>> take a look at page seven, exhibit 24. >> it says wamu has no record of action taken for performance issue, although with certain loan officers.

>> if i could find out exactly where that is. >> i'll get back to you. ok, right in the middle. there's ears with those two officers that are named there. what that's referring to is summarizing on the previous page the prior referrals with the corporate fraud investigation office led to eight separate investigations, two cases each year, with the loan officers list the as persons related to the case. that's page six. you'll see it the fourth paragraph.

>> none interviewed one of the people involved until january of 2008. then it says that wamu is now going back. wamu had no record taken. now, i don't know how a bank can possibly operate the credibility with this kind of problem, this kind of fraud. but instead of getting disappeared or fired, those top loan offers during the same period that they were being investigated, 2004 to 2007, were rewarded each year with an invitation to the president's club, wamu's highest honor, including all expenses paid

trips to places like hawaii, the bahamas. you were very much involved in the president's club. >> how does that happen? you got offered under investigation year after year after year, instead of being disciplined or fired, they are given rewarding trips to hawaii and the bahamas. how does that happen? >> mr. chairman, in cases of fraud where there's an investigate, i ask the h.r. group and legal work to do the fraud investigation, and they came back with a recommendation to terminate or punish an employee, then i would have taken that recommendation. >> are you aware of the fact -- should you have been?

a was there a recommendation in 2005 to take action against those officers? >> that report is something i was just familiar with. >> this memorandum outlines a few of the most egregious activities identified based on targeted reviews with the specific areas of failures based on the consistent pervasive pattern of activity among these employees.

they are recommending firm action be taken to address the particularly willful behavior as part of the employee's name. that's the action. you troubled by that? think the bank should be troubled by that? should your investors or stockholders be troubled by that except us? >> any team there's fraud we took it very seriously. >> no, when it was fraud, what you do is reward the folks that are being investigated with trips. that's the action. year after year. hope to see all these folks, not specifically these folks,

hope to see them all in hawaii with david schneider. take a look, if you would, at exhibit 30, internal wamu documents called a significant incident notification. now, this is west lake village, so that's near los angeles. those were loans that were issued in 2007, but the report says april 108. first bullet, many of the loans had several fraud findings, such as fabricated asset statements, altered statements, income misrepresent tailings, and one altered statement that is believed to have been used in two separate loans. we're talking here about west lake village.

some of the associates would manufacture asset statements from previous loan documents and submit them to the office. they said the pressure was tremendous to get them, since the loan had already been funded and pressure for the loan to get the loan funded. page two, sales associates would take asset statements from other files and cut and paste the current borrower's name and address. were you informed about the

investigation of the west lake village office? >> up wasn't. >> you were? >> i wasn't. i'm not sure -- i was or i wasn't? >> i was. >> were aware that they were cutting corners engaging in fraud? >> when that happened, we take it very seriously. in no way did i think that fraud shouldn't be treated and i think ultimately some of our sales were terminated. my question is what did you do with the time? did you get back into those securities, make sure the people who bought them were notified? >> i don't know specifically what was done. did you find out at the time, did you ask?

market risk committee, wamu. it was tabbed for further review and analysis, recent securitization deals appeared to have more delinquency behavior, increased delinquency

, including sales, securitization of delinquent loans. what did you do about it? >> i was want a member of the committee. i had not seen the document before. does it trouble you now? is this the first time you've seen this document? >> i think i saw it yesterday in preparation.

these are securities that happened on your watch. mr. beck, on your watch too. are you aware of these documents? i was aware of this at this time. i do recall this. and we bought the security -- we bought the loans back. >> they were brought to your attention? >> yes, we did. >> we bought the loans back. >> did you look for them after you found out about it? fraudulent mortgages, securitized. this document says that we sold loans that were delinquent, and that's never right. that's never what we represent.

>> you saw it at the time. >> right, we brought it back. >> i know. did you go out and look for it? did you initiated the recovery? >> tom lehman worked for me, the person making this report. >> you told him at the time go and find every single one of these loans, on all these other documents as well, up where found all these fraudulent loans -- >> i'm talking about this specific question. >> when we -- when we identified -- when you saw these documents -- when we saw these documents, in every case, you sold your people to find every single security that incorporated these fraudulent loans, we're going to buy them back? >> that's not what i said. no, i said i remember and recall this specific event, because we did go out, because

we securitized loans that were delinquent. when we found that out, we went and purchased these loans back. >> you notified everybody? >> yeah, i believe we did. i believe we made a filing on this particular -- >> what about the earlier ones where the fraud was identified? you go back and identify what securities incorporated those mortgages that were fraud will not for those offices? >> i'm not certain, dr. coburn, mr. chairman, that the loans that from that analysis ever got into a securitization in the first place. >> did you check it out >> i never saw the audit. >> you never saw the two audits? >> no. >> should you have seen them?

>> i don't know. i don't know the answer to that. i dent see the audit. what i relied on was an origination, post-closing review would remove the he frblingtive loans before they were put in the warehouse itself. >> do you know this? >> i don't know. i don't know that those loans were sold. >> i did not. i wasn't copied on the report.

a in general, were you aware that 2005 and 2008 investigation we were discussing, you were not aware of it? >> probably not. >> long beach is set up, do you remember that? >> i do.

>> that was to afirm actively investigate a complaint about the loans. is that correct? >> it was set up at the end of 2006. >> you supervised that program, right? >> did you set up a similar program for wamu's loans? >> that program was designed for long beach. >> my question is, did you set up a similar program for wamu's loans? >> the repurchase and recovery team also looked at requests for repurchase for wamu loans, but the seven-step process that you're rfering to was used with long beach. the best i can recall. >> why was it not set up for wamu's loans? there was fraud and variation options, why was that not set up for wamu's loans? >> we had a significantly higher level of repurchase requests from long beach.

>> now, 34 is a report from wamu's corporate credit review group. it is found that wamu loans marked as containing fraudulent information, nonetheless, sold to investors.

you look at the first bullet point. it can be harold saying misrepresentationing are a fraud are not current canly he will fective, so the controls are not affected. there's not a systematic process to prevent a loan in the risk mitigation inventory and/or confirmed the suspicious activity from being sold when investors, the coding of the user to find risk mitigation. they do not direct the saleability of the loan. a review is completed of a sample of the 25 loans.

this is a sample of 25 loans posed in 2008 that the appropriate coding, the risk mitigation. it reflected a sales date after the completion of the investigation which confirm fraud. there is evidence that this existed for some time. you recall this report? >> i do not. >> should you have seen this report? >> yes. >> are you aware that for some time wamu had been selling loans to investors, even after the loans had been marked as containing fraudulent information? >> no.

>> is there any way you should not have been informed about this? i would expect that i would be informed about that. >> i mean, this is damning stuff. it almost reflects sales. after an investigation confirms fraud. and this review says that that failure has existed for some time. now take a look at exhibit

40-b, if you would. >> senator kaufman, any time you want to jump in here, please do. >> exhibit 40-b, now, this one is going to take some difficult following, because it's an email that we got to start first email, which is on page four at the end. take a look on page four. you'll see there on february 4. michael liu writes the subject.

the senior vice president for a portfolio management, here's the subject. option a.r.m., a monthly treasury average, option a.r.m. and option a.r.m. m.p.a. delinquensifment notice that, delinquent. this adjusts to the monthly average, is that right? >> that's right. >> an email points out some information. fico scores, loan to value ratios about the delinquent nonperforming option a.r.m. you see that? there's some information about fico scores and about loan to value rather than yo.

is that fair? >> now, a few minutes later, still on february 14, work ourselves to page three, you'll see that an email to somebody whose name i believe is chen. do you know who that person is? >> yes. >> is that a man or a woman? >> it's a man. >> so mr. chen is being sent this email subject to option a.r.m. delinquency. you attached the option a.r.m.'s that were delinquent in the 2006 fourth quarter. you can see it is very much a function of fico low-document loans. we're in the process of updating the metrics. so now go up that page and

you'll see shortly thereafter, a couple of hours thereafter, a letter onar email sent from mr. chen, is that correct? did you say it was a male? female, i'm sorry? >> male. >> mr. chen to you, february 14, subject, option a.r.m. delen quinn a. -- delinquensifment just answer partially mr. schneider's question. apparently he asked the question on the breakdown of the option arm delinquency. they show where most of the delinquency comes from and not a product. now, the next email, you keep going up, is from you, same

day, you're forwarding that email on option a.r.m. delinquency, the head risk manager in the home loans division, and here's what you write. you write at the want to page, please review the performance of newly mipted option arms is causing us problems. we should address selling first quarter. that's the quarter you're in, as soon as we can before we lose the opportunity so in option, you want to set newly originated option a.r.m.'s as

soon as you can, right? with me so far? that's what you want to do. later that day, this is from you to david schneider, sunday, february 18, 2007.

now mr. schneider is saying, cheryl, your thoughts. do you remember this? >> do you remember this? >> i do. the results describe below -- and i'm reading now -- similar to what my team has been observing. california option a.r.m.'s, large loan size, 1.25 million, have been the fastest increasing delinquency rate in a single family residential portfolio.

there is a meltdown in the subprime market which is creating a flight to quality. i was talking to robert williams just after his return from the asia trip, where he and alan talked to potential investors for upcoming covered bond deals backed by our mortgages. there is still a strong interest around the world in u.s. residential mortgages. they were certainly earn couraging us to think seriously about it at the m.m.b.r. what can i do to help? david, would your team like any help on determining the impact of selling certain groupings of option a.r.m.'s on overall delinquencies?

he describes a meltdown, flight to quality. who's going to buy option a.r.m.'s? well, you talked to investors, backed by wamu, backed by wamu mortgages, and she writes, there's still strong interest around the world in u.s.a. residential mortgages. in other words, we can still sell our option a.r.m.'s in some places. this seems to me to be a great time to sell as many as we can. in fact, you said pretty much the same thing, so the "as soon as we can before we lose the opportunity." the idea is to sell as many of these delinquency-prone loans as possible to investors before their performance gets worse, wamu gets stuck with them. the only thing is you viewed something thaten they didn't, these loans were likely to go

delinquent. here's what happens. you reply late, the subject again, option apartment delinquencies, and here's what you suggest in this email. you say d.b., mr. beck, i assume, felt that you asked mr. beck to select a potential sample portfolio and coordinate with finance on buy-selling analysis, and then you asked, to ran a credit scenario. you send an email early in the morning, 7:17 a.m. subject, great option a.r.m.'s delinquencies, mr. felton and mr. schneider make plans to

supply low-level detail and coordinate with finance. in the final email of the chain, which is at the top of page one there, the subject line now reads urgent need to get some work done in the next couple of days. that's added about option a.r.m. delinquencies. we are contemplating selling a larger portion of our option a.r.m.'s than we have in the recent past. and this could be a way to address california concentration, rising delinquencies, falling house prices in california with a favorable arbitrage, given that the market seems not to be yet discounting a lot for these factors. she asked for en put on portions, her words, of the option a.r.m. portfolio that we should be considering selling. now when you turn to exhibit 41

if you would. february 20, mr. shaw sends to felt the analysis -- the key characteristic of loans, the wamu portfolio, contributed to rising delinquency rates. cheryl, i reviewed the h.f.i., the call for investor prime loan characteristics that

contributed to the rising 60-plus delinquency rate between january 6 and -- january of 2006 and january of 2007. the result of this analysis shows that seven combined factors combining 8.3 billion opposed, experience above average increase in the 60-plus delinquency rate during the last 12 months. this is an increase. i recommend that we select loans that some or all of these characteristics to develop a whole for sale, chips, in other words. and then he lists the facts that went into this chain.

ate specific factors, two, recent villages 2004 to 2007, three in california, four in new york, new jersey, connecticut. jumbo loans and specific fico scores. and then he wrote, i recommend we select loans with some or all of these characteristics so. he presented a recipe for selecting option a.r.m. loans, those most likely to go delinquent so they can be put up for sale before before they actually went delinquent. is that right? is that a fair reading in that respect? >> mr. shaw is laying out the as he sees them and the risk factors that are going to contribute to delinquencies. >> yeah, ok.

now, that day, he mails the recipe on to you, this is the top of that exhibit 41, the subject is some thoughts on targeted population for potential option a.r.m. loan sales. you write, might be helpful to see the components of the portfolio that have been the largest centtors to delinquency in recent times. the whole phoenix is how to take a look at 42. this chain of emails starts five days later on february 25, 2007. first email is from you, mr. beck, yourself, mr. schneider.

here's what you wrote. david and i spoke tosmede he instructed me to take actions to sell all arms that we intend to transfer to the portfolio in the first quarter of 2007. that amounts to roughly $3 billion of option arms available for seasm i'd like to get these loans into sale immediately so that i can sell as many as possible the first quarter. sounds urgent. mr. beck, is the david you're referring to mr. schneider? >> yes. >> mr. schneider, you recall giving that instruction to mr. beck? >> mr. chairman, i recall a decision being made in alco to sell more option arms and provide more liquidity and capital? >> do you remember giving that direction? >> yes, i do.

>> now, about two weeks after this email, market risk committee gives approval to move up to $3 billion in option arms out of the investment portfolio and into the sales portfolio, stharkt? >> correct. >> exhibit 43 is the minutes of the market risk committee reflecting the unanimous approval of the transfer. now, how many of the three billion in option arms that were authorized for sale by the market risk committee were, in fact, sold, do you know? >> i don't know. >> do you know, mr. beck? >> i don't recall precisely. >> was it about a billion and a half? >> half. >> so we'll say about a billion and a half of three billion. do you know which were sold and which weren't? >> no. >> now, the reason option arms

were selected is they were most likely delinquent, the market is not yet aware of it. did you notify investors when you securitized option arm loans that the delinquency rate for several wamu securities has gone up, were expected to go up. did you notice them? -- did you notify them? >> the market was aware. >> did you know whether or not investors were notified? >> investors were notified of the risk characteristics of the loan. >> were they notified of their risk, a $1.5 billion of loans were selected because they were option arms, and that with your option, that option arms were going to go delinquent in greater numbers? were they notified specifically of your findings? >> no. >> now, those option arms, in

2007, that's chart 1-b if you'll take a look at it, they show the delinquency rates for a number of wamu scaurts, is that arm, which is where you put these delinquency-prone option arms -- and by the way, option arms are supposed to be current. now up won't be able to see that. you'll have to look in your book. they now have a delinquency rates of more than 50%, which means more than half of the underlying loans are now delinquent, more than a quarter of the underlying mortgages are in foreclosure.

>> is this truthful information? the investors knew everything that you knew about the expected high delinquencies? >> mr. chairman, the risk characteristics that mr. shaw -- >> no, no, were they notified? i'm asking you a specific question. you had an expectation, option apartment and your inventory are going to have a high delinquency rate. you base that on an assessment that you made, you did a study p. were the investors notified? >> wamu did its own analysis to identify option arms that had a propensity to go delinquent, were they notified? >> mr. chairman, i'm not even sure that the loans that mr. shaw identified got into the sale transaction. do you know whether they did or didn't? >> i do not. i'm not sure whether the loans

that mr. shaw -- >> well, should you know? should you have known? hey, look, you're being told that your option arms have a real high propensity for delinquency. you write emails back and forth, high delinquency, high delinquensifment you identify those option arms. first you identify the risk, ok? $3 billion is authorized. a billion and a half of option arms, that inventory are sosmede you've done a study. you know the propensity. you have an obligation to tell your purchasers as an underwriter, complete and truthful information. did your investors know of your high delinquency expectation? do you know? >> mr. chairman, it's important when i answer this question to understand that, as you pointed

out, this is the beginning of 2007. the subprime market pretty much shut down, and delinquencies are rising very fast in that space and in the prime space. and as mr. cathcart pointed out in the earlier testimony, because we can't sell loans, they're coming back on to the balance sheet and use up capital, and delinquencies are rising, so our loan loss reofficers are going up. so one alternative to help raise capital would be to sell loans from our option arm portfolio. >> mr. beck, those emails talk about delinquen success, delinquencies, delinquencies. you identified the delinquencies are coming from your options. my question is very specific. you knew all this. they were identified. and my question is, did you notify people that were buying your securities that you had done a study of delinquencies? do you know?

>> we did not dab they don't have these emails. what they do have is a prospectus that has all the relevant risk, including what mr. shaw would have put in there, the fico's, the geographies, all that information would have been in the prospectus. >> you're saying that the prospectus notified your investments that you had done a study dab >> no, mr. chairman, i'm not. i'm not. i'm not saying -- i'm not saying that. >> and that you had determined that that first quarter's option arms had a high risk of delinquency. you're telling us you didn't notify the investors of that study, you're telling us that you don't even know whether or not those option arms ended up as securities, whether that $3 billion included them. that was your responsibility to make sure that the securities which came to the investors were following notice to the

investors of everything that they needed to know in order that the information be complete and truthful. that's what your testimony is under host. >> it's a very real possibility that the loans that went occupy were better quality than mr. shaw laid out, it's a very real possibility. >> and there's a very good possibility that they were exactly the quality that he laid out, right? is that right? >> that's right. you dont. apparently you don't care. the trouble is you should have cared, because there's an obligation to make sure that your investors know. them didn't know. but you knew. critical information that you knew. that's the problem. senator kaufman? >> on this list, it shows that some of the high-fico loans are the ones with the high delinquency rate from february 21. so there was a high fico -- the

high delinquency rate, correct? >> senator, could you repeat the question, please? >> if you look at exhibit 41 where shaw lists options, he lists a bunch that fico increased the delinquencies among fico's of 700 to 739 was an increase, fico 780-plus of an increase, there's someone looking at the portfolio, the high fico were really the ones having the increase in the delinquency rate. is that fair? >> they had a high increase in rate, but it was 4%.

>> that's not the amount that's delinquent. >> and what percentage of that would be delinquent? >> .4%. >> let me ask you one other question. >> ini have this wrong. there's fico 501 to 540. >> senator, which document? >> that's on 40 -- it's on page 40. >> yeah, senator, once alone goes nonaccrual goes delinquent, its credit score

gets impacted very significantly, so that wouldn't be a surprise, nor would it be cafity of what loan was originated at. >> this shows the delinquency score, not at the time they applied for the loan. >> that's correct. >> you said that investors were told of the character stex of loans. they were told all the characteristics of loans. did they know, were they informed that loans with those or some of those characteristics had a greater propensity towards delinquency in wamu's analysis, were they told that? >> they were not told that. >> so they may have been gven a

long list of loans, but they were not informed that loans with those or some of those characteristics, according to our wamu analysis, had a greater propensity towards delinquency. is that correct? >> you said it was in pretty bad shape. >> they knew this was a pretty bad situation, which i think by then they did. >> they did, but they didn't know how bad it was ultimately going to get, and so at that point in time they were demanding wider margins for the securities that they bought, but hadn't stopped buying it yet. >> you made reference to the subprime market going down. option arms are prime, not

subprime, right? they're supposed to be prime mortgages, is not that correct? >> yep. >> you're excused. we appreciate you being here. we'll go to our third panel. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> the congressional week gets underway monday for the senate, and for the house, tuesday. senate leaders are planning to bring a new financial regulations bill to the floor sometime this week. the house has already passed its version with senate banking committee chair christopher dodd creating similar legislation. to begin the week, however, senators turned to several administration nominations. monday, they'll take a vote to limit debate on the nomination of the treasury department undersecretary. that vote takes place at 5:30 eastern after members gavel in at 2:00. you can see it live on c-span2. the house returns at 2:00

eastern on tuesday for legislative business. on its agenda this weerks a measure that gives washington, d.c.'s delegates the same voting rights as a representative, but they'll also include revisions to repeal several of d.c.'s gun control laws. follow the house on c-span. a thaw weekend, the first of three british election debates. for the first time, prime minister gordon brown, conservative party leader david cameron, and liberal leader nick clegg will face off in u.s.-style debates. watch them in their entirety for three consecutive weekends with the first election debate courtesy of itv tonight at 9:00 eastern and pacific on c-span. a thaw year's c-span student cam competition asks middle and high school students to create a five-meant video dealing with one of our country's greatest strengths or a challenge the country is facing. here's one of the second-place winners. >> there are plenty of

challenges facing america today , the economy, high unemployment. but as energy continues to get more and more scarce, the amount of solid waste discarded in land fills every year becomes more and more costly. the figures from the e.p.a. are truly staggering. did you know that about 135 million tons of municipal solid waste was discarded in land fills in 2008? that's 54%. and you can't recycle everything. >> would it be good if we could reverse that process? >> today we'll be looking at green technology.

>> incineratorings have been used in the past. >> it's used as a fuel. >> however, they create environmental concerns. >> one popular system performs methane gas. >> this gas can be process and had turned into natural gas or into it. >> extract the methane gas which is produced in the land fill. methane gas is natural gas, the same gas you use in your gas pedals and gas water heater and it's produced in land fills every day. ought a it fights us. >> within problem with this technology, though, is that all the solids in the land fills are still being wasted.

>> actually pretty interesting project. >> it goes into a process which then spreads it and democrat nation. >> refment active is talking about plasma art. i am interviewing the president and chief executive officer at a company which uses this technology. >> it's a technology for taking the waste material and turning it into glass, into sort an artificial subsidiary, like the black glass that comes out of a volcano. and this is done by that kind of a reactive. the melters are basically glass, this pool of molten glass, you dissolve the thing,

allow materials that up to the vitrify are made up of those harmless and harmful materials, ok? what some guys came up with that's working at the pacific northwest national laboratories using a sort of plasma zone where very hot cyanide gas inside it would break apart the materials into an component. so this is fundamentally have a melter with a plasma operating above the moaten glass to the inorganic materials that go into the glass. >> so basically this is how it works.

first this is brought. here the waste is hydrogen and carbon gases. these gases are thin gas. the waste will then fall into a chamber with a plasma-enhanced melter. there they can reach 10,000 degrees celsius. the plasma earth whisks away into its original element. the gases were thin gas and can be used for fuel production. the metals strain into their metal element. it falls to glass to make an artificial subsidiary. >> and the byproduct? >> the only byproduct of the process are the kind of glass, and when i talk about the glass, it really is -- it looks exactly like obsidian.

one of the videos on our website, one of our scientists, a former c.e.o., who was holding a block of this glass, and that block of glass, it looks exactly like it, so the left inorganics are completely locked inside that glass, and it can be used as an aggregate, as grit to go into asphalt or as gravel to go into asphalt and concrete, depending on how finally it's smashed up. the primary product is thin gas. thin gas is a mixture of carbon monoxide and hydrogen gas, ok? if you would take all the garbage that we today have in land fills and you would turn

all that into thin gas and you would take all that thin gas and turn it into transportation we're talking about billions of gallons a year of transportation. >> today we have three different technologies. let's compare them. this can be used to make fuel. it's bad environmental policy and still has waste by burning it. then we have a little better by not burning waste, but it has methane gas in land fills and has other gases, which brings us to plasma, which the byproduct is thin gas which can be made into ethanol, hydrogen, and others and also glass and metals along with other things.

the problem is it costs a lot to make a plasma-enhanced melter. there is no perfect solution. however, there are technologies to help us to stop with this waste and help give us a better future. >> to see all the winning entries in this year's competition, visit studentcam.org. >> all this month, see the winners of c-span's student cam video documentary competition. middle and high school students from 45 states submitted videos on one of the country's greatest strengths or challenge the country is facing. watch the top-winning videos every morning on c-span at 6:50 eastern, just before "washington journal." and at 8:30 during the program, meet the students who made them, and for a preview all the winners, visit studentcam.org.

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