The meeting of the Financial Crisis Inquiry Commission will come to order. There is a quorum present, and so we will now proceed with this first of our public hearings. Good morning to everyone and thank you for being here. I'm honored to welcome you, as we start this series of public hearings, into the causes of the financial and economic crisis that's gripped this entire country. I thank Vice Chairman Thomas for his extraordinary cooperation and partnership. I applaud the dedication of my fellow commissioners, and I'm grateful to all of our witnesses for giving us their testimony and sharing their wisdom. We've been given a critical mission, one that goes far beyond any party or even policy agenda to conduct a full and fair inquiry into what brought America's financial system to its knees. We're after the truth, the hard facts, because it's our job to provide an unbiased accounting of the actions that led to devastating economic consequences for so many American families. We'll follow the evidence wherever it leads. We'll use our subpoena power as needed. And if we find wrongdoing, we will refer it to the proper authorities. That's what the American people want, that's what they deserve, and that's what this commission is going to give them. Some already speak of the financial crisis in the past tense, as some kind of historical event. The truth is it is still here and still very real. Twenty-six million Americans are unemployed or can't find full-time work or have given up even looking for jobs. Over 2 million families have lost their homes to foreclosure in the last three years. Millions more have a very legitimate fear that they will. Retirement accounts and life savings have been swept away, vanished like some day trade gone bad. People are angry. They have a right to be. The fact is that Wall Street is enjoying record profits and bonuses in the wake of receiving trillions of dollars in government assistance while so many families are struggling to stay afloat has only heightened the sense of confusion. I see this commission as a proxy for the American people, their eyes, their ears, and possibly also their voice. This forum may be the only opportunity to have their questions asked and answered. This forum may be our last best chance to take stock of what really happened so that we can learn from it and restore faith in our economic system. If we ignore history, we're doomed to bail it out again. And so expect our witnesses before us to be forthright. We need candor about the past so we can face the future. Today's hearing is the beginning, not the end, of our questioning. We'll hold hearings throughout the year and take testimony from hundreds of individuals. Witnesses called to testify today are likely to come before us again as this investigation and inquiry unfolds. Those who haven't yet been asked to appear should be confident of this: We intend to thoroughly question individuals and institutions relevant to our inquiry. Let me close with this thought. My father grew up in the Great Depression. Like so many of his generation, he was shaped by sacrifice, hardened by economic hardship and war, keenly aware of the financial recklessness that made his life and the life of so many others so much harder than it needed to be. His generation learned the lessons of financial disaster so that the country could avoid it for decades. Let us learn the lessons of our time. Let us be diligent and thoughtful today so that our financial and economic system can fully rebound and enrich and sustain Americans for the years to come. Mr. Thomas? The meeting of the Financial Crisis Inquiry Commission will come to order. There is a quorum present, and so we will now proceed with this first of our public hearings. Good morning to everyone and thank you for being here. I'm honored to welcome you, as we start this series of public hearings, into the causes of the financial and economic crisis that's gripped this entire country. I thank Vice Chairman Thomas for his extraordinary cooperation and partnership. I applaud the dedication of my fellow commissioners, and I'm grateful to all of our witnesses for giving us their testimony and sharing their wisdom. We've been given a critical mission, one that goes far beyond any party or even policy agenda to conduct a full and fair inquiry into what brought America's financial system to its knees. We're after the truth, the hard facts, because it's our job to provide an unbiased accounting of the actions that led to devastating economic consequences for so many American families. We'll follo

Thank you very much, Mr. Chairman. I'd ask unanimous consent that my written statement be made a part of the record, and I just want to thank all of the commissioners. We've been doing a lot of that seven-eighths of the iceberg underwater, and people are now going to see the one-eighth that you usually see above water. I think all of us are conscious of the fact that these hearings, notwithstanding the drama of the hearings, is not the fundamental work that is before us. It is, as you indicated, asking the questions the American people would like answered and doing it in a way in which we increase the understanding, the comprehension of what happened, obviously, for the purpose of not having it happen again. Thank you, Chairman. Thank you very much, Mr. Chairman. I'd ask unanimous consent that my written statement be made a part of the record, and I just want to thank all of the commissioners. We've been doing a lot of that seven-eighths of the iceberg underwater, and people are now going to see the one-eighth that you usually see above water. I think all of us are conscious of the fact that these hearings, notwithstanding the drama of the hearings, is not the fundamental work that is before us. It is, as you indicated, asking the questions the American people would like answered and doing it in a way in which we increase the understanding, the comprehension of what happened, obviously, for the purpose of not having it happen again. Thank you, Chairman.

Thank you, Mr. Vice Chairman. And now, we will go to the witnesses on our first panel. Let me say that it will be the common and customary practice of this commission in public hearings to swear witnesses in terms of their testimony. So this is not unusual. And with that, though, I would like to ask each of the witnesses to be sworn. And I'd like to ask that you stand so that we may swear you in, as is I said, the common practice. Do you solemnly swear or affirm under the penalty of perjury that the testimony you are about to provide the commission will be the truth, the whole truth, and nothing but the truth to the best of your knowledge? Thank you, Mr. Vice Chairman. And now, we will go to the witnesses on our first panel. Let me say that it will be the common and customary practice of this commission in public hearings to swear witnesses in terms of their testimony. So this is not unusual. And with that, though, I would like to ask each of the witnesses to be sworn. And I'd like to ask that you stand so that we may swear you in, as is I said, the common practice. Do you solemnly swear or affirm under the penalty of perjury that the testimony you are about to provide the commission will be the truth, the whole truth, and nothing but the truth to the best of your knowledge?

(OFF-MIKE) I do. (OFF-MIKE) I do.

Thank you so very much. Now, gentlemen, thank you very much for being here today. We appreciate you coming here. We appreciate you sharing your views with us. I should tell everyone here that each of the witnesses today has submitted written testimony which will be available on our Web site, which is FCIC.gov. It is also, I believe, available in the room today. We have asked each of the panelists to make opening statements of no more than 10 minutes. And so I think we'd like to proceed with that. I will signal you when there is one minute to go so you can wrap up. And so let's do this then. I think, with that, I'd like to start with Mr. Blankfein. We're going to go in alphabetical order. Mr. Blankfein, please proceed. Thank you so very much. Now, gentlemen, thank you very much for being here today. We appreciate you coming here. We appreciate you sharing your views with us. I should tell everyone here that each of the witnesses today has submitted written testimony which will be available on our Web site, which is FCIC.gov. It is also, I believe, available in the room today. We have asked each of the panelists to make opening statements of no more than 10 minutes. And so I think we'd like to proceed with that. I will signal you when there is one minute to go so you can wrap up. And so let's do this then. I think, with that, I'd like to start with Mr. Blankfein. We're going to go in alphabetical order. Mr. Blankfein, please proceed.

Thank you, Chairman Angelides, Vice Chairman Thomas, and members of the commission. Thank you for the opportunity to contribute to the commission's work to understand the causes of the financial crisis. Goldman Sachs was established 141 years ago. We are an institutional-focused firm providing investment banking, market making, and investment management services to corporations, institutions, governments, and high-net-worth individuals. As an underwriter, we help our clients access equity in debt capital markets in order to grow their businesses. As an adviser, we assess and facilitate strategic options for mergers and acquisitions. We provide the necessary liquidity as market makers to help ensure that buyers and sellers can complete their transactions and securities markets can function efficiently. And as an asset manager, we help public and private pension funds, corporations, not-for-profit organizations, and high-net-worth individuals plan, manage, and invest their financial assets for the long term. To begin on a more general point, any examination of the financial crisis should set out with an understanding of some of the global economic and financial dynamics of the last two decades. The growth in the amount of foreign capital, 10 years of low long-term interest rates, and other factors coalesced over many years to create a sustained period of cheap credit and excess liquidity. This in turn generated a desire to find new investment opportunities with higher returns. Many of the best were thought to be in residential housing. One contributing factor to the attractiveness of the housing market was public policy's active support of the expansion of homeownership, recognizing the societal benefits. For our industry, it is important to reflect on some of the lessons learned and mistakes made over the course of the crisis. At the top of my list are the rationalizations that we made to justify that the downward pricing of risk was different. While we recognize that credit standards were loosening, we rationalized the reasons with arguments such as: the emerging markets were growing more rapidly, the risk mitigants were better, there was more than enough liquidity in the system. A systemic lack of skepticism was equally true with respect to credit ratings. Rather than undertake their own analysis, too many financial institutions relied on the rating agencies to do the central work of risk analysis. Another failure of risk management concerned the fact that risk models, particularly those predicated on historical data, were too often allowed to substitute for judgment. Next, size mattered. Whether you owned $5 billion or $50 billion of supposedly no-risk super-senior debt in a CDO, the likelihood of loss rate would appear to be the same. But the consequences of a miscalculation were obviously much bigger if you had a $50 billion exposure. Third, risk monitoring failed to capture the risk inherent in off-balance sheet activities such as structured investment vehicles, or SIVs. It seems clear now that financial institutions with large off-balance sheet exposure didn't appreciate the full magnitude of the economic risks they were exposed to. Equally worrying, their counter parties were unaware of the full extent of those vehicles and therefore, could not accurately assess the risk of doing business. Fourth, assets at certain institutions weren't valued at their fair market value, the price at which willing buyers and sellers transact. One consequence was that losses weren't seen early enough, so risks weren't curtailed. A second consequence was that bank balance sheets became suspect. As a result, lending between counterparties froze. Fifth, financial institutions simply didn't have enough capital to meet the extraordinary market environment that arose after a long period of benign conditions. Lastly, the role we play in the capital markets is to support economic growth. Some of the activities we undertook contributed to the prevailing mood of the time. We didn't know it then or even today when it actually crossed over into bubble territory. But we lent money out too cheaply and in certain loans, without the traditional safeguards. We didn't recognize early enough that risk was being mispriced. We made too many liquid investments, particularly in real estate. And we were too concentrated in certain areas, namely leveraged loans. Given the competitive focus on maintaining market share, we didn't see as clearly as I would have hoped the excesses, so we didn't raise a hand and ask whether some of those trends and practices that became commonplace really served the financial system's interests. Going forward, I hope that one of the improvements made will be the creation of a mechanism by which the industry and regulators can step back, try to assess if markets have gone too far and consider what needs to be done. In light of these lessons, it is important to consider principles for our industry and for policy makers as we move towards reform. Risk and control functions need to be completely independent from the business units. And clarity as to whom risk and control managers report is crucial to maintaining that independence. To increase overall transparency and help ensure that book value really means book value, regulators should require that all assets across a large financial institution with a capital markets business be accounted for on a fair value basis. Also, all of the exposures of a financial institution should be reflected through its P&L. In this vein, valuation of capital standards across risky assets, regardless of the form or legal entity in which they are held, must be consistent. One of the largest stresses placed on Goldman Sachs and other firms during the height of the crisis was the possibility that we were managing risk in the same way other institutions, which were severely hampered or later failed, had managed their risks. Getting the market to recognize that our balance sheet was well marked and that our reported capital levels were accurate was one of our most significant challenges. Without question, direct government support was critical in stabilizing the financial system. And we benefitted from it. The system clearly needs to be structured so that in the future private capital rather than government capital is used to stabilize troubled firms promptly before a crisis takes hold. The two mechanisms that seem to hold the most promise for addressing this goal and addressing too-big-to-fail are ongoing stress tests, which are made public, and contingent capital possibly triggered by failing a stress test. These two elements could also be the core of a strong but flexible resolution authority. Certainly, enhanced capital requirements in general will reduce systemic risk. But we should not overlook liquidity. If a significant portion of an institution's assets are impaired and illiquid and its funding is relying on short-term borrowing, low leverage will not be much comfort. Regulators should lay out standards that emphasize prudence and the need for longer-term maturities depending on the assets being funded. Institutions should also be required to carry a significant amount of cash at all times ensuring against extreme events. Lastly, I wanted to briefly discuss our firm's experience during 2008 and 2009. While we certainly had to deal with our share of challenges during the financial crisis, Goldman Sachs was profitable in 2008. As I look back to the beginning and throughout the course of the crisis, we couldn't anticipate its extent. We didn't know at any moment if asset prices would deteriorate further or had declined too much and would snap back. Having to fair value our assets on a daily basis and see the results of that marking in our P&L forced us to cut risk regardless of market or individual views, estimates or expectations. Throughout 2007 we were committed to reducing certain of our risk exposures, even though we sold at prices many in the market, including at times ourselves, thought were irrational or temporary. After the fact, it was easy to be convinced that the signs were visible and compelling. In hindsight, events not only looked predictable, but sometimes looked like they were obvious or known. The truth is that no one knows what is going to happen. And that recognition defined our approach to risk management. We believe key attributes of our strategy, culture and processes were validated during the extraordinary events and macro-economic uncertainty of the past year. But they have also prompted change within our firm. Over the last 18 months our balance sheet has been reduced by a quarter, while our capital has increased by over a half. Our Basel I and tier one capital ratio has increased to 14.5 percent through earnings generation and the number of capital offerings. Our pool of liquidity was relatively high at the onset of the crisis, but we carry a great deal more cash on our balance sheet than ever before to deal with contingencies. While we believe our firm has produced a strong relationship between compensation and performance, we have announced additional reforms in this area. At our shareholders meeting last year we outlined specific compensation principles. Consistent with those principles, in December, we announced that the firm's entire management committee will receive 100 percent of their discretionary compensation in the form of shares at risk, which cannot be sold for five years. In addition, we announced that the five-year holding period on shares at risk includes an enhanced recapture provision that will permit the firm to recapture the shares in cases where the employee engaged in materially improper risk analysis or failed sufficiently to raise concerns about risk. Finally, our shareholders will have an advisory vote on the firm's compensation principles and the compensations of its named executive officers at the firm's annual meeting of shareholders in 2010. Once again, we appreciate the opportunity to assist the commission in your critical role. And I look forward to your questions. Thank you. Thank you, Chairman Angelides, Vice Chairman Thomas, and members of the commission. Thank you for the opportunity to contribute to the commission's work to understand the causes of the financial crisis. Goldman Sachs was established 141 years ago. We are an institutional-focused firm providing investment banking, market making, and investment management services to corporations, institutions, governments, and high-net-worth individuals. As an underwriter, we help our clients access equity in debt capital markets in order to grow their businesses. As an adviser, we assess and facilitate strategic options for mergers and acquisitions. We provide the necessary liquidity as market makers to help ensure that buyers and sellers can complete their transactions and securities markets can function efficiently. And as an asset manager, we help public and private pension funds, corporations, not-for-profit organizations, and high-net-worth individuals plan, manage, and invest their financial asse

Thank you very much. Thank you so much. Mr. Dimon? Thank you very much. Thank you so much. Mr. Dimon?

Chairman Angelides, Vice Chairman Thomas and members of the commission, my name is Jamie Dimon and I am chairman and chief executive officer of JPMorgan Chase and Company. I appreciate the invitation to appear before you today. If we are to learn from this crisis moving forward, we must be brutally honest about the causes and develop a realistic understanding of them that is not overly simplistic. The FCIC's contribution to this debate is critical, and I hope my participation will further the commission's goals. I'd like to start by touching on some of the factors I believe led to the financial crisis. Of course, much has been said and much more will be written on the topic, so my comments are summary in nature. As we know all too well, new and poorly underwritten mortgage products helped fuel housing price appreciation, excessive speculation and far higher credit losses. When the housing bubble burst, it exposed serious flaws in mortgage underwriting, and losses flowed from the chain from mortgages to securitizations to derivatives based on these products. Excessive leverage by many U.S. investment banks, foreign banks, commercial banks, and even consumers pervaded the system. This included hedge funds, private equity firms banks and non-banks using off-balance sheet vehicles. There were also several structural risks and imbalances that grew in the lead-up to the crisis. There was an over reliance on short- term financing to support illiquid long-term assets, and over time, certain financing terms became too lax. Another factor in the crisis was clearly a regulatory system. I want to be clear I do not believe the regulators. While they obviously have a critical role to play, the responsibility for companies' actions rest solely on the companies' management. But we should also look to see what could have been done better in the regulatory system. We have known that our system is poorly organized with overlapping responsibilities. Many regulators did not have the statutory authority they needed to address the failure of large global financial companies. Much of the mortgage business was not regulated or lacked uniform treatment. Basel II capital standards allowed too much leverage in investment banks and other firms and not incorporate liquidity at all. The extraordinary growth and high leverage of the GSEs also added to the risk. We also learned that our system has many embedded pro-cyclical biases, a number of which proved harmful in times of economic stress. Loan loss reserving methodologies caused reserves to be at their lowest levels at a time when high provisioning might be needed the most. Certain regulatory capital standards are also pro-cyclical, and continuous downgrades by credit agencies also required many financial institutions to raise more capital. When all is said and done, I believe it will be found that macro economic factors will have been some of the fundamental underlying cause of the crisis. Huge trade and financing imbalances caused large distortions in interest rates and consumption. As for J.P. Morgan Chase, the last year and a half was the most challenging period in our company's history. I'm immensely proud of the way our employees continued to serve our customers through this difficult time. Throughout the financial crisis, we never posted a quarterly loss. We served as a safe haven for depositors. We worked closely with the federal government. And we remained an active lender. I would like to describe some of the regular business practices that we believe protected us leading up to and during the crisis. If we weren't doing these things right going into the crisis, it would have been too late to start once the crisis began. J.P. Morgan Chase did not unduly leverage our capital or rely on low-quality capital. We've always used conservative accounting and vigilant risk management, built up strong loan loss reserves, and maintained a high level of liquidity. We always believed in maintaining a fortress balance sheet. We continually stress test our capital liquidity to ensure that we can withstand a wide range of highly unlikely but still possible negative scenarios. We did not build up our structured finance business. While we were large participants in the asset-backed securities market, we deliberately avoided large risky positions like structured CDOs. We avoided short-term funding of liquid assets and did not rely heavily on wholesale funding. In addition we essentially stayed away from sponsoring SIVs and minimized our financing of them. Even before 2005 we recognized that the credit losses were extremely low, and we decided not to offer higher risk, less tested loan products. In particular, we did not write payment option ARMs. As I said before, we did make mistakes. There are a number of things we could have done better. First, we should have been more diligent when negotiating and structuring commitment letters for leverage to indicate loan transactions. In response we have tightened our lending standards as well as our oversight of loan commitments we make. Second, the underwriting standards of our mortgage business should have been higher. We have substantially enhanced our mortgage underwriting standards, essentially returning to traditional 80 percent loan to value ratios and requiring borrowers to document their income. We've also closed down most---almost all of the business originated by mortgage brokers where credit losses have generally been over two times worse than the business we originate ourselves. Even so, we remained relatively strong throughout the crisis so much so that we were called upon to take actions to help stabilize the system. Over the weekend of March 15, 2008, the federal government asked us to assist in preventing Bear Stearns from going bankrupt before the opening of the Asian markets on Monday morning. On September 25th, we acquired the deposits, assets and certain liabilities of Washington Mutual from the FDIC. Later we learned that we were the only bank that was prepared to act immediately following the largest bank failure in U.S. history. In addition we continued to lend and support our clients' financing and liquidity needs throughout the crisis. Over the course of the last year, we've provided more than $800 billion in direct lending and capital raising for investor and corporate clients. For example, we helped provide state and local government financing to cover cash flow shortfalls. We are the only institution that agreed to lend California $1.5 billion in its time of need. And even though small business loan demand has been down, we have maintained our lending levels to small business. In November of last year, we announced plans to increase lending to small businesses by $4 billion, to a total of $10 billion this year. For the millions of Americans feeling with the effects of this crisis, we are doing everything we can to help them meet their mortgage obligations. In 2009 we offered approximately 600,000 new trial loan modifications to struggling homeowners through our own program as well as through participation in government programs like the U.S. Making Home Affordable initiative. Our capabilities, size and diversity of business have been essential to our withstanding the crisis and emerging as a stronger firm. It is these trains that have put us in a position to acquire Bear Stearns and Washington Mutual. Some have suggested that size alone or the combination of investment banking and commercial banking caused the crisis. We disagree. If you consider the institutions that failed during the crisis, some of the largest and most consequential failures were stand-alone investment banks, mortgage companies, thrifts and insurance companies. Our economy needs financial institutions of all sizes, business models and areas of expertise to promote economic stability, job creation and customer service. America's largest companies operate around the world and employ millions of people. These firms need banking partners to operate globally, who offer a full range of products and services and provide financing in billions of dollars. But let me be clear. As I've said before, no institution, including our own, should be too big to fail. We need a regulatory system that provides for even the largest financial firms to be allowed to fail in a way that did not put taxpayers or the broader economy at risk. Shareholders, management and unsecured creditors should bear the full cost of failure. The great strength of any organization---indeed, our country---lies in our ability to face problems, to learn from our experiences and to make necessary changes. I would like to thank the commission for their contribution to this process and commitment to identifying the causes of the crisis. We stand ready to assist the commission in any way we can. Thank you for the opportunity to testify before you today. Chairman Angelides, Vice Chairman Thomas and members of the commission, my name is Jamie Dimon and I am chairman and chief executive officer of JPMorgan Chase and Company. I appreciate the invitation to appear before you today. If we are to learn from this crisis moving forward, we must be brutally honest about the causes and develop a realistic understanding of them that is not overly simplistic. The FCIC's contribution to this debate is critical, and I hope my participation will further the commission's goals. I'd like to start by touching on some of the factors I believe led to the financial crisis. Of course, much has been said and much more will be written on the topic, so my comments are summary in nature. As we know all too well, new and poorly underwritten mortgage products helped fuel housing price appreciation, excessive speculation and far higher credit losses. When the housing bubble burst, it exposed serious flaws in mortgage underwriting, and losses flowed from the chain

Thank you very much, Mr. Dimon. Mr. Mack? Thank you very much, Mr. Dimon. Mr. Mack?

I'm ready to go. Chairman Angelides, Vice Chairman Thomas, distinguished commissioners, my name is John Mack. I'm the chairman of Morgan Stanley. I also served as Morgan Stanley's CEO from June of 2005 to ‘09. And I'm pleased to have the opportunity to address you today. The past two years have been unlike anything I've seen in my 40 years in financial service. Unprecedented illiquidity and turmoil on Wall Street saw the fall of two leading franchises and the consolidation of others. We saw credit markets seize, the competitive landscape remade, and vast governmental intervention in the financial sector. And the consequences have obviously spread far beyond Wall Street. Millions in America today are struggling to find work. They've lost homes. They watched their retirements evaporate their savings. I believe the financial crisis exposed fundamental flaws in our financial system. There is no doubt that we as an industry made mistakes. In retrospect it's clear that many firms were too highly leveraged. They took on too much risk, and they didn't have sufficient resources to manage those risks effectively in a rapidly changing environment. The financial crisis also made clear that regulators simply didn't have the visibility, tools or authority to protect the stability of the financial system as a whole. Let me briefly walk you through what happened from Morgan Stanley's viewpoint and our response to the crisis. As the commission knows, the entire financial service history was hit by a series of macro shocks that began with the steep decline in U.S. real estate prices in 2007. Morgan Stanley, like many of its peers, experienced significant losses related to the decline in the value of securities and collateralized debt obligations backed by residential mortgage loans. This was a powerful wake-up call for this firm, and we moved quickly and aggressively to adapt our business to the rapidly changing environment. We cut leverage. We strengthened risk management. We raised private capital and dramatically reduced our balance sheet. We increased total average liquidity by 46 percent, and we entered the fall of ‘08 with $170 billion in cash on our balance sheet. Thanks to these prudent steps, we were in a better position than some of our peers to weather the worst financial storm, but we did not do everything right. When Lehman Brothers collapsed in early September of ‘08, it sparked a severe crisis of confidence across global financial markets. Like many of our peers, we experienced a classic run on the bank as the entire investment banking business model came under siege. Morgan Stanley and other financial institutions experienced huge swings and spreads on the credit-default swaps tied to our debt and sharp drops in our share price. This led clearing banks to request that firms post additional collateral causing further depletion of cash resources. In an effort to stem the panic, Morgan Stanley moved up its announcement of its strong third-quarter earnings to September the 16th, but our stock remained under heavy pressure. It lost nearly a quarter of its value the following day, falling from 28.7 to 21.75. Despite these strong results, it continued to trade low and, finally, traded as low as $6.71. This crisis of confidence in the market had a chain reaction to the broader economy as lower prices for financial assets undermined confidence and led to lower prices throughout the rest of the economy. This period was marked by rampant rumors and speculation. My management team, like those of my peers here, worked around the clock to address these rumors and provide investors, clients, and employees accurate information. We also worked closely with our regulators to keep them informed and achieve the right result for the markets and the economy. Our position began to stabilize after Mitsubishi agreed to invest $9 billion in our firm as part of a broader strategic alliance. Morgan Stanley also converted to a bank-holding company providing direct oversight and access to the Federal Reserve. The U.S. government announced its TARP investment a short while later, which also helped stabilize the broader market. And the SEC instituted a temporary ban on shorting financial stocks. Morgan Stanley appreciates the many steps the government took to prevent the collapse of the financial system and the support provided by American taxpayers. I believe every firm in the industry and the broader financial markets as a whole benefited from this support. As you know, Morgan Stanley has since repaid our TARP funds providing taxpayers a 20 percent annualized return on that investment. We learned an important lesson from 2008 crisis and have adapted our business to help prevent something like this from happening again. One of the clearest lessons was that many firms simply carried too many leverage. As I mentioned, Morgan Stanley moved aggressively, beginning in ‘07, to reduce leverage cutting it in half from 33 times at the end of ‘07 to 16 times by the third quarter of ‘09. We raised a total of $14 billion in capital from private sources maintaining one of the highest tier one capital ratios. We've also taken a number of steps to diversify our revenue and funding sources, including through an expansion of our wealth-management business and extending maturities on our debt. We have made important changes, systemic changes to our business practices, including scaling back proprietary trading. Morgan Stanley also devoted significant resources over the last two years to further strengthen our risk-management policies and procedures. This including naming a new risk officer early in 2008 and adding about a hundred more people to the risk-management process. We have enacted changes to how we pay our employees and ensure that compensation is linked even more closely to performance and does not encourage excessive risk taking. We were the first major U.S. bank to enact a claw-back for a portion of year-end compensation in 2008, one that exceeded TARP requirements. We have since strengthened this provision further so we can claw back compensation for up to three years if investments or trading positions produce subsequent losses. We've also enacted a new, multi-year performance plan that makes a portion of senior executives' year-end compensation contingent on reaching certain three-year performance goals. And we're increasing a portion of year-end compensation that's deferred to all employees. Finally, as CEO, I recommended to the board that I receive no bonus in 2009 because of the unprecedented environment in which we are operating and the government's extraordinary financial support to our industry. This was the third year in a row that I recommended no bonus to my board. Morgan Stanley is also doing its part to get our economy moving again. We are working with businesses to raise capital to invest in job growth. We are working with families to modify mortgages we service so families can stay in their homes. By the end of November ‘09, Morgan Stanley's loan servicing subsidiary had active trial modifications in place for 44 percent of borrowers who are over 60 days delinquent and eligible for the administration's Home Affordable Modification Program. This was the highest percentage of any servicer participating in the HAMP program. We believe this is both business imperative and public important. The financial crisis laid bare the failures of risk management of individual firms across the industry and around the world, but also made clear that regulators simply don't have the tools or the authority to protect the stability of the financial system as a whole. That's why I believe we need a systemic risk regulator with the ability to ensure that excessive risk taking never again jeopardizes the entire financial system. We cannot and should not take risk out of the system. That's what drives the engine of our capitalist economy. But no firm should be considered too-big-to-fail. The complexity of the financial markets, financial products exploded in recent years, but it's clear that regulation and oversight have not kept pace. While many of these complex products were designed to spread out risk, they've often had just the opposite effect, obscuring where and to what degree that risk was concentrated. Regulators and investors need to have a fuller and clearer picture of the risk posed by increasingly complex products as well as their true value. We should also aim to make more financial products fungible to ensure they can be transferred from one exchange or electronic trading system to another. I believe we need to establish a federally regulated clearing house for derivatives or requiring reporting to a central repository. This will create truly efficient, effective, and competitive markets in futures and derivatives which would benefit investors and the industry as a whole. Finally, today's financial markets are global and interconnected. Our regulatory regime needs to be as well. The U.S. must work with countries across the globe to coordinate and synchronize risk. At Morgan Stanley, we're grateful for everything the federal government and the American taxpayer did to support our industry and to help bring stability back to the markets. We recognize our industry has much to do and to regain the trust and confidence of taxpayers, investors, and public officials. Thank you. I'm ready to go. Chairman Angelides, Vice Chairman Thomas, distinguished commissioners, my name is John Mack. I'm the chairman of Morgan Stanley. I also served as Morgan Stanley's CEO from June of 2005 to ‘09. And I'm pleased to have the opportunity to address you today. The past two years have been unlike anything I've seen in my 40 years in financial service. Unprecedented illiquidity and turmoil on Wall Street saw the fall of two leading franchises and the consolidation of others. We saw credit markets seize, the competitive landscape remade, and vast governmental intervention in the financial sector. And the consequences have obviously spread far beyond Wall Street. Millions in America today are struggling to find work. They've lost homes. They watched their retirements evaporate their savings. I believe the financial crisis exposed fundamental flaws in our financial system. There is no doubt that we as an industry made mistakes. In retrospect it's clear that many firms were