WASHINGTON – The now-bankrupt investment bank Lehman Brothers arranged millions in bonuses for fired executives as it pleaded for a federal lifeline, lawmakers learned Monday, as Congress began investigating what went so wrong on Wall Street to prompt a $700 billion government bailout.
The first in a series of congressional hearings on the roots of the financial meltdown yielded few major revelations about Lehman's collapse, and none about why government officials, as they scrambled to avert economic catastrophe, declined to rescue the flagging company while injecting tens of billions of dollars into others.
But it allowed lawmakers still smarting from a politically painful vote Friday for the largest federal market rescue in history to put a face on their outrage at corporate chieftains who took home hundreds of millions of dollars while betting on risky mortgage-backed investments that ultimately brought the financial system to its knees.
That face was Richard S. Fuld Jr., the Lehman chief executive who sat for a two-hour-plus grilling before the House Oversight and Government Reform Committee as the panel combed through his pay history, management practices and financial strategies.
"You made all this money by taking risks with other people's money," Rep. Henry Waxman, D-Calif., the panel's chairman, said. "The system worked for you, but it didn't seem to work for the rest of the country and the taxpayers, who now have to pay $700 billion to bail out our economy."
A subdued Fuld opened his testimony declaring, "I take full responsibility for the decisions that I made and for the actions that I took," but he conceded no errors or misjudgments in the chaotic period that led to the firm's bankruptcy.
And he said a compensation system that he estimated paid him about $350 million between 2000 and 2007 even as the company headed for disaster was appropriate.
"We had a compensation committee that spent a tremendous amount of time making sure that the interests of the executives and the employees were aligned with shareholders," Fuld said.
That wasn't good enough for some lawmakers who decried what they called a culture of entitlement at Lehman even as the company's performance nosedived.
The panel unearthed internal documents showing that on Sept. 11, Lehman planned to approve "special payments" worth $18.2 million for two executives who were terminated involuntarily, and another $5 million for one who was leaving on his own.
That was just four days before the government let Lehman go under, touching off a cascading series of financial shocks and failures that put Washington on track for the multibillion-dollar rescue the Bush administration urgently requested from Congress at the end of that week.
On Wall Street, uncertainty Monday about the effectiveness of the rescue sent the Dow Jones industrials sinking below 10,000 for the first time in four years. Investors fear the crisis will weigh down the global economy and the bailout won't work quickly to loosen credit markets.
The bailout, now law, was so rushed that the usual congressional scrutiny is only coming now, after the fact.
"Although it comes too late to help Lehman Brothers, the so-called bailout program will have to make wrenching choices, picking winners and losers from a shattered and fragile economic landscape," said Rep. Tom Davis of Virginia, the committee's senior Republican.
Fuld said Lehman did everything it could to limit its risks and save itself. It failed, he said, because of a "crisis in confidence" on Wall Street, market manipulation in which investors preyed on distressed financial players by betting on their demise, and would-be buyers who waited for the government to step in to help fund a sale.
"In the end, despite all of our efforts, we were overwhelmed," Fuld said, looking uncomfortable seated by himself at a witness table where he fiddled with a pencil and removed and donned his glasses habitually as he fielded at-times angry questions.
"Do you think it's fair?" Waxman demanded of Fuld as he outlined his exorbitant pay packages and noted that shareholders ended up with nothing.
Fuld said he is haunted nightly wondering what he might have done to avert Lehman's bankruptcy, the largest in U.S. history.
"This is a pain that will stay with me for the rest of my life," he said.
Also haunting him, Fuld said, is the question of why Lehman didn't get a federal rescue while others did: Bear Stearns, the mortgage giants Fannie Mae and Freddie Mac, and insurance giant American International Group Inc.
"Until the day they put me in the ground, I will wonder," Fuld told the committee.
But the committee's investigation painted Fuld as anything but a victim.
Waxman released e-mail correspondence from June 2008 in which Fuld dismissed the suggestion from executives at a Lehman subsidiary that the company's top people forgo bonuses to "send a strong message to both employees and investors that management is not shirking accountability for recent performance."
Fuld wrote, "Don't worry — they are only people who think about their own pockets."
The suggestion came from executives at Lehman's money management subsidiary, Neuberger Berman, who also were recommending that Lehman spin off its business to insulate its employees — and their bonuses — from Lehman's sagging stock price and from "management mistakes."
George H. Walker, President Bush's cousin and a member of Lehman's executive committee, breezily shot down the ideas, according to the e-mails.
"Sorry team. I am not sure what's in the water at" Neuberger Berman, Walker wrote to the rest of the executive committee. "I'm embarrassed and I apologize."
Republicans dismissed the hearing as little more than a political stunt given that it failed to probe the role of Fannie Mae and Freddie Mac — huge players in the mortgage market — in the financial meltdown.
"If you haven't discovered your role today, you're the villain, so you have to act like the villain," Rep. John Mica, R-Fla., told Fuld facetiously, earning a tight smile.
In a statement, Rep. John Boehner, R-Ohio, the House minority leader, accused Waxman of refusing to investigate the mortgage giants "solely to shield his fellow Democrats politically," and said it "cheats the American people of key facts that could help all of us learn how we got here — and what we must do to make certain this situation never repeats itself."