guest: we do not have a way of detecting when it is one person doing something. how do you detect a single minded person who is flying under the radar? host: the debate continues under -- over don't ask don't tell. where is that headed? guest: mr. skelton just said very clearly that he opposes lifting the ban. basically, relegated the hearings that the subcommittee level. it is the personnel subcommittee level that has jurisdictionsover that issue. çit is going to be a little bit of a disconnect between what president obama wants see and also, speaker nancy pelosi was a strong supporter of for peeling don't ask don't tell. and looks like mr. skelton is more in-line with moving slowly. the pentagon is also moving very

slowly on this. there's been some concern that it may be disruptive with the military obligations right now. host: the internal debate between liberals and the more moderate wing and the party when it comesi] to defense authorization. what are you looking for? guest: mostly the funding for the afghanistan war, the additional funding that the president will ask for. it is very clear there will not vote for additional money for war. it is a vote that will be secured by the republicans or more conservative democrats, those who support the military. host: no question it will pass? guest: action there is a question. --- i think there is. guest: on a number of grounds, it will be difficult for them to

get it built on. you will have a strategic review that were command getting rid of this and adding that. you have the don't ask, don't tell fight, which i will disagree. i think they do have the votes for the armed services committee to pass it. the worry is you cannot get 60 votes and the senate and it will die there. in a minimum, it will delay at with a fight. then you have a question of the funding for afghanistan, where the democratic party is certainly not all in line here. i do not think that it will happen. guest: i think congressman skelton carries a certain way when it comes to the repeal of don't ask don't tell. when you look in 1993-1994, he played a favorable role in crafting a law that is right now. he is pushing for compromise. he opposed lifting the ban it to begin with. it carries a lot of weight with the military. guest:host: thank you very muchr

being with us. thank you for your questions and insights on "newsmakers". >> i described myself after i left the congress as a recovering congressmen. >> fred grandy -- randy represented by what in congress for four terms. she was ceo and president of goodwill industries. -- he was ceo and president of goodwill industries. he is our guest on tonight's "q&a." >> witnesses at this meeting include top executives from goldman sachs, j.p. morgan chase, morgan stanley and bank of america. the commission, made up of six democrats and four republicans is mandated to deliver a report to congress b.

this portion of the hearing is three hours, 20 minutes. >> the meeting of -- oh, good, the microphones work. the meeting of the commission will come to order. there is a quorum present, and so we will now proceed with this first of our public hearings. good morning to everyone and thank you for being here. i am honored to welcome you as we start this series of public hearings into the causes of the financial and economic crisis that has gripped this entire country. i think vice chairman thomas for his extraordinary cooperation and partnership.

i applaud the dedication of my fellow commissioners. 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 far 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 unbiased accounting of the actions that led to a devastating economic consequences for so many american families. we will follow the evidence wherever it leads. we will 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 deserved, and that is what this commission is going to give them. some already speak of the financial crisis in the past tense.

-- as some kind of historical event. the truth is, it is still here. -- and still very real. 26 million americans are unemployed or cannot find full- time work -- or had given up even looking for jobs. over 2 million families have lost their homes to for closure in the last three years. millions more have a very legitimate fear that they will. retirement accounts and whites savings have been swept away, vanished -- retirement savings have been swept away vanished like someday trade. wall street is enjoying record profits and bonuses in the wake of receiving trillions of dollars in government assistance. i see this commission as a proxy for the american people. their eyes, their ears and possibly also their voice.

this form may be the only opportunity to have their questions asked and answered. this form may be our last best chance to take stock of what really happened so we can learn from it and restore faith in our economic system. if we ignore history, we are doomed to bail out again. and so we expect our witnesses before us to be forthright. we need candor about the fat -- the past so we can face the future. today's hearing is the beginning at the end of our questioning. we will hold hearings throughout the year and take testimony from hundreds of individuals. witnesses called to testify today are likely to come before us again. those who have not yet been asked to appear should be confident of this -- we intend to thoroughly questioned individuals and institutions relevant to our inquiry. let me close with this thought. my father grew up in the great depression. like so many of his generation, he was shaped by sacrifice, hard

by economic hardship and war, keenly aware of the financial ruckuses 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 disaster. let us learn the lessons of our time. let us be diligent and thoughtful to date so that our financial and economic system can fully rebound and rich 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@ áo@@@@@@@@ @ @ >> the role we play in capital markets is to support capital growth. we did not know it then or even today, when it actually crossed over into a bubble territory. but we lent money up too cheaply and in certain loans without traditional safeguards. we did not recognize early enough that risk was as 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. çexcessiv leverage by many u.s.

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. process. we stand ready to assist the thank you for the opportunity to testify before you today. >> mr. mack.

>> i am the chairman of morgan stanley. i also served as morgan stanley proceed ceo from june at two -- in 2005. i am pleased to address you today. unprecedented il liquidity saw the fall of two leading french oat -- leading french as is and the consolidation of others. -- leading franchises and the consolidation of others. the consequences have spread far beyond wall street. millions of americans today are struggling to find work. they've lost homes. they have watched their retirements evaporate and their savings. i believe the financial crisis expressed fundamental flaws in our financial system. . . s 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. system as a whole. let me 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 important because the lessons will not be simple. it is important that we can learn the right lessons and apply them for the future. we have seen four crises and full. the mortgage crisis, a capital crisis, a credit crisis, and a recession.

the mortgage crisis originated through subprime language and terms, leading to a greater debt burden for consumers. lenders, prompted by interest rates, home prices, and capital available mid loans for borrowers who could not previously qualified for mortgages. the national policy to expand homeownership was popular, and created a tail wind. no one foresaw the rapid and dramatic appreciation in home prices. when this was experienced, it was the first since the great depression. the option to refinance disappeared, leading to default. the second crisis came in the

investment banks and capital markets area. investment banks had not only underwritten mortgages, but held risks. investment banks created products based on these risks, and they spread. it happened in money markets purchasing commercial paper from those pickles. the crisis began to spread beyond to more market participants. this destabilized institutions. it was global. without intervention to restore liquidity, the risk of global collapse is very real. the final crisis, and perhaps the most daunting, is that we have a severe recession. some would say that the financial crisis caused the recession, but experts will

analyze it over coming years to establish the exact cause. it was funded in part by home price appreciation. in addition, financing was contributing to economic expansion. the history of economic cycles shows that an expansion built on excessive debt or leverage will result in recession, no matter what triggers it. and it did. but me give you highlights. first, a clear assessment of portability to pay the loan. second, capital is important. the leverage in investment banks and other markets was

untenable. banks and others should have more capital going forward. more liquidity is key. liquidity allows an institution to fund, rather than selling at a discount, which could lead to further losses. rules require banks to reduce reserves, set-aside losses in good times and build them and bad times. -- in bad times. it can become distracted when there is no market process. at bank of america, our competition guidelines are set by a board of directors. the goal is to attract accounts to make business is profitable. in 2008, our company earned more than $4 billion, but that was

far from what was needed for shareholders. many in the company received a bonus for 2008. for the executives the next level down, bonuses were cut more than 80%. 2009 bonuses have not been finalized. we expect compensation levels higher than 2008, but not at levels from before the crisis. we have implemented programs, including callbacks, but we have seen in other places. the tarp regime, various regimes. we understand the anger felt by many citizens that institutions that received federal investments are now paying employees through this recovery, especially investment banks. 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 we are grateful for the courage most of all, we as managers have to no longer let this happen again. thank you for your time. >> thank you very much.

we are going to now move to questions, and we have got a lot of ground cover, so i'm going to ask that you be as insight and selling at possible, but brief. i would like to start by asking questions about specific types of business and risk management practices that may have been fitted it to the financial crisis as a way of making this tangible and real. i want the cup on your comment, mr. diamond, and i would like to be brutally honest. i'm going to start with you today, with your testimony that there were financial products and practices that may serve no essentially good or productive purpose in the finest system.

recently, he made a few comments, and i would like to read you a couple. he said in november of last year, listen, there was a lot of negligent behavior that had to be fixed and sorted through. we do not take ourselves out of that, i include ourselves in that. it also said we participated in things that are clearly wrong and that we have reasons to regret and apologize for. what are the two most significant instances of bad behavior in which your firm engaged for which you apologize? >> i think the -- our behavior got caught up in and contributed

to elements of fraud in the market. for tipple, what leverage finance, our biggest exposure, we are eight top service provided to private equity, we are eight top merchant for mergers and oppositions in terms of rendering that advice, we helped finance those transactions. increasingly, those transactions took are higher and higher leverage, which they could not have, plus dealing with fears participating in that, and we were a major finance year. and moreover, we held those positions for too long, too much concentration in our own books. relative to our size, we had more than we should have had. going back to look at them, too much leverage in transactions and to much concentration

remains in that leverage on our books. >> would you look back on some of the finance years as negligent or improper? >> in the context of the world we were in, and using terms like that, i always think about standards of behavior context. i think those were very typical behaviours. given the context we were in. >> have you done any kind of internal investigation, and what did you find? is that something we did have? >> if we have something, we will identify it for you, and you can have it. i am referring to the fact that would look at our risks and positions and look at the

balance sheets and evaluated liquid positions there. that is what i am referring to. >> if you had done an internal investigation, you could look at the practices and mistakes, and you would like to be able to review that. let me move on now. let me talk about the issue of conflict that comes up in many respects in the marketplace, in compensation, in trading practices. i want to ask you about a specific instance as a way of getting at how things might be changing in the future. based on a review of public documents, york firm sold a significant amount of mortgage related securities, and it appears you have simultaneously batted against securities you sold clients. he sold about $40 billion in

2006-2007, december 2006, i think, you came to the conclusion that the market was going to stop. in many of these securities, they went bad within months of issuance. one expert says that the simultaneous selling of securities to customers and charging them because they believe they are record to be fall is the most cynical use of credit information i have seen. do you believe that was an ethical practice, or do you believe that is the kind of practice that undermines confidence in the marketplace? >> the answer is that i do think the behavior is improper, and the consequence, that people have lost money in it. but i just want to explain.

in our market making function, we are principle. we represent the other side of what people want to do. we're not a fiduciary agent. we have an obligation to fully disclose what an instrument is and be honest in our dealings, but when we sell this, that item will have gone up, in which we will wish we could not have this, or it will go down. but we are market makers. they came to us for the exposure

they wanted to have. >> the notion that i would make a transaction with you and then the person with whom i made the transaction, that transaction would blow up, it is inevitable to me. you were not actually a broker. you were taking subprime product, packaging it, and selling it under your label, right? >> we were not a broker at all. we were a principal. >> the act of selling, i guess one of the questions i asked you is how you go to the rating agencies and persuade them to give many of the tranches at the

same time that you have credit information making you believe that that could fail. >> we were not controlling our risk. when you listen to testimony that has come by, the biggest problem institutions had was the accumulation of risk. when you wore it, a market in makeup does not manage its risk profile. like housing. it is separate. we have various pockets of goldman sachs but like the position or do not like it. what we do is risk-management. because we have this risk, because we were trading positions, which by the way, we've had clients that wanted to sell them to us, we had to go out ourselves and provide an

source the other private transactions so we can manage our risk. these are all exercises in risk management. >> it sounds to me like selling a car with faulty brakes and buying an insurance policy on those cars. it does not seem to me to be a practice that inspires confidence. >> this is an institution dedicated in most cases to this business. these are the professional investors who want this exposure. in the current market today -- i think these are important matters. i think this is one of the most critical questions. >> i have a question to follow up on this. >> no, i understand.

the equity market is being driven by more baubles. i do not want an exposure to the equity market. we've got to make sure the product to do what they say, that they are honest. but we are an institutional firm, and this is the highest part of the institutional market. even today, by the way, people are coming to us for exposure to these very instruments. four 8 cents on a dollar, because they think it will be worth 12 cents, and others say it will go to four cents. that is what the market will do.

>> did you always disclose to every investor the you were taking contrary positions? was that consistently disclosed? >> we were selling as a principal. we were selling something we owned. they owned it, we did not. >> let me ask you one question as a principle, which is that in september 2004, the fbi's head of the criminal division warned mortgage fraud was so rampant in this country that it was a potential epidemic, and if unchecked, it would result in a crisis. do you take any steps to evaluate the market is your selling in the marketplace? >> we were not and originator of

mortgages. we have due diligence practices that are robust. there is no information that would not change my behavior in some respects. anybody who says, i would not change a thing, i think they are crazy. whatever the standards of the time were, it did not work out well. of course i would go back, to not be in the position where we find ourselves. >> let me ask a set of questions about risk. you talked about where things are going.

i think you make the point you have profitability in 2008, and i think it goes to the overall context of risk as it was perceived. when gdp was growing up 1.3%, your leverage, mentored against conventional equity, was 36 to one. you have even made the observation about dependence on to short-term liquidity which exacerbates that. there is extensive handwritten -- hedging, i assume because of the risked for filing to assets you held. at the end of the day, it seems to me that you survived with

extraordinary government assistance. $13.9 billion as a counterparty the of the bailout. you issued debt guaranteed by the ftse -- fdic, given access by the fed, you became a holding company over the weekend, benefited from banning short selling, which initially opposed, then advocated, and got some relief from market rules. when you look at the amount of leverage, you look at that government assistance which i have laid out.

>> the fact of the matter is, you can wish there were less leveraged than, but people are throwing out our highwater mark as a fraction of that, and a lot of it included cash on the balance sheet. with government intervention coming it is a more nervous position. we never anticipated government help. we were not relying on it. when you think about the extraordinary weeks after lehman brothers, which was the most hard and tense week there was,

the next day, we ourselves both privately with warren buffett, and the day after that, we have access to the capital markets, and we were not relying on government help. that is when the top legislation came three weeks later. that being said, i do not know, i cannot say what would have happened, and i know for sure that no one else knows either. i felt good about it, but we were going to bed every night with more risk than any responsible minister should have for business or for the system as a whole. risks, not certainty. there are still risks today. but the question does not have to turn on, would you have to

gone on? it was safe, and taxpayers took measures to reduce an intolerable level of risk to a much more tolerable level, and that, we should all be appreciative of. >> in common terms, what was done is extraordinary leverage. you go to a small business person with $50,000 in net worth or a family borrowing $1.5 million, with much of that money to overnight -- i'm trying to drive to the clear recognition that despite the risk models on the fundamental basis, excessive risk was being taken, notwithstanding the models.

>> everything is context-driven. i could not be more clear. after 10 years in the context where we were -- look, how would you look at the risk of a hurricane? after four of them on the east coast, rates got very low for risk premiums. that year, after four hurricanes, rates went up spectacularly. was the rate before hurricanes different any of those times? >> acts of god are exempt. these were acts of men and women. these were controllable. >> i agree. i read testimony to the effect of reducing balance sheets, raising capital. clearly, we're less leveraged.

consequently, much lower leverage than others, cash on the balance sheet. but if you're asking me, would i do something differently knowing what i know now, how could you not? of course. i also wanted to put in context to the level of risk and that the level of assistance. let's do this. let's move to questions from other commissioners. i'm going to stop at this moment. thank you very much. 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, by one of those acts of god, there is an enormous catastrophe. there are thousands of people -- and i think the number of deaths will shock a lot of people, if you 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 did anyone ask you any point to take anythin >> but never got a request myself about taking less. it did not come out in a conversation i can recall.

someone in my organization, after the aig, a couple of months later, told me he got a question containing the inference, would you be willing to take less, and he said he could not answer the question, and he then said it never came back to him, and as i said, 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 >> mr. moynihan, you have any >> we have had a tradition in paying with stock. the next clawback begins with compensation.

it is part of our scheme. paying stock has been part of our scheme. >> my questions go to the issue of incentives. things that are intended to shape or direct our behavior. i am interested in all of the underlying incentives. mr. mack, you say that you closely linked compensation to performance. what are the primary elements of performance? >> the first criteria is clearly profitability. . ity.

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. 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. we focus a lot of effort on senior management. at the highest level of the firm. i think one thing we constantly learn from every crisis, 1998, this one, is the need for more stress test. very often in our business we go through the analytical process of what could go wrong verses what is the probability of going wrong? , which tend to discount the consequences too much. what a stress test does is says

and do not tell me this is unlikely. what if it did happen? what i learned after some years in the market is given enough time, not everything can happen, but everything will happen. implementation of more stress test. >> you have done this as a confirmed -- >> yes, consequently. you read in the paper some anxiety over whether the emerging markets are happening in the bubble. we look at that and they read in the paper or see it of the pricing of assets and it is far on the horizon because we are quite positive in the research. 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. .

and the conditions that apply in to maintain the things that allowed a lender to intervene in the company became more and more relaxed. so you could intervene less. that lack of rigor of the transactional side i think, had its counterpart in the consumer side in the commercial lending side. >> were you aware of this at the time? did you see the standards going down? how did you highlight this in your risk-management? >> in all honesty, we did know you cannot miss the fact that the covenants are getting lighter and that the leverage is

getting bigger. , 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 it has been suggested that the lack of accountability could be remedied if all the firms and individuals involved in the creation of financial instruments have had to keep their own cooking. requiring that their fees be taken not in cash, but insignificant part in the securities they created, which they would be required to hold until the maturity and hedged. if the bonds were issued that order to pay 7% interest, the originators would receive their

compensation on the same basis. if the investment banker who led the underwriting was entitled to a million-dollar bonus, they would receive the million dollars worth of securities, yielding income resulting in a million in cash. if the security fail to perform as represented just like investors, the originators will lose their expected annual income and the expected principal amount of their bonus. some have suggested that they have a put for 18 to 30 months, during which time it failed, investors would be a in title to a refund. -- would be entitled to refunds. these suggestions are in no way intended to punish the individual but improve the quality of the diligence exercise in the origination of the security, knowing that their financial security is tied to

the success or failure of the security to perform as they represent it will be performed. i would ask each of you that whether you think the volume traded at the liquid toxic securities that created significantly to the global financial crisis could have been materially reduced by such a mechanism of placing financial responsibility where it belongs on those who are rich and it 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

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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 where there is some transaction that loses money t i think firms are trying to respond to that. >> [inaudible] >> i think we are in environment said difficult we can never strike the perfect balance. everyone is very focused on that effort to do that. >> [inaudible]

>> just in our case, we have a very small mortgage for regulation -- origination. there is a real effort to keep people in their homes. i cannot comment on the bigger companies, but there is an effort to do that. >> [inaudible] >> we are making progress on that. a lot of the trial modification are not going on to become permanent. >> you have to start somewhere. we have been aggressive on it. we want to be very sensitive going forward. we need to be responsible. >> [inaudible] >> i think the most important thing is to try to redo -- we

try to be very responsive and continue to work with homeowners to keep them in their homes. we have to take a break. they do. -- thank you. i will focus on clients and some of the issues that i see. i will be happy to do that. >> [inaudible] >> i did not know. thank you. this is just the first meeting. i think a lot of people will end up coming here. thank you.

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in your testimony as you said there were products that created that serves no purpose. what were the products? why did they get created? why were they not regulated better? to what extent that the products that had no purpose contribute to the problem? >> i think at that point i was talking about off-balance sheet. i think there were regarded as

an arbitrage, if you will, to have a company or trust that invested in algor-term assets and finances that fell short in the commercial paper market. that is a mistake that is as old as financial markets to make a comment that liquidity would be there and ultimately those risks contained in the assets that were required where a way to keep the risk of the balance sheet, but when it blew up they suddenly came on to the balance sheet of institutions and created a lot of uncertainty as to the solvency of the institution that sponsor them. >> 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,

i think we do need to look at complexity. it continues to jump higher and higher. which innovation and computers and very smart people you can continue to make a complex. one other thing that the regulatory framework needs to focus on its complexity. >> candler regulatory framework to adapt fast enough at -- camp the regulatory framework adapt fast enough? >> we do need a regulator who is more resources and a bigger

budget to focus on that and to attract people into that arena to focus on it. we have many different regulators. i would like to see some consolidation. i would like to see ahead pretty bitter, not just in the u.s. but tied to other regulators across the world and the global economy. nk 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 sometimes it is difficult to put in simple terms, but don't all of them focus on who gets what, when, and how? you can permeate that in any way you want to. there are fundamentals that do not have to be there. sometimes the complexity is impressive. if i said i hate you, you did it. if i said i had extremely strong feelings of animosityso