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Ex-Lehman CEO Richard Fuld's Testimony About Repo 105

Ex-Lehman CEO Richard Fuld's Testimony About Repo 105

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Published by DealBook
Prepared remarks by Lehman Brothers's former chief executive, Richard S. Fuld Jr., about the investment bank's accounting in the months before its collapse. The statement is for a House Financial Services Committee hearing.
Prepared remarks by Lehman Brothers's former chief executive, Richard S. Fuld Jr., about the investment bank's accounting in the months before its collapse. The statement is for a House Financial Services Committee hearing.

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Published by: DealBook on Apr 19, 2010
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Mr. Chairman, Ranking Member Bachus,and Members of the HouseCommittee on Financial Services, you have invited me here today to address anumberofpublic policy issues raised by the LehmanBrothers bankruptcy reportfiled by the Examiner.Since September of 2008, I have given much thought to the financial crisisand the perfect storm of events that forced Lehman intobankruptcy.Everyone’sfocus is now on how to prevent another crisis. The key is how regulation andgovernance should be deployed going forward to better protect the financialmarkets and the entire system.The idea of a “super regulator”that monitors the financial markets for systemic risk, I believe,is agood one. Tobesuccessfulin today’s challengingenvironment, this new regulator should have actual experience and a trueunderstandingof the business of financial institutions, the capital markets and risk managementand must be given the resources sufficient to accomplish its importantmission.My view is that the new regulator also should have access, on a real-time basis, to all information and data regarding transactions, assets and liabilities, as
well ascurrent and future commitments. In addition, we shouldput in placeestablished and effective methods ofcommunicationbetween the regulatorand thefirms being regulated, all of whom should be guided by clear standards for capitalrequirements, liquidity and other risk management metrics.The job of the new regulator can only be done, in my opinion, with thecreation and utilization ofa master mark-to-market capability that determinesvaluations and capital haircuts on all assets, commitments, loans and structures.In short, to havea fair and orderly market, I believe we need a single set of transparent rules for all of the participants.You have asked specifically about the role of the SEC and the FederalReserve Bank of New York.Beginning in March of 2008, the SEC and the Fedconducted regular, at times daily, oversight of Lehman. SEC and Fed officialswere physically present in our offices monitoring our daily activities.The SEC andthe Fed saw what we saw, in real time, as they reviewed our liquidity, funding,capital, risk managementand mark-to-market processes. The SEC and the Fedwere privy to everything as it was happening. I amnot aware that any data wasever withheld from them, or that either ofthem ever asked for any information thatwas not promptly provided.After an extendedinvestigation into Lehman’s bankruptcy, the Examiner recently publisheda lengthy reportstating his views. Despite popular and press
misconceptions about Lehman’s valuations of mortgage and real estateassets,liquidity, and risk management, the Examiner found nobreach of dutyby anyoneatLehman with respect to any ofthese.Speaking of asset valuations, the world still is being told that Lehman had ahuge capital hole. It did not. The Examiner concluded that Lehman’s valuationswere reasonable, with a net immaterial variation of between $500 million and $2.0 billion. Using the Examiner’s analysis,as of August 31, 2008Lehman thereforehad a remaining equity base of at least $26 billion. That conclusion is totallyinconsistent with the capital hole arguments that were used by many to undermineLehman’s bid for support on that fateful weekend of September 12, 2008.The Examiner did take issue, though, with Lehman’s “Repo 105” saletransactions.As to that, I believe that the Examiner’s report distorted the relevant facts,and the press, in turn,distorted the Examiner’s report. The result is that Lehmanand its people have been unfairly vilified.Let me start by saying that I have absolutely no recollection whatsoever of hearing anything about Repo 105 transactions while I was CEO of Lehman. Nor do I have any recollection of seeing documents that related to Repo 105transactions.The first time I recall ever hearingthe term “Repo 105” was a year after the bankruptcy filing,in connection with questions raised by the Examiner.

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