Days from becoming the largest bankruptcy in U.S. history, Lehman Brothers steered millions to departing executives even while pleading for a federal rescue, Congress was told Monday.
As well, executives who feared for their bonuses in the company's last months were told not to worry, according to documents cited at a congressional hearing. One executive said he was embarrassed when employees suggested that Lehman executives forgo bonuses, and cracked: "I'm not sure what's in the water."
The first hearing into what caused the nation's financial markets to collapse last month, precipitating a $700 billion bailout, opened with finger-pointing and glimpses into internal company documents from Lehman's chaotic last hours.
Rep. Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee, said the giant investment bank was "a company in which there was no accountability for failure." Lehman's collapse set off a panic that within days had President Bush and Treasury Secretary Henry Paulson asking Congress to pass the rescue plan for the financial sector.
Richard S. Fuld Jr., chief financial officer of Lehman Brothers, was among witnesses called to testify.
"What has happened is an absolute tragedy," Fuld said in prepared remarks. "I feel horrible about what happened."
Waxman read excerpts from Lehman documents in which a recommendation that top management should forgo bonuses was apparently brushed aside. He also cited a Sept. 11 request to Lehman's compensation board that three executives leaving the company be given $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.
The government let Lehman go under Sept. 15, only to bail out insurance giant American International Group the next day, in a cascading series of financial shocks and failures that put Washington on track for the multibillion-dollar rescue starting the end of that week.
Waxman described that plan as a life-support measure. "It may keep our economy from collapsing but it won't make it healthy again," he said.
That sentiment echoed on Wall Street, where the Dow Jones industrials sank below 10,000 on Monday 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 rescue plan, 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.
Waxman said that in January, Fuld and his board were warned the company's "liquidity can disappear quite fast."
Despite that warning, he said, "Mr. Fuld depleted Lehman's capital reserves by over $10 billion through year-end bonuses, stock buybacks, and dividend payments."
Waxman quoted Fuld as saying in one document, "Don't worry" to the suggestion that executives go without bonuses.
That suggestion came from Lehman's money management subsidiary, Neuberger Berman. Waxman quoted George H. Walker, President Bush's cousin and a Lehman executive who oversaw some Neuberger Berman employees, as responding with a dismissive tone to the idea of going without bonuses.
"Sorry team," he wrote to the executive committee, according to Waxman. "I'm not sure what's in the water at 605 Third Avenue today.... I'm embarrassed and I apologize."
Fuld said in his statement that the company did everything it could to limits its risks and save itself.
"In the end, despite all our efforts, we were overwhelmed, others were overwhelmed, and still other institutions would have been overwhelmed had the government not stepped in to save them," he said.
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