WASHINGTON (MNI) – The following is the full text of testimony by
former Lehman Brothers CEO Richard Fuld on the events surrounding the
firm’s bankruptcy and its accounting practices prepared for Tuesday’s
hearing by the House Financial Services Committee:

Mr. Chairman, Ranking Member Bachus, and Members of the House
Committee on Financial Services, you have invited me here today to
address a number of public policy issues raised by the Lehman Brothers
bankruptcy report filed by the Examiner.

Since September of 2008, I have given much thought to the financial
crisis and the perfect storm of events that forced Lehman into
bankruptcy. Everyone’s focus is now on how to prevent another crisis.
The key is how regulation and governance should be deployed going
forward to better protect the financial markets and the entire system.

The idea of a “super regulator” that monitors the financial markets
for systemic risk, I believe, is a good one. To be successful in today’s
challenging environment, this new regulator should have actual
experience and a true understanding of the business of financial
institutions, the capital markets and risk management and must be given
the resources sufficient to accomplish its important mission.

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 as current and future commitments. In
addition, we should put in place established and effective methods of
communication between the regulator and the firms being regulated, all
of whom should be guided by clear standards for capital requirements,
liquidity and other risk management metrics.

The job of the new regulator can only be done, in my opinion, with
the creation and utilization of a master mark-to-market capability that
determines valuations and capital haircuts on all assets, commitments,
loans and structures. In short, to have a 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
Federal Reserve Bank of New York. Beginning in March of 2008, the SEC
and the Fed conducted regular, at times daily, oversight of Lehman. SEC
and Fed officials were physically present in our offices monitoring our
daily activities. The SEC and the Fed saw what we saw, in real time, as
they reviewed our liquidity, funding, capital, risk management and
mark-to-market processes. The SEC and the Fed were privy to everything
as it was happening. I am not aware that any data was ever withheld from
them, or that either of them ever asked for any information that was not
promptly provided.

After an extended investigation into Lehman’s bankruptcy, the
Examiner recently published a lengthy report stating his views. Despite
popular and press misconceptions about Lehman’s valuations of mortgage
and real estate assets, liquidity, and risk management, the Examiner
found no breach of duty by anyone at Lehman with respect to any of
these.

Speaking of asset valuations, the world still is being told that
Lehman had a huge capital hole. It did not. The Examiner concluded that
Lehman’s valuations were reasonable, with a net immaterial variation of
between $500 million and $2.0 billion. Using the Examiner’s analysis, as
of August 31, 2008 Lehman therefore had a remaining equity base of at
least $26 billion. That conclusion is totally inconsistent with the
capital hole arguments that were used by many to undermine Lehman’s bid
for support on that fateful weekend of September 12, 2008.

The Examiner did take issue, though, with Lehman’s “Repo 105″ sale
transactions. 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 Lehman and 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 105 transactions. The first time I recall ever hearing
the term “Repo 105″ was a year after the bankruptcy filing, in
connection with questions raised by the Examiner.

My knowledge, therefore, about Lehman’s Repo 105 transactions, and
what I will say about them today, is based upon my understanding of what
I have recently learned.

As CEO, I oversaw a global organization of more than 28,000 people
with hundreds of business lines and products and with operations in more
than forty countries spread over five continents. My responsibility as
the CEO was to create an infrastructure of people, systems and
processes, all designed to ensure that the firm’s business was properly
conducted in compliance with the applicable standards, rules and
regulations.

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** Market News International Washington Bureau: 202-371-2121 **

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