Lehman Brothers Boss Defends $484 Million in Salary, Bonus

Debate of Mortgage Regulation

"Many Americans developed unrealistic expectations and assumed that housing prices could only go up," he said.

Meanwhile, the securitization of mortgages aggravated the situation – it allowed mortgage originators to make risky loans without concerns about the consequences.

"Since the mortgage originator was no longer going to hold the mortgage to maturity, but rather was going to immediately sell it to a securities firm and collect its fee up front, it did not have a strong incentive to perform due diligence on the loan," Westcott said.

Peter J. Wallison, a fellow in financial policy studies at the American Enterprise Institute, said that the lack of regulation of government-sponsored mortgage giants Fannie Mae and Freddie Mac played a major role in the crisis. Congress, he said, resisted reforming the regulation of the two companies "until it was too late."

Wallison also cited a newspaper article that showed "the SEC's failure to devote sufficient resources to the regulation of the major investment banking firms."

Weak regulation, Wallison said, "can be worse than none."

Near the end of the hearing, after some two hours of questioning, Fuld stressed his personal feelings about Lehman's bankruptcy.

"My employees, my shareholders, creditors, clients have taken a huge amount of pain and, again, not that everybody on this committee cares about this, but I wake up every single night thinking what I could I have done differently," he said.

"I have searched myself every single night, and I come back to at the time ... I made those decisions, I made those decisions with the information that I had ... I can look right at you and say this is a pain that will stay with me for the rest of my life, regardless of what comes out of this committee."

Waxman closed the hearing noting that he was dissatisfied with Fuld's testimony.

"You took responsibility for the decisions you made in retrospect, you think you should have done some things different," he said, "but you don't seem to acknowledge that you did anything wrong."

Click Here for the Investigative Homepage.