>> i like the position of taking away the punch bowl because if you turn out the lights, there were a lot of things going on in the dark. [laughter] >> i think we are at the appointed hour. i would like to think this panel. are there any additional comments? . . .

it was at least in a liquid condition. can you explain that? >> citigroup had a wholesale

funding structure. what wachovia had was a fairly decent resale franchise. baggage would have gone along with it. the thought was to be able to incorporate the to to stabilize some of the funding structure. >> 27 of the the radiators to to

get away, we meant that you were supposed to dump it out and not continue the consumption at the regulation stages for the that is a question we would be concerned about. we were really/treasury making a decision. i think it was outside the bounds. >> i think i said that. >> yes, you did. >> thank you very much. we will come back here at 12:25. we are a little behind schedule. we are close enough to catch up. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010]

>> thank you very much. i am the chief risk officer of jpmorgan chase and have served in that role since i began working in the bank of december 2007. thank you for the ability to appear before the commission. you ask me to discuss several topics including our program and our relationship with lehman brothers for the jpmorgan is one of two major banks providing the clearing services in the united states t.

at the beginning of each trading day and a process known as the unlined, if jpmorgan would advance the cash needed to buy back securities professor. these advances were discretiona. we took no hair cut. this magnified the risk that jpmorgan would be able to recoup the full amount of our advances if the collateral had to be liquidated. shortly after the collapse of bear stearns, we began taking margin on the advances made to

all of our broker dealer clients. jpmorgan is a gift is held a fight with a high-level meeting in june of 2008 to discuss the risks we face from the unwind in the extensions of credit to lehman. the executives agreed to pledge additional collateral to j.p. morgan in the form of securities. by late august and early september 2008, the deteriorating financial condition was becoming apparent. we were determined to support lehman by continuing to unwind a vote each morning and act on a business as usual basis. are going to exposure also included derivatives for prime brokerage clients and requested by the dreaded counterparties

for innovations. we understood that the credibility and the market's collapse instantly and jpmorgan declined to take on this additional exposure. to protect ourselves without triggering a run on the men, we requested $5 billion in additional collateral. it was far from sufficient. potential exposure to lehman but, that we believed lehman could reasonably provide. on september 9th, lehman agreed to pled additional collateral and delivered $3.6 bn over the next few days. analysis performed around september 11th of 2008 indicated that some of the largest pieces of collateral that lehman had pledged were illiquid, could not reasonably be valued and

were supported largely by lehman's own credit. this was inappropriate collateral because it was essentially claims against lehman pledged to secure other claims against kleiman. for this reason as wll as the increasing riskin continuing to support lehman as that week progressed, we requested an five billion in cash collateral. this amount was still less than what we believed could beustified as a risk management matter but

to provide continued to extend many tens of billions of dollars of credit to lehman on a daily basis allowing the broker-dealer to stay aflowed long enough to sell its business t barclays capital and transfer more than 100,000 customer accounts. as a rult of our continuing support to lehman, jpmorgan ended up with nearly $30 billion in claims against the bankruptcy estate. more than 25 billion of those claims arose out of exposure to jpmorgan took on after the lehman bankruptcy filing as part of our efforts to support lehman in these increasingly distressed markets. i appreciate this opportunity to share my views and i look forward to your questions. >> thank you very much, mr. sue bro. zubrow. microphone please. >> thank you, mr. chairman, i appreciate the opportunity

to testify before this commission. my name is harvey miller. i'm a attorney in the law firm of the wile which is a major law firm in the bankruptcy case of lehman brothers. my role is to present the circumstances surrounding the commencement of a bankruptcy case by lehman brothers holdings, inc., on september 15th, 2008. it would be virtually impossible to summarize in five minutes my written testimony but i will try to do the best i can. the commencement of form ma'am bankruptcy case was totally unplanned. bankruptcy was never in contemplation of lehman as it struggled through the economy's financial slow down during 2008 and was subjected to negative effects of collapse of bear stearns in march that year. at the time of the bankptcy filing the lehman enrprise represented the fourth largest investment banking firm in the united states. the consolidated enterprise had reported assets of over $6 billion and liabilities close to that amount. the lehman enterprise was global. it operated pursuant to a

classic holding company structure. lehman brothers holdings was the parent corporation t managed and directed the affairs of subsy airies and affiliates. while lehman had over 8,000 subsidiaries, approximately 100 plus were active and engaged in the business. lehman had offices in every major financial center in the world. lehman's business included derivatives, commercial loans, underwriting real estate, bank ownership and broker-dealer operations at the time filing the enterprise employed approximately 26,000 people, persons. over 10,000 employees were located in new york city. each day the enterprise engaged in thousands of transactions involving the movement of billions of dollars. the parent corporation acted as a bank for the lehman enterprise. generally each night all cash from operations was swept into cash concentration accounts at the holding company and each rning cash would be dispersed to various subsidiaries and affiliates as needed. lehman's cash needs were

supported by substantial borrowings, a large portion of those borrowings were short term which negatively affected lehman's ability to refinance as the economy slowed and was adversely impacted by the expanding subprime mortgage crisis that began in 2007. lehman's liability was, depended to a large extent on the confidence of the financial markets and the public. any disclosure of bankruptcy consideration would have been disasterous to continued operations. public comments made after the collapse of bear stearns by various hedge fd spokesmen and others as to lehman's alleged insolvency and vulnerability to bankruptcy had a negative effect on lehman. during the week preceding september 15th, 2008, lehman's financial condition materially deteriorated and was aggravated by the announcement of negative quarterly earnings. as that week pgressed lehman's situation became more precarious. lehman was being bombard by demands of its clearing probation for additional

collateral security and guaranties or face loss of clearing facilities. lehman was confronting a major liquidity crisis. substantial pressure had been applied and was intensified to find a major partner, merger partner or sale to resolve its financial distress. during that time negotiations were ongoing as to a possible merger or sale involving bank of america or alternatively barclays. my involvement as a bankruptcynd reorganization attorney occurred during the week of september 8, 2008. when we were first, my firm was first contacted, as to potential bankruptcy planning if an alternative transaction or other financial support was not forthcoming. at that time almost all senior lehman personnel were involved in the merger or sale discussions and as a consequence there was no direct contact with lehman personnel. the direct personnel contact began during the evening of friday, september 12th, when there was a meeting at lehman with representatives of the federal reserve bank

of new york to get a determination as to the liquidity of lehman. that meeting which was attended by a large portion of the financial staff of lehman included the cfo, and it was reported at that meeting lehman would not be able to give a complete picture on its liquidity until the close of all the markets and all the information came in from its global offices so that the conclusion would not be available until late that evening or that night, or saturday morning. the events that followed after that were very dramat including meetings over the weekend at the federal reserve bank of new york. the net of those meetings was a decision that was made and lehman was told, that there would be no federal assistance and essentially, suggested are directed that the lehma representatives return to the lehman hequarters, cause a meeting of the board of directors to be convened and that, lehman should adopt a resolution to commence a

bankruptcy case before midnight that day. that was an impossible task but after consideration of the inevitability of bankruptcy because of the lack of liquidity, a bankruptcy petition was filed at 2:00 a.m. electronically with the united states bankruptcy court for the southern district of new york. the were many events and many facts that went into what occurre and the systemic consequences that resulted during the following week. i'm very pleased to he the opportunity to answer questions that the commission may have. and i refer to my written testimony as to the circumstances which surrounded the filing of the bankruptcy petition and my conclusions or opinions as to why that decision was made by the regulators. thank you, mr. chairman. >> thank you, mr. miller. mr. fuld. >> chairman angelides, vice chairman thomas, and members of the commission, thank you for the invitation to appear

before you today. lehman's demise was caused by uncontrolable market forc and the incorrect perception and accompanied rumors that lehman brothers did not have the capital to support its investments. all of this resulted in a loss of confidence with which then undermined the firm's strength and soundness. those same forces threatened the stability of other banks and not just lehman but lehman was thenly firm that was mandated by government regulators file for bankruptcy. the government then was forced to intervene to protect those other firms and the entire financial system. in march 2008, bear stearns nearly failed. i believe then and still do now that had the fed opened the window, the financing window to investment banks just before the bear problem, that decision might have provided necessary liquidity to keep bear stens operational and more importantly, might have lessened the need for additional government intervention.

with bear stearns gone, lehman as the next smallest investment bank became the focus of the marketplace and was subject to increasingly negative and inaccurate market rumors. critically in 2008, lehman reduced its totalexposure to less liquid assets by almost 50%. going from the approximately 126 billion to 69 billion. we further strengthened our capital and liquidity positions by raising 10 billion of new equity and pursued a wide variety of new capital opportunities. during that same period lehman proposed to government regulators converting a bank holding company and imposing a ban on naked short-selling. both of tse requests were denied for lehman but granted for other investment banks shortly following lehman's bankruptcy filing. unfounded rumors about lehman's, lehman continued to besiege the firm and erode confidence. investment bank's very existence depends on confidence to consummate

transactions to pledge collateral and toepay loans. without that confidence, no bank can function or continue to exist. this loss of confidence in lehman, although unjustified and irrational, became the self-fulfilling prophecy and culminated in a classic run on the bank, starting on september/10, 2008, leading to that sunday night when lehman was mandated by government regulators to file for bankruptcy. notably on that same sunday, the fedex pannedded for investment banks the types of collateral that would qualify for borrowings from its primary dealer credit facility. only lehman was denied expanded access. i submit had lehman been granted same access as its competitors even as late that sunday evening lehman would have had time for at least a orderly winddown or for acquisition. either of which would have alleviated the crisis that followed. there are a number of completely incorrect claims

have been held up as explanations for the demise of lehman brothers. do this day these incorrect claims still persi in the public domain. just because those incorrect assertions are repeatedly made that does not make them true. i highlight some of these claims only because i believe this committee needs to hear what is true. first, there was no capital hole at lehman brothers. the at end of lehman's tir third quarter we had 28 dal billion of equity capital. false market rumors about lehman's mark-to-market determination, even lehman bankruptcy examiner found immaterial differences in the firm's asset valuations ranging from a low of 500 million to a high of 1.7 billion. assuming that's full 1.7 billion in additional writedowns as estimated by the examiner, lehman still would have had 26.7 billion in equity capital. positive equity of 26.7 billion is very different from the negative 30 or

negative 60 billion holes claimed bip some. section lehman had adequate financial collateral. many people to thisay do not know on september 12th, the friday night precing lehman bankruptcy filing, lehman financed itself and did not need access to the fed's discount window. in addition on that monday, september 15th, lehman's broker-dealer subsidiary borrowed 50 billion from the new york fed by pledging acceptable collateral. the fed was paid back 100 cents on the dollar. what lehman needed on that sunday night was a liquidity bridge. we had the capital. in the end, however, the lehman wasorced into bankruptcy and not because it neglected to act responsibly or seek solutions to the crisis. but because of the a decision based on flawed information, not to provide lehman with a support given to each of its competitors. in retrospect, there is no queson we made some poorly-timed biness

decisions and investments but we addressed those mistakes and got ourselves back to a strong equity position with a tier 1 capital ratio of 11%. we also had financial collateral and we also had solidly performing businesses. there is nothing, nothing about this profile that would indicate a bankrupt company. let me just end by saying that i'm proud to have spent my entire business career of over 40 years at lehman brothers and i am more proud to have been its chairman anzio for its last 14 years. i thank the commission for its time and i look forward to answering any questions. >> thank you, mr. fuld. mr. baxter. >> chairman angelides, vice chairman commas, members of the commission, thank you for the opportunity to speak about the events that brought lehman brothers to bankruptcy, events that occurred during 2008 when our nation was in the midst of the worst financial crisis it has experienced since the great depression.

i'd like to start with a question that i'm often asked about lehman. why did you allow lehman to fail? it is an understandable question but it contains a false premise. the federal reserve did not allow lehman brothers to fail. instead, the federal reserve, the treasury department, the sec, and others tried incredibly hard to save it. to avoid the harmful systemic consequences that we have seen. in my written testimony, i discuss in greater detail the federal reserve's actions to address the lehman problem. now, given time limitations, i will focus on two matters. first, we needed a suitable merger partn for lehman. second, we needed that merger partner to provide a guaranty, similar to the one that jpmorgan chase provided in its acquisition of bear stearns. wherein the acquiring institution, agreed to backstop lehman's trading

obligations between the signing of the merger agreement and the merger closing. by sunday, septber 14th, at the government'sequest, a group of lehman credors and counterparties had agreed to finance approximately $30 billion lehman'slliquid assets to facilitate a lehman rescue. an indispensable element of the plan however as secretary geithner and others have pointed out was a willing and capable merger partner. as of that friday, there were two candidates, bank of america, and barclays. on saturday, september 13th, bank of america reached an agreement to acquire merrill lynch, thus leaving barclays as the only potential acquirer with the resources and the ability to merge with lehman. on sunday, september 14th, with the consortium financing committed, we learned for the first time that barclays could not

deliver the needed guaranty without a shareholder vote. which could have taken months, and there was no way toredict if the shareholders would even vote for the transaction to oceed. lehman simply didn't have the luxury of that amount of time. i explored with counsel whether the u.k. government, or the financial services authority might waive this requirement so the guaranty could go forward and the rescue could proceed? i learned that the u.k. government was not amenable to a waiver, thus, barclays ceased to be the capable buyer we needed to rescue lehman and we had no other suitors. this guaranty was indispensable to lehman's rescue. our experience bear stearns is most instructive. with bear, we had a willing and capable acquiring party, jpmorgan chase, that guaranteed bear's trading

obligations from the merger announcement in march of 2008. to the merger closing in june of 2008. this kept bear as a going concern and provided the necessary protection to counterparties during one of the most vulnerable periods in any transaction, the period between merger contract and merger closing. if during that critical period a merger falls apart because of a failed shareholder vote, for example, the counterparties willot be protected against the obvious risk of the target's bankruptcy. many have asked why the federal reserve did not intervene and guaranty the trading obligations of lehman, ending its merger with barclays? they observed that we lent approximately $29 billion to facilitate the rger of jpmorgan chase and bear stearns, and they look at our commitment to lend up to $85 billion it aig.

under the law, the new york fed does not have the legal authority to provide what i would characterize as a naked guaranty. one that would be unsecured, and not limited in amount. lehman had absolutely no ability to pledge the amount of collateral required to satisfactorily secure such a fed guaranty. finally, without security, a guaranty of this kind would present enormous risks to the american taxpayer. upon a lehman default, the taxpayer would be liable for lehman's trading obligations. in the end, noescue was effected because we had no willing and capable merger partner. thank you again for the opportunity to speak to you today and i look forward to answering your questions. >> thank you very much, mr. baxter. we'll now start with questioning.

mr. fuld, i'm ging to start with you. in your written testimony you indicated that lehman's demise was as a result of turbulent market conditions, but would you stipulate that the start given the growth in your institution, the, extrordinary leverage, the nature of the assets, that also the risk taken by the institution also led to its demise? >> let me try to talk, you're asking me specifically how did we grow he and what was basis upon which we grew and thereby increasing risk? >>nd i'm talking about your leverage ratios which of course, seeded 30 to one by 2007, 39 to one plus on tangible equity. tangible assets, tangible equity. >> the risk profile of institution plus enormous growth, asset growth from

about 200 billion i think 224 in 20. that 691 billion in 2007. just the risk profile, your aggressive risk profile. >> would say that the aggressive risk posture is not an accurate depiction of how we ran lehman brothers. r balance sheet certainly did grow. it grew as we gained and increasedarnings which then became net worth and equity capital. we did in fact, in 2007, run a higher leverage ratio, at least, half of that was, our matchbook. please remember that we were one of the largest government dealers, maybe even in the world. and, that matchbook was a series of short-term contracts to finance our clients that brought

governments and other, other securities. >> having said that, we did in fact have too much commercial real estate as i have spoken about before. we had about 129 to, 130 billion of what i called less liquid assets which included about 50 billion, maybe a touch more, of commercial real estate. we brought that down to 30 billion. we had 45 billion of leverage alone which we brought down to about nine approximately. we had about 35 billion of residential mortgages which we brought down to about 17 billion, and actual four that 17 was sold to blackrock just prior to our -- which neverot consummated. all in all we had 130

billion. we brought that down to about 69. we brought our leverage down. by inhe is keg our -- increasing our capital, taking 25 billion of write-downs and selling a lot of these less-liquid assets. we derisked our positions. so that by the time we got to the third quarter, we had a tear 1 capital ratio. we were close to 11% which by a number of standards is fairly solid. we had a strong liquidity pool which unfortunately evaporated in three days after the run on the bank ensued. and, we believe and i believe, clearly to this day that our actions that included bringing down the balance sheet, raising capital, pursuing solutions with regulators without

asking for bank holding companies status, trying to pursue, either capital providers or actual buyers of the firm, that we pursued everything we possibly could have to have prevented what occurred on that september 15th. >> let me ask you a quick question, a couple quick questions, yes, no, your best recollection. were you ever told by federal officials that many they, that there was no authority under 13.3 to lend to you or provide liquidity, prebankruptcy? were you told that was the bar? >> i never had that conversation to my recollection. >> all right. are you aware of any collateral analysis that was do by the federal government, by the federal reserve board of new york, by other federal entities in terms of the inadequacy of your collateral? were you ever in a sense, presented with their

assessment of your collateral and insufficiency thereof? >> not scifically other our collateral but we did have three meetings with the federal reserve bank of new york that reviewed our funding capabilitis. whether that involved collateral i assume -- >> these are stress tests you're talking about? >> the stress tests were in fact after our filing. these were, were funding reviews. i actually participated in all three of them. there were different other people that participated. our cfo, our treasurer, our chief lal oicer. but we had three of those. i forget the days offhand, telling you the truth. but it was june, july, maybe earlier. never did i get any feedback on those, and certainly no

negative feedback. >> all right. earlier today we entered into the record a chronology prepared by our staff and it had supporting documents. let me just quickly make a couple notations i want to ask you about, mr. baxter about. first of all, if you look at this chronology, with you i lived, so you don't have to review gentlemen but it starts in march with the rescue of bear stearns, acquisition of bear stearns by jpmorgan and concludes just after the bankruptcy filing. and here's what i take from it. obviously very hard as the vice chairman sa, we're looking back and trying to discn what happened. buwhen which, obviously what the federal reserve has said is that assistance was not extended -- i'm trying to get, what was the policy decision? what was the strategic decision, the why of the not, not assisting lehman or, not assisting a way where there could be more orderly winddown.

when i look at this chronology, my first takeaway from this, seems over a period of months what ends up being made is a conscious policy decision not to rescue the entity, at least that's my reading of the documents. it seems to me during the course of this time that there was financial assistance considered. excuse me, with no legal bar being offered up. . . . .

he e-mails scott alvarez'. he says the working groups have been directed to flush out the acquisition transition and how it might vote. mr. timothy geithner told the examiner that government assistance was possible as late as september 11. there is an e-mail that refers to a federal board a financial commitment from the air looks as though it is on the table. of a flight fares political considerations mr. wilkinson says on the night of september

that "cannot stomach it there is another e-mail saying it does not seem like it to a and pretty. in no way is there money coming in. i just did a call with the white house. there are united behind no money for them. there is a recognition of systemic problems. in the end, there is no rescue. do you believe it was a political decision? d leave it with the result of the surprise of barclays if not happening? what you think was at the decision not to provide liquidity?

winddown? mr. fuld, and then i'd like to ask mr. baxter. >> i apologize. i thought you were asking that to mr. baxter. i was not privy to that formation that you just went through. i was not pt of the conversations over the weekend. for us, it was less about -- and i understand all of the noise about crisis and bailout and morale hazard. lehman had the capital. we needed the liquidity. we had four -- we went into that last weekwith over $40 billion of liquidity, we lost close to 30 in three days. we needed the liquidity.

i really cannot answer you, sir, as to why the federal reserve and the treasury and the sec together chose to not only provide support for liquidity, but also not to have opened the window to lehman that sunday night as it did to all of our competitors. i must tell you when i first heard about the fact that the window was open for expanded collateral, a number of my finance and treasury team came into my offense -- office and said we're fine. we have the collateral. we can pledge it. we're fine. 45 minutes later, they came back and said, that window is not

open to lehman brothers. >> yes, that is in the chronology. all right. mr. baxter, let me follow up on this. in addition to the -- did you see political considerations in the timeline? you see the debate about the financial assistance. i never see anyone say we can't consider because the condition of lehman won't allow it. i'm suring the evaluation of the assets didn't drop in a matter of days so s to, you know, change the collateral equation. but i also see in this chronology that mr. hoyte at treasury actually says on july 11th, the fed has plenty of legal authority to provide liquidity. if we choose not to, i doubt we would, but he talks about the authority. there's assessment about impact.

action about acknowledgment, for example, there would be much more from the september 11th memo saying it would be much more complex to unwind because lehman has twice as many positions. there's a number of other studies in here that says look there's going to be tremendous impact. the size of the triarty repo book was much larger than bears. about $180 versus $52 mllion. from day one, you were saying legally not possible. looks like there's a heck of a lot of debate about whether or not to rescue, whether or not to provide for an orderly transition. and none of this was cut off by a legal opinion that says not possible. the legal opinion came about in this itance, you see the opposite, where apparently you're saying there's now no

legal authority. but at the time, i see no evidence of the inability to act legally. >> let me see if i can clarify what exactly happened from the week beginning september 8th until september 15th. and it is not true that no federal assistance was provided to lehman. i'll explain that in a minu. >> are you talking about the lending postbankruptcy? >> yes, sir. >> which was substantial, but postbankruptcy. >> yes, sir. >> and the pdcf was available? >> and i'll explain that. i think it's important to understand the framework that we went into lehman with and our principal plan, our plan a, if you will, was to facilitate a merger between the strong merger partner and lehman. that was plan a, rest assured, commissioners, we worked night

and day to make the plan happen. it wasn't about politics. it was about getting to the right result as i explained in my full statement and oral statement this morning, we had a poblem with the facilitated merger acquisition in that we couldn't get the guarantee that we needed. the first question was, all right, we have financing. $30 billion from the private sector, reminiscent of what happened in 1998 and i was there. so we had that private sector finanng lined up. it boiled down to the guarantee. so the first question, and it's a legal question. could the fed issue a naked guarantee? a guarantee unlimited in amount like jp morgan chase were in the bear transaction and unsecured. and the answ to that question is a matter of law that cannot be down by the federal reserve. now look at what happened in the congress of the united states in october of 2008.

when express guarantee authority was conferred on the treasury, i'm talking about section 102 of the emergency economic stabilization act. there you will see express authority for the guarantee of a kind that i'm talking about. the fed has no such legal authority. the reason is in section 13-3 there's a requirement that we're secured to our satisfaction. a naked guarantee of unlimited amount, unsecured, does not meet that statutory requirement full stop. so plan a couldn't be executed. now secretary geithner, when i worked for him, he when he was president of the new york federal reserve bank, he used to say plan beats no plan. so he was in fact going to allow us to be in a position where we had no contingency plan. to our contingency plan for the facilitated merger acquisition

of lehman was the following. the parent would file a chapter 11 petition. the u.s. roker dealer would stay in operation, the benefit of federal reserve liquidity until such time as a proceeding could be commenced under the securities investor protection act. that was the contingency plan. the plan b if you will. now just to give you a dimension -- >> let me ask you a question. >> let me give you a dimension. >> let me ask you a question. you assume it would be unsecured. >> we are guaranteed, sir. i'm moving on to describe the secured facility. with respect to the broker dealer, we had two widely available programs. one was the primary dealer credit facility that mr. fuld mentioned. another was the term security lending facility that we initiateed on march 11th of 2008

before bear. and then the third were routine open market operations. so those facilities were fully available to lehman. the question was would we continue those facilities available to lehman's broker dealer post petition. we decided the answer would be yes. now on monday, september 15th, in the evening, so i'm talking about post petition by at the parent, we extended to the amount of $60 billion across he primary dealer credit facility, the term security lending facility, and open market operations. all of those are fully secure. >> i'm aware of that. let me ak the brief question because i want to move on and let the other commissioners ask. why was it not extended prior to? >> the facilities were always

open to lehman prepetition. there's a letter to the new york fed officer. it says you have access to these facilities. now the haircuts were steeper post petition. but the facities were available and they were used. $60 billion the first night and approximately $45 billion on september 16th and another $45 billion on september 17th. so there's a misunderstanding about what was happening here. there's the lending to the u.s. broker dealer after the petition wa filed by the parent. it was fully secured. and that distinguishes -- that distinguishes this situation from the naked guarantee which wanot secured and not limited in amount. and not within the authority of the federal reserve. >> all right. i'm going to return for more questioning later. thank you very much. let me go to the vice chair now. >> thank you, mr. chairman. for those of us who reside in

the second half of the alphabet, we appreciate your courtesy in terms of starting with z and working over to b on the panel. you're just not familiar with how rarely we get that kind of an offer. i would ask each of you if you would to verbally respond to our request that as is in the case with every panel, we wind up with questions after the panel is over. if we could submit written questions to you, would you give us a timely, whatever that means, written response? would you be willing to do that? >> yes. >> okay. thank you. because it's hard to record head nods. i -- im willing to admit that i have never had an interest in, never followed, although i had to and others have, all of the intricacies that we're trying to

discuss. so i'm going to ask some questions that are just kind of questions that most anyone would ask. we focused on bear stearns. we understand there was someone, jp morgan that was willing to take on the relationship. now that was in march, right, of '08. events continued on for what, five months? going on to six months by the time that we had gotten to september. could any of you give me some understanding of the mental set of folks who had seen what happened to bear and your looking, i believe, mr. fuld, you talked about who's next in line in terms of size and ability? didn't someone start looking around and beginning to assume

if what happened to them, god forbid, for the grace of god want me or maybe i or now it may be me. was there any concern or activity about this trying to look fr potential connections? was there discussion on the street or behind closed doors? or at the fed were you guys talking about we may have to hook up a few more marriages? what was going on in that march to september period? anybody. >> let me try to help you with that. >> yeah. yeah. >> at the time of bear stearns, the record book, as i understand it, speaks to jp morgan's first, second, and third cut at acquiring bear stearns was

negative. that continues to come back, create, recreate, find capabilities that would give jp morgan the comfort with whim to consummate this transaction. when that transaction was finished, that set two precedents. one, very difficult going forward for new capital providers to understand where the government was in their position. to either be a part of it or not part of it. to provide liquidity. the fed did open the window after be stearns, which was a very positive move. in my view, that did answer the question of liquidity. and to a number of other investors around the world and counterparties, that did, in fact, mean that the fed was there to provide liquidity for

noncommercial bank entities, meaning investment banks. it also set another precedent, though, in that the terms used were crisis were bailout, and as i said in both written and oral testimony, had te fed provided liquidity prior to the bear problem, i think the words crisis and bailout never would have used. i tink it would have alleviated the problem. i can't talk about what wa in bears book, because i don't really know and it'd be inappropriate to do so. i did see the stock drop from 80, 60, to 40, to 2, later to 10. as you correctly said earlier, chairman said, i don't know how those assets change would so quickly in a seven-day period. so this was clearly a time of loss of confidence, a ton of rumors swirling, stock prices going down, and investors saying

if it continue to be asset sales, will these firms have enough capital to support those losses? so that ises beginning. during the entire time, all of the banks with not just lehman, derisked and raised capital. i would tell you that for lehman itself, we raised $10 billion of new equity capital. if you look at our total of net loes, we raised 3.7, $3.8 billion more than we lost net. so with all of our capital raises and all of our net losses, we came out close to $4 billion with additional capital, $4 billion of additional capital

than when we started. i don't want to take you through the whole litany again. >> no, that's okay. because that gets me then to -- i want to make sure that i understand you correctly, mr. baxter, yu said that lehman did not have the collateral to back a sufficiently large bridge loan. is that correct? >> no, chairman, i was talking about the naked guarantee. a guarantee of the trading obligations o lehman between merger with barclays and closing of that merger. if you look back to the march transaction betweenbear sterns and jp morgan chase, we'll see a guarantee without limit and that was unsecured. we were working off of that model. the fed has no authority to issue that kind of guarantee. >> i understand that. but what i hear lehman saying is they needed some assistance on -- for liquidity.

they needed a liquidity bridge if not a collateral bridge. and my only question is why was barclay the only one who stepped up? where there others? >> well, first let me say in the period leading up to lehman weekend, that's the period from bear stearns to march of 2008. >> april, june, july. >> on the basis f what i read on mr. lucas' report, mr. fuld was working very hard to find a merger for lehman. mr. fuld, during that six month period, i don't believe succeeded. when we got to lehman weekend, was the government was trying to do is facilitate a merger of lehman by coming up with a private sector group who had financed illiquid assets and make lehman for amendable to

requiring the institution liar a merrill lynch or barclays. those were the two institutions that were interested with the possible merger at the time. the important point, and it's a really important point to focus on, we had the financing. we had gotten to the point by sunday, september 14th. $30 billion was going to be provided by the private sector institution to take the illiquid asset to facilitate the merger. really important point. yet, even with that, even with that, we couldn't get that deal done. so the problem, as we got -- >> barclays was a foreign bank. theyjust couldn't? >> they couldn't produce the line of guarantee. you know what happened with bank of america, they decided to merge with merrill lynch on saturday september 13th. we couldn't get the merger done. okay. what's the best alternative

plan? d in our view, and in the view of our bankruptcy advisors was to keep it alive with bridge finance from the fed. not waiting for some partner to aive, because we didn't think that would happen, but alive long enough to conduct the orderly winddown of the position until we could do the proceeding. >> my question is you say lehman had no ability topledge the amount of collateral required to satisfactorily secure a fed guarantee. one large enough to withstand a run by lehman's creditors and counterparts. >> let's imagine -- >> how short were they? >> let's imagine an unlimited

guarantee of the trading obligations of lehman which was $600 billion in asset size. so how much -- how much collateral would you need for a guarantee of that kind? and you can imagine that happening under the new authority in the emergency economic stabilization act and how would you score it for the purpose of authorization? $7 billion. would it wipe out the entire authorization? perhaps it would. that's the point i was trying to make on page 7, this is a guarantee of enormous size. if you wanted to collateralize it to it, you'd need hundreds of billions of dollars of collateral. lehman didn't have it. >> they didn't have it. they went into bankruptcy. in hindsight, was that tipping

an indication that lehman was ybe too big to fail based on what happened after lehman? or was it evidence that you can go right to some definition. we've always had difficulty in defining too big to fail. or was it close to the border and lehman wasn't too big to fail and the continues sequences of lehman failing were expected? i'm trying to understand what would have happened, if there was a bridge. although i understand if there was a bridge too because there wasn't anyone that would acquire them. >> we thought it was a bridge to nowhere in that particular point in time. >> yeah. >> but with respect to the overall point that you were making, vice chairman, i do believe leeman was systemic. i don't believe that lehman was the only systemic trigger during the incredible month of september2008 which began with

the conservatorship of fannie mae and freddie mac. and at the end of the month we had aig and wamu. this is an extraordinary point in the crisis. i think one the most historic months in the history of american finance. >> so had lehman failed in may it might have been a different circumstance prior to this extremely confusing month of september? >> i believe lehman would have been in systemic in may, it would have been in systemic in march, and it was systemic in september. >> okay. i want to reserve my time. i know there are others who have a whole series of questions that i want to ask. i took more than my time in the first panel. i'll reserve my time. >> thank you. mr. holtz-eakin.

i'm going to mix it up a little. [laughter] >> thank you, mr. chairman. being strategic. gentleman, thank you for taking the time to do this today and help us with this. i want to go back to the issue of the vailability of the pdcf to lehman on sunday night. and i simply cannot reconcile the two things that i've heard. and so my question to you, mr. baxter, is did everyone have the same access to that facility using exaly the same collateral right up to the point when lehman filed it? >> everyone means the eligible primary dealers to borow? >> yeah. including lehman importantly. >> there was -- and it's a complicated question. i want to make sure i answer it completely.

first of all, there was new authority under section 13-3 to expandhe collateral available for the pdcf. >>which had been passed that afteron -- >> correct. by the board of governors. that modified the earlier resolutions that came overbear sterns and allowed us to set up for the operation on march 17, 2008. so those are two things. with that understood -- >> right. >> and that there may have been miscommunication in the fog of that sunday between the fed and lehman brothers. with that understand, what was decided that ehman had access to the pdcf with the expanded collateral but with a higher haircut. >> prior to filing? >> prior haircut -- >> prior to filing? >> i'm sorry. i didn't understand. prior to filing exact same terms for lehman as for all other

primary dealers. >> mr. fuld, is that your understanding? and if not, why? >> that is not my understanding at all. my understanding was that the fed opened the window to investment banks where an expanded definition of acceptable collateral. not to berepetitive, my people came to in see me. >> when? >> i forget what time, but it was in the later part of sunday in the afternoon and said we're fine. fed just opened the window. expanded collateral. we are fine. 45 minutes later they came back, what we were told -- well, i put it this way, what i was told was that the fed said yes we are expanding the window capability for -- we are opening the window

for expanded collateral, but not for you, lehman brothers. that's what was told to me. >> as usual, when confusion reigns, lets go to the lawyers. mr. miller, what is your understanding of this sequence of events? >> yes, sir. i may -- i have a different perspective on it. you haveto understand that we were talking about lehman brothers holdings inc. company which ran the whole enterprise. the pdcf window which was discuss during sunday at the federal reserve bank, from my impression, the condition on that window being opened was that lehman brothers holdings inc. could file a bankruptcy petition. this they filed bankruptcy

petition, they would make available and the other financing that mr. baxter referred to. those funds would only be available to fund the broker dealer and not the other operations of lehman. which were very extendive. -- extensive. so there was it was a pdcf financing. but it was limited to one entity. and the condition was there would be a chapter 11 filing a bankruptcy petitn filed before midnight. >> okay. >> now i could just add, sir, -- >> please. >> going back to chairmans questions, during that fateful sunday afternoon and into the evening, the list of yes or no questions, at no time during the meeting down at the feds was the lehman representatives and the

team from -- there came a point in the meeting which basically we were told go back to lehman, get the board of directors together and pass the resolution to file a bankruptcy petition. and then we will allow, because lehman brothers inc. is a broker deal, was not qualified to file under chapter 11 as a stock broker. we will allow lbi, lehman brothers inc., to continue to operate for a week or so so that customer account accounts could be dealt with. ultimately, there would be a proceeding. it was just a tempora financing to get from a to b. >> i'm not going to prove i'm truly confused. what i think you just told me that was the broker dealer which, i believe, shld have

had access on the same ters as everyone else to the pdcf was told they didn't have access until there was a filing by the parent. >> in the context of that -- >> that's what you understood them to say. >> yes, sir. >> mr. baxter, that was right or could the broker have accessed it like everybody else? >> that's not right. it's in the -- you have it in the record. you can look at that and see what we said in plain terms. there shouldn't be doubt about this. you have it in writing. and we put it in writing because we were concerned that communications weren't as robust as they should be. and if you were -- if i could take you back in time to sunday september 14th and you could be with us, having been up for several days, not only the people at the fed but the people at lehman brothers, you might

understand better why there could have been a lack of clarity in terms of communications. >> poinof clarification. what was the letter? i want the timing of the letter. >> go ahead. >> was the letter send afterwards? [inaudible response] >> let me ask you, and i would appreciate the continuity problem that you would let them make their point. >> there was on somebody's time. not yours. >> i'll take it. >> an observation, i understand how tired it was, iwas on the mccain campaign, and it ruined my life. number two, which was the letter sent to clarify? was this because -- what was the letter sent? >> you know, i' trying to remember one letter among many. i think it was september 15th. but we'll provide another copy. and the letter will speak for

itself. >> so that night, it very well could have been in the case in the confusion that lehman was told they had no access which they really did have. nd i'm just trying to reconcile what was going on. >> i don't think there was confusion out that particular point. i also don't think there was confusion about the decision by the lehman board of directors, the parent, to file bankruptcy. because we had a discussion with the board late in sunday even. and i participated in that discussion along with chairman cox. i believe the board ofdirecto of lehman fully understood that that had to make a decision with respect to the filing. i believe they made that decision in consultation with counsel. i believe the minutes should show that the directors fully understood they needed to make the fidiary decision.

that was their decision to make. they had very confident counsel advising them at the time. and i have no question. no quetion that they understand it. >> let me ask you for a second. just to put a punctuation mark, apparently there was confusion. mr. fuld seemed to have a different understanding, mr. miller had a different understanding, and in our staff interviews with mr. mcdade and loett, baxter tells them they cannot access the window and had to file bankruptcy. you dispute that? you said you never told that to nobody? >> correct. >> ow did they infer all of this. why did they come to this conclusion? how does this happen? >> i think you'll have to ask them. >> i'll ask all of you. >> i would look at the letter.

>> what i understand the letter, it came the 15th. the day of the filing. not the sunday which was the 14th. all right. mr. holtz-eakin, thank you very much. >> why do you, mr. baxter --how can you then explain why mr. fuld said he just needed the liquidity bridge did not take the one that he had? >> trying to understand that question which asks about mr. fuld -- >> if there was the confusion that they had the same access of everyone else, they were never told they had to file bankruptcy, they simply chose to. all they needed was access with something like the pdcf with the expanded collateral and they would have been able to continue operation and seek a merger partner. why didn't they do that? >> the u.s. broker dealer need access to funding the night of september 15th because the triparty investors were no

longer there. the only place it could get funding was from the fed. >> the 15th. afterwards. >> the night of the 15th. that funding of needed. we had to take over from our brothers at j. p. morgan chase. that funding is committed. what you are talking about with additional funding to escue the lehman parent, it comes on the funding that was committed to the broker dealer. if you take -- if you take what was offered in one the statements that there was another $40 billion needed, we're up to $100 billion now. where's the collateral coming, how are you doig that? those things are all -- all completely obscure. so the differce is funding. >> thank you. >> -- from the parent. >> thank you. mr. fuld, he's saying you did not have the combination of collateral to make it go and

thus had to do the filing; is that correct? >> i'd like to clear up one piece, if the letter was sent on the 15th, we had already filed by then. so thank you r the letter. but enough said on that. we had $143 billion of combination of equity and long-term debt. so by definition, we had $143, maybe it was $140 let's round it off, of what we called unencumbered collateral. that means collateral that we were financing with our long-term debt and euity. that's numr one. we had the collateral. clearly again, you don't need to hear it from me, we hd the capital. as with the case with aig, we had whole businesses. we could have put up newburger,

we could have put you have newburger bedroomman between $7 and $900 billion. we had equity funds. we could have carved off either all or part of that as, in fact, a business and used that as collateral. so we had collateral both in securities and in whole business forms. >> thank you. i want to try to get back down to one the major themes of hairing. when institutions are too big to fail and when it is appropriate for government to step in. i want to you ask, mr. zubrow, whether you concur on the financial condition on the 14th. would you have provided repo on the 15thif they had access to

expanded pdcf? >> i think it was clear in the marketplace both the week leading up to the weekend of the 13th, as well as over that weekend that erewas, you know, great concern in the marketplace amo all sorts of counterparties about the ability of lehman brothers to continue to finance their various operations. and in so going into that weekend, the triparty book financing was obviously held by investors and the question would then come up on monday morning, the 15th, as to whether or not we would be able to do an unwind and provide intraday financing. and certainly over the weekend of the 13th and 14th, you know, we were ry concerned that

there would be not be sufficient investor counterparties to continue to finance on the night of the 15th without a strategic resolution of the entire lehman situation. >> so would a merger partner, only a bridge to the 15th, you do not think there would have been a successful ability to sustain the repo operation? >> it certainly appeared to us at that point that there was nt going to be investor appetite to connue to finance lehman's oprations. >> okay. in your view, jpmorgan's view, was lehman an systemically important institution always or only in the market conditions that you found in september? >> i think there's no question that lehman was a very important counterparty to many people in the marketplace. and as such, they were very

important systemic institution. i think the issue was, obviously, how was the government going to try to resolve the situation, and as mr. baxter said, mr. did not appear to be sufficient legal authority in mechanisms for the various regulators to be able to resolve the situation in the ways that, obviously, congress has now provided for? >> mr. baxter, when the federal reserve was examining its options, what did it think would happen if it had in the marketplace -- if it had to go through plan b? what did it expect the fallout to be? >> first commissioner, i want to correct a mistake that i made. i said the letter was september 15th, my counsel advices me it was september 14th. i was a day off. and it was quite material.

because it was prepetition. >> okay. >> all right. with that, again looking at the issues, we knew that were going to be terrible consequences with plan b. >> specifically? >> we knew that there was going to be disrupt of derivatives market, we knew there was going to be disruption with respect to the triparty, and that's why we tried to step in with a backstop to what would ordinarily be the money fund for investors pooring money in over night. so we anticipated those things. and that's why it was plan b. plan a was way better from our point of view. and that's why we work so hard to try to get the merger party. mr. chairman, i yield gentleman five additional minutes. >> go back. you mention you provided a backstop for money in the triparty -- say that aain? >> yes, with respect to the --

what we were doing when we started the week, monday september 15th, is chase was lending intraday. >> so postfiling? >> postfileing. the fed was coming in and essentially taking the credit over night. now we knew the consequences were going to be significant. we knew -- tat's what made lehman systemic. and the idea was to try to put foam on the runway, if you will, to mitigate the consequences that we were concerned about. and my i add, i think with respect to the u.s. broker dealer, we did, in fact, mitigate the consequences. because remember on september 16th, barclays came back to the table. and we were able not only to move those accounts, but the employees and the business from the u.s. broker dealer to barclays. and the situation would have

been worse, but for that mitigating action by the fed and the government. >> now i want to ask you the hypothetical. which is what we ultimately are always trying to imagine in thinking about the issue of intervention or not. suppose you had the statutory authority and had provided the naked guarantee to the trading for barclays merger. what would have happened in the marketplace? >> i think the market would have reacted well. the counterparties of lehman would have been looking to the -- essentially the fed, the taxpayer to back that guarantee. but as i pointed out in my full statement, in the event that there wasn't an affirmative shareholder vote, in theevent that barclays saw a way out of the dealthat perhaps they didn't like, the american taxpayer would be on the hook for perhaps hundreds of billions of dollars. and -- >> would that have --

>> with that -- >> had you had the choice between that, had you the statutory of authority, would you have done that instead of plan b? >> the issue is the balancing. whenever you approach one of these potential rescue, you are thinking not only legal authority but also the potential cost to the american taxpayer. and it has always been in the 30 years that i've served the federal reserve, part of our orientation that we had to be good stewards of the taxpayer funds. that's why we always want to be fully secured. and the history of the fed is we haven't lost any money. and the problem with stepping in and providing a naked guarantee in a situation where you can't force deal certainty in a merger is it's an enormous risk of taxpayer funds. i realize i haven't answered your question. i think the cost, the potential cost to the american taxpayer

had we had the legal authority, and we didn't have it, would have led us to say that's not something we should do. >> okay. last question, mr. wallison raised earlier, and it always coming up, the decision over bear stearns, and my question to you is: terms of the process of rubbing options, communicating with potential merger partners, communicating with bear stearns, is the process identical for bear stearns and for lehman brothers? >> in some ways,yes. in some ways, no. the real risk for the government in this kind of situation with communicating with potential merger partners is the risk that thatn itself becomes the trigger for the run. that if the government starts to talk about arranging a marriage, someone like a lehman or a bear,

in the eyes of those it's talking to, it's communicating something. and so that can be the precipitating factor for a rn. so in both bear and lehman, that was not done until the last -- the last possibly moment. the point of no run. against by the government. so that's one common situation in both of these. with respect to bear, we only had one suiter. that was jpmorgan chase. and in the lehman weekend, we had two real suitors in bank of american and barclays. we lost bank of america because it went to the next investment bank in the line. that was merrill lynch. that left usith barclays, barclays had the problem with guarantee. >> thank you mr. chairman. >> before we go to mr. zubrow, i

want to ask you one question, mr. zubrow, this is between jpmorgan and lehman over the period of 2007, 2008, and in particularly in those critical days. it's a chronology which i'll enter into the record. but i want to ask you specifically about one item. on the 14th, which is the critical sunday, mr. zubrow, apparently federal reserve staff person parkinson told our staff that you told him and other fed officials on the 14th that jpmorgan chase would not unwind transactions and provide until the fedex anded the types of collateral that could be financed by the pdcf. is that accurate? >> we were very concerned that there would not be investors

that would be willing to lend money to lehman brothers on the 15th such as if we did the unwind for the broker dealer on the morning of the 15th. >> right. >> but added the collateral. >> and no one would be there at night to finance and take us out of the intraday exposure. >> apparently mr. parkinson also told the fed board of governors under your comments tell those, quote, sons of -- to not only any collateral, it would be unforgettable not to unwide the triparty. my question is for you, you are saying pretty bluntly here, he ain't going to do it on monday until it was expanded. but it was expanded on sunday. therefore, was that sufficient for you to be able to provide intraday credit on money?

>> on mday morning we did the unwind in the business as usual manner and extended i think $86 billion worth of intraday credit to the broker dealer on monday morning. our decision was based in part that the fed on sunday night had expanded the pdcf such that there was an outlet for investors. >> i just wanted to get clarity. thank you so much. all right. mr. georgiou. >> thank you. and thank you gentleman for comin today. i want to try to finish up the point if i can. we're not talking about this whole failure of lehman resulting from somebody not checking their fax machine or something on sunday. are you suggesting that the letter from the fed reflecting the ability of pdcf went to lehman on sunday but they chose not to exercise their authority or utilize that authority?

>> no, i'm not saying that. because they did use the facility. >> the next day though. >> that's what we were talking about was the conditions going forward. >> but -- so they couldn't have exercised it on sunday? they could not have had access to the -- use their collateral to use the pdcf on sunday. >> no, it was available on friday night. but they were being financed in the triparty arrangement through the weekend. that's what mr. zubrow -- >> so that collateral was bound up in the triparty arrangement over the weekend. is that true, mr. zubrow? >> yes. the collateral was bound up in the triparty arrangements overt weekend and obviously the markets were closed over the weekend. >> right. and you would have continued to bind up that same collateral had you extended -- i take you to used that the same collateral on the monday, is that right, to

extend credit to the broker dealer on monday? is that right? >> that is correct. >> so really then there were wasn't any additional collateral available for the pdcf loan on sunday? it wasn't all right all rght -- otherwise encumbered. is that your view, mr. baxter? >> i think the misunderstanding is chasewas financing lehman intraday, and monday night, the fed came in and financed lehman over night. >> okay. and lehman -- chase chase -- jpmorgan chase had financed them over night, over the weekend? >> over the weekend the innovators in the triparty repo mecanism for financing lehman brothers to broker dealer. on onday morning in the ordinary course of business, there would have to be an unwind

of those arrangements in which chase would advance funds to lehman bothers such that lehman brothers could repurchase the collateral they had tied up over the weekend from the investors and the funds to be able to do that would be advanced by chase. >> my -- and you would use what collateral? >> after that time we would use the collateral that the investors had been using over the weekend to secure our intraday advance. >> and i guess i need to now ask mr. fuld, are you suggting? did you have -- was that the collateral that you were going to -- did you need additional mone on sunday in addition to what had already been provided to you over the weekend by jpmorgan chae that you didn't have that they regarded you -- no one else -- everyone else regarded you as not having sufficient collateral to back up. >> i think there are two

different pieces. one is the funding monday after the fact, which to me is meaningless. the real question is did we have the collateral on sunday, which i believe is the guts of you question. >> correct. >> two pools of collateral. jpmorgan gets the collateral back from the those investors or triparty partners that don't want the collateral or freeze it up. then we put it to the fed. so that's just a swap of collateral from one institution to the fed. >> right. >> over and above that, we had collateral. as evidenced by the fact that we posted $50 billion, i actually found out now it's more than $50 billion, but i'll settle for the 50 within the broker dealer. than didn't just jump up out of the night mysterious. that was there. so we had the collateral. there's another piece, which i'd

like to address, if i may, which is this question of fed backing naked. or unsecured. the first place $600 billion balance sheet. 50% of it is a match book. it gets sold. >> right. >> very easy. the remaining $300 billion, a lot of it is on-the-run securities, governments, corporates, equities, $69 billion of it was less liquid assets. of that, close to 20 was residentials, not to get too far into the weeds. >> yeah. >> ut those had been marked so aggressively that a number of people said that the rest of the street had to mark their resi where lehman marked it's resi, it would be a lot of blood on the street.

i look at 20 and say that was okay. that leaves 50, 50 billion of less liquid assets. it's not that they needed 50 billion to collateralize the trades. we did a trillion dollars of transaction a day. the missing piece at the margin is for each of those transactions could there have been market volatility that would have compromised that transaction at the margin? not the full face amount. >> no, of course. some percentage of it. >> we're talking about a tiny fraction of what that would have been. >> okay. understood.

i don't really want to use all of my time on this point. but it seems to me we don't have a resolution to this question here. i mean if it -- i'd hate for us to end the hearg thinking that because of a bunch of misunderstanding and mistakes, lehman turned out to be the only investment bank that had to go down. is that really where we were are at here? or was there some other resolution possible on the traumatic sunday afternoon after the fed had acted that could have resolved it short of the bankruptcy? maybe mr. miller, do you have a view in that regard? >> yes, sir. it seems to me there was an alternative available. there were other assets that would have served as collateral. maybe not under the pdcf standard of collateral. >> yeah. >> but there could have been an alternative to avoid systemic risk by at least the fed

standing -- the fed or treasury, standing behind an orderly winddown of lehman. instead of the cat quiz pick event of bankruptcy which produced all kinds of loss of value. >> understood. i guess i'm going to leave this. i already used half of my time. which was not my intent. i'm actually more interested -- i mean it's interesting why it is that lehman was not -- had to file bankruptcy and the others were rescued. the others being bear, merrill, morgan, sachs, and stanley all and of the principal competitors. :

>> less liquid assets we cut by 15%. we address that. capital, we got to 11% tier one ratio. spent that you still, even with an evil with those actions, you still were not able to secure adequate credit facilities to operate your business, correct?

>> you are correct, 100%. weould not stem te time of the uncontrollable, and that's what i talked about it, the uncontrollable market forces. and the false rumors that swirled around the firm. and as i also talked about, once the bank is in siege and loses the confidence in the marketplace, i don't believ that any bank can exist. and we saw that. right after lehman, market lost a ton of confidence. we saw it right on down the line. morgan stanley, goldman sachs, had it not been for the fed and treary stepping in with huge capital injection to put a stiff arm right there to say, okay, everybody, stop. we are behind it. that would have continued. having said that, you asked me another question. did we do everything right? we clearly did not.

as i say we had too many commercials. i did not, i myself, did not see the death and violence of the crisis. i did not see thecontagion. i believe we made poor judgments in timing with thessets that we bought, and for the businesses that we supported. what i would love today, be able to reach back and take those, yes. did i say in the very beginning i take full and total responsibility that the decisions that i made, i only made those decisions though with the information that i had at the time. that's the only way we can make decisions. >> we understand that, but -- go ahead. >> i could have come and in retrospect, should have closed

all of our mortgage originations platforms. instead of doing it in the middle of all seven, i probably should have done it in '05 four '06. people would've looked at us and said that's a really irrational move. i would've had to say i have a crystal ball, i can see wat's happened spent in retrospect it would have been an irrational move because that same difficulty of lifted a whole number of other institutions that were exposed to those bad mortgage originations come in the first instance, and the multiplication of those effects that occurred when those mortgages were turned into mortgage-backed securities and collateralized debt oligations, cdos, synthetics so forth and so on. i want to ask you a couple of questions relating to that. that i popped off or override of these hearings. do you think that there have been an erosion of market

discipline and market intelligence in the origination of these, some of these mortgages and securities based on those mortgages by the ability of investment bankers like lehman brothers to earn fees at the ront end, essentially with regard to the consequence of outlined results with regard to the origination of those mortgages, or the ultimate performance of the securities, whether they perform as represented to investors and so forth. it seems t me that by turning all your tees up front, as did the mortgage originators, as did the credit rating agencies, as did the auditors and the others that participated in the offerings, with no reserves essentially of those revenues against the possibility of failure of the securities, no clawbacks of the compensation resulting from those originations. that all the investment banks

and help right of other institutions were placing them at risk of failure, because their margins were so narrow with regard to those things that ultimately suffered significant losses. can you speak to that? >> we had two parts of our mortgage origination business. one was the actual origination when we owned the oriination platforms. and the second where we acted as a conit while we went to other mortgage originators and bought their production. we believed at the time, very clearly, that we had proper due diligence for the mortgage origination platforms that we bought. we came in and change management, change the standards. we change the types of mortgages that we would allow, and we packaged and securitized mortgages, clrly, that we thought were safe.

given low interest rates huge availability to capital that was in the marketplace, and he individual home owners ability to pay those mortgage payments, given the low interest rates, those loans were secure. >> well, it turned out -- i meant -- >> it turned out not to be, very clearly. >> and the ratings, our evidence shows some 92% of the tranches of mortgage-backed securities that were raided by the agencies as aaa have been downgraded since. i suspect at this hearing is i should probably not the right for them, but limit just ask one final question, if i could have another minute or two. spectate too, but stay with it. >> the focus here is on the

question of too big to fail. your principle gripe here, if i could say it that way, mr. fuld, is your institution was the one that was permitted to fail. and just about everybody else that you either did business with or competed with was permitted, was rescued, rss in some significant instance to continue to survive, or some merger, assisted merger was negotiated. but isn't a fundamental question i guess it is under what circumstances, any institution ought to be permitted to fail? some might argue here that really ought to have ben the rare instance where there was a rescue, and not the rare instance that there wasn't a rescue, as was the case with your institution. and can you share with us your views whether and under what circumstances the government ought to place taxpayer funds,

utilize taxpayer funds to assist institutions like yours? >> first off, it's not that we were permitted. or allowed. we were mandated. >> you had no choice. unless somebody gave you the lifeline, you had me, bankruptcy was your option, basically, is that not right? i mean, i'm looking at mr. miller and he is nodding his head. i don't know what else you could have done. you couldn't have opened for business on monday morning. >> we didn't have access to that window as described. i can't tell you -- >> but that would've been taxpayer dlars i'm saying any absence of extension of that lifeline by the taxpayers, your option was to file bankruptcy,which he did. with all consequences to your shareholders and creditors and the system and so forth, correct? >> correct. >>ow the question i guess i'm asking you is, don't you think

that's what ought to happen in the basic capitalist system that we all operate under? >> unfortunately going to give you a convoluted answer. i apologize. capitalism works -- >> and if you could do this for us, just try to get as breed of possible follow up wita longer written into. try to hit it hard. >> i apologize. capitalism works within a finite rae of standard deviations of volatility. when i talk about uncontrolled market forces, we were way outside. had the fed totally ignored everything, treasury ignored everything, in a pure capitalistic free market let it happen as it falls, not only would you have lost lehman, morgan stanley quickly, then goldman sachs thereafter.

what other countries did, very quickly, they stepped in and they said no more. we are guaranteeing, we're going to stop this irational sense of panic. put confidence back in the marketplace. >> okay. well, i'm going -- >> that would've -- >> let's leave it there. i mean, -- that's fine. out of see if there's a the time at the end i would like to follow-up, but that's fine. thank you very much. >> mr. hennessey? >> thankou, mr. chairman. mr. chairman, at the beginning that i yield the gentleman five additional minutes so we don't have to play the time came? >> thanks. base in your testimony and other things i've heard, i think i want to stipulate that there was a liquidity run, even though there may be different views as to why there was a liquidity run. and it sounds like sometime

around the eighth or ninth of september yet fannie or freddie, not sure that after you have this whole sequence of events. i'm interested in the time before that. so before the liquidity run begins, and mr. fuld, the story, all different stories, from all the different elements of testimony and the staff work that we've seen, these lehman investors have become especially in commercial real estate in '06 and '07. at the beginning of '08, sometime i the late '07, early '08 he recognizes and you start to address, start to wind down your various portfolios were your two highly leveraged. i think after bear you got any star racing equity capital. and so you've got a problem and your working as quickly as you can to solve it. in the post-bear world, there are questions being raised by counterparties and others in market as to whether what you're doing is sufficient. you have said several times look

at all the things we were doing to solve the problem. i haven't heard anyone dispute that you taking aggressive action. i have heard people saying and have been reading people saying we're not sure if it's enough, we are not sure if the from a still healthy. and your testimony you say there was a cap hold at lehman brothers. i want to start with the other three here. freely quiddity run, was there a capital at lehman brothers. mr. miller, i saw you saying of course limits challenges were very serious and suffer from capital deficiency, liquidity dreaanthe low level of market confidence. mr. siegel, i've heard you talking about your liquidity concerns and the counterpart right in those day let me start with you. did j.p. morgan have solvency concerns about lehman befe this liquidity run began? >> as i said in a written

testimony in the oral testimony, one of the things that we focused with all our triparty clients going back to the spring of '08, you know, was our concern about the composition of those books the character of the assets that were being financed on an overnight basis. and whether or not there was appropriate haircuts being applied by investors to reflect the character of those assets. and so i think that it is clear that throughout that whole period, there were a number of concns that we were raising with our broker dealer clients in general, and lehman brothers in particular about the character of their financing, and that obviously magnified itself as it went towards the end of the summer, september expect i'm going to catch altogether to go back in time into that april august time

period and ask you privately, do you think lehman was solid, what would you have said at that point in time? yes, no, or i'm not sure? >> i think that lehman clearly had capital at that time that was supporting its businesses. so from a pure accounting standpoint, it was solvent. but it obviously was financing its assets on a very leveraged basis with a lot loud short-term financing. so i do not think that our own view from economist and what would be that day, you know, had a very thin, you know, cushion of air with the way they were financing their balance sheet and what the character of the sets were on the balance sheet and the way they were being financed. >> mr. baxter, do you have a you on this? >> first, the fed was not the supervisor of ehman. >> understand. >> but one of the lessons of the

crisis for us is that there wasn't enough capital in the banking system either to extend the kind of effects that we felt in 2008. >> i'm trying to fige out whher the liquidity run, in fact, they've had some justification because the marks were bad weather balance, unit, maybe mr. fuld was wrong. maybe they didn't have sufficient capital before the run started. do you have a you on the? >> when i was going with that is, i think one of the things that we learned during the crisis is there needed to be more capital to withstand this kind of shock. and that's why on columbus day 2008, the nine major financial holding companies were urged in a meeting at the treary to raise more capital. d then as we went into 2009, the fed led the supervisor capital assessment program which developed a capital buffer to come on top of that -- >> understood.

that's after the fact. transit, i think i know your answer, which there wasn't a capital hole. why did you such a tough time convincing others that your acunt was good and you sufficiently transparent, that your marks were good, and that the firm was viable? why was the decrease conference, the lucas report specifically citing the two consecutive cores of loss earnings and this talk about market participants raising concerns about your marks and about your transparency. can you talk about that from your perspective? pre-med september. >> first quarter difficult quarter, i believe we were positive net income was about 500. that was shortly after i think we reported shortly after bear stearns. bear stearns, there's been a huge number of rumors, and nobody likes to hear about,

making short-sellers but i believe there are enough institutions that suffered from naked short selling and as many tough testimony around that. you don'need to hear from me. there'no quit since about stock price -- go incidents. i would just leave that alone. we were the next small. i think there were a number of rumo, incorrect rumors that talked about mark-to-market. talked about misrepresentation of certain assets. there was some hedge funds that talked about mortgage ceos that we are carrying on the balance sheet that we weren't disclosing. we went to full disclosure. they were not mortgages. they were not real estate related. they were corporate asset-backed financings. we went ve with that. we dug deeper into our

explanations and were even more transparent. that did not resolve. and once you get a bank on the run, having to defend itself time and time again, you lose -- not you. we, we loss of credibility. you're asking me a question, why was i not able, or why were we not able to put a stake in the ground and say, this is where we are, believe it, and let's go on. and i do not know. because we did have a number of analysts. we did have the agencies out there, the agencies have their own problems. come out and say why was lehman, why was lehman a single? and take a 25 billion, they have the capital, they have the

liquidity and they had a strong set of operating businesses. i do not know. >> let me then follow-up. >> i do not know why. >> to question. i assume you agree that post bankruptcy filing, there was a capital hole. senior, senior unsecured debt holders were getting eight or 9 cents on the dollar spent it was a post bankruptcy. it was within six hours. >> but your argument then is that that was entirely the result of liquidity? >> it was taking our entire derivative swaps structure, structured transaction book, those that don't us money because the bankruptcy didn't have to pay those that had collateral didn't have to return it. and that only heighten the crisis because what they di was they sold out collateral which meant that there were more

assets in the marketplace looking for a new home, which further depressed prices. >> i want to come to one other point. the point which you said you sort of set aside, the rumors, the whisper campaign that is out there to talk and lehman, those are my words, not yours, from our perspective we heard a similar story from the former heads of bear stearns. we were a fundamental solvent company. were, unit, there was no reason for people to stop providing us with liquidity but the were people after whispering. and out of say from my perspective, it is a plausible story that there are people out there talking down the value of the firm. i'm happy to believe that there are people who would do that, for whatever reason. until and unless someone can ask a point to some and accuse them and say, i think this person was doing it, what's going to happen is we're going to spend around and around like we always have

done, which is something like you will assert there are people who are trying to bring down my firm by whispering lies about it, and then the investigators, the sec or someone else, was a winner and talked and couldn't find anybody. so setting aside and saying their unnamed people out there who are spreading these rumors, doesn't help convince, at least me, that that's the case. point to someone and say here's a hedge fund manager whose talking down my firm, so that was sung with subpoena authority, whether this commission or the sec, can go after them and see what did you say about lehman brothers. i want to ce now to the question of the weekend, and the bridge loan. and the bridge loan veteran looking for, the bridge funding that you're looking for, that was a bridge to what? what we've heard from mr. baxter, what we've heard frommr. alvarez, what we've heard from then-president guide and chairman bernanke and

secretary paulson is that the problem was there wasn't a buyer. it was the korean development bank that said no. barclays filter. of a went with e-mail. so suppose that r. baxter was wrong. suppose there was some legal path to provide you with short-term financing. what would that have bought you time to do? who is going to be your partner? >> b of a clearly was not. barclays remains to be seen. ease remember, that we were forced to prerelease our earnings on september 10, whatever it was. that was about 10, 10 days to two weeks earlier than we had planned. we were having a number of conversations. i said no, don't mean to her three. i mean closer to eight or nine, with potential capital provide

providers, or larger, to support the firm. even kgb was literally on its way to new york on that wednesday of that we, whatever was, september 7, 8th, 9th and 10th, when thy were called back by their finance minister. theyere on their way. to see us. no meira subsequently steped in. i can't look at you today and tell you i had two or three people that would have bought the firm. all conjecture. you wouldn't be able to prove otherwise. but you asked me question. my view, i can't do that. but at least we would have been in a position where how they got to that sunday, we would've been able to have had at least

an order wind down they have wid out a good part of the equity value. i'm not sure of that. i believe it would've protected the creditors and debt holders, would've held in in place the derivatives, swaps and structured transactions. and also may have given, may, have given us an opportunity to have been consummated a transaction which would've taken lehman into somebody else's corporate world. a merger. >> and just for i'm hearing it, the fed guys are saying loo, we didn't see any possible buyer out there. after b of a and barclays filter there was nobody there lined up. and that's why this is fundamentally different from j.p. morgan and bear stearns,

fundamentally different citi and wachovia. what i hear you saying is fed, give us ome time at a minimum to wind down in an orderly manner, and maybe someone else will be out there to buy a. that second part, that maybe somebody that will be out there too buys, sound consistent with what the fed guys were saying. which is, over the courseof the weekend there wasn't a buyer. there wasn't a viable candidate. so from that perspective, the entire sphere of government action was contingent on there being a potential buyer out there. it sounds like the to do agree that that over the weekend there wasn't. the clock ran out on you. a liquidity run was in place at you didn't have a buyer, and if you believe the fed's perspective, they are saying we don't have the legal authority to do it. and others are saying, well, maybe there were some other motivation. comment on that. [inaudible] >> one minute to finish up.

>> two minutes? expect two minutes. >> we are five. two minutes. >> thank you. >> i did believe we had a buyer and barclays. i believe they did want the entire energy. i believe that they wanted to highlight certain assets, and i believe our competitors have put together a consortium to have financed those assets. so i believe we did have a buyer. needs and pieces of assistance, but i believe we have a buyer. nomura stepped in 24 hours later. and i can tell you that -- i said before. will having 45 of the conversations. it wasn't just a buyer. it was a potential capital provider, because the question

was did we have the capital to fund spend go, which was sec approved, yes, we did, because the capital that would've gone to spend go was the same capital that was supporting ose mmercial real estate assets on our balance sheet. so yes, we di. we had internal tape ability to create capital. change the perverts too common, bring down the ballot sheet and so forth. we had other opportunities to create seven, whatever was, 10 billion from capital. any one of those would have bridged that gap. >> some internally created, some external. >> i think i'll finish with a comment here, which is on the extensive amount of time we spent with mr. alvarez and mr. baxter, debating whether the fed not action was a choice, or was the only option that they

had, i think that there is a burden on those who argued that it was a choice to describe what the other option was. and part of the other option is who was the buyer option, but the other piece of it that i have not seen is what was the other legal path. i've still not seen in the, what, two years since this happened, any largest tribe in five had mr. baxter's job, here's what i would advise the president of the new york fed to do. here's the legal authority that he could have used to provide this stream of funding to either the broker-dealer or a holding company, pre-bankruptcy filing, to then facilitate the ansaction here. for there to be a choice that has got to be two options. i've heard one option described. i heard some people say i don't, human, there may be nefarious motives about what that option was, but until someone describes

the other option, there isn't a choice. and i'm still waiting for someone to tell me what was that other option that president geithner and chairman bernanke supposedly rejected. >> thank you. >> i does have one vote, which is i don't think anyone implied nefarious motive. i think what we're trying to do is why it happened, why decision was made. i was a the fed has its position. they stated it well. there's information we have, which people can review and come to their own conclusions about. i think we're just kind yet to what happened. >> just a quick -- >> the only thing i might add on that, and i'm not, i'm saying i'm trying to find out what happened. i see number of motivatio work in the chronology since you raised his. i also note that on september 23 and 24th when chairman bernanke was called before congress to talk about the lehman failure/failure, i just want to point out that the chronology seems to indicate

ltiple items, considerations at work and that wasy only point. now, mr. vice chrman. . . the fed was an expose of that was a good deal. i just want to thank you mr. baxter for three times mentioning that if they had only d access to additional funds,

a, b or c would have occurred and if only had additional access to funds, d, e or f would have occurred -- you said that you couldn't sustain it the taxpayer exposure to allowing additional time to see if something else could happen. so on behalf of the taxpayers i want to appreciate your understanding that whatever euphemism is used, government, fdic, federal reserve, all the taxpayers' money and at some point if that was going to be relieved to give y the ability to do something else you just ran out time. and the taxpayers certainly from out of dollars. a. >> 30 seconds that i would like to move on. just respond to your point i

agree it's important to understand all the motivations of the aors involv. on this particular issue i think the legal question is dispositive. >> we have mr. baxter and mr. alvarez testifying under oath that they believe there was only one particular legal path. >> let's do this -- >> we will have time between now and december to discuss this, i'm going to observe the legal opinion fo mr. alvarez. i understand your point, i said as one member of the commission report facts on the table and part of our job is to adjust those and let the public at just those. senator graham. >> thank you mr. chairman. i like to ask my first question of mr. baxter. not individually but as representati of the new york fed. has there been evaluation made of the consequences of the faure of it lehman?

>> i think not just by the new york fed, all in the federal reserve understand that the lehman bankruptcy has significant consequences and was one of the accelerants for what we experienced in the last quarter of 2008. >> is there a written cuments either from your office, new york fed or some other place, that put some numbers behind the consequences? >> none come to mind, commissioner, but let me go back and check with my colleagues. if there is such a document we will provide it to the commission. >> mr. miller, do you know of any evaluation of the consequences of the failure of lehman? >> no, sir. >> the microphone. >> there is nothing in writing and have seen.

>> about the bankruptcy? >> it has severe consequences for the creditors and stockholders and has ancillary waves of problems for the companies that were relying upon financing from lehman to end up in bankruptcy. >> the whole rationale for governntal intervention is that there are consequences to fill you're that are not only unacceptable to the institution directly involved but to the larger financial and economic unity. this seems to be the most significant case study to test that theory so i would think someone would have done an analysis of what were the consequences of the failure of lehman as a means of evaluating the seriousness of the consequences of an on intervention and other analogous cases. i'm particularly interested in

the future and that is what can we do in order to avoid getting into this sunday night situation with future institions. we had a list of items from the earlier panel as to what has been done three things -- through things like the dodd act and now was to enhance the this risk management. the risk management for one of the world's financial institutions, what have you done to enhance risk management since september 2008 or what do you anticipate being donna? >> first of all,, commissioner, i would note obviously throughout the crisis we feel

that jpmorgan cse performed extremely well. we had the benefiof wt we think was very good risk management practices that started as a very strong at risk culture and tone at the top. there is no question that leading up to the crisis we made some mistakes and there are things that we have certainly chged in terms of the way we think about risk-management. as i look forward, i think that's some of the most important things that people have to focus on a large complex institutio is making sure that there's a comprehensive risk culture in the institution, that risk culture has to start to a very strong tone at the top of a ceo and the board and percolate throughout the whole organization and there has to be the right comprehensive measurement device to be able to assess what the risks are the institution is taking, to

measure and monitor them and obviously mitigates those risks that are deemed to be excessive. >> in your corporate derrin and structure is risk-management irresponsibility of the audit committee or is there a separate entity of the board that has a broader responsibility for risk-management praxis. >> there is a separate committee of the board. its our directors risk policy committee and i certainly feel that i am accountable to that committee. obviously i report direct to the ceo, but in addition the entire risk management organization of the bankeports to me, its independent of the different kinds of businesses that they monitor or control and that independence is a very important part of the type of riss culture that i talked

about. >> you have said the end i believe there is an external support for this that morgan stanley had a reputation for strong risk management process. >> i believe you mean jp morgan chase. >> i am sorry, jpmorgan, but do anticipates any changes to further augment your risk management? >> we certainly constantly review how we do risk-management in nine different businesses. there are certainly things that we have changed. one of the things we certainly emphasize over this time is greater stress testing, not only of our trading books but also of our other lending books. we certainly have changed a number of a cost the limited structures under which we allowed our businesses to operate. and so we do risk-management very much an evolutionary process. we try to learn from mistakes i

the past both ours as well a others. >> mr. fuld, you listed some of the mistakes that you thought lehman had made. was moral hazard in the sense that there would be an old cement governmental support if things went as bad as they ultimately did? was backed part of the mistakes of it lehman brothers? what was your level of expectation that you were going to have a government assistance in the extreme situation? >> i had no expectation that the government would help us. and i think fact that precedent was set to after bear stearns were there was so much lash back

on blout in crisis that it was clear that the government could not do that again so i walked into not only that we can but also the months before knowing that we had to create our own solution. >> one of the other items to raise was your mortgage origination operation. by the mid part of the last decade there were some signals that residential mortgages or weakening the pace of acceleration of housing values stalling and then starting to decline, some -- >> senator -- >> and i have 30 seconds?

do you think -- why didn't lehman become aware of this decline in his residential mortgage assets portfolio earlier then you indicated it did? >> i said that we closed our platforms in the middle of a 07. toward the latter part of 06, we began to hedge our mortgage positions and even spoke about it in our 2006 filing indicate that we had started to hedge those positions. at that point though i did not believe that it was going to escalate to the point that it did. but even in the early part of 07 and we began to cut back on the commitments that we made to

securitized and then eventually cle the platform altogether. >> thank you. >> it went in a chronology of 06 hedging, 07 cutbacks thomas securitization south, mitt 2007 closed the platform. >> thank you. >> thank-you, very quickly members we have received a copy and i guess we could make a copy for all the members of the letter to which mr. baxter has referred. as remember he said there was a letter offered on september 14th which made it clear expanded collateral was available to lehman brothers. this is what i think mr. baxter matter referred to as the smoking water. the - there are a couple questions on this letter and some information from the report. it would be helpful to inform the members here. mr. chairman, does mr. baxter have a copy?

>> is your memory that good? >> it doesn't matter, the only question -- >> let him have the copy we have. it shows no knowledgement of receipt by lehman, we like to see that. it must be in a file somewhere, someone. >> we will look. i don't have it with me. >> i know, that's for later. here's what i want to understand. this is from the locus report and it says that on the 14th the federal reserve issued a press release stating the expansion of collateral pledged my letter informing recipients of fact and then quotes, upon learning of expansion of the window they believe that the problem was solved and that lehman wouldn't open in europe by borrowing from the pvc f. however, lehman learned it was not eligible to use the window. the federal reserve board of bank of new york limited collateral lehman brothers could use for overnight financing to

the collateral that was in lehman brothers at jpmorgan as of friday september 12th, 2008. that restriction was referred to as the friday criterion and a source of that information is, in fact, christopher burke who is the author of this letter. is that correct? >> i have met with mr. lucas in a trip to chicago in june to talk abouthis issue with respect to this and other issues with respect to the letter. and i don't have an answer as to clarify other than the latter seems to speak for itself. the utmost confidence and i think to the report is an excellent reporting. it doesn't mean i think every single detail is correct and

this is one of those details that i think our record and the rerds of mr. lucas are different and i can't reconcile those differences were you. i will go back and see whether we can come up with our best understanding as to explain this, but i don't have an explanation right now. >> we don't have time now but i would ask very much that you cannot just give your best effort but, please, reconcile the various accounts of what was eligible to be pledged by lehman prior two their filing at 2:00 a.m. on the 14th. thank you. >> what i'd like to do with your permission is to enter the latter in the record and the relevant portion of the loop is report to. if there is objection. the only other thing i want to put a punctuation mark is the last sentence to read it was attributed to the examiners interview of mr. burt so this wasn't the examiner but examiners interview of mr. burke, so we will follow up

at the staff level or the staff will follow up at the staff level on this issue. >> thank you. ms. born. >> thank you very much mr. chair, and i would like to start by asking mr. bter a question. you testified that the federal reserve and les the bank of new york but i thank you meant the entire federal reserve board was aware the run-up to a the lehman brothers bankruptcy that lehman brothers was systemically important and that it would -- its failure would have systemic negative effect, is that correct? >> that's, correct. >> and you also said that that one of the things that too where aware of was that its failure

would cause disruptions in the derivatives markets, is that correct? >> yes. >> further disruptions in the derivatives markets when the lehman -- lehman brothers failed? >> yes. >> for those disruptions? >> well, i'm probably not the best person being a lawyer to describe them for you, commissioner born, but i understand that there were problems with netting arrangements. some of those problems occurred also because of what we were trying to deal with during this most of trenary week. remember september 16th we had problems with ig's2 so it's hard to say what was cause and effect. particularly at that point in time and this is another very significant point with respect to causation. the month begins with the conservatives ship a fannie mae and freddie mac and then lehman the file, we have an

extraordinary event with respect to a ig's september 16th and then to cap it of on the weekend after lehman the weekend morgan stanley an goldmanachs become a bank holding company so and a veterinary series of events and a short series of time their destructions across all markets including derivatives market so it's very hard to say that it was the lehman that caused the destruction rather than one of the other many advance weaver tried to deal with, many of the other fires burning at the time. >> are you aware of any studies or reports or information at the fed or another government agency dealing with the disruptions in the derivatives markets at that time? >> i believe there are reports. i can't cite to the economists wrote them at this particular point in time, but let me go back and see if we can identify

them and make them available to the commission. >> that would be very well, and i requesthat you do so. we have had some people tell us that to the lehman brothers failure did not in any way involve problems with derivatives and that that was an illustration of how small a role derivatives played in the financial crisis. so i wanted to ask mr. mier whether or not there were problems or concerns with derivatives involved in the bankruptcy of a lehman brothers to your knowledge? >> yes, there was in there continues to be major problems with the unwinding to review

transactions. the offense of the filing on september 15th was creating an event unfolding and your most of these derivatives in the contracts. and because of the events of the fall the counterparties were entitled to give notice of termination. from friday to monday, on friday i understand spe net -- lehman was in the money and we got to the week of the 15th lehman was out of the money and many of the counterparties give notice of determination and proceeded to liquidate the collateral and because of provisions in the bankruptcy code the bankruptcy code has no jurisdiction over that. 2005 congress passed legislation which safe harbor that all these transactions so lehman took very substantial losses in connection with the derivatives markets and a major portion of the administration of the state in terms of personnel even to this

day and also trying to unwind this still remaining derivatives transactions. there are over almost to give to people who work on a the lehman estate to work on nothing but service. these transactions are extremely complex, there are multiple, all types of transactions. it's a very complex area. and it's all interconnected. all across the globe. >> intconnections among financial firms? >> yes, ma'am financial firms in all of the lehman global erations. on sept. 15 because of the bankruptcy of lehman holding within 10 days we had 84 and proceedings and everyone of those had either a reiver or administrator and a very major operation in london lehman brothers europe which was one of

the biggest broker dealers in london, when that entity went into administration of the u.k. insolvency lawand administrators were appointed from p wci the first thing they did was closed down to the system, the accounting system. that accounting system which was a global system operated an excellently while lehman was operating. by closing that system we lost track of all the transactions and we have to recreate the entire accounting and reporting system. and so to this very day derivatives remain a very big part of the administration of the state's. >> is there any documents that you are aware of that describes in detail the problems of derivatives in the estate? >> i believe there is, the international society of derivatives association has done a number of studies on the affect not only of lehman

bankruptcy but generally the contraction in the markets. i think they have done a numr of reports prepared. >> have you any of those? >> i'm sure we can have access to them. >> and would be valuable if you could get access to those and provide them to us. >> i will do so. >> mr. zubrow, let me ask you a question since jpmorgan was a major counter party as well as the try part -- try party repo clearing bank lehman brothers. in your testimony indicated that lehman brothers had asked -- jp morgan chase asked lehman brothers for $5 billion in extra collateral on september 9. and you said that a primary reason for that was because of

j.p. morgan's derivatives exposure related to lehman brothers. pitcto explain what that exposure was? what kinds of things did that consists of? >> as i said in my testimony both written and oral, there were several primary sources of our credit exposure to lehman. one was obviously the try party repo book that we talked about. in addition for artists to continue to be supportive of lehman in the marketplace we would be taking on derivatives exposure either by directly trading with lehman or trading on behalf prime the brokerage clients and then in addition many counterparts of the lehman during that week sought to close out their derivatives positions with lehman and extinguish and a credit exposure they might have in the final year of lehman and

they would come to us and asked us to step into their shoeand a procs that's called inhalation. order for us to continue to be supportive of of lehman in the marketplace to continue to except those innovations and not back away from them as a counterpart, we asked for that additional collateral. >> end due to consider just one -- >> take two minutes. >> i assume the the request for novation where essentially an aspect of the run on the lehman brothers at that point. >> that would be, correct. >> thank you. >> bad is it? >> yes. >> of type. >> thank you, mr. chairman. question for you, mr. zubrow, and it really follows down this line of inquiry. a lot o your testimony and also

your commentary has been specific to lehman brothers but i was wondering if you could provide some conte for that. you have been around ri-management for a long time through a number of different business cycles and could you talk a little about how you typically deal with their clients in a situation where there may be more uncertainty in the markets in the past and then also specifically in this instance and crisis among other clients you might have had to take similar actions with regard to collateral or reducing exposure. whether in any way lehman stood out as out wire in that regard or whether it was part of overall strategy you has in dealing with the markets at the time. >> thank you, commissioner, for that question. certainly we talked about the let me emphasize one of the things that were very focused on in looking at all of our try party repo clients was a question of what was the character of their try party

financing book and going back to the end of a 07 and into the spring of 08 following the bear stearns situation, we went to all our try party clients and felt that the character of their book had changed materially over the last time. the try party business was originally a business design to help broker-dealers finance government and agency inventories and i think we collectively woke up as an industry and found at the end of a seven beginning of 08 that much of the financing or a significant portion finanng being done by the broker-dealers had shifted into less of a quid the harder to value securities that typically were not cleared through the fed wire or the fed systems but rather cleared

across the ctc, soe tended to refer to those as ctc eligible securities. but they shared a characterization of typically being less liquid. obviously less sece because they weren't government or agency bonds. and we were concerned that investors were not providing the right credit analysis in the view of that collateral in applying direct here cuts in their relationships with the broker-dealers. during the spring and summer of 08, we worked collaborative we with the number of the large and brer-dealers, large clearing or largeanks as well as other investors to the counterparty risk management policy group to try to articulate among other things in that group a series of best practices for the try party

repo business. we did ask in a collaborative way, we articulated those best practices through that report which i believe you have a copy of a and we also did so very much in consultation with the new york fed recognizing that some of the best practices that we were suggesting in that report would have an impact on the financing of the broker-dealer community, the need for them to revive the additional hair cuts and ultimately to try to finance some of their inventory investments from other types of a means. >> so there were others that you had made similar requestsf? >> we had discussions with all of ourry party repo clients about the need to implement the types of best practices i talked about and in particular to move

to making sure that during the intraday finanng that jp morgan chase provided through e try party mechanism that we move to a situation where we were retaining at a minimum the full amount of the investor hair cut from the overnight financing arrangements but we also had discussions with each of our clients about the need to move to more of a robust risk based hair cut mechanism which would a better take into account the character of the securities that were being financed and in particular what the liquidation of risks of those securities were in the advent of a default.

we were doing to try purdie repo book. we were taking on additiona exposures >> could you comment briefly on the notion that were

that if there is specific information that you can share with this commission, it would be very helpl to try to ferret out the merit of some of the allegations that have been made because it's been made in many of the witnesses that have come before us. were curious to see if we can pinpoint the merit and validity of some of these claims. is it your observation so that there was market manipulation at work in the two biggies that some of the securities of the financial companies, bear stearns, lehman brothers, others? >> i certainly have not made that observation. what i would say is that it's clear that when you look at the market seads for lehman brothers during this period of time, there is clearly a widening of their credit spreads and obviously the price of their stock was declining, but i don't have a speculation as to whether there was any manipulation or other activities that were going on such as your

reference. >> thank you. >> your timing is always impeccable. anyway, mr. wallison. >> mr. chairman, prior to turning itver at like two at five minutes to the commissionertime, which doubles your time. thank you. >> that don't quite do that in any event. >> i don't know. i want to follow up in an area that we haven't really discussed either this morning or this afternoon and it's entirely possible that i am confused or maybe not up to date, but my understanding of the discount window would suggest to me that the discount window, at least from what we've heard should have been a useful option for

both wachovia and for leaving. i'd like to understand a little bit about why that was not true. the discount window as i have always understood it was for the purpose of allowinfinancial institutions banks, only banks, not including companies as we were told this morning by the general counsel of the fed, but banks to address runs, withdraws, things of that ki if they are solvent. and the fed would take good collateral and monetize it, in effect, so that they could continue to meet the obligations that they were facing when depositors were taking their funds out because of panic that fearsome things like that.

in fact, the whole idea was establishing the federal reserve was to overcome the problems that are brise in the case of runs. now, let's start with wachovia. wachovia, i think, certainly. and i'll adjust this to you, mr. baxter if i can. mr. baxter if i can. of saving, in effect, wachovia or at least making it to a deal with what we were told was the quiddity details was not used, not actually available or not a fact or in the wachovia case. everyone seems to have been looking for another bank. i would only be true to me if

wachovia was in fact insolvent. it was simply a liquid, then the discount window was pposed to be the cure. mr. baxter, can you fill us in a little bit on that and that will turn to the lehman case. >> commissioner wallison, i cannot speak to wachovia which not located in the federal reserve districts, b another federal reserve test it, so not familiar with the facts associate with that. i know mr. alvarez was here earlier. >> i was one of the questions i didn't get to with mr. alvarez. >> some of the general philosophy which back to the discount window, you're quite correct, then under section 10 of the federal reser act, the discount window is nrmallyused for handling the quiddity problems and depository institutions, banks, roughly defined.

there are different programs under that section of the federal reserve act as te primary program for banks that are in good shape and a secondary program for banks that are not such good condition. so there is a different type of lending done at the discount window for institutions that are not a sound as others. it is intended principally for liquidity problems. it is not intended for p. and you're correct that where there is a capital deficiency in an institution, often the supervisors, said included, let to other solutions to deal with the types of problems, including mergers. >> so, in the case of wachovia, you cannot speak directly to that, but there must be some knowledge in the federal reserve about something as significant as the wachovia ce, which we

spent so much time on this morning. were you at the understanding that wachovia was insolvent at the time it was considered for some sort of special takeover by the city and ultimately taken over by wells fargo? were you of the view that it was insolvent? >> i don't have personal knowledge of the wachovia position. >> i guess we'll try to address this question to the chairman when he is here. that's a question off a forehand. now, let me just turn to the lehman case because it raises the same issues. lehmann wines eligible for the discount window as i understand it. and i cannot get cleareven from all the exchanges we've had, whether we are talking only

about lbi, the broker dealer or we are talking about the holding company. i thought that the fed had opened the discount window to the holding companies before lehman failed and in that case, lehman, at least the holding company was eligible for discount window access. is that your understanding or am i wrong about that? >> that's not correct. i'll try to explain it and i pe not to sound too much like a lawyer. the discount window is used to refer to lending programs and the federal reserve probably. the normal federal reserve lending program is the one under section 10 b. of the federal reserve act to depository institutions. when we got into the credit crisis, and we got into 2008, we

started to think of using a statutory power that had not been used since the great depression. i'm talking about section 13, subdivision three of the federal reserve act, which enables the fed to plan to an individual partnership, not a bank. in the first usage of that section 13, three, power reserved on march 11, 2008, when we introduced the term funding facility. the second time we used that extraordinary power was on march march 14, when the board of governors had authorized the new york fed to land two bear stearns through jpmorgan chase to carry bear stearns through the weekend. now, that's a special type of power used only in extraordinary unusual circumstances. >> now why would that power not be of the same kind and purpose

as the discount window with salt? the use of the discount window term is just a broad freeze for the same kind of lending. the purpose of the discount window i described before, the purpose of 13, three, was to make the same kind of facilities available to non-bakes. so does the fed hae different rules? is there some different purse for 13-3 other than simply to liquefy institutions that are otherwise solvent? >> the statute is different than a couple of significant requests. if you look at the statutory language, for example, does the infection 13-3 that that lending is to be done only when the lending reserve bank signs that

there's no adequate adequate credit accommodations available to the punitive borrower elsewhere. now that doesn't exist and section 10b. so banks can come to the window, even though they can get credit elsewhere under section 79 -- and i'm speaking of 13-3 before it was amended by dodd-frank. those institutions were institutions that couldn't find credit elsewhere. so we're talking about extraordinary situations, borrowers who can't get credit. >> i'm sorry to interrupt, but in lehman we did have enough room that couldn't get credit elsewhere. so, why was it excluded under 13-3, when the whole idea is to provide the quiddity to solvent institutions? >> this may be a long answer. it was not lehman's --

broker-dealer was not excluded under 13-3 because it was eligible to borrow at the term securities lending facility. >> i'm not talking about the broker-dealer. we focus only on the holding company. >> with respect to the hlding company, a couple things would need to happen. we'd need a new finding by the board of governors under section 13-3 that authorize the federal reserve to land to the holding company. it never happened. that resolution was never promulgated by the board. it was never promulgated by the board. >> yes, i'm sorry, for reasons -- that's my question. >> we were getting into early that would've been alone a bridge to nowhere and i think commissioner hennessy had a framing of that that was very elegant and right. and we would've been lending lending to the parent in the face of a run and it was inconsistent with the contingency plan for executing after plan a fellow part in the confined in a merger.

>> the fact you have a different contingency plan can't be a factor. the important question has to be, if the institution is insolvent and mr. fold has said i haven't heard anyone contradict that yet. if it was solvent, then it doesn't matter what other plans he had in mind. it seems that the board could have adopted a resolution that made lehman brothers eligible for the use of 13-3, that is the parent company eligible for the use of 13-3. was that only the absence of a board resolution that stopped that from being accessible to lehman brothers, the holding company? >> now, commissioner. if i like that kind of bridge alone was a virgin lunch nowhere because the management of lehman had worked, i think, as diligely as pssible to find a

solution to the problems in the run-up to lehman weekend. wead worked through lehman weekend to find the solution to those problems. the market no longer had confidence in lehman. america was no longer willing. >> i'm going to interrupt again. i'm sorry, but thatis a characteristic of a liquidity run and that is the market has no confidence. the purposeof the fed liquefying or monetizing the asset of the company that otherwise have unsalable or asset for which there isn't a liquid market. the purpose of that is to say to the market, this is a solvent company. we are going to find as much as it needs in order to maintain its ability to meet its obligations because otherwise it is solvent. that's the purpose of the discount window. you're sending a signal and

eventually the run stops because people say well, the fed has concluded this is a solvent company. there's nothing for me to worry about. there's plenty of money to meet my obligations. now, i don't quite understand yet why the fed didn't make this -- didn't come to this decision and allow lehman brothers to use that facility. >> we saw no end to the run. >> if their solvent -- if they are solvent, then there's always an end to the run. >> commissioner wallison, one has to pay your debts as they come due. and that was the situation that lehman was experiencing at the end of lehman weekend. they can pay the debt and no one would extend credit to it. >> m have a few more minutes? >> i think he recorded five more minutes. >> i should've given you to an end to the menu to felt really

good. aughter] >> let's do this. it's a god line of question, but i would like to accord mr. thompson the opportunity and then maybe we can run back up your all right? >> sure, good, thank you your >> thank you, mr. chairman and thank you for being with us. mr. fuld, there's been much said about the mistakes that she made for the firm made. there's been conversation about the risk management techniques are part is at jpmorgan chase. obviously those practices for the same forhe systems weren't the same at lehman brothers. can you talk a bit about the risk management practices that lehman brothers and why you didn't see this coming? [inaudible] >> excuse me. lehman very much part of it been

a strong risk management culture. that's how i grew up in the firm. the executive committee was in fact the risk committee. a number of my senior executive at a majority of their net worth tied up in lehman brothers. i'm not going to say 100% of our employees, but a huge percentage out of stock in the firm. so i looked at it that we had 28,000 risk managers. our risk management philosophy was no surprises. never get yourself on the end of a one, where you can't come back. do not rely on risk modeling and always make sure you have an exit strategy. we have executive committee

meengs, formal ones, every single monday. a number one piece on the agenda was always risk and risk management. our risk, senior risk officers, were at those executive committee beanies. we had presentations to the board about risk and risk management we had presentations to the agencies about risk and risk management. >> or what failed? something obviously didn't work. and so, that's when i'm trying to get at. what failed? >> what failed in the bginning, i believe, was rectified in the end. or what failed the beginning was the sense that te dislocations and disruption in the mortgage market, mostly nonresidential, was in fact contained.

and we weren't the only one that had that view. that contagion spread. other asset classes. i believe that we reat to, not because there were one or two people floating around the firm. it was because the risk management committee said other asset classes or be in effect dead and that is what drove that reduction and less liquid assets. that was our focus. it was not about bringing down governments. it was not about bringing down corporate or on the run equities. was where were we affordable? where can we be most affect it in the pml, which will then eventually hurt our capital. that was about less liquid assets. commercial real estate, residential mortgages, but which loans. those are the things we focused

on. that's what we brought tamils 50%. did it fl in the beginning? bushes say that we had -- we make poor judgments as far as timing, building some of those businesses. had poor judgments and ting on making some investment. made those mistakes, addressed those mistakes. and as i said, i believe both in my written and oral, but the time we got to the third quarter, we were in a solid decision. did i answer that? >> yeah. so mr. miller, you would with one method of lehman is allowed to fail, it would need financial armageddon. can you talk about what happened to the counterparties and any of those transactions and how that armageddon has manifested itself post-lehman? >> yes, commissioner. as mr. fuld has pointed out, there's many different classes

of actions that lehman operated in connection with the derivatives. that's largely outside the spirit of the bankruptcy proceeding. except for the contracts that are still open. and that assuming an enormous amount of time. damon suffered tremendous losses in derivatives because the counterparties took advantage of the contracts, closed out those contracts, liquidated in a failing market so they have very substantial claims against the next day. there were many commercial real estate loan transactions where lehman was a member of the sender can thing thunder and was not able to fulfill its obligations and those entities, many of them ended up in the bankruptcy proceeding. overseas, many of the lehman global offices, as i said enough subject to two insolvency

proceedings. in those cases there were notes sold individually in those countries. there are huge claims in that connection. i think i pointed out there are 66,000 claims that have been filed against lehman. in a gross amount, $830 billion. their many claims that are filed today that are on liquidated because they haven't been able to calculate the damages. those are the direct results of the bankruptcy. i think there are a lot of incidental results of the bankruptcy that nobody may have contemplated. in the week that followed, september 15, i think it was wednesday, chicago mercantile exchange closed out the lehman accounts. that resulted in a loss to payment of approximately $1.4 billion. all of lehman's positions were auctioned off at very reduced values. the commercial paper log that

goes up on wednesday and for major u.s. corporations were unable to retain or they thought they would be unable to redeem commercial paper or sell commercial paper and there were questions raised as to their ability to raise their obligations. thanks for concerned about backup lines on commercial paper. what's you had is almost a whirlpool of failures. what was created with the crisis confidence. you have to remember that prior to lehman's failure, there was a growing expert tuition that no matter what happens, somebody would intervene in a the situation. and i think that was accentuated at the bear stearns situation. and many people in the market just assumed, and in the public, but if there was a crisis of some kind, there would be some

intervention. and remember, in all those situations going back to what mr. baxter refer to as long-term capital management, no creditor was heard and creditors were always paid. so while there was the us a contraction of credit, most everybody, at least in my world thought that there would be some bailout of some kind. >> so in your opinion, there could've been actions taken. it couldave mitigated the aftermath ofthe lehman collapse or even -- >> i believe so and i understand mr. banks this position. but as mr. fuld points out, their assets there. even if there was a bridge to nowhere, just an orderly wind down those assets serving to back up the unlimited guarantee of the fed over an orderly period of time, the values that were inherent in the balance sheet whe they are. what happened to them, they were basically liquidated at the

stretch prices. so you lost all of that value, which putting aside the ancillary effects, that could've been recaptured with an orderly wind down. but look at i when somebody comes into the emergency room and is on the operating table and hemorrhaging, you don't ask can you pay the search and? to save the patient. i look at lehman has been the patient. and if to do with the calculation that systemic risk was so great, somebody had an innovative way of avoiding the systemic defenses. somebody found the way and beyond mobile industry. they could've found a way in this and this are you. >> mr. zou zubrow, can you talk about other counterparties and lehman? but have been?

>> i think mr. miller has summared a lot of thing off on effects of the bankruptcy. certainly, there continued to be concerned in the marketplace, you know, over the credit worthiness of other broker-dealers. mr. baxter is talke about the other extraordinary efforts, you know, the new york fed and the fed took with respect to other enterprises. but i would just say that as a general matter in the market place following the bankruptcy of lehman, there continued to be a contraction of credit availability and be concerned about lending to many financial and the two shows. so mr. fuld, europe you would he screwed up. >> i never really odd about the two big to fail. in retrospect, the big mistake

that was made was that lehman -- lehman is a sound company was mandated to file for bankruptcy. that was the first mistake. the second mistake was the fact that it was forced to file for bankruptcy and the knock on effect, not only in this country, but also throughout the rld -- that was the second mistake. >> thank you very much. >> all right, a couple of just very quick questions i had on the remaining part of my time, just very quickly. mr. zubrow, as i just said i entered into a chronology earlier on about the interrelationship between jpmorgan chase and lehman brothers. one of the things we didn't have a chance to talk about today is

the way she should come as sensibly, even though sunday beeen counterparties, it's quite fascinating to see how many counterparties did stick around. how many did believe lehman would be saved. your relationship is a very special one because of the tri-party repo. and i just wanted to ask you just to very quick questions. on september 9, you demanded $5 bilon in collateral and i believe over the next cple days about $3.6 billion is posted, correct? >> that's correct. >> and again on september 11, after a series of existing agreements, on september 11, you demanded another 5 billion made it clear that if you didn't receive the 5 billion, we intend to exercise their rights to decline credit to you under the clearance agreement among which means essentially the next day the men couldn't operate. is that true that basically he said posed a 5 billion were not going to provide credit?

.. we did send them a notice that you referenced, but it was falling there isgreement that they had already told us they would post the cash collateral and we have every expectation they would.

>> one more question on this and that is according to our interview with mr. fuld, he approved posting the $5 billion after mr. black said lehman would get back in recent interrogatories and receive them and send them to mr. diamond. we haven't had time to talk about this but we continue to look at it. s it your recollection there was a promise to return the collateral? >> no, my recollection is there was no such promise. >> mr. fuld, to let it stand was this a $.6 billion drawn on your liquidity a death blow? >> i was really only aware of the thursday conversation. >> teeeleven. >> that i participated in. i believe the call was going. i forget it was feared he asked me to participate and i believe

jaime diamond tennessee black from that call and it mr. zubrow. in all fairness i was not aware that mr. zubrow was part of that call then, but whatever. they ask for a 5 billion. i looked setian, he nodded his head, and i said fine. i said that as in al i assume i get this back tomorrow. my recollection very clearly is that they said, yes. >> do you remember m. to new chief saying during this conversation when he asked why a jpmorgan wanted the collateral participants on the jpmorgan respon of no reason and a further asked to keep you from asking 10 billion tomorrow separatism into may have been mr. diamond according to this note said nothing and maybe will. guess my question is, how

fundamental for these calls of the end to your liquidity run? with a the trigger point? >> or the death blow? >> was this a series of events happening during those days? >> the clearing bank 7-up with 16 -- 17 billion of additional collateral. out of the three of liquidity that we lost in those three days. had we had that collateral i think that would have made a huge difference. >> the only other comment i want to make ends if other members have wrapup questions here is i have a context, and today which really is about are two panels. one thing that strikes me with a wachovia which suffered in a run when washington mutual wasn't saved and today we focus on lehman that was in save and the consequences. i think of us are mindful why we spent our day on the exception that proves the rule that this was an era of massive and

expensive bailouts. i just wanted to make that comment because we focus on these two instances where there was an aberration and what apparently became a sweeping policy. at a certain level that old adage that turned on its head and became theifth first you don't succeed and fail, fail again and became the model of that era. i want to put today's hearing in context. additional comments, i think peter and one question each, and doug, did you have a question and then the vice chairman may wrap up. one question so we can proceed. >> i just wanted to comment on your comments, mr. fuld, about a sound institution that was compelled to file bankruptcy. and i guess that really goes to the fundamental, one of the fundamental questions we're here to answer is whether these were extraordinary events that occurred in kind of out of

nowhere that p a whole bunch of sound institutions into a position where their liquidity was inadequate to meet their normal obligations. there were failures. a certain failures and other institutions require that liquidity to prop them up until circumstances developed or were there certain fundamental and soundness within the institutions which is what ledger credit caris to make greater demands and insist on greater cllateral and require greater hair cuts on the try party repo, the short-term financing? i mean, i guess it's more of a comment i suppose in a question, that really is that the and a day one of the major things we have to resolve was whether these were a bunch of sound institutions who faced the stress of an economic crisis or financial crisis that was

short-lived or really for embedded within those institutions many, many on sound assets which have to find themselves the leverage out of the system in order to get back to more fundamentally sound institutions. sunland san from your perspective coming regarded institution as sound and i respect to the voter life and career to that and you'd have that perspective regardless. but it is not entirely free from doubt because as mr. zubrow said one of the definitions of insolvency is an ability to major obligations when they come due and you could not do that. given the circumstances. >> is that a statement? >> it is a statement. >> do you have a response? quick, consigns to th point. >> you know me well by this point. >> thank you. >> all i can say is right after

us came to other investment banks. had they not been addressed with some form of support to, they would have gone. >> but that doesn't answer the question because there may have been on soundness within those institutions as well. i suspect that is part of what are charges is to identify whether there were causal -- causes the swept across the range of institutions that found themselves in jeopardy during this time that we could avoid on a go for a basis to avoid that kind of circumstance occurring again. that rather than it being sort of a a god created a flood of that threat to sweep over all these institutions, you could say that there were human created problems within the institutions as well as. >> i am getting soft in my old age as chair.

very quickly, mr. wallace, one question and then mr. vice chairman for closing marks and we will adjourn. >> one question and this is for mr. fuld and i still want to put words in mr. baxter mouth, but i took away from our discussion that if the fed adopted their purpose resolution under 133 that would have allowed them to take your illiquid assets a monetize them as they might do with a solvent bank, if that had occurred wouldn't lehman have been able it to survive? >> i believe so. >> thank you. >> mr. vice-chairman. >> mr. baxter, on the 133 decision was tt discretionary on part of the federal reserve? >> the decision by the board? >> yes. >> yes. >> when you have a discretionary decision you look at the

consequences of the decision and you basically focus on what death. so if you go ahead and make that decision what have you done, what of the consequences following that, so if there's a required or in automatic discount for banks or the l says you have to do it than i understand is no discretion. where there is discretion you have to weigh the facts as you know them in terms of making that decision, isn't that the intervening? i just have to tell you, foe, is interesting what we will do for the next couple of weeks. basically what i've heard here is a whiff of, should have, we would all have a in their christmas. we're talking about hundreds of billions of dollars. if i just had another 70 billion we might have been able to make another week. we're going to go out and listen to people who are not in need of

billions or hundreds of billions. they just need a few thsand. there are facing foreclosure. they are facing the inability to get assistance on restructuring alone, a bridge to save their houses. and if any of them are still watching after they have listened to these discussions about another 50 bilon here, another hundred billion there, we might have en able to hang on and they're sitting there saying, whatorld are these people in? if youook the hundreds of billions and alloweds as we go out to the communities across erica listening to people say, i could have made it, they told me we are restructuring, i never got the call back, and when i found out we were in foreclosure i asked the why didn't they get back to me. i have heard that over and over again. so as toave your arguments about which hundred billion was

needed when coming you've really got to get out there and take a look or at least listen or maybe watch what we will be hearing from people who just don't get it to. when do they get to a bridge to somewhere? when do they get a modification on the loan? and it is in the extreme example of a guy who runs a top coatrack who got a loan and was living in a $450,000 home for a month. that is not the problem out there. it is real people with real jobs who had real homes who are making real payments and needed to a little bridge. not a trillion dollar bridge, not a hundred billion, not even a billion. a $25,000 bridge, and $15,000 bridge, and weill listen them finally. your leaving washington, a leading new york and wall street and are going to talk to people who would like to have their say

about five has and hasn't happened. i just wish i could have you all along so that you can appreciate and understand why this coming election in november is under a whole lot more turmoil than anyone thought it was going to be. thank you very much for your testimony. ou job is to try to understand and explain what happened and some of it is learning what didn't happen. obviously there is argument about what happened but i think there are a whole lot more arguments about what didnt happen. thank you mr. chairman. >> members, anything more? i want to thank the panel members for coming here today, for your written testimony and as the vice chair says we will probably follow up wit you as we are as a mentioned with jpmorgan and on some issues. i thank you very much. thank you. we will recommence here at 9:00 a.m. tomorrow morning with chairman bernanke.

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we can fwhot do it for them.

we can create the environment for negotiations but ultimately it's going to provide leadership on both the palestinian and israeli side and the region that say they bant a pal stos verdes stinian state only israelis and the locals can prove the readiness to bhak the

what they say, hifry teaches us

there is a different bath. there is a path of resolve and determination where comprimise is possible. this path is open to israelis and palestinians. we can build a just, lasting and comprehensive peace in the middle east. thank you very much.

>> in relaunching direct

negotiations between israelis and palestinians, like you and the rest of the world and the people of the middle east and the world look forward to have this negotiations as a final and desighsive negotiations that will need to the peace. our meeting today would not have taken place without the consider able effort accepted bit u.s. president and administration under the leadership of president obama i still look

forward to its success and

completion. remains a dream in the conscious. there is no doubt there is frustration and hunger. it's no longer acceptable that we fail to is chief negotiations through peace

>> it is true that reaching between fwoej sides, yet the a come looted succeeded in both parties in the previous understandings particularly to the 27,000 and subsequent understandings and with the previous is rail government

>> no doubt the position of the international community and the statements in particular has laid this statement. pay due row inspect and supported the outcome using different negotiations tlut outcome of negotiations. it has distressed the aim is to reach a peaceful consideration that begins in 1967 allowing for a emerging palestinian to emerge

with peace until the negotiation

process comes do not let it slip through your fingers through the peace initiative. i say egypt will continue the faithful support the aspirations

of your people. we would stand by you until this capital. we will continue the reconsiliation for the sak of the palestinian national interest. i would like to give my thanks to barack obama and police accept my appreciation and peace be upon you. >> in the name of god most

merciful and compassion, peace be upon you. >> millions of men, women and children have suffered. feeting hatred and igniting wars. they cannot be addressed effectively until arabs and iz riels can find peace.

this is why we must prevail. will cause further suffering in our region and beyond. president obama, we value your commitment to the cause of peace in our country and your value to help the parties move forward. you have said middle east is in the national security interest of your country. we believe it is on the basis of

two states living side by side is apre condition for stablt of all countries of the middle east for a regional peace that would lead to the arab-peace initiative. that would be a stap towards neutralizing forces of evil. we node your support as a mediator and honest partner as partiers move along in the heart

of setlers time is not on our side. with a review to reaching a two-state issue. a future of peace in which fathers and moernls can raise their children without fear. young people can look forward to hope. too long, tomb people have been

denied the most basic human right. the right to live in peace and security, enjoying freedom and opportunity. our peoples want us to rise to their expectations. we can do so if we approach these negotiations with good will, sin sarity and courage. thank you.

>> excellencies [speaking in native language] peace unto us all. i am pleased to be here today to begin our effort to achieve lasting peace between is rails and palestinians. i want to thank you for the tireless efforts to renew this request for peace. i want to thank president obama, tony blare who have all worked

so hard to bring is rails and palestinians here today. i want to thank president obama and king ab dala for their dedicated and meaningful support for their meaningful support to promote peace throughout the region. i pressure presence here today. i began with a hebrew word for peace. shal overwhelm. our goal is peace.

we seek a peace that will last for dpen operations. our dpen operations, our children and the next this is the pooegs all our people aspire to. this is the peace they discern. a lasting peace is a peace between peoples, is rails and palestinians. we must learn to live together, next to one another and with one another. president hamas. you are my partner in peace.

it is up to us and our friends to conclude the agonizing conflict and afford them a new beginning. the jewish people are not strangers in our homeland but we recognize that another people share this land with us. i came here today to find an historic comprimise to enable both our people to live in peace and dignity i've been making a case for israeli all my life. i didn't come here to make an argument. i came here to make peace.

even the winner's loose. everybody looses if there is no peace. i came here to achieve a peace i didn't come here to find solutions or make them i know the grooef that is has a mrikted so many families. yesterday, four israelis including a pregnant woman and another woman were brutally

murdered by six terrorisms. two hours ago, there was another terror attack. thank god, no one died. i will not let the terrorists block our path to peace. that peace must be anchored in security i'm prepared to walk down that path of peace. i know what it would mean for our children and grandchildren for palestinians and all the peoples of our region. i think it would affect the world. i see what a period of calm has

created in an era of progress and hope. we can take place of our unique place under the sun. the cross roads of history. our dpeeography, history, culture, the climate and talents of our people can be unleashed to create enormous opportunities in so many areas we want the sky

line of the westbank to be lined with apartment toweres we left leb he none and we got terror. we left gaza and we got terror. we want to make sure this will not be turned into a third enclave. i want to add that everyone of us sitting on this stage. this is why peace requires security arrangements that can withstand the test of time and the challenges sure to confront us. there will be many challenges,

both great and small. let us not get bogged down by every difference between us. let us direct our courage and thinking at those decision that's lie ahead. there is no shortage of skeptics. i suppose there are many reasons. i have no doubt that peace is possible. we cannot erase the past but it is within our power to change the future thousands of years

ago on these very hills, we envision a lasting peace. realizing that vision for a better future. [applause]

>> his image he is city king abdullah, ladies and gentleman, i would like to start by thanking president obama for the welcome of hosting us today covering all the status issues over the year in accordance with the law andres lugss. as we move towards the relaufrnl of these negotiations we recognize the challenges and op stick wills that lie ahead.

we assure you to make these negotiations successful. we recreate our commitment of obligations. it is not setting apre continue but a goal to implement an agreed obligation we will spare

no efforts but ensure all of the issues. jerusalem, refugee, settlements, voters, the release of all our prisoners. the people of the area achieve peace we want peace that will correct an historical injustice.

the people of the region give us security and obligation your third and sweeping drive from which youen gulf from the day you took office to set the parties on the path of peace. this same spirit schibted by others. and the telling indication egypt and jordan have been playing a supportive roll. the effective role is further

administratored andfully endorsed a most telling signal especially since he has been involved for many years and in the efforts for states building time has come to end the

situation from 1967. it is time for the establishment of peace and time to put an teened the struggle in the middle east. the palestinian people that insist on the rights, freedom and independence are at most need for security because they are the victim to be harmed the most from violence.

we are capable of making peace in the land of peace. >> we do not want that a drop of blood be shed. we want the people to live a normal life. let us sign an a growment and put an end to a long period of struggle forever and peace be upon you.

jie want to thank the delegations represented here a lot of times they are doing a lot of work. i appreciate very much the leaders represented here for giving us an excellent start. thank you for your presence loin here. this is not easy and a lot of history. for them to take the step and the