Lehman gave $20 million in bonuses before bust

Lawmakers slam failed bank's chief executive at hearing

By S.A. Miller (Contact) | Tuesday, October 7, 2008

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Lehman Brothers doled out more than $20 million in bonuses to top executives just four days before the investment giant declared bankruptcy and accelerated the credit market collapse that resulted in a $700 billion bailout approved last week, documents revealed Monday at a House hearing showed.

Rep. Henry A. Waxman, chairman of the Oversight and Government Reform Committee, said the bonuses and other decisions by former Lehman Brothers Chief Executive Officer Richard S. Fuld Jr. underscored what was "fundamentally unfair" about the bank's demise and its impact on the entire economy.

"In other words, even as Mr. Fuld was pleading with [Treasury Secretary Henry M. Paulson Jr.] for a federal rescue, Lehman continued to squander millions on executive compensation," Mr. Waxman said.

Mr. Fuld, who said Lehman Brothers did not see the financial meltdown coming, told the panel that he "took full responsibility of the decisions I made and the actions I took," and at the time he made the decisions his actions were "prudent and appropriate."

He said the roughly $20 million is bonuses were awarded in accordance with contractual obligations to executives who were terminated.

Republicans stopped short of coming to Mr. Fuld's defense but they stressed the culpability of mortgage buyers Fannie Mae and Freddie Mac, quasigovernment companies that helped pump up the housing bubble with a seemingly insatiable appetite for buying up subprime mortgages from banks.

The argument highlights Democrats' longstanding resistance to Republican calls to reform the two mortgage giants, which the government took over Sept. 8 to prevent their collapse from wrecking the mortgage industry.

Mr. Waxman has not scheduled a hearing on Fannie Mae and Freddie Mac.

The hearing Monday was the first of five the committee scheduled to investigate causes and impacts of the financial crisis on Wall Street that led to the $700 billion rescue in addition to the $85 billion federal bailout of insurance mammoth American International Group.

House Speaker Nancy Pelosi, California Democrat, said the hearings will serve as a staging ground for new regulations on banks, investors and mortgage lenders to prevent the excesses that contributed to the credit freeze.

She said the new regulations will dovetail with efforts by the Democrat-led Congress to pass a credit card holders' Bill of Rights to add protections for consumers, make CEO pay subject to shareholder votes and crack down on predatory mortgage lenders.

House Minority Leader John A. Boehner, Ohio Republican, said the hearings were "little more than political theater" if they do not include an investigation of what went wrong at Fannie Mae and Freddie Mac.

"We will never have a full and complete understanding of the roots of this financial crisis without shedding light on Fannie Mae and Freddie Mac's role in it, and Chairman Waxman's refusal to hold hearings to examine their role says a lot about where the Democrats' priorities lie," he said. "There is no debate that these government-sponsored enterprises share responsibility for the housing crisis that has preceded today's market turmoil."

At the hearing, Mr. Waxman produced documents that detailed Lehman Brothers' chiefs bucking recommendations that they forgo bonuses this year. A company e-mail obtained by the committee showed the bank's money management subsidiary, Neuberger Berman, suggesting no bonuses because it would significantly cut expenses and send a strong message that "management is not shirking accountability for recent performance."

Lehman Brothers executive George H. Walker, who is President Bush's cousin, wrote the management team and apologized for the recommendation. "Sorry team," he said. "I'm not sure what's in the water."

Mr. Fuld shrugged off the recommendation, telling executives in an e-mail, "Don' t worry - they are only people who think about their own pockets."

Mr. Waxman grilled Mr. Fuld about his own pay, which the committee calculated at nearly $500 million in salary and bonuses since 2000.

"That's difficult to comprehend for a lot of people. Your company is now bankrupt, our economy is in a state of crisis but you get to keep $480 million," Mr. Waxman said. "Is this fair?"

Mr. Fuld said his compensation for that eight-year period was closer to $350 million, an amount he conceded was still a large number.

But he said the bank's compensation committee "spent a tremendous amount of time making sure that the interests of the executives and the employees were aligned with shareholders."

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