Raise Your Right Hand, Boss

Wall Street's testimony, like so many of its products, doesn't add up.

Bloomberg gets a bigtime scoop from a former Lehman in-house lawyer who says Dick Fuld lied to Congress about how much money he made—and that Lehman lied to investors for years about how much it was paying its executives:

Among those closely observing Fuld was a 49-year-old former Lehman lawyer named Oliver Budde who was watching the hearing at home on C-Span. Budde (pronounced Boo-da) was certain Waxman’s figures weren’t too high. They were too low, and he could prove it. Fuld, he believed, had understated the amount he was paid during those years by more than $200 million, and now he had done it under oath, for the entire world to see.

For nine years, Budde had served as an associate general counsel at Lehman. Preparing the public filings on executive compensation had been one of his major responsibilities, and he had been infuriated by what he saw as the firm’s intentional under-representation of how much top executives like Fuld were paid. Budde says he argued with his bosses for years over the matter, so much so that he eventually quit the firm. After he left, he couldn’t let the matter rest.

And worse:

“I never sold my shares,” Fuld said at one point. At another, he said he had not sold the “vast majority” of them…

In direct contradiction to Fuld’s claim to Waxman that he had not sold the majority of his shares, Budde estimates that Fuld earned $469 million from stock sales between 2000 and 2008

Well, this one ought to be easy figure out. Either Fuld was telling the truth or he wasn’t. Felix Salmon flat calls it perjury and says:

Fuld’s in a lot of legal jeopardy already, of course. But we’re still waiting for a villain from this crisis to end up in jail. Is there any chance, do you think, that an aggressive attorney general somewhere might launch a criminal prosecution for perjury?

And also investigate whether Fuld and his executives misled investors for years. Of course, Bloomberg reports that Budde went to the SEC and it has done zippo.

Budde is backed up by an academic study that found similar numbers on Fuld’s pay and stock sales. You ought to be hearing much more about this one soon. Nice work by Bloomberg.

Meanwhile, the press continues to unspool Tuesday’s testimony of Goldman Sachs’ executives to Congress, looking for inconsistencies.

Yesterday, the Journal had a smart story on how Fabrice Tourre’s testimony may have damaged Goldman’s case.

Today, Andy Kroll of Mother Jones looks at Daniel Sparks’s testimony and asks “Did Goldman’s Ex-Mortgage Guru Lie Under Oath?”

At one point, an indignant Sen. Jon Tester (D-Mont.) said, “Every one of these [deals] looks like a wreck waiting to happen.” And he asked Daniel Sparks, the former head of Goldman’s mortgage department, how he “in good faith” could peddle these mortgage-related products to clients when it was clear the mortgage market was close to complete collapse—and when Goldman itself had begun “shorting,” or betting against, this very same market. Sparks—whose overall evasiveness drew the ire of Senate investigations subcommittee chair Carl Levin (D-Mich.) and other lawmakers—replied: “At the time we did those deals, we expected those deals to perform.” Numerous documents released by the subcommittee, however, indicate that Sparks, who left Goldman in the spring of 2008, and his former employer knew otherwise. And his testimony raises a serious question: whether he lied to Congress under oath.

Kroll pulls evidence from eight Goldman emails (Goldman is an Audit funder) that Sparks not only knew the mortgage market was toast, he thought that CDOs were, too.

According to the minutes of a March 7, 2007, meeting of Goldman’s risk committee, Sparks delivered the following prognosis of the subprime mortgage market: “Game Over—accelerating meltdown for subprime lenders such as Fremont and New Century.” He was so skeptical of the subprime industry that he told the risk committee, chaired by CFO Viniar, that the firm’s mortgage operation “is currently closing down every subprime exposure possible.” Meanwhile, Goldman wouldn’t close its Abacus deal until the following month.

Game Over, indeed.

First of all, Sparks assertion that “we expected those deals to perform” is ridiculous on its face. Seen in light of these emails, it’s something worse. How can you expect your synthetic worst-of-the-worst subprime CDO deal you’ve created to “perform” in May when the game is over for subprime in March and you’re “getting short CDS on RMBS and CDOs, getting short the super-senior BBB- and BBB index, and getting short AAA index as overall protection”?

I guess Sparks meant he expected it to “perform” for John Paulson, who after all, selected many of the referenced bonds in Abacus intentionally meaning for them to fail. But that’s clearly not what Senator Tester was asking. This is a great catch by Kroll.

Sparks, along with Josh Birnbaum, came out looking like worst of the testifiers from where I sat (in Seattle, watching C-SPAN on my laptop). Birnbaum was downright contemptuous of the same folks who had to bail his firm out in 2008 in no small part because of things he set in motion.

Meanwhile, Bloomberg profiles Birnbaum—an “insolent young man,” Dana Milbank aptly called him. It points out that what senators called conflicts, Birnbaum called “hedging.”

What’s interesting here is it sure looks like Birnbaum was pitching something other than hedging when he wrote his self-evaluation in September 2007. Here’s McClatchy:

Former Goldman trader Joshua Birnbaum indicated in his 2007 personnel performance review that he could capitalize on the “fear” in the market of a coming mortgage market collapse to reap profits for the firm.

Because “the world would think” Goldman would continue to invest in the mortgage market for the long term, he wrote, the firm should “flip our risk” and bet on an impending crisis.

“We could use that fear to our advantage if we could flip our risk,” wrote Birnbaum, who left Goldman in 2008.

For some reason, nobody but McClatchy has picked up on that Birnbaum quote. They should. And good job by McClatchy for doing so.

Finally, I wrote a couple of weeks ago about big discrepancies in the testimony of former Comptroller of the Currency John D. Hawke to the Angelides Commission.

Here’s what Hawke told Angelides, who asked a question based on “Power Problem” by The Audit’s very own Dean Starkman:

Well, I should say, Mr. Chairman, that we asked state law enforcement officials on many occasions to refer to us any evidence that they had or any incidents they had of national banks involved in conduct of the sort that you described. And we got zero. And we asked consumer groups for the same thing.

Here’s what I said to that:

That would be, how do you say… false. I went to the tape. The record shows states all but begged Hawke’s OCC to take on abusive lenders or allow states to do it to themselves. The OCC first preempted the states, then sat on its hands, effectively running interference for its regulated institutions.

Hawke never responded to my request for comment. So far as I can tell, no one else has followed up on it. Why not?

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.