JKyleBass ManagingPartner HaymanAdvisors,L.P.

Testimonybeforethe FinancialCrisisInquiryCommission HearingonTheFinancialCrisis January13,2010

ChairmanAngelides,ViceChairmanThomas,mynameisKyleBass,ManagingPartnerofHayman Advisors,L.P.andIwouldliketothankyouandthemembersoftheCommitteefortheopportunityto sharemyviewswithyoutodayasyouconsiderthecausesoftherecentcrisisaswellascertainchanges thatmusttakeplacetoavoidorminimizefuturecrisis.IbelievethatIhavesomewhatofaunique perspectivewithregardtothiscrisisasmyfirmandIwerefortunateenoughtohaveseenpartsofit coming.Haymanisaglobalassetmanagementfirmthatmanagedseveralbilliondollarsofsubprime andaltamortgagepositionsduringthecrisis,andweremainanactiveparticipantinthemarketplace today.WhileIrealizethattheprimaryobjectiveofthehearingtodayistoprovidebaselineinformation

 onthecurrentstateofthefinancialcrisisandtodiscusstherolesthatfourspecificbanksorinvestment banks(GoldmanSachs,MorganStanley,BankofAmerica,andJPMorgan)playedinthecrisis;inmy opinion,nosinglebankorgroupoflargeinstitutionssinglehandedlycausedthecrisis.WhileIwill addresseachparticipantsstructureandproblemsindependentlylaterinmytestimony,theproblems withtheparticipantsandtheregulatorystructureneedstobeconsideredmoreholisticallyinorderto preventfuturesystemicbreakdownsandtaxpayerharm.Whiletherearemanyfactorsthatledtothe crisis,IwilladdresswhatIbelievetobethekeyfactorsthatcontributedtotheenormityofthecrisis. TheOTCDerivativesmarketplace,withthe nearlyinfiniteleverageitaffordedand continuestoafford thedealercommunity,mustbechanged.AIG,BearStearnsandLehmanwouldnothavebeenableto takeonasmuchleverageastheydid,hadtheybeenrequiredtopostinitialcollateralondayoneforthe riskpositionstheyassumed.Assetmanagementfirms,includingHayman,havealwaysbeenrequiredto postinitialcollateralandmaintenancecollateralforvirtuallyeveryderivativestrade.However,inAIG's case, they did not have to post collateral even after the positions moved against them (the socalled variancemargin).Thedealercommunity,aswellasothersupposedAAAratedcounterparties,were (andsomestillare)abletotransactwithoneanotherwithoutsendingcollateralfortheriskstheyare taking.Thesocalled"initialmargin"was,andstillis,onlychargedtocounterpartiesthataredeemedto beoflessercreditquality.Imagineifyouwerea28yearoldmathematicssuperstaratAIGFinancial ProductsGroupandyouwerecompensatedattheendofeachyearbasedupontheprofitabilityofyour tradingbook,whichwasultimatelybaseduponrisksyouwereabletotakewithoutinitiallypostingany money.Howmuchriskwouldyoutake?Theunfortunateanswerturnedouttobemanymultiplesthe underlying equity of many of the firms in question. In AIG's case, the risks taken in the companys derivatives book were more than 20X the firm's shareholder's equity. For a comprehensive look at leverageratiosofselectedcompaniesattheendoffiscalyear2007,pleaserefertoExhibit1included below.TheUStaxpayerisstillpayinghugebonusestothemembersofAIG'sFinancialProductsGroup becausetheyhaveconvincedtheoverseersthattheypossesssomeuniqueskillsetnecessarytounwind thesecomplexpositions.Inreality,therearehundredsofoutofworkderivativestradersthatwould happilytakethatjobfor$100,000ayearinsteadofthemanymillionspaidtothesesupposed"experts".

SolvingaLargePartoftheOTCDerivativeProblem
Inthelistedmarketsforequityoptionsandfuturesoptions,youdonothearaboutthesemarkets causingsystemicproblems,andthereisawellreasonedanswerforthisthereisarequiredcollateral depositfortakingriskthatisappliedtoallparticipants(regardlessoftheircreditrating).The requirementismandatedandsupervisedbyFINRA(FinancialIndustryRegulatoryAuthority).Again,if participantshadtopostinitialcollateralinordertotakerisk,thederivativesmarketplacewouldnot havemutatedintothemonsteritistoday.Ibelievethismarketwouldbehalfthesizeitistodayif participantswereforcedtofollowthisonesimplerule. Inordertohelpreducesystemicproblemsbroughtaboutbyderivatives,Congressandregulatorsneed toimplementanewsystemthathasthreekeyaspects: 1. HomogenousminimumcollateralrequirementsallparticipantsintheDerivativesmarketplace shouldberequiredtopostcapitalbaseduponaformulaicdeterminationofriskbythe appropriateregulatorybody.Thiswouldpreventfirmsfromestablishingsystemicallyrisky derivativespositionsbyattachingamarginalcosttotheestablishmentofeachnewposition, thuspreventingtherecurrenceofanAIGtypescenariowherehundredsofbillionsofdollarsin riskisassumedwithnocost.Toputthecurrentsituationintocontext,in2000,theFDICBanking Review(Volum13,No.2)estimatedtheentirecostoftheSavings&LoanCrisistotheUS taxpayertobe$124billion.Bycomparison,AIGalonehasbeengiven$183billionintaxpayer funds. 2. Centralizedclearingandmandatorypricereportingofallstandardized(nonbespoke)CDS,FX, andinterestratederivatives(accordingtoDTCC,roughly90%ofallCDScontractsare standardizedandcouldeasilybeclearedinthismanner). 3. CentralizedDataRepositoryforallclearedandnonclearedderivativestrades,allowingthe appropriateregulatortomonitorexposuresbydealerandcounterpartytomonitorsystemic risk.

BankLeverage
AfundamentaltenetoftheUSbankingsystemisleverage.Usingcurrentregulatoryguidelines,banks aredeemed"wellcapitalized"with6%Tier1capitaland"adequatelycapitalized"with4%Tier1capital baseduponriskweightedassets(asanaside,theconceptofriskweightedassetsshouldalsobe reviewed).Thisinturnmeansawellcapitalizedbankislevered16XtoitsTier1capital(muchmoreto itstangiblecommonequity)andanadequatelycapitalizedbankis25XleveredtoitsTier1capital.How manyprudentindividualsorinstitutionscanpossiblymanageaportfolioofassetsthatis25Xlevered? Again,unfortunately,theanswerhasturnedouttobenotmany.Ofthe170banksthathavefailed duringthiscrisis,theaveragelosstotheFDICiswellover25%ofassets,ormoreimportantly6times theirminimumlevelsofregulatoryequity.DepositoryinstitutionslikeCitibankwereabletoparlaytheir depositsintolargeleveredbetsinthederivativesmarketplace.Infact,atfiscalyearend2007,Citigroup was68.4Xleveredtoitstangiblecommonequity,includingoffbalancesheetexposures.Accordingto thefollowingtable,realleverageattheinstitutionsinquestiongotcompletelyoutofhand: Exhibit1:OnandOffBalanceSheetLeverageofMajorUSFinancialInstitutions
AllasofFiscalyearend2007(Nov31,2007orDec31,2007) Wachovia Wamu Goldman BofA MS JPMorgan WellsFargo gs bac ms jpm jpm 18.0x 15.3x 26.2x 21.2x 36.3x 17.5x 16.9x 23.3x 18.8x 32.4x 28.8x 40.1x 21.1x 17.0x 3.6% 27.7x N/A 3.9% 25.8x N/A 2.7% 36.8x 199.8% 1.8% 54.3x 52.8% 2.3% 44.3x 222.2% 2.3% 44.4x 58.1% 4.1% 24.2x 67.2%

Lehman GrossLeveragetoTangibleEquity GrossLeveragetoTangibleCommonEquity OffBalanceSheetExposures TangibleCommonEquity/TotalAssets+Commitments(1) GrossLeveragetoTangibleCommonEquity Level3Assets/TangibleCommonEquity 1.9% 52.3x 225.2% 37.6x 40.0x

Bear 35.6x 36.8x 2.6% 38.1x 262.0%

Citi jpm 32.2x 35.0x 1.5% 68.4x 213.4%

(1)CommitmentsIncludecontingentloansthatmaybe,asoffiscalyearend2007,fully,partiallyornotcommitted. Source:SNLFinancialand10Ks.

Clearly,thecompositionoftheseassetsisimportantaswell,butIamsimplytryingtoillustratehow leveredthesecompanieswereatthestartofthefinancialcrisis.WhileAIG'sderivativebookwasonly 20Xleveredtobookequity,$64billionofthosederivativeswererelatedtosubprimecreditsecurities, themajorityofwhichwereultimatelyworthzero(against$95BoftotalequityasofDec2007). Insomecases,theexcessiveleveragecosttheunderlyingcompanymanyyearsoflostearningsandin othercases,itcostthemeverything.Somecompaniesfaredmuchbetterthanothersandhaveactually shownaprofitoverthepasttwoyears.Thoseprofitsmayhavebeenadirectresultoftaxpayer infusionsandgovernmentguaranteesofdebt,facilitatingthepumpingofcheapmoneyintofailing

 enterprisestoallowthemtoattempttoearntheirwayoutoflossesresultingfrombadassetsonthe books.Below,wehavecompiledatableforyearsoflostearningsduetothecreditcrisis: Exhibit2:CumulativeNetIncomeandLossofFinancialInstitutionsSinceQ32007

Cumulative NetIncome (Loss):3Q07 $(120,459) $(103,572) $ (67,904) $ (37,492) $ (31,608) $ (6,148) $ (29,332) $ (4,439) $ (567) $391 $14,444 $20,399 $15,641 $16,828

($inMillions) FannieM ae AIG FreddieM ac M errillLynch* Wachovia* WashingtonM utual* Citigroup LehmanBrothers* BearStearns* M organStanley BankofAmerica JPM organ WellsFargo GoldmanSachs

YearsofHistorical CumulativeProfitsErased >20.5years >17.5years >11.5years >11.0years >4.5years <2.5years <1.5years <1.5years <.5years n/a n/a n/a n/a n/a

*Theseinstitutionsultimatelyfiledforbankruptcyand/orwereacquiredin adistressedsale.Cumulativelossesreflecttotallossuptothepointat whicheachrespectiveinstitutionceasedtoreportasastandaloneentity. Actuallossesfortheseinsitutionsarelikelygreater. NetIncomeincludesunusualcharges. BearStearnsfinancialsarethrough1Q08. LehmanBrothersfinancialsarethrough3Q08. Wachoviafinancialsarethrough3Q08. WashingtonM utualfinancialsarethrough2Q08. FreddieM acandFannieM aefinancialsareonlyavailablebeginningin1996 and1988,respectively.

TheMostLeveredofThemAllFannieandFreddie
With$5.5trillionofoutstandingdebtandMortgageBackedSecuritiesGuarantees,thequasipublicor nowinconservatorshipFannieandFreddiehaveobligationsthatapproachthetotalamountof governmentissuedbondstheUScurrentlyhasoutstanding.Therearesomanythingsthatwentwrong orarewrongatthesesocalledGSEsthatIamnotsurewheretostart.First,whyweretwoforprofit companieswithboards,shareholders,charitablefoundations,andlobbyingarmsevergiventhe "implicit"backingoftheUSGovernment?TheChinesewon'tbuythemanymoreonlybecauseour governmentwon'tgivethemtheexplicitbacking.TheUSgovernmentcannotgivethemtheexplicit backingbecausetheresultingfederaldebtburdenwillcrashthoughtheCongressionallymandateddebt 5

 ceiling(whichwasrecentlyraisedtoaccommodatemoredeficitspending).Theseorganizationshave beensomeofthesinglelargestpoliticalcontributorsintheworldoverthepastdecadewith$200 millionbeinggivento354lawmakersinthelast10yearsorso.Yes,theUnitedStatesneedslowcost mortgages,butwhyshouldorganizationscreatedbyCongresshavetolobbyCongress?Fannieand Freddieusedthemostleverageofanyinstitutionthatissuedmortgagesorheldmortgagebacked bonds.Atonepointin2007,Fanniewasover95Xleveredtoitsstatutoryminimumcapitalwithjust18 basispointssetasideforlosses.That'sright,18onehundredthsofonepercentsetasideforpotential losses.Theymustnotbeabletoputhumptydumptybacktogetheragain.Iftheyaretoexistgoing forward,FannieandFreddieshouldbe100%governmentowned,andthegovernmentshouldsimply issuemortgagestothepopulationoftheUnitedStatesdirectlysincethisisessentiallywhatisalready happeningtoday,withtheaddedburdenofsupportingaprivatelyfunded,andarguablyinsolvent, capitalstructure. WhenDr.Greenspantradedthedotcombustforthehousingboomintheearly2000swithhis extremelyaccommodativemonetarypolicy,thedamagetoFannieandFreddiewaswellunderway,and ultimatelyresultedintheaccountingscandalsandbalancesheetdebaclesthatwereinitiallyidentifiedat thoseinstitutionsin2003(Freddie)and2004(Fannie).Followingtheforcedresignationofthesenior officersatFannieresultingfromanSECinvestigation,concernsoverquestionablefinancesand accountingpracticeswerelargelysubdued,andCongressundertooktoenactregulatorychangesto rectifycurrentissuesandpreventfutureones.Asyourecall,theHouseFinancialServicesCommittee putforthaproposalinMay2005toaddresssuchproblems. Atthetime,privatecompetitorsandcertainWhiteHouseofficialswerecriticaloftheproposedreform, claimingthatitwasnotstringentenough,didnotaddressalloftherelevantissues,andkepttoomuch powerinthehandsofthesetwoinstitutions.Iwouldnotbesittingbeforeyouoverfourandahalf yearslaterhadthesecriticsnotbeenprovencorrect. Inanattempttoaddressourcurrentcrisis,theTreasuryDepartmententeredintoagreementsin September2008withFreddieandFannietopurchaseupto$100billionofseniorpreferredstockin eachofthetwoentitiesandtoplacethetwofirmsintoaconservatorship.TheTreasurysownFAQand associatedansweronthedealstated:

 Whyisthepreferredstockpurchaseagreementlimitedto$100billion?Isthatenoughto protectagainsteventheworstdownsidescenario?Whathappensiflossesexceed$100 billion? Treasurydeliberatelychosealargenumbertogiveconfidencetothemarkets. Yet,inFebruary2009,theTreasuryincreaseditsfundingcommitmenttoFannieandFreddiebyanother $100billioneachtoanewtotalofupto$200billionperinstitution.Recently,onDecember24,2009, theTreasuryagreedtoprovideunlimitedsupportforthenextthreeyears.Atthispoint,theUS taxpayerisonthehookforwhateverlossesoccurtoeitheroftheseinstitutions.Themostobvious questionis:Whyaretheshareholdersandotherunsecuredcreditorscontinuingtoreceiveafreerideon thetaxpayersnickel?Among,thelargestunsecuredcreditorsaretheverybanksthataretestifying herewithmetoday.WhileCongressandtheAmericanpeopleareoutragedattheperceivedbackdoor bailoutsthatseveralinstitutionsreceivedviatheAIGrescueandthelackoftransparencyastowho indirectlygotthemoneyandwhynohaircutsontheremainderofthecapitalstructurewereconsidered, thesesamequestionsshouldberaisedinthecontextofFannieandFreddie. Ifthegoaliskeepingpeopleintheirhomesandprovidingasystemwherepeoplecanindeedget financingtopurchasehomes,continuingtofunnelmoneythroughtheGSEstootherfinancial institutionsisnotthewaytodoit.Weshouldsimplyredirecttheguaranteestodirectlyhelp homeowners. Oneofthepremisesofputtingtheseinstitutionsintoconservatorshipwasthatovertimetheseentities wouldshrinktheirbalancesheets.Yet,byyearend2009,theirbalancesheetswillbecollectivelylarger todaythantheywereatalmostanytimeduringtheprior5years.Congressshouldconsiderstopping thisridiculousnessandwindingtheseinstitutionsdownatthesharedexpenseoftheircreditorsrather thantheUStaxpayer. 7

 Exhibit3:LeverageSummaryofFannyMaeandFreddieMac
Asof12/31/2007 FannieMae FreddieMac $3,039,886,000 $2,164,673,000 69.1x 67.0x 95.2x 0.18% 81.0x 57.1x 81.7x 0.31%

($inthousands) TotalAssets+LoanGuarantees LeveragetoTotalEquity LeveragetoCoreCapital(seebelow) LeveragetoStatutoryMinimumCapital(seebelow) Allowance%

FromFannieMaeandFreddieMacfilings: StatutoryMinimumCapitalRequirement .Theexistingratiobasedminimumcapitalstandardtiesour capitalrequirementstothesizeofourbookofbusiness.Forpurposesofthestatutoryminimumcapital requirement,weareincomplianceifourcorecapitalequalsorexceedsourstatutoryminimumcapital requirement. Corecapital isdefinedbystatuteasthesumofthestatedvalueofoutstandingcommonstock (commonstocklesstreasurystock),thestatedvalueofoutstandingnoncumulativeperpetualpreferred stock,paidincapitalandretainedearnings,asdeterminedinaccordancewithGAAP.Ourstatutoryminimum capitalrequirementisgenerallyequaltothesumof: *2.50%ofonbalancesheetassets; *0.45%oftheunpaidprincipalbalanceofoutstandingFannieMaeMBSheldbythirdparties;and *upto0.45%ofotheroffbalancesheetobligations,whichmaybeadjustedbytheDirectorofFHFA undercertaincircumstances.

ProtectingtheTaxpayerfromFutureCrisesandRestoringtheUSBanking System
Ibelievetherearethreeimportantchangesthatarenecessarytoprotectthetaxpayerfromfuturecrisis andrestoretheUSbankingsystemtoitshistoricallystrongposition.First,itisimperativetoseparate depositoryinstitutionsfromproprietarycapitalgroupsandderivativestraders.Wecannothave systemicallyimportantdepositoryinstitutionstakingenormousrisksinthederivativesmarketplace. Second,Ithoughtwelearnedthatoffbalancesheet=BADduringtheEnronandWorldcomfiascos. Bringallrisksandleveragebackonthebalancesheetinorderforregulatorsandinvestorstobeableto compareapplestoapples.Third,wemustdetermineif25Xleverageisthecorrectminimumlevelof capitalization.Mandatinga10%capitalbalancedoesnotseemtoofarawayfromwhereweneedtobe. 10Xleverageisplenty,anditstillmightnotbestringentenoughinanenvironmentwherewehavea multistandarddeviationeventand10%lossesbecomethenorm. TheUSBankingsystemcurrentlyhas8,099insuredinstitutions(after170havefailedinthiscrisis).The compositionofthesystemshouldalsobereviewedasthetop4bankshave41%ofdepositsand45%of bankassets.TheUSbankingsystemhasdevelopedintoatopheavyinstitutionitselfwith concentrationslikethis.Regulatorsmustdecidewhattheindividualinstitutionconcentrationlimits 8

 shouldbetopreventtoobigtofail(TBTF)problemsalloveragain.Maybebankingshouldbede centralizedandmoreregionaltopreventanyoneinstitutionfrombecomingTBTF. Exhibit4:BreakdownofDepositsandTotalAssetsHeldbyMajorUSFinancialInstitutions

ShareofTotalDeposits
JPMorgan 11% Bankof America 12% Remaining 8,095 Institutions 59% Citigroup 9% Wells Fargo 9% Remaining 8,095 Institutions 55%

ShareofTotalAssets

JPMorgan 13% Bankof America 13% Citigroup 10% Wells Fargo 9%

Deposittakinginstitutionsshouldnotbeabletoleverageandbetinthederivativesmarketplace.The factthatthetaxpayerwasessentiallyforced(inthespiritofsystemicriskreduction)tobuyequityin Citigroupratherthanbeseniortoexistingcreditors/bondholdersisanaffronttotheUStaxpayer.There needstobeaframeworkforhowtaxpayermoneyisinvestedinforprofitcorporations,andIbelievethe repealoftheGrammLeachBlileyActisnecessary.FormerFederalReserveChairmanPaulVolckerhas suggestedareturntotheprinciplesoftheGlassSteagallActof1933wherecommercialbankingwas forciblyseparatedfrommostproprietarycapitaltransactions.Iendorsethisconcept;itisonepartofa necessarysetofreformstocurtailtheriskyactivitiesofsocalledTBTFinstitutionsandacknowledges thattheroleandimportanceofsomeinstitutionsdemandstightregulation. Attheheartofthecurrentcrisishasbeentheemergenceofsystemicallyimportantinstitutionsthat havebeenexposedtosomuchriskthatadverseeventshavedriventhemintoinsolvency.Standard markettheorysuggeststhatfirmsthatadopttoomuchriskleavethemselvesopentoinsolvencyand failurethisshouldactasasuitabledisincentivetoexcessiverisktaking.Ibelievethat,inaperfect world,themarketforcesshouldbecompletelyfreetoregulateandcastjudgmentuponafirms behaviorrewardingandpunishingitwithnosafetynetsortaxpayerbailouts.Howeverwedonotlive

 inthatworld,andifweassumethatthereareindeedsomeinstitutionsthatreallyareTBTFwhich appearstobetherealityfacingustodaythenwemustacknowledgethattheseinstitutionsrepresenta substantialmoralhazard. Theirverysystemicimportanceprovidesthemwithanimplicitguaranteeofsolvencyfromtheir counterpartiesor,ultimately,thetaxpayerbecausetheirfailureisregardedastoodamagingtothe systemasawhole.Theeffectofthisimplicitguaranteeofsolvencyistodivorcetheinstitutions incentivesfromtheprudentriskmanagement.Withnorealthreatoffailure,afirmhasanincentiveto ratchetupriskinordertoprofitfromtheupsideignoringanyconcernsofthedownside.Nobanking institutionthathasbeentherecipientofcapitalfromtheUSgovernmentisregardedbythe marketplaceashavinganythingotherthananimplicitguaranteebytheUSTreasury.Thisguarantee mayhaverestoredfaithinthesefirmsascounterparties,butithasdonesowithoutreformingthe balancesheetsorbehaviorofthebanksthatgeneratedthemarketconcernovertheirsolvencyand viabilityinthefirstplace.SeveralrecipientsofTARPhavemoredailyValueatRisk(VAR)inproprietary tradingtodaythantheydidpriortoNovember2008.Thedangerofthismoralhazardisthatitwilllead tofurtherrecklessbehaviorandmorelossesinthefuture,thuscreatingfurthermarketchaosand necessitatingevengreatertaxpayerexpense.InthecurrentenvironmenttheTBTFinstitutionsare incentivizedtoplayagameofheadsIwin,tailsyoulose. IfwemustacceptthatthereareinstitutionsthatareTBTFthenthemoralhazardmustbeaddressed throughregulation.Thesystemicallyimportantpartoftheinstitutionshouldbeseparatedorfirewalled fromthepartthatengagesinexcessiverisktaking.Ihavementionedearlierthatnewleverageratios andstandardsshouldbeappliedtothebankingsystem.Theselimitsshouldbeironclad,universaland completelytransparent(thatmeansnoSIVsorotheroffbalancesheetvehicles)forinstitutionstouching theretailconsumer.Thecostofbeingasystemicallyimportantdepositaryinstitutionistohave profitabilityregulatedandlimitedtobalancethebenefitofanimplicitguarantee. Fractionallendingoperatesonconfidencethatanyoneinstitutionwillbeabletosatisfyanycreditors fromdaytodayeventhoughthereisanacceptancethatallpossiblecreditorscouldnotbesatisfiedat anygiventime(theproverbialrunonthebank).Thisgivesdepositaryinstitutionsaspecialrolein maintainingconfidenceinthefinancialsystem.Ifonefails,itmayhaveacontagioneffectonothers, whichiswhywehavetheFDICandaninsurancemechanismfordepositstoamelioratethisrisk.This specialroleonlyenhancesthereasonsfortighterregulationoftheoperationsandbehaviorofthese

10

 firms.Retailbankinghasessentiallybecomeapublicutility,andshouldberegulatedasonewiththe limitsaswellastheassociatedguarantees. Ido,however,believethatthereisaroleforleverageandforaggressiverisktakingintheeconomy,but thatroleshouldbeplayedbyfirmsthatareopenandsusceptibletotheriskofinsolvencyandfailure. Capitalismrequiresfailureandbankruptcyasaconsequenceinordertoguidebehavior.Astheold adagegoesCapitalismwithoutbankruptcyislikeChristianitywithouthell.Ifwecannotallowafirm togobankrupt,thenweshouldregulateitsactivitiessothatitcannotengageinthesortofrisky transactionsthatputitatriskofbankruptcy.Tobeclear,weshouldnotpreventallfirmsfromtakingon leverageorengaginginriskybehavior;wemustensurethattheyarenotallowedtobecomeTBTF.One oftheoptionstopreventthisisahardandfastbalancesheetcapthatisnotgamedbyrisk weighting.AtacertainnominalgrossbalancesheetsizeafirmisdeemedTBTFandsubjecttonew limitsonrisktakingandassetconcentration.Asafirmapproachesthisbalancesheetsize,itwouldbe monitoredbytheappropriateregulatorandwarnedthatcontinuedgrowthwouldpushitintoanew andtightlycontrolledregulatoryregimethatwouldforceittodivestcertainassetsandunwindcertain positions.Thealternativeswouldbetostopgrowth,spinoffunitsofthefirmintoseparateandremote companiesorsellthemtoothermarketparticipants.Thecapcouldbereviewedevery5years(asan example)andadjustedtothesizeofGDPtoallowthatastheeconomygrowssotoodoestheuppersize onafirmbeforeitisconsideredTBTF.Theaimofthisregulatoryregimewouldbetoensurethatnonon depositaryfinancialinstitutioncouldgrowtoasizethatmadethemTBTF.Ibelievethatacombination ofbalancesheetcaps,monitoringbytheappropriatesystemicriskregulatorandtheintroductionof regulationsliketheuniformcollateralrequirements(whichwilltendtoreducetheoverallsizeof derivativepositions)Ihavementionedearlierwouldgoalongwaytoreducingthelikelihoodofnon depositaryinstitutionsbecomingTBTF. Thisconcludesmywrittentestimony,inwhichIhaveaddressedwhatIbelievetobetheissuesofcritical importance.IrecognizethattheCommissionsmandateistoaddressabroaderrangeofissuesoutlined inSection5(c)(1)oftheFraudEnforcementandRecoveryActof2009.Ihaveopinionsonmostifnotall ofthosetopicsthatIcanaddressifnecessary.IamhappytotakequestionsfromtheCommissionat thispoint.Thankyou.

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Appendix

12

AppendixA:SupportingDatatoExhibit1
Lehman
($inThousands)

Bear 11/30/2007 $ 395,362,000 $ 214,393,000 N/A N/A $11,793,000 $11,104,000 $10,752,000

Wachovia 12/31/2007 $ 782,896,000 N/A $ 592,065,000 $ 43,528,000 $ 76,872,000 $ 43,528,000 $ 33,538,100

11/30/2007 $ 691,063,000 $ 372,959,000 N/A N/A $22,490,000 $18,363,000 $17,268,000

AllasofFiscalyearend2007(Nov31,2007orDec31,2007) Wamu Goldman BofA MS gs bac ms 12/31/2007 11/30/2007 12/31/2007 11/30/2007 $ 327,913,000 N/A $ 252,330,000 $ 21,610,000 $ 24,584,000 $ 21,387,000 $ 17,477,000 $ 1,119,796,000 $ 747,300,000 N/A NA $42,800,000 $42,728,000 $34,608,000 $ 1,715,746,000 N/A $ 1,212,833,792 $ 83,264,703 $ 146,803,000 $80,897,000 $59,625,000 $ 1,045,409,000 $ 565,585,000 N/A NA $ 32,897,000 $ 28,826,000 $ 26,098,000

JPMorgan jpm 12/31/2007 $ 1,562,147,000 N/A $ 1,051,879,104 $ 88,746,000 $ 123,221,000 $ 89,160,000 $ 74,155,000

WellsFargo jpm 12/31/2007 $ 575,442,000 N/A $ 483,420,900 $ 36,647,000 $ 47,914,000 $ 34,091,000 $ 33,837,000

Citi jpm 12/31/2007 $ 2,187,631,000 N/A $ 1,253,321,000 $ 89,226,000 $ 113,598,000 $67,849,000 $62,541,000

TotalAssets NetAdjustedAssets(1) RiskAdjustedAssets Tier1Capital TotalStockholders'Equity TangibleEquity(includesprefstockandcertainhybrids) TangibleCommonEquity CAPITAL&LEVERAGERATIOS Tier1RatioEquity(incprefstock)/riskadjustedassets Tier1ImpliedLeverage TangibleEquity/TotalAssets TangibleCommonEquity/TotalAssets TangibleEquity/Net(orR/A)Assets TangibleCommonEquity/Net(orR/A)Assets GrossLeveragetoTangibleEquity GrossLeveragetoTangibleCommonEquity NetLeveragetoTangibleEquity(1) NetLeveragetoTangibleCommonEquity(1) OffBalanceSheetExposures

N/A N/A 2.7% 2.5% 4.9% 4.6% 37.6x 40.0x 20.3x 21.6x

N/A N/A 2.8% 2.7% 5.2% 5.0% 35.6x 36.8x 19.3x 19.9x

7.35% 13.6x 5.6% 4.3% 7.4% 5.7% 18.0x 23.3x 13.6x 17.7x

8.6% 11.7x 6.5% 5.3% 8.5% 6.9% 15.3x 18.8x 11.8x 14.4x

N/A N/A 3.8% 3.1% 5.7% 4.6% 26.2x 32.4x 17.5x 21.6x

6.9% 14.6x 4.7% 3.5% 6.7% 4.9% 21.2x 28.8x 15.0x 20.3x

N/A N/A 2.8% 2.5% 5.1% 4.6% 36.3x 40.1x 19.6x 21.7x

8.4% 11.9x 5.7% 4.7% 8.5% 7.0% 17.5x 21.1x 11.8x 14.2x

7.6% 13.2x 5.9% 5.9% 7.1% 7.0% 16.9x 17.0x 14.2x 14.3x

7.1% 14.0x 3.1% 2.9% 5.4% 5.0% 32.2x 35.0x 18.5x 20.0x

Lendingrelatedcommitments,opencreditcardlines&S $ 191,346,000 $ 7,219,000 $ 66,221,000 $ 122,968,000 $ 82,747,000 $ 1,487,619,000 $ 108,618,000 $ 1,262,588,000 $ 241,881,000 $ 1,736,070,000 Othercommitmentsand/orindemnificationexposure $20,286,000 $7,128,000 $ 78,531,000 $ $70,121,000 $36,415,000 $988,000 $ 471,020,000 $2,000,000 $ 356,326,000 TotalAssets+ContingentFundingCommitments TangibleCommonEquity/TotalAssets+Commitments GrossLeveragetoTangibleCommonEquity DerivativeNotional(3) LEVEL3ASSETS Level3Assets $38,884,000 $28,169,000 N/A N/A Level3Assets/TangibleCommonEquity 225.2% 262.0% N/A N/A (1)Excludescertainassetsincludingsecuritiespurchasedunderrepoagreements,butmaybecalculateddifferentlybetweenfirms. (2)Thesecontingentloansmaybe,asoffiscalyearend2007,fully,partiallyornotcommitted. (3)Notionaldoesn'trepresenttruerisk,butdisclosureisinadequatetodetermineultimateexposure. Source:SNLFinancialand10Ks. $ 69,151,000 $ 31,470,000 $ 57,996,000 $ 43,103,000 $ 22,749,000 $ 133,435,000 199.8% 52.8% 222.2% 58.1% 67.2% 213.4% 819,323,000 $ 4,280,027,000 $ 902,695,000 $ 409,709,000 $ 927,648,000 $ 450,881,000 $1,272,664,000 $ 3,239,780,000 $ 1,155,015,000 $3,295,755,000 $ 1.9% 52.3x 2.6% 38.1x 3.6% 27.7x 3.9% 25.8x 2.7% 36.8x 1.8% 54.3x 2.3% 44.3x 2.3% 44.4x 4.1% 24.2x 1.5% 68.4x

$ 737,937,000 $ 13,396,700,000 $ 5,006,809,000 N/A(FV=$2bln)

$ 2,045,341,000 $ 34,270,664,000 $ 7,120,380,000 $ 77,249,000,000 $ 1,038,351,000 $ 35,708,587,000

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AppendixB:SupportingDatatoExhibit3
($inthousands) Asof12/31/2007 FreddieMac FannieMae $ 53,543,000 $403,524,000 $357,513,000 $ 64,809,000 $ 50,237,000 $438,872,000 $281,685,000 $ 23,574,000

Assets:
Cash,fedfundsandsecuritiespurchasedonrepo Loansnetofreserves(thisincludesPCsforFreddie) Securities(includesFNM,FREandotherRMBS) OtherAssets TotalAssets MBSandothergaurantees(notheldinportfolioabove) TotalAssets+LoanGuarantees TotalStockholder'sequity TotalEquity/Assets+Guarantees LeveragetoTotalEquity CoreCapital(seebelow) CoreCapital/Assets+Guarantees LeveragetoCoreCapital(seebelow) StatutoryMinimumCapitalRequirement(seebelow) StatutoryMinimumCapital/Assets+Guarantees LeveragetoStatutoryMinimumCapital(seebelow) Allowance%

$879,389,000 $794,368,000 $ 2,160,497,000 $ 1,370,305,000 $ 3,039,886,000 $ 2,164,673,000 $ 44,011,000 $ 26,724,000 1.4% 1.2% 69.1x 81.0x $ 45,373,000 $ 37,900,000 1.5% 1.8% 67.0x 57.1x $ 31,927,000 $ 26,500,000 1.1% 1.2% 95.2x 81.7x 0.18% 0.31%

FromFannieMaeandFreddieMacfilings: StatutoryMinimumCapitalRequirement .Theexistingratiobasedminimumcapitalstandardtiesour capitalrequirementstothesizeofourbookofbusiness.Forpurposesofthestatutoryminimumcapital requirement,weareincomplianceifourcorecapitalequalsorexceedsourstatutoryminimumcapital requirement. Corecapital isdefinedbystatuteasthesumofthestatedvalueofoutstandingcommon stock(commonstocklesstreasurystock),thestatedvalueofoutstandingnoncumulativeperpetual preferredstock,paidincapitalandretainedearnings,asdeterminedinaccordancewithGAAP.Our statutoryminimumcapitalrequirementisgenerallyequaltothesumof: *2.50%ofonbalancesheetassets; *0.45%oftheunpaidprincipalbalanceofoutstandingFannieMaeMBSheldbythirdparties;and *upto0.45%ofotheroffbalancesheetobligations,whichmaybeadjustedbytheDirectorofFHFA undercertaincircumstances.

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AppendixC:SupportingDatatoExhibit4
($inThousands)

JPMorgan BankofAmerica Citigroup WellsFargo

TotalDeposits $ 1,014,186,148 $ 1,110,779,388 $844,295,643 $833,381,202

% 11% 12% 9% 9%

TotalAssets $ 1,768,963,935 $ 1,714,764,797 $ 1,305,664,786 $ 1,206,919,781

% 13% 13% 10% 9%

TOP4
PNC USBancorp BankofNewYork Suntrust StateStreet BB&T AllOther

$ 3,802,642,381
$189,758,847 $234,441,768 $141,854,158 $125,732,956 $ 97,247,558 $113,788,885 $ 4,406,533,447

42%
2% 3% 2% 1% 1% 1% 48%

$ 5,996,313,299
$278,495,745 $259,942,982 $180,163,546 $166,171,009 $160,208,203 $159,145,841 $ 6,067,559,375

45%
2% 2% 1% 1% 1% 1% 46%

Total

$ 9,112,000,000 100% $ 13,268,000,000 100%

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