Prepared Testimony of Richard S. Fuld, Jr.

Oct. 6, 2008— -- Chairman Waxman, Ranking Member Davis, and Distinguished Committee Members, We are in the midst of unprecedented turmoil in our capital markets. The problems that most believed would be contained to the mortgage markets have spread to our credit markets, our banking system, and every area of our financial system. As incredibly painful as this is for all those connected to or affected by Lehman Brothers – this financial tsunami is much bigger than any one firm or industry. Violent market reactions to a number of factors affected all of the financial system. These problems are not limited to Wall Street or even Main Street. This is a crisis for the entire global economy.

No one realized the extent and magnitude of these problems, nor how the deterioration of mortgage-backed assets would infect other types of assets and threaten our entire system. In April 2006, Chairman Bernanke predicted that the housing market "will most likely experience a gradual cooling rather than a sharp slowdown." In March 2007, he stated "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." Similarly, Secretary Paulson said in June 2007 that the crisis in the mortgage markets "will not affect the economy overall," echoing the views of the International Monetary Fund. And at Lehman Brothers' annual shareholder meeting, I too said what I absolutely believed to be true at the time – that the worst of the impact to the financial markets was behind us.

With the benefit of hindsight, I can now say that I and many others were wrong. Far from the credit crisis being contained, we now exist in a world where there are no major independent investment banks; where AIG, Fannie Mae and Freddie Mac are under government control; where we are seeing the largest bank seizures in history; and where we are struggling daily to stabilize the financial system. These events have been as stunning as they have been swift. On September 14, there were four major stand-alone investment banks, and they were considered essential for the flow of capital to and investment in American business. Within a week, there were none. Since July of this year, nine banks across the United States have been taken over by government regulators. Creditors and shareholders have lost money on their investments, employees in the financial industry – from support staff, administrative professionals, and recent college graduates to thirty-year veterans – have already lost jobs. Around our country, workers in industries dependent upon the flow of credit fear they could be next.

I will try my best to be helpful to this Committee, so that what happened to Lehman Brothers does not happen to other companies; so that their shareholders, creditors, clients and employees do not have to feel the enormous pain that our shareholders, creditors, clients and employees are feeling right now. I welcome this opportunity to be helpful to this Committee in its important work, and also to address the issues that Lehman Brothers faced. Some of the media coverage of Lehman Brothers' demise has been sensationalized – based on rumors, speculation, misunderstandings and factual errors. I believe to move forward, we first need to accurately understand how we got here.

By way of background, I am a Lehman lifer. I started 42 years ago as an intern while I was in college at the University of Colorado. I moved to New York and started working full time for Lehman Brothers in 1969, and later began taking night classes at New York University to earn my business degree. I have never left Lehman Brothers.

Founded in 1850 in Montgomery, Alabama by three brothers who ran a dry-goods store, Lehman Brothers has played a significant role in the American economy. Lehman Brothers financed the growth of railroads as Americans pushed west, and funded legendary American businesses, from Sears, Roebuck and Woolworth's to B.F. Goodrich and RCA. In 1984, Lehman Brothers was acquired by American Express and merged with Shearson. In 1994, we became independent again, after American Express spun off Lehman Brothers to its shareholders. At the time, our Firm had only 9,000 employees and $75 million in earnings.

Over the next decade, we restored the once proud Lehman Brothers name. In 1998 we joined the S&P 500 index; by 2000, we had joined the S&P 100 index. In 2002, we executed the largest financial services IPO in history. In 2004, we advised on two of the top five largest worldwide M&A deals. In 2005, we were awarded "Best Investment Bank" by Euromoney. In 2006, Barrons ranked us #1 in its annual survey of corporate performance of Fortune 500 firms. In 2007, we were ranked #1 "Most Admired Securities Firm" by Fortune. Between 2004 and 2007, we had four consecutive years of record-breaking financial results. Between 1994 and 2007, our market capitalization grew from $2 billion to $45 billion. During this period, our share price went from $5 per share to $86 per share, an average annual return for shareholders of 24.6%. We grew to more than 28,000 employees, with more than 60 offices in over 28 countries. Through a commitment to excellence and innovation, Lehman Brothers created value for its clients and investors in the United States and throughout the world.

On September 15, 2008, Lehman Brothers Holdings was forced to declare bankruptcy as a result of an extraordinary run on the bank. The Honorable James M. Peck, Bankruptcy Judge for the Southern District of New York, after the first several days of intense hearings in the bankruptcy proceedings, observed: "Lehman Brothers became a victim. In effect, the only true icon to fall in the tsunami that has befallen the credit markets. And it saddens me."