WASHINGTON - The now-bankrupt investment bank Lehman Bros. 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 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.
'Other people's money'
"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 hundreds of millions of dollars 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.
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 Bros., 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.
"In the end, despite all of our efforts, we were overwhelmed," Fuld said.
But while Fuld said he and executives did everything they could to protect the company, committee chairman, Waxman slammed Fuld for earning $484 million in salary, bonuses and stock sales since 2000.
"Your company is now bankrupt, our economy is now in a state of crisis, but you get to keep $480 million," Waxman said, displaying yearly compensation figures on large TV screens in the hearing room. "I have a very basic question for you. Is this fair?"
Fuld said the figures were not accurate and he probably received "a little bit less than $250 million, still a large number, though."
"It seems that 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 up to $700 billion to bailout our economy," Waxman said. "We can't continue to have a system where Wall Street executives privatize all the gains and then socialize all the losses."
Monday's hearing was the first of at least five Waxman plans to hold on the causes of the financial crisis, which led to the Wall Street bailout plan passed by Congress last week. Republicans criticized Waxman for not focusing first on the problems that led to the government takeover of Fannie Mae and Freddie Mac.
House Minority Leader John Boehner, R-Ohio, derided Monday's Lehman Brothers hearing as "political theater" designed to divert attention from the role of Fannie and Freddie, the government-sponsored mortgage lenders that he charged Democrats protected for years from Republican reform attempts.
Waxman said that his committee is looking into the problems on Fannie and Freddie and might hold hearings on them as well. He noted that Republicans controlled Congress from 1995 to 2007.
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 other companies did.
'You're the villain'
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."
Republicans dismissed the hearing as little more than a political stunt. "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.
The Los Angeles Times contributed to this report.