October 6, 2008 -- In the first Congressional hearing into the financial crisis, the former CEO of the bankrupt Lehman Brothers, Richard Fuld, became the poster boy for Wall Street greed today as he defended the $484 million he received in salary, bonuses and stock options since 2000.
"Is that fair?" asked committee chairman Rep. Henry Waxman (D-CA) who pointed out Fuld owns a mansion in Greenwich, Connecticut, an ocean front estate on Jupiter Island, Florida, a ski chalet in Idaho and a Manhattan apartment.
"If you haven't discovered your role, you're the villain today," said Rep. John Mica (R-FL).
Fuld said given the collapse of Lehman Brothers and its now worthless stock, his actual holdings were closer to $350 million.
"That's still a lot of money," he told the hearing.
Fuld said he took "full responsibility" for the bankruptcy of Lehman Brothers and "felt horrible" about it.
But Fuld said he has yet to understand why the federal government helped to bail out the AIG insurance company and other investment banking firms, but did not do so a few days earlier to save Lehman Brothers.
"Until the day they put me in the ground, I will wonder," Fuld told the Congressional panel, seeming to seethe with anger.
"This is a pain that will stay with me the rest of my life."
In his opening remarks, Waxman lambasted both Fuld and Lehman.
Internal documents obtained by the committee, Waxman said, "portray a company in which there was no accountability for failure."
Waxman cited an e-mail exchange among top Lehman executives. After someone sent an e-mail suggesting that Lehman's top management give up their bonuses, both Fuld and George H. Walker, a member of Lehman's executive committee and a cousin of President Bush, sent e-mails disagreeing with the suggestion.
Walker, according to Waxman, replied by writing, "Sorry team. I'm not sure what's in the water at 605 Third Avenue today. … I'm embarrassed and I apologize."
Waxman said that Fuld "mocked" the suggestion by adding, "Don't worry – they are only people who think about their own pockets."
Waxman also cited a request submitted to Lehman's compensation committee four days before the firm filed for bankruptcy. The request, he said, recommended that the board give three departing executives over $20 million in "special payments."
"In other words, even as Mr. Fuld was pleading with Secretary Paulson for a federal rescue, Lehman continued to squander millions on executive compensation," Waxman said.
Richard Fuld Testifies Before Congress
Despite warnings that "liquidity can disappear quite fast," Fuld "depleted Lehman's capital reserves by over $10 billion through year-end bonuses, stock buybacks, and dividend payments," Waxman said.
Others at the hearing voiced their own concerns about compensation at Lehman.
Nell Minow, the editor of the research firm, The Corporate Library, highlighted Fuld's compensation, which exceeded $70 million last year.
"I think it is fair to say by any standard of measurement that this pay plan is as uncorrelated to performance as it is possible to be," she said.
Minow also found fault with Lehman's corporate board. The Corporate Library grades the performance of corporate boards and last month, Minow said, the firm downgraded Lehman's board to an "F."
"In this case, the board was too old, had served too long, was too out of touch with massive changes in the industry, had too little of their own net worth at risk, and was too compromised for rigorous independent oversight," she said.
Prior to Fuld's testimony, Minow and several other experts testified before the committee on Lehman's bankruptcy and today's financial turmoil.
Dr. Luigi Zingales, a professor of finance at the University of Chicago, said that Lehman's demise was a result of its aggressive use of leverage, or debt to finance investments, "in the context of a major financial crisis."
It made Lehman especially vulnerable to insolvency, Zingales said.
"Lehman did not find itself in that situation by accident; it was the unlucky draw of a consciously-made gamble," he said.
Robert Wescott, the president of the economic analysis and public policy research firm Keybridge Research LLC, said that the root of the financial crisis, overall lay in "easy credit."
Variable rate mortgages with low initial interest rates "gave many families an inflated sense of their capacity to afford housing," Wescott said. As a result, he said, housing prices began rising as high as 30 percent per year and "a housing frenzy developed."
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."