Lehman's Fuld Takes the Fall

The company's fate took a sharp turn downward last spring after it unexpectedly reported a $2.8 billion second-quarter loss. During testimony, Fuld and other witnesses described the resulting loss of confidence, precipitous stock decline and demands from counterparties to offer more collateral for their loans.

They also discussed how Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote) contributed to mayhem in the capital markets. The week after the government announced a plan to essentially take over the two mortgage-finance giants, Lehman filed for bankruptcy.

Before Fuld appeared, five witnesses criticized Lehman's handling of the credit and liquidity crisis, as well as Fuld's earlier statements that the company was in good standing, just weeks before its collapse.

Luigi Zingales, a finance professor at the University of Chicago, said that Lehman was overleveraged, took on too much risk and did not adequately prepare for the "risk of a bank run." Nell Minow, chairman and editor of The Corporate Library, noted that her group gave Lehman substandard ratings for its high compensation ratio and corporate governance.

Fuld noted that he still held 10 million shares of Lehman Brothers and other stock options when the firm filed for bankruptcy, and that his "financial interests completely aligned with those of Lehman shareholders." But members of the House committee still grilled him about his compensation, emails he received warning of the impending disaster and meetings he attended regarding the crisis, including one with Treasury Secretary Henry Paulson.

"Your company is now bankrupt, our economy is in a state of crisis, but you get to take home $480 million," Chairman Henry Waxman said. "I have a basic question for you: Is this fair?"