relatively unusual because usually we would close the record after a period of time. given the job that we have and a time in which we need to do it, i would ask unanimous consent, mr. chairman, that every hearing record remain open, that questions submitted irid there during the hearing -- i did during the hearing or to us -- i like it channel it to those submitted to us, if we open it up to an editorial, every day there will be a list of questions, but we can handle that as well. hard job fundamentally was to get to the bottom of what happened, but most importantly, explained it in a way that the american people can understand. we have assets with the

gentleman in front of us an additional assets weekend -- we need to utilize every resource and helping americans understand what happened. primarily for the purpose, as you indicated mr. blankfein, to know what we should have done had we know now what we knew them. and our job by the end of this year is 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 the question they would have asked. that should be agreed to by everyone. i will then begin channeling those questions that come to us and obviously as i said, the first questions are on page 827

-- a-27 of today's "new york times." >> i will now call on the commissioners for questioning. i will start with ms. marin. >> thank you, mr. chairman. my first question is to mr. blankfein. a question to you about aig. you talk a little bit about when the government supported aig and enable them to close out their exposures to risk that aig. did anyone ask you any point to take anything less than one under% on the dollar? -- 100% on the dollar? >> i never got a request by self -- myself about taking less. it did not come up in any conversation that i can recall. subsequently, somebody in my organization who was going back and forth with -- this was after

the ad shi'a, a couple of months later, at the time whenever closing out -- when they were closing out the maiden lane ii, that these contain the inference that he drew, would you be willing to take less? and he said he could not answer that question now. himself, at his level. he then said that it never came back up again to him. and it never came back to me. >> did he further that question up the chain of command? >> i can say that i did not get it. he might have told his boss. >> could we talk a little bit about your interactions with the regulators, in particular, when

you think back on the events of 2007-2008, there were obviously a lot of people that participated in risk-management either internally or a externally regulators, there is internal auditors, and external auditors, people wonder board, did any of those in that these are individuals raise the issue of the quality of the assets under balance sheet? >> we are a mark to market firm. we have businesses, important businesses -- we have distressed businesses and businesses that specifically go out and buy distressed assets. but they are marked correctly. our people would -- our auditors would say i do not like this asset or this asset. they would say is it appropriately marked? i talk to the auditors each

time and they tell me we do a very good job. we not only mark them, we go out and get external benchmarks and go out and test the marks. we will today go out if someone came to us and wanted to sell us a very distressed portfolio, lehman brothers debt, or anything like that, we would have a bid for it. that is our role in the market. they can get it off their balance sheet and we can get in on two hours, but it has to be marked correctly. that is the real issue. >> it sounds like you have a bit of discretion in that regard. it does not sound like there were a lot of challenges to the mark's you're making. >> there are huge challenges in the organization. >> i was referencing outside your organization. specifically the regulators. >> oh, no, they go over our books and records very

specifically. they not only all that the marks but the process by which we get the marks. >> t think that in light of what has occurred, that they were doing a great job? >> i think they did -- i can, i am answering everything with the scope of my knowledge. i don't engage with the audit process. i get a summary and talk to the audit partner. i receive it as a member of the board. but we are quite satisfied with our audit there. otherwise we would not have them. >> and the regulators as well? >> well, we went through a evolution of our reboant -- an evolution of our regulators. during that period we were regulated by the sec is our primary regulator. that was the institution that came in over the last two years

with one main regulator, and that regulator switched when we became a bank holding company, which would have been in the fall of 2008. >> but it is their responsibility to help you determine what risks you may or may not be undertaking as a firm. is that right? >> help to determine what risk -- i think a bit as they survey less and we in the first instance are always disclosing. it is an ongoing process, and this is the intention of the process, to be engaged, but then they look very quickly and if they did not like it, they would not let us do it. that is their role. >> there should be more surveillance in that regard and more supervision of the type of activities undertaken by investment banks? >> first of all, there has been a clear demarcation between

sociology of our regulation before and after becoming a bank holding company. before that, with the sec, which was viewed as the provincial -- prudential regulator, our organization with the the fed -- with the fed, dozens of people come to work and our building, not as employees of goldman sachs, but as members of the fed because they work with goldman sachs prevail look at our processes and procedures. our regulation is different now. >> is there a yes in there? that there should be more regulation and more supervision? >> there should have been more than there was in september under the old regime. right now, given that we are still catching up, our first year under the fed, it feels

much different and feels like a lot of regulation. and appropriately a lot. i cannot say now that it is not enough. >> the youth feel that things have changed from tibet -- for the better for regulatory standpoint? are they improving? >> we have a very tough regulator. i cannot tell you whether they have improved because it is a new regulator. we acceded to this regulator as a result of becoming a bank holding company in september 2008. >> i have one final question, mr. chairman. i was struck that 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 time. given that we're 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? >> what i meant to convey is that i am not sure -- again, i have not surveyed what the standards of the time work, but let me say -- and people will go back and test this and look -- i know that the standards of that time were different than what they are now. i was as the question, how would you rate yourself in terms of negligence and what you would have done. it would have to be compared to those standards. when you look back in hindsight, those standards should have been elevated. that could also be another source of incorrectness. maybe we should be in a part -- to reach -- we should have been

a part of those that corrected that. again, that is how we would measure ourselves in terms of what we were thinking. now usps question. >> thank you for clearing -- for clarifying that. compared to where the country is economically, and in your 2007 annual report, that is listed as one of your core values. heidi rectify all of these days, given what is going on in the country economically? do you feel they chirk compensation adequately reflects your behavior, and if they can have a compensation structure and place that will reward people for taking the longer term view as opposed to maximizing the short-term profitability? >> commissioner, the last compensation we did in 2008 and we have not announced our compensation -- we announce the results for the year next week.

but in 2008, the cycle which we already went through in the heart of this downturn, we took our firm-wide compensation and, including people whose compensation is hard to take down because their secretaries and staff. our overall compensation when down about 15%, which was in line with our performance. the senior most people in the firm were down 80%. and then named executive officers, myself, the ceo, the vice-chairman, the cfo bonuses were down 100%. we took no bonuses. given the circumstances, that

was quite appropriate. and so that as far as our structured, we of always -- we have always had our work, and if you look at our compensation, it always correlated with the results of the firm. as it did last year, and that is something that emanates -- we have been a firm for 140 years, but it is only the last 10 years that we have been a public company. clearly everyone in the firm had all of their wealth, all their accumulated compensations in the firm, virtually, until they retired. everybody got paid with an interest in the firm. most of our senior people, their predominate compensation was in shares. and we've ratcheted that so that our senior committee is only getting shares.

>> an interesting point about this changed your structure. there some that would say that now that you are a bank holding company, there is more incentive to take excessive risk because it is no longer partnership structure, and therefore the risk is shared by your shareholders, and necessarily our partners at the firm. and i believe if not -- if you're not mistaken that compensation was not down as a percentage of your revenues last year. >> i think the firm's compensation was down in accordance with the revenues. i did not say in excess of revenues. there was an exceptionally close correlation. >> and the partnership structure? >> bair we still have the people in the firm that our partners get paid, all of their compensation in shares, and the most senior people, their compensation is in shares.

and i am obligated to hold 75% of those until retirement. after my transaction with warren buffett, 90%. the people of goldman sachs have the results correlated with the success of the firm. >> thank you for answering my question. >> mr. thomas, as a follow-up. >> did i understand that you are now providing compensation in part in shares? >> we always. >> you always provided. >> prior to having shares, partners only get paid interest that they had to keep in the firm, except for a stipend. >> in terms of the question was asked of mr. blankfein, could you give us a before and after if there is been a change in the compensation structure?

have you changed your compensation after the "downturn" to require some equity time prior to receiving -- >> recently you saw the g-20 and the federal reserve and the compensation principles which we generally agree with. we've always had general principles. senior people get their compensation in stock. generally 75%, higher for me. you have to maintain ownership of that, 75% as long as you were a member of the committee. you look at the amount of risk that you are taken before you pay the compensation, and we do not have things like special change or control parachutes,

special severance packages, things like that. >> mr. mack. the >> we always paid a large portion of our compensation and equity. we of increase that up to 75% for the most senior people. we've put a clawback provision in now so that some of the bonus, we would have access up to three years if the trade turns bad in the new year, we can go in and take that back. that has been the big change. >> mr. moynihan, you have any position but you are not new. tell me about yours. >> we've had a tradition in paying in stock like mr. mack said, and our firm has instituted callbacks to match the duration of the risk. -- clotawbacks to match the duration of the risk. >> and that is an ongoing change. >> thank you, mr. chairman.

>> and now senator gramm. >> thank you, mr. chairman. my questions go to the issue of incentives. incentives are the things that are intended to shape our direct behavior and performance. we'll talk some about the forming of those incentives. i am thinking what are the underlying goals of those incentives. mr. mack, if you closely link compensation to performance. what of the primary elements of performance to which the compensation is linked? >> the first criteria, clearly profitability. as you go from profitability, you going to the sales and trading areas, which is where most of these questions are focused on. how much of the risk they take

to have that profitable performance? how much interface they have with other senior members of the sales and trading operation to make sure communication is what it should be. we also look at the interface that we and our traders have with our clients. and most important, one of the things that we look at is, how do our risk managers -- and these are risk takers -- how did they interface with our risk management team? these people report directly to me and not to sales and trading, but they oversee the soundness and safety of the type of risk that we do take. under that, we have a lot more resources into that process, and a number of people to work creating models to make sure we can monitor that risk. it could risk management as an

example, you say to yourself, clearly what we have been through over the last few years, that individual needs to be paid not on profitability but needs to be paid on safety and soundness. is he or she doing their job to make sure that we're not taking on excessive risk, we have liquidity in our risk positions? so when you say how do you pay? you have to go department by department. so many departments, like the i.t. departments, where we do a lot of work in building our models and the ability to measure that kind of risk we take and our balance sheet. they are paid differently but they are paid on what do they produce and how quickly they get it online and does it work? but broadly speaking, each group within the firm has certain groups, depending on they are supports, risk-management, or

trading services. and again we go into investment banking, how we looked at each one of our banks. >> i got the question in the wrist area, most of the measures of performance our process. do you then go back and assess whether that process actually resulted in greater or lesser risk, and that those outcome measures become part of performance? >> we definitely go back. one of the things we have done recently, sir, is create a separate risk committee of the board where risk management reports to them. risk-management, we look at those processes and a ball -- and evaluate them, but more importantly those are decisions that almost are instantaneous. as soon as a new risk comes on to the books, it is the responsibility of risk- management to analyze the impact

it would have on our valued and risk. the answer to you is yes. >> my question is, from your testimony in the testimony of your other colleagues this morning, some of those decisions by virtue of time has been shown to have been excessively risky and but the financial system -- contribute to putting the financial system in the shape that it is. have those actual outcomes of risk analysis, particularly where they were turned -- termed to have untoward outcomes, did they become part of the performance evaluation? >> they did. but again, as the chairman said, i want to be brutally honest. there was no question that we had not put enough resources into our risk management system.

>> do any of you in your performance standards include aspects that are at external to your own firm? 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. to those kinds of considerations -- how much of your decision makers contributed to the economic growth, job creation, those things that affect the general economy, are they part of the performance measures? >> clearly, the paint that homeowners are going through and the people losing their homes, we have been very direct in our mortgage area to make sure -- i think they gave the statistics that we're 44% with all of our

mortgages that we hold renegotiating the payments. in an aspect, the answer is yes. but when you look atñi some of e automobile companies whom we have loans to come of those loans are made based on how much risk we're taking. we know those automobile companies or other companies need loans, but we also have a fiduciary responsibility to make sure that we about it -- we have done the hard you diligence. and it is not the same social pushed as we do in home once and our mortgage facility. -- in home loans and our mortgage facility. >> in terms of about a wedding -- and maybe i will turn this question to mr. moynihan -- as one of the potential sources of investment for growth, how the 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 may be 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. but in terms of generally how we do our financial plans and how we grow our business, we make allocations of capital and one of the goals of the executive or person working is to make that financial plan, so it indirectly factors in. but we do not specifically relate someone's performance into a broader question of how to allocate capital.

>> in retrospect over the last decade, how what they did do you think your performance standards have been and the compensation that they have generated to achieving goals of your institution in the broader economy? >> i would sayñi that like my colleagues, we could do a better job aligning in some areas -- the timeframe that at risk can be taken on, and we also do that through the holdback of equity and callbacks that we have in other areas where you make underwriting decision today and it turned out to be true later. it will continue all because i think we learned the lesson of the last several years that the nature of the underwriting takes time to figure out whether it comes true.

we are trying to address that. >> one minute. >> one last question to mr. blankfein. your firm about 10 years ago changed from being a partnership to a publicly held corporation. now you have changed again to a bank holding company. how would your approaches to performance evaluation changed, or have they, as you change the structure of goldman sachs? >> i think we tried very hard to keep the partnership ethic. there are elements of our compensation scheme that might be a little different to suit our culture and history. it might not suit everyone. for example, no one at goldman sachs gets paid solely at his or her own performance. not traders, not sales people,

everyone gets paid on the basis of a firm as a whole, their business unit, and we take account of their performance, but the opted for us is to keep going with that spirit of partnership and cooperation and teamwork, and also by the way, an incentive for everyone to surveil everyone else around them, because everyone is responsible for everyone. that would be a distinctive element of our structure. in terms of looking at it and scrutiny, we try to keep it. the big change is not becoming a partnership of becoming a much bigger global company, still called partners of goldman sachs and staff in beijing and far- flung places, whereas 20 years ago we were clustered around some american societies -- cities and maybe london and tokyo. >> has the percentage of your

total revenue distributed in compensation to your partners changed as the legal status of goldman sachs has changed? >> in the old regime, everything that was left over along to the partners. they were effectively the shareholders. but in the tenure saw was a public company, -- that 10 years or so as a public company, we said we would start looking like it would be about 50% and it has largely gone lower. for the good reason that our revenues have often gone higher. you did not need to pay as much. and the overall effort of what to do -- one of the problems we have is that what we do a lot for the economy is not like -- is not as invisible -- not as visible as an investment bank.

we put companies together and launch new businesses but it does the really interface a lot -- it does not interface and up with the people who we will want to understand what our role is in the system. and until recently, we embarked on a program called 10,000 small businesses to get goldman sachs to apply itself to that issue, to deal with something that is on a dimension that is close to what is needed for the current moment. >> thank you very much, senator graham. one question to mr. mack. succinctly, what is the pay structure an amount for risk management versus traders? >> i would say that we have been very clear, especially in 2008 when we changed our risk management, one gentleman was a trader could make the same kind of money that are best trader

can make. >> but that is not an historic. >> that is correct. >> thank you. mr. holtz-eakin. >> i want to pick up on that and ask a question broadly of the whole panel. each of your in your testimony talked about problems of managing risk and excessive risk. mr. blankfein talked about under prime risk that matt -- led to massive leverage in. mr. diamond talked about compensation practices -- mr. dimon talk about compensation practice. each of the represented -- they have boards and internal auditors, and so my question is, what is it about this traditional structure that failed us? why is it that the risk that you identified were not uncovered in a moment? and what has each of you done to

change your risk-management practices since the crisis? mr. blankfein. >> i think if i had to say one thing in specific, and we focus all lot of effort and always had on risk management, what a bar named executive officers is our risk manager, so it is the highest level of the firm. constantly learn from every crisis, 1998, attack, this one -- which was a different level, it is the need for more stress tests. very often in our business, we go to the analytical process of what could go wrong versus what is the probability of that going wrong? and we tend to discount the consequences too much. i stress tests says don't tell me that this is unlikely.

what it did happen? we learned after so many years in the market had given up enough time, not -- everything will happen. >> you have done that constantly. and now it is essentially the ones like the treasury conducted? >> know it's like you read in the paper. you may read in the paper and you feel it's welling up in ec and the prices of some assets. it far enough rise and because we're positive about this. but we say, ok, what if, what are the knock on effects, what are our exposures to those places? what are our exposures to those places that had exposure to those places? assume that this happens. and we constantly through our

risk community are doing those kinds of things which help us to avoid problems but also tells us what to do if something happens. it will not be the first time that we considered it. >> the stress test process would be audited in the usual fashion? >> note, this comes from our internal process. >> mr. dimon. >> if you do business, you're going to make mistakes. hopefully they will be smaller and it will be pregnant your institution or anybody else. the process is very rigorous. you have a separate price group, and internal audit and an external audit, and reviewed by the fed, you can look at those things in day -- and you can be impressed by the diligence behind some of the process. we always did stress testing and

you have to be prepared, but you should never be surprised. you don't know exactly what is going to go bad or what direction it will come from. when you look at a business -- we look at a whole balanced scorecard. if you're not financially successful, you failed. it is a sink one on of doing business sine -- it is sine qua non of doing business. it is never determined by one metric. in looking back, as a business you have to look at what you did right and what you did wrong. if you are not continually analyzing and improving it you will not do better. i've already mentioned the biggest mistakes that we may. in mortgage underwriting, somehow we just missed that home

prices do not go up forever and it is a sufficient to have stated income. >> you had done stress tests prior to the crisis. did you show one that showed housing prices falling? >> that was one of our biggest mistakes. we did not see home prices going down 40% 3 that was not part of our stress test. -- 40%. that was not part of our stress test. >> mr. mack. >>ñi our risk managers sits rigt by our ceo on the floor. there is our real link with risk management in the firm. and this goes to the earlier question, i think with the federal reserve is our lead regulator, 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 to the point that we want to make an acquisition, they were involved and ask certain questions. it is very new in my 40 years with this new regulator. i would give high marks to our regulator on how -- i don't want to use the word intrusive -- how diligent they are in our risk and how we manage risk. >> mr. moynihan. >> much like my colleagues, if u.s. what we thought we miss, it would be similar to what mr. dimon said. yes, we have the investment banking, but mistakes were made and the losses had been on credit cards and mortgages, and we kept originating prime into the economy and we did not do the testing saying what if

housing goes down 40%. i think that is probably the best lesson that we have learned out of this crisis and we will apply. when you look at the commercial side, we had a practice that but on the consumer side we did not have those kind of practices. that is what we have implemented and we will make sure we're diligent about it. >> you have stress tests for commercial assets and picking up your exposures. >> we've always had view of commercial real estate through the hard knocks taken in the late 1980's to be very diligent about what happened. i don't think the consumer side is ever seen this kind of -- has ever seen this kind of recession. >> i want to pick up on your testimony, mr. blankfein, were

you said that almost all the losses that financial institutions sustained over the course of the crisis have revolved around bad lending practices, particularly in real estate. can you tell us what those bad lending practices are? what of the list of things that were bad? [inaudible] >> in the consumer area, and other people with consumer businesses, much has been written about origination and jami returned to the testing, and he can pick up the cudgel and talk about the consumer side. on a more corporate side, i would say it had to do with leverage, and it had to do with terms and conditions. .

that lack of rigor on the transactional side i think had its counterparts on the commercial side and the consumer-lending side, with people are more familiar with. >> did you see it going down? if so, how did you handle your understanding? >> in all honesty, -- you cannot miss the fact that the covenants, with the benefit of hindsight, i wish i were not in

the position of having to explain it, but at the time, i know other people have rationalized. gosh, the world is getting wealthier. things are more efficient. there is no inflation. things are going to do well. and i think we talked, much of the world did, talked ourselves into a state of complacency, which we should not have gotten ourselves into, and which, of course, after these events we have gotten ourselves into, will not happen again in my lifetime. >> three minutes for the commissioners questioning, if he is interested. >-- the commissioner's questioning. >> i would like to ask you specifically, did goldman sachs do that?

did you look at products that were rated highly? and you have highlighted it in your testimony. >> i think we did -- i would like to talk about some places where we were scrupulous and where we scrubbed ourselves, but i think that there were some places where we did defer. the same when you say you cannot blame a regulator, you cannot really blame a regulator or a credit agency. that is our decision -- position to bear the consequences of. when i saw something had aaa, aa, i also must of been deferring to a rating agency. >> i would just like to ask mr. dimon to go back on your

observations on how so many bad mortgages could be written in the united states. >> so it is really not a mystery. 80% to value loans. 95, 100, even higher. the second thing is that you have to verify your income with either tax documents or pay stubs, and make sure that the income is there. there is more reliant on fico scores. -- more reliance. you never saw losses in these new products because with the prices going up, people are making money, and in addition to this, i think it is true that there were some bad products.

as it turns out, i think option arms were not a great product. i think there were some unscrupulous mortgage salesman and mortgage brokers. there were people buying second and third home, as opposed to a place to live. >> thank you. >> just a quick follow-up on my time, and that is that i mentioned earlier that the fbi made a clear warning. mr. dimon, you indicated in your testimony, i think again today, that most mortgage brokers -- brokerage originated lending from your practice, and you were seeing default rates of two or three times, but did any of you

excise these from what your packaging and selling to the market? >> no. no, not that i am aware of. >> did you not have the data? >> we were laid in that process of securitizing product, and we did sampling and testing, but we did not do that to anyoneñiiñke. ñrwhen we found faulty data or faulty mortgages, to put them back to their originator, and we did that. >> ok, i will leave it there. let's move on. >> gentlemen, i am 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 expertise to monitor these. it could threaten the stability of the entire financial system. expert commentators have said that the crippling financial crisis was at least partially caused by inadequate accountability by those responsible for the creation of financial interests, for the consequences of his actions, and the investment bankers that undertake the fiduciary a duty -- fiduciary duty, the lawyers to draft the prospectuses, those you review, and the rating

agencies are paid in cash from the proceeds of the sale and therefore do not have any state. this puts the boredom of loss -- burden of loss on the people. there are some looking to fund their monthly benefits during retirement. if all of those had to, quote, each to their own cooking, requiring, for example, that their fees be taken not in cash but insignificant part in the securities they created -- eat their own cooking, which they would have to hold until maturity unpaged. the originators would receive their compensation on the same basis. if the same banker that led the underwriting was entitled to a

$1 million bonus, he or she would receive $1 million worth of securities, union come 45 years, receiving $1 million in cash at the end. the originators would lose their expected in, and the expected principal amount of their bonus. alternatively, some have suggested that investors should have a foot, during which time it security fail to perform, investors would be entitled to a refund. they are not intended to punish the responsible individuals but rather to improve the quality of the diligence exercise in the origination of the security, knowing that their financial future, just like that of the purchasing investors, is tied to the success or failure of the security to perform as they were sent to reform, and i would ask each of you if whether or

not you think the volume of toxic securities contributed could have been materially reduced by some such a mechanism by placing responsibility where it belongs, on those that -- financial instruments. and i would respectfully request that you attempt to answer not as leaders as four of the world's most profitable institutions, focused on maximizing your firm's' profits, but looking for potential remedies to avoid the situation. >> we did each hour of cooking, and we choked on it. -- we did eat our own cooking. that part of the industry, the

housing market. number two, to be paid in stocks and bonds, i would do that. i think the issue with investors today, if we get that kind of payment, or in the past, when we have gotten payment, particularly with start up companies, we have been criticized withholding back stock. a successful transaction. if i am paid in stocks or i am paid in bonds, that would not be an issue. >> i am not sure i understand that point. >> let's say we have the next apple computer company, whoever it may be. we do the underwriting. and we get a certain amount of stock. the stock was hugely successful. it went up dramatically. i think people would want to make sure that they have access

to invest in stocks like that or bonds that also do well. the sec and the past has been pretty clear that when we distribute securities, and especially when they go up, we do not hold any securities back. so i think there could be a debate about whether we should be paid in equity or should we be paid in fixed-income. >> when you engage in underwriting, simply an insignificant part in the securities themselves this would also permit you to just let the investors do. >> again, i would welcome that. i would think you have to give us some leeway. other than that, i would not mind being paid in equity.

>> it undermines the whole notion of the concept, which is to place responsibility on you, the underwriting, the originator, the party who has the greatest access to the information, for the success or failure. >> if you are a very large underwriter, and we had just gone through a week of records, inñi the corporate bond market,e would very quickly fill up our balance sheet, again, i am not opposed to it. >> or it might require more capital raising on your part to expand your business? >> possibly, and we have ratios. it could. the other part,xd you mentionedn the security does not perform, again, there is a short period of time.

there are times when new information comes back, and there is a pushback, but to extend that over a long period of time, that is putting all of the risks on the underwriters, and some of view may think that is the right way to do it, but that would curtail our business to radically -- dramatically and also hurt the capital markets. >> any mechanism to put on the originators >> directionally try to put more onus on the issue of originators is probably a good idea -- any mechanism to put on the original interest? -- on the originators?

>> directionally trying to put more onus on the issue of originators is probably a good idea. we would an incentive to have a lower price than the higher price, xdbut that is neither hee nor there. the overall theme should be, should there be some skin in the game? that should be a fee morts pursuing. what john mack brought up are things that have to be accounted for. you are not just someone tried to find the right thing between a seller of a security, the person needs the capital, and the investing public. those would have to be sorted through.

in this process, most of the problem was, in my opinion, the cynicism of companies that held these positions, even though they knew they were toxic, and motivation. they did not know they were toxic. many tens of billions of dollars it was a failure of risk- management, i think, rather than a failure of incentive. >> you have 20 seconds. >> would not be originated entities be in a better position to know whether the securities that the possibilities of becoming toxic? if you had evaluated some of the cbo's, which do not have been in a better position to know about them failing? >> you should be in a good place. i cannot think of a bigger incentive than having that

accumulating on your balance sheet. we had that incentive, and it did not work. >> some of you have talked about clawback provisions. and any of you utilize your clawback provisions? and i wonder whether each of you, since i do not have time to hear your answers, whether or not you applied the clock back to the people in your firms, without naming the particular people, but the clock back and what percentage of compensation that was, and if you can put that in writing, we would appreciate that. >> terrific. we are going to take literally a five-minute break. we will then get on with our business. [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute]

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>> did you feel like you were at court today? >> i think in many ways, you know, we often have other things to do that are really important, to be able to participate and give our views. i think we are very lucky to have a chance. >> the pressure of the public?

>> you know, i have not reviewed it yet. i am really not going to make a comment on it. >> so much more now. >> there is so much going on with the economy, especially the u.s. economy, and i think progress has been made. we have put a lot of things in place to make sure that we know

what is going on, but again, as long as there is high unemployment and people losing their homes -- >> when they read about this. >> well, it is zero. let me just talk about that here. look, i have to run. if you go back and look, historically or even look and the last year during all of the turmoil, and number of people have left, not just morgan stanley, but goldman sachs, other companies, to go to other banks or private equity, so there is still a very big market out there for demand, so we have to find the balance between what is prudent to run your business

and at the same time being responsible for what is 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, but also most of us had put in clawback, where there is some transaction that loses money the following year. you have the right to take that money back. i think firms are trying to respond to that. well, you know, again, i think we are in the environment that is so difficult that we can never start a perfect balance. the effort to do that, everyone is very focused. the principle of mortgages, homeowners and their loans, things are not working out.

we have a very small origination, there is a real effort to keep people in their homes. i cannot come -- comment on the bigger companies, but there is an effort to do that. ñithis is part of the program. so we are making progress on that. some are these are not going to be permanent and will not necessarily keep people from going into foreclosure. you have to start somewhere. we started, and we have been aggressive on it, and we wanted to be very sensitive. if we have to extend it, we will do that. >> as of now, you are not thinking about agreeing to write down principle? >> i think the most important thing is to try to redo -- it has begun to shake.

try a response and continue to work with the homeowners to keep them in their homes. all right, you guys, i am going to take a break. i am going to stay here and talk to my guys. i focus on clients. i am the chair, and if i can tell this committee or any of the regulators with some of the issues that i see, i would be happy to do that. >> bonuses, like you did? >> i think people have to make up their own minds. i do not know. >> was this the first meeting? >> i think a lot of people are going to end up coming year. thank youñr

to keep them off of the balance sheet. they suddenly came off the balance sheet. that created a lot of >> and organization took down a lot. there were things they're off balance sheet. many, many statutory changes were made to govern

organizations to make sure that they did not do things like that. how could that have occurred on such a magic scale. not because these things have not happened before, but they have risks that were not showing, but it creates two problems. 1, when you have uncertainty about whether or not you are solving it or other people in the world are solving it. because of a regiment, we are required to put everything in, whether or not it is on our balance sheet. we make a commitment, and even

before it is a security. we have to mark that commitment to market. it would not allow us to do that, but it created a lot of problems for some response to institutions. it created a wave of the financial markets, is security about whether or not anybody can be trusted. >> while it's certainly suggested that risk-management may have lapsed, there is 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

apply the word "excessive" and instead of this, how do you take such prudence? liquidity, and a lot of capital around it. you do not want to -- is the age-old problem. you do not want to fail to innovate on the one hand, and on the other hand, you do not want to bear the consequences. said that is a balance that has to be reached, -- so that is a balance. again, before the 100-year storm, that, i think, is going to be one of the most important uses of the information that is gleaned from the work that is commissioned, is how do we reset the balance but also to make

sure that we do not go so >> you think about innovation and managing the risk associated with it. you have seen a great deal in your time. >> they have to focus on complexity. it can be so complex, even though let's assume that i am a salesperson,

it continues to juggle and up, and you can continue to make it complex. i think one of the things that the regulatory framework needs to focus on is complexity. >> so can the regulatory framework adapt fast enough? we do need a regulator that is more resources and a bigger budget to focus on that.

but, yes, they can do that. but, again, we have many different regulators. i would like to see some consolidation. i would like to see it something, not just here in the u.s. but tied to other regulators across the world and the global economy. i think there is a super regulator. ñii have to tell you, the amount of questions that were asked, i find it helpful. it is a great check and balance. they say, let's tell you how to look at it. >> there is an old adage that if it sounds like too good of an idea, maybe it is, and perhaps some of this oversight is management's responsibility, not necessarily that of the regulator , so, thedimon, --

regulator, so, mr. dimon, how much do you put on the management team? >> let me say that i blame the management team 100% and no one else. this does not mean that we should not look at the gaps in the regulatory system. if i were a regulator, i would say that there should be no gaps in the system. there should be new products that should always be reviewed. i do not think it is unique to financial-services. new products have problems, and there is time before people leverage up on it. i think most of these things can actually be fixed pretty quickly as you go through your work, and you see where everything was. a lot of the things we all talk about, mortgages, derivatives, they were not a secret.

no one put it altogether. the money market funds have a problem, and that will cause a problem. it is not a mystery or a surprise we have a crisis every 5 to 10 years. without trying to be funny, i was saying 5 to seven years. we should not be surprised, but we have to do a better job looking forward, better disciplines, eliminates some of the balance sheets, helping. >> one more. >> on a longer-term basis, some say that our country has had more of this 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 a way that has made this economy weaker from its perspective of delivering milk products and services into the marketplace. >> i think probably a lot of this has gone to financial- services. macroeconomic, how it moves and why it moves. i do not know. i have a relative who has a ph.d. in physics, and he would not even want to get involved in something so mundane as trading, so i think there'll probably be a change over time. we have seen in google and technology, and the trend will probably reverse at some point. >> thank you. >> mr. thomas?

>> can i ask a quick follow-up question? in terms of the complexity, more and more drive with the documents that the public deals with in terms of trying to put them, in relation -- so that you can understand them. i know that sometimes, it is difficult to bring it in simple terms. but do not all of them focus on who gets what, when, and how? and you can permeate that in any way you want to, but there are some fundamentals that do not have to be there. sometimes, complexity is impressive. i mean, if i said "i hate you," you would get it. i am extremely strong feelings of animosity, some folks may not. the fundamentals are the same -- i had extremely strong feelings of animosity.

talking about simplification, so that people can understand, or a kind of agreement that you're going to have a fraternity, which gets paid highly and has the jargon. i used to run a lot in government in which jürgeargon s used in which 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 mnow? -- now? you get paid more for 100 pages. >> no, it is not about 100 pages instead of one page. certain products answer certain questions or problems that someone is trying to solve for, so all of us, we are lucky to have very smart people, and if

there is a problem that an asset manager has, or a pension fund, and you try to work with them to solve the problem as a result -- >> is each one unique? it is something about who gets what, when, and how. >> it is a combination, and my uáq" this earlier, that some of these are tailored, but some can be used across many different fields of investing. >> and this costs more than the general. >> thank you, mr. chairman. >>ñpáhank you. mr. hennessy? >> thank you, mr. chairman. i want to focus on the too big to fail question. i think it is interesting that we are talking about risk- management with the four firms that survived, whether that was because of your risk-management practices. i am more interested in hearing

about risk-management practices at lehman brothers and bear stearns and fannie mae and freddie mac, those as opposed to others that failed and went under. but i think the american people, we do not care about the risk- management practices at home depot or caterpillar, or even the biggest firms, like wal-mart and chevron, because if those firms bail and go under, and they go away, their competitors swoop in, but i think a lot of the problem and a lot of the political blowback -- we could not allow the largest financial firms to fail because of the broaderçó consequences for the economy, so what i want to do is first focus on the perception of the too big to fail question, and a question for each of you, on both investors and managers and your board members, and that is in the fall of 2008, do you believe that investors that were investing in your firm where 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, that you talked with other members and board members, to the possibility of the government coming in and rescue your firm, or preventing your firm from failing to enter into those discussions? i am much less interested in whether or not your firm was likely to fail as to whether or not the investors bought more firm was likely to fail to and whether you were discussing with others, well, if things get really bad, we can always count on the government to step in, and that is a question for each of the four of you. let's start on this one side and work our way over. >> in terms of discussions, again, i was not party to those discussions. as mr. blankfein earlier said,

you would go to bed during the darkest days thinking, it does and does not stop, what will happen? in terms of your views, if you look at the spreads in the debt and comcent, august 2008 to the first quarter of 2009, they will lighten things up dramatically, and therefore, investors would take a position that they were requiring a substantial multiple that they would require by the time the crisis -- an earnest. in some cases, they were as high as 35%. they were factoring in a deep discount. during these times, i do not think any of us in the industry thought about the ramifications of what could happen, at least

restoring the system in some regard. >> i think lehman brothers allowed to fail, i think with morgan stanley was thinking they were too big to fail. as a result, the stock went down. if they had a view that that was not the case, i think lehman brothers said 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. if we get into where the japanese are not want to put in the money they invested with us, would we be bailed out by the united states government? it was never discussed. >> raise in the question because at no point before the crisis did the markets seem like it was too big to fail. -- raising the question. >> mr. dimon, would you move the microphone?

i am getting signals. >> i cannot move any closer. i am saying that no part -- at no point was it too big to fail. there is the potential of failure, like any other company. even after they started feeling. indymac, virtual failures in wachovia, bear stearns. even after the government did the stress test and said they do not want these things to fail, it was like they could fail. we never had a conversation ever about relying on the government to do anything. >> i do not recall any internal conversation among the employees or with the board about what we would do if we would fail. on the rodentia a big to fail issue, i agree about the

sequence. nobody in our country -- company entertained that, and we did not behave that way. we are shareholders. we work for the shareholders, the equity. even the context of too big to fail, if you take bear stearns, that was, quote, rescued, that failed, and all of the shareholders -- that is how we think internally about what constitutes a failure, so for our purposes, they rescue the debt, and equity goes, and that is as much of a failure as anything could be. the external, i think everybody contemplated that the equity could go to zero. that is because that was the pattern, and, in fact, it is interesting. there was the idea of big to fail noise that came out, that only came after lehman brothers,

not before. it is interesting, because there are always unintended consequences. our shares did not go down to the lows until, for us, after buffett. we did our capital raised the week after the bank holding company at 123. we went down to a low under 50. that was after we got capitalized privately and after the tarp, because at that point, people started thinking they will be quick on the trigger, the debt will get saved, perhaps, and maybe equity would get crushed. maybe we would get into a scenario of the kind of bear stearns, and so, in other words, that puts some pressure on the equity of our shares, which, again, went to those lows after the government in certain that

money into the firms. >> thank you. a related question, and when we go to this direction now, the capital purchase program and the stress tests drew a line between the 90 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 that, well, now because my firm was a part of a capital purchase program, because they were a part of the stress tests, because the federal government clearly stepped in and save at the minimum the financial system and, in fact, certain specific firms that there is an implicit put option in the value of your firm and the value of those other 15, 16 firms? >> i just want to say that there are only a few minutes. >> we do not behave that way, but that sentiment is in the eye of the person you ask, and maybe some people think like that.

and, by the way, post-lehman brothers, which, by the way " was allowed to fail, and congress and the reaction to westering as these firms, i think that has gone a long way -- and the reaction to rescuing these firms. away from the context of the big systemic risk like we had, i think any one of these firms can fail now in the context that we're in now a lot more easily than could have at that moment. >> ok, well, let me ask you a different but related question, which is, do you believe if one of your three counterparts here, if one of your three counterparts messed up, and that firm failed tomorrow, do you think that policymakers would step in and prevent that firm from failing? >> i think tomorrow, in the context of this environment, at some levels, the government would intervene. i do not think the equity

holders, the shareholders would find any relief from that, but there would be something done because of the fragility of the system today, i believe. >> ok. 1.5 years ago, maybe not. >> all right, quickly, i think mr. dimon mentioned some sort of wind down authority. is that important in legislation? >> mr. chairman, i leave the gentleman 3 additional minutes to be able to pursue the line of questioning. >> yes, i think similar to mr. dimon's comments, so we do not have been left to people speculating, there is a clear path forward, as has been in the fdic process for years and years and years. >> we would like not to have the it too big to fail context prevail. >> ok, but on the specific

question -- we do not want to have the too big to fill context prevail. -- to fail. >> can you explain to me the difference in views? clearly, there was a view that there were systemically important financial institutions. we now hear the secretary of the treasury, when you're the chairman of the fed, and we hear other people talking about systemic we important financial institutions, and higher standard -- we hear the chairman of the fed. and we hear other people talking about systemically important financial institutions and higher standards. what about the perceptions of the policymakers? mr. mack? >> again, i think it was

incorrectly that somewhere in the future, one year or two years, clearly, any of these institutions could fail, i think, given how fragile the markets are, not just here, on a global basis. i think that is an issue, so as to go forward, and when i think of ford, i am not just talking about the u.s. economy. -- and when i think of forward, i am not just talking about the u.s. economy. you could get there faster by pulling away this idea of a safety net, but it is more complicated than that. i think that regulators or leaders at the fed or treasury have more insight into 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 right now, trying to figure out what is the right thing to have, i think down the road,

this safety net that many believe, and i believe in this particular time frame, it is inflated. i think that will evaporate and will not be needed. what we always learn and not just through the crisis, these markets are connected around the world, and some of them in one part of the world could have a huge impact on here in america or what we do in here impacting on somewhere else, but it will take a lot of work to do due diligence and come up with the right framework to remove the safety wernet, but i think that will happen. >> 15 seconds. there is a significant difference between the increase in perception if a firm will fail and whether or not a put option exists. it may be the case that your spreads increase after lehman failed, but investors may still

be pricing and risks, the possibility that the government might step in and rescue your firm. thank you. >> mr. hennessy? >> thank you, mr. chairman. i would like to focus on a couple of things, a few things, for all of you that relates specifically to what caused the financial crisis. the newspapers have covered this somewhat, but i would like to get this in the record. >> excuse me, mr. wallison, would you pull that microphone down toward you and then pull it up? >> i have got it. mr. blankfein, i just have to say that we w's have always envied you b's, and i now

recognize the downside to being a b. i would like to get in the record, as i said. post aig, if they had been allowed to fail, what would the consequences for goldman, and why? >> this is a subject that we obviously hear a lot about, so much about it that we put information on our website as to what happens. but we had transactions outstanding -- as to what happened. we had marginal arrangements with them. >> and these were credit default swaps? >> credit default swaps. the conditions eroded. they owed us a lot of money. they literally gave us the cash, in our possession, with respect to the mark to market losses.

with respect to the difference, we held the cash. during the period, 32008, we were marking to market, as were our regimen, and we were one of the most aggressive in that, because that was our regiments, and they became very slow in giving margins, such that there was a gap. as a result of our protocol, which does not allow us to take a certain amount of risk, we went out and bought our own protection against their credit, such that the combination of literally the cash that we had and the credit derivatives we had from other big financial institutions -- we also had a margin. we had the cash from them, effective recovering what would have been the loss. >> what was the total -- effectively covering what would

have been the loss. >> what was the total? >> about $10 billion of exposure, against which i think we had $7.50 billion in cash, literally cash, and $2.50 billion of credit protection. they would get the agency or government securities. >> what were these credit default swaps protecting you against? >> the default by aig. >> not the ones you bought, but the ones that aig was originally covering, what kinds of assets were they? were they, as people call them, toxic assets? were they cbo's? >> they were a lot of assets, and somebody doing business with aig, other parts of aig, including other things -- but to a point, i think the main part of it, cbo-like things.

>> you are holding these? >> again, i do not want to get too far over my skis. >> but you answer these in writing afterwards? >> yes, but i believe that we had -- protection to another counterparty, and a squad that protection from aig, so, in effect, we had no kind of equity risk, but we did have a credit risk to aig -- protection to another counterparty, and we had protection from aig. >> since goldman was regulated by the sec, which, again, i think was about 2004, your

leverage increases substantially, from 2004 until about 2008. why would deleveraged increase after you became regulated by the sec? -- why would your leverage increase? >> the way we did deleveraged, the way we looked at it, under our regulatory regime -- the way we did leverage, it did not rate every asset the same way, so, for example, with a balance sheet, much of that is cash, what is on our balance sheet, so we assign a very low risk to that, so we had notions of it being adjusted. the federal reserve, the bank holding company, as a growth deleveraged -- has a growth leverage cap.