OtherI can't. Keep trying, you'll get a good one. Yeah, that's one of these. I don't want you to overindulge here.
OtherGood afternoon.
OtherGood afternoon.
OtherToday's hearing. hearing is a very important one. And for the purposes of our orderly proceeding on today's hearing, I think it's very important for us to conduct a little bit of housekeeping. And it is very important for us to keep the aisles clean and clear if we could. And so what I'd ask on either side is if you could press back somewhat more towards the rear of the hearing room, each of you, who are standing in the aisles. You would very much help us to comply with some of the concerns which the other people who are seated have with regard to their ability to be able to witness today's proceedings. And would thank each of you, if you could, in the aisles, and comply with that request throughout the course of the hearing. Today's hearing is Congress's first public examination of the stunning revelations concerning illegal activity in the government securities market by senior officials of Solomon Brothers Incorporated. Clearly, all investors and taxpayers have a direct stake in the fairness of the fairness of the most important financial market which we have. a $2.3 trillion market, one which provides the fuel for the nation's fiscal engine. This subcommittee's inquiry will not constrain itself to illuminating the darkness of Solomon Brothers activities. We will be examining the following. First, not only what happened at Solomon Brothers, but why? Was there a corporate culture at work or a climate of permissiveness? Second, are these revelations? reflections reflective of more widespread unethical or illegal activities in this market. And third, how did regulators respond to what happened and what are they doing now? And finally, what can Congress do to prevent such activity from happening anywhere in the market in the future? This subcommittee began its own inquiry into the government securities market last September, when And Representative Cooper and I wrote to the SEC Chairman Breeden requesting a comprehensive examination of problems in this market and the need for legislative reform. In May of this year, the subcommittee's first hearing on this issue focused on abusive sales practices in the secondary government securities market. In conjunction with that hearing, the subcommittee released a report from the Resolution
[7:54]
QuestionerTrust Corporation that identified at least the government security market. 37 SNLs, which lost a combined $620 million in the government securities market and whose ultimate failure and taxpayer bailout was directly linked to those losses. Finally, on June 3rd, I wrote to the SEC, the Treasury Department and the Fed, seeking a full investigation of allegations of manipulative activity in the primary market, leading to a squeeze in the secondary market. The Solomon revelations relate directly to the areas of inquiry in that letter. The admissions of wrongdoing at Solomon not only reveal an arrogant disdain for the law by former Solomon Brothers officials, but cut right to the heart of concerns about the adequacy of regulation in the market itself. We must be assured that all wrongdoers will be identified and punished, and more importantly, that there will be a true change in the culture of an institution which clearly went awry. With regard to the role of the federal government and the need for regulatory change, a broader reevaluation is in order. Unlike other securities markets, there is a very different oversight scheme that governs this market. And this scandal raises concerns over its value in serving the interests of taxpayers investors. For example, can we continue to rely on an essentially private business relationship between the New York Fed and a limited number of privileged primary dealers with no set of codified rules? As for the enforcement of the laws, we rely on the SEC to be the cop, but compared with the SEC's vastly superior surveillance authority in other markets, in this area of the SEC is a cop with no nightstick and no map of the streets on the beat. In my view, we need to consider a legislative agenda that directly attacks the weakest areas of regulatory oversight in this marketplace. First, the SEC and appropriate regulatory agencies should be given the authority to write sales practice rules to govern the relationship between broker dealers and their customers and government security. Second, the SEC should be given the authority to oversee the manner in which price and trading information gets to the public and regulators. Third, firms which participate in this market should be mandated to abide by standard internal procedures which act as the front line against illegalities. This would follow the model set in the insider trading bill of 1988, which I authored, along with Chairman,
[10:54]
OtherChairman Dingell and Representative Ronaldo. Fourth, consideration should be given to some form of large trader reporting for customers in this market, in order to gauge better where major positions are in the market. Fifth, the SEC's general anti-fraud authority should be augmented to make explicit that any fraudulent or manipulative activity in the auction process is a violation of the securities laws. And finally, consideration should be given to formalizing the cooperation amongst the SEC, the Treasury, and the Fed over this marketplace. There is much work still to be done by the government agencies, investigating the facts of the Solomon Brothers case and by those of us in Congress seeking both to prevent any such recurrence and to improve the fundamental fairness and integrity of this market. I expect that this hearing and the lessons of Solomon Brothers will set us squarely on path of developing tough common sense government securities market reform legislation. That concludes the opening statement of the chair. Now turn to recognize the ranking minority member, the gentleman from New Jersey, Mr. Rinaldo. Thank you very, thank you very much, Mr. Chairman. Mr. Chairman, I want to commend you for holding today's hearing on what has been appropriately referred to as a Solomon Brothers case. To the public, this is probably a complicated issue. involving arcane trading practices of one of Wall Street's most prestigious firms. But stripped of all of the language of Wall Street's bond traders, what the public, what my constituents, what the people of this country want to know is simply this, are the American people who ultimately are responsible for paying off these government securities being ripped off by a few aggressive traders manipulating the market. In effect, was Solomon Brothers' chief bond trader trying to corner the market to squeeze out competitors to unfairly and illegally enrich the company and perhaps also determine in advance interest rates that affect other securities. And why didn't those at the top of Solomon Brothers reported as soon as they found it out? These are not easy questions to answer, and it's distressing that Solomon Brothers' chief officers withheld the information from the government for months before a government inquiry finally persuaded them to come forward with some of the facts. What else is missing from the puzzle? Before members of this subcommittee can determine
[13:41]
Otherhow the regulations governing the government securities trading practices should be changed, we need to know the full story of who was at fault, how it happened, why it took so long to report, and if these practices were an isolated incident or if they are more widespread. For years, this subcommittee has been told that the industry places itself, that more and more regulations inhibit the free market and are difficult and expensive to enforce. Well, I'd like to know whether or not this is a case of one bad apple and a barrel, or are there more? It's deeply troubling to me to learn that Solomon Brothers, one of Wall Street's most respected names had on several occasions violated the Treasury's rules on bidding and apparently created several short squeezes. These actions are unconscionable, and this Congress and the American public will not tolerate a repetition of this reprehensible and arrogant behavior. That's one reason why I'm pleased that the Securities and Exchange Commission is broadening its probe to look into bidding practices of both commercial and investment banks. The SEC is attempting to determine whether there is widespread collusion occurring in connection with Treasury securities auctions. And if these allegations are true, our nation's economy has been harmed. Confidence in our capital markets has been eroded. And manipulative activities that undermine the confidence of investors ultimately will drive borrowing costs upward at the expense of the taxpayer. Mr. Chairman, Chairman, today's hearing is an excellent opportunity to begin assessing the status of the Treasury securities markets. I'm not willing to assume at this early stage that the entire dealer community has been engaged in improper activities solely because the SEC is conducting a broad-based investigation. Moreover, I'm pleased to learn that Solomon Brothers has a new top management, which I understand is committed to operating school. squarely within the law. I know that Warren Buffett and his new team at Solomon Brothers already have instituted procedures to stop abuses, such as preventing unauthorized bidding on behalf of customers. I also believe that the new team at Solomon deserves credit for cooperating fully with federal law enforcement officials and is not stonewalled or denied responsibility for the actions of their predecessors. These are encouraging signs. But we need to take a careful and dispassionate look at what is going on in the nation's
[16:30]
Questionerbiggest securities market. Mr. Chairman, after five years of the Government Securities Act, we have an opportunity now to review this legislation carefully to determine how the market has changed and how our laws should be strengthened to address any newly discovered improper activities. In my opinion, we should alter the Government Securities Act. so that it fulfills the goals that I articulated in 1986 of protecting the citizens of this country while avoiding a regulatory scheme that is excessively burdensome and expensive. I want to welcome Mr. Buffett and today's panel of witnesses and look forward to their testimony and yield back the balance of my time.
OtherI thank the gentleman. The gentleman's time has expired. The chair recognizes the gentleman from New York. Mr. Schoyer.
QuestionerI thank the chair and I congratulate our chair. for holding these timely hearings. We have a great deal to do before October 1st when the legislation governing these markets comes up for renewal. So it's a very timely hearing and I congratulate Mr. Markey. Government and all of us have traditionally been loath to burden the government bond market with regulations, particularly regulations that really don't seem to be urgent and necessary. After all, this market is supposed to have been the safest, most efficient financial market in the world. And it's a safe haven. And it has been, and we want to keep it that way. Now, the efficacy of this hands-off approach is being questioned and properly. Is this a matter of corporate greed? Is this a matter of obsessive determination to one? win the game? Is this simply an aberrational occasion that we've run up to? Or is it a corporate environment, a corporate community failing that has produced these actions? And they're not alone. Looking broadly across the spectrum of corporate markets, we've seen the Ivan Boski affair, we've seen the Michael Milliken affair, we've seen the Keating affair, and now we see this. Now, most of the people in this room are professionals. And they understand that the SNL scandal isn't exactly the same as the security scandals and the, that we've seen with Mr. Milliken and Mr. Boskin, and they are, in turn, different from this serious problem. But to the public out there, I think that is the not quite so sophisticated. They're all, it's a mishmash. And I think John Q. Public may be feeling, and we hope he isn't, that there's something rotten in Denmark at the highest
[19:42]
Questionerechelons of our financial community and that the leadership somehow or other is flawed. And it's up to us to find out why these things have been happening. What is there about our corporate financial culture that produces these embarrassing? embarrassing, disgraceful episodes. After all, the viability of our financial markets is a matter of global concern. We have central bankers from Asia, Japan, Europe, who are major supporters of our system for financing America, so to speak. We have a three-point a $7 billion national debt, excuse me, a $3.7 trillion national debt. Mr. Buffett was nodding with some concern, $3.7 billion. That's a lot of money. And I think we have to know what the impact is going to be on consumer confidence, on the part of bankers, investors, central bankers around the world. How much is this kind of thing likely to afford us, to cost us? If it's only one one hundredth of one percent, you're talking about three hundred and seventy million dollars. Do I have the decimal point right, Mr. Bubby? If it's one-tenth of one percent, then you're talking about three billion, three hundred and seventy million. If by any chance the cost of the consumer dismay and concern about the state, of the market was 1 percent, and I don't for a moment think it will be, then you're talking about $33,3,000, $33,700 million. Cost to our economy of financing America, including support of the national debt. These are the questions we have to determine the degree of investor disquietude. I'll yield back the balance of my time, Mr. Chairman.
OtherThe time has expired. Chair recognizes the gentleman from Kansas. Mr. Slattery.
QuestionerThank you, Mr. Chairman, and I, too, would like to commend you, Mr. Chairman, for calling this hearing in such a timely fashion. I would like to welcome my fellow Midwesterner, Mr. Buffett, and my colleague from Omaha, Mr. Hoagland, also to the committee. It's good to see you all. As I sit here today, I can't help but think, Mr. Buffett, that you have an opportunity to provide a great service for the taxpayers of this country, for thousands of shareholders of Solomon Brothers, for hundreds of thousands of investors around the world, and for some 8,000 employees of Solomon Brothers, also. Needless to say, it's a daunting responsibility and tasks that lies before you. And as you begin your service, I would urge you to say to say that set what you have described, I think, as a Solomon model for dealing with corporate
[23:12]
Questionerincompetence and corporate greed, the more important gross negligence on the part of corporate management at the highest levels, and blatant violation of a corporate manager's fiduciary obligations to the shareholders, and in this case, corporate criminality. and I am pleased that you have moved quickly to fire the upper managers that appear to be responsible for this activity and responsible for this scandal. And I only hope that we won't learn in the future about any sweetheart deals with these managers that are being fired now. And I've expressed to you earlier my deep concern about even paying for their defense. And as far as I'm concerned, I'm concerned, those responsible deserve absolutely nothing from Solomon Brothers, not a dime in severance pay, not a dime in any kind of remuneration of any kind, and not a dime to pay for their defense either. These are sophisticated, well-educated, highly compensated, probably very wealthy people that have embarrassed Solomon brothers, have discredited the the securities markets in this country, and they deserve absolutely nothing but a swift kick in the butt out of Solomon Brothers and onto the street. And I think I would speak for a lot of people in this country in suggesting what they would like to see from some of these people is them in striped suits sweeping the streets of Wall Street for a few months or a few years or a decade, and that would probably get the attention of others that are so. inclined to engage in activity of this kind in the future. But I hope that the shareholders of Solomon Brothers will explore the possibility of perhaps a derivative suit or shareholders' suit to seek civil damages from those that have been responsible for this scandal. What I would like to see this hearing focus on, and I think the task of this committee, is to hear from you, to hear from the Treasury, to hear from the Federal Reserve to hear from the SEC about what can and should be done to prevent this kind of thing from happening in the future. And I specifically want to hear from the SEC as to whether they believe that they have adequate legal authority and adequate personnel to police the market today. Does the Treasury have adequate legal authority in this area? Does the Federal Reserve system have adequate legal authority in this area? legal authority. And these are the questions that I would like to get answered today.
[26:10]
QuestionerAnd if they don't, and if they don't have adequate personnel to do the job of enforcing the law today, then why hasn't the chief law enforcement officer in this country, the President of the United States, been before the Congress, asking for the authority and the resources to get the job done? And once again, I think we see a situation where we are obviously very disappointed, and the people this country are very disappointed that this kind of activity has taken place. taken place. So, Mr. Buffett, you clearly have a great opportunity and a great responsibility. And your past reputation would indicate that you're up for the task. And I wish you well as you as you commence a difficult responsibility. I look forward to your testimony today. And again, I urge you in the strongest possible way to demonstrate a lot more justice than mercy in dealing with these people that you're dealing with within Solomon Brothers. Thank you, Mr. Chairman.
OtherThe gentleman's time has expired. Chair recognizes the gentleman from Ohio, Mr. Eckert.
QuestionerThank you very much, Mr. Chairman. Like most of my colleagues, I have just returned from the County Fair Circuit all across my district. And as these stories were breaking in Northern Ohio, at one of my town hall meetings at the Randolph Fair, Portage County Fair, a gentleman farmer came up to me and he said, waving these clippings under my hands. these clippings under my nose. He said, how'd this happen? Who's mine in the store? And I suspect that the look I gave him was the best answer that I could engender at the time. And that is, is that apparently no one. The fact is that there's probably lots of blame for this to go around. I finger number one, this Reagan-esque regulatory regime that we've had for. 11 years in this town, which basically, seemingly took its cue from that hit Cole Porter song, Anything Goes. And once the market in which we are told that we must repose so much trust figures out that anything goes, then everything does. And the only thing that's left are the things that are nailed down. One of the fears that I have is that the The market isn't responsive, or the government just doesn't care. Corporate compensation in this anything goes type scheme has been simmering as an issue. We know that greed is good drove some of the decisions and activities that were taken here. But we've gone way beyond corporate compensation.
[29:02]
OtherMr. Breeden, from whom we're going to hear in a little bit, is testified about reforms needed. reforms needed in this area. It's no longer compensation. It's become a feeding frenzy. I've seen hogs at the trough act with more manners than what the public has been exposed to in the past a few weeks once again of revelations about what people will do in order to enrich themselves. The second piece that troubles me is I look to try to figure out where we need to a portion of the blame is this cozy atmosphere that exists between a regulator seeming to be dependent on a trader simply because that trader is doing us a service. Well, heavens, I just can't help but feel the same way like when I go to these stores and some of these clerks who wait on me think they're doing me a favor by selling me something and taking my money to boot. It doesn't make any sense. at all. It's an Alice in Wonderland turned on its head type approach to government regulation that just is amazing to me. This cozy, almost incestuous relationship between those who seek to protect the public and those who want to serve the public is amazing to me. I can't believe that we could come up with any less efficient way than we are doing it today. The last point that I want to make as I sit around and try to look at how this matter gets fixed, is once again an unseemly parallel from the savings and loan industry. That scandal, which has had political and economic implications for this entire country, has once again at its core a philosophical change of direction for which the taxpayers are ultimately going to be responsible. And that is, is that the taxpayer has to be responsible. has to bail out potentially any failures that occur here. Not likely to happen because of the stability of the marketplace, but it is a lesson that should not be lost upon us. This trust us philosophy that is driven this town, that is rife in your industry, and upon which this Congress and this committee particularly is going to be asked to make more judgments is beyond me. Oscar Wilde said a long time ago that life imitates art. Gordon Gecko and Sherman McCoy are alive and well on Wall Street. Bonfire of the vanities, moving from fiction to nonfiction. Greed is good. Master of the Universe. Ladies gentlemen, I don't know how we legislate that. What we do do is we encourage more people like Mr. Buffett to get in the air and
[32:15]
Questionermy colleague said, kick some butt and take some names. But until more of your colleagues, similarly situated Mr. Buffett, rise to this challenge, then the Gordon Geckos and the Sherman McCoys are going to be the masters of our universe. And that, sir, is a sad day for us all. I yield back to balance my time.
OtherThe gentleman's time has expired.
OtherThe gentleman from Maryland, Mr. McMillan.
QuestionerI thank the chairman for holding these important hearings, no less than the United States' financial well-being, is at stake clearly. What is at stake? It is dependent upon the integrity of our primary and secondary dealers. So this, I think it's particularly important that we have these hearings. When you look at the transgressions that have been committed, in many respects, it's financial treason. In fact, in peril of the well-being of our country, and it's only by Mr. Byrd it's intervention, we were able to avert and to stop the hemorrhaging at one of the most respected financial institutions in this country. There are clear lessons in what has occurred. You have a problem at a financial institution, reminiscent of what we saw on the savings and loan scandal. Related to the fallibility of human beings, the regulators find out, they act ex post facto after the deed. And either they improve the situation or make it worse. I would have to say thus far, the regulators have acted appropriately and have not made the situation worse. Because if, in fact, what had occurred, Salomon Brothers had been closed down, we might have been in here a few weeks earlier, Mr. Chairman, having an emergency hearing because of an overnight failure of a major institution in this country. Clearly, the too big to fail doctrine would have been tested at its extreme and the repercussions to our economy. would have been very, very severe. So fortunately, we've been able to keep a balance that it's been judicious thus far. And there are lessons in what has occurred. Clearly, we need to tighten regulation, coordinate the oversight between the four government agencies involved here. Greater disclosure is needed with respect to Treasury instruments, particularly in the secondary market. Participants need to be fully informed. We need to stop any collusion in the primary market. But I think bottom line here is that we all are, as a gentleman from Kansas, trying to avert this from happening again, clearly by raising
[34:58]
Questionerthe stakes and clearly making out the wrongdoing that has been done, we can avoid that. And again, Mr. Buffett, I want to congratulate you for the leadership that you've brought to this problem. I think it has been a very, very important day for America economy when you stepped in and averted a greater catastrophe. Thank you.
OtherThe gentleman's time has expired. I now recognize the chairman of the full committee, the gentleman from Michigan, Mr. Dingell.
QuestionerThank you. Mr. Chairman, I commend you for holding this hearing. I believe that it is both important and timely. I think that it is extremely important that we look into the questions associated with the government securities market while we at the same time analyze and try to review the form that any legislation to deal with the FDIC, the bank failures and the failure of the bank fund to have adequate resources to meet the challenges that confront it. I'd like to welcome Mr. Warren Buffett to the committee this morning. Mr. Buffett, you're a man of unquestioned integrity, and you hold respect because of the great decency with which you have conducted yourself over the years. It's a matter of some comfort to me that you are going to be in charge of Solomon, and I feel that you will be a great force for good not only there, but elsewhere in the government securities industry. Having said that, market integrity has been severely threatened by behavior which we have seen at Salomon. The committee began its concern over these questions a number of years ago, and it's useful to look back a little bit at history, because as George Santiana tells us, he who refuses to learn from history is doomed to repeat it. In 1986, this committee reported out legislation, reforming to a degree the government securities market. When Treasury testified before us in 1985, with government securities firms failing, and hundreds of millions of dollars in losses to investors being undergone, Treasury said there are no problems in the marketplace and that no new regulation was needed. Interestingly enough, we hear the same testimony today from the Treasury. Department. And the dealer community, working in concert with the Treasury, were very successful in limiting the Government Securities Act to Treasury rule righting authority in the area of financial responsibility. It is interesting to note that during those same times, the Treasury lobbied most vigorously and diligently against anti-manipulation, rule-writing
[37:51]
Otherauthority, being placed anywhere. And they have consistently shown a policy which is very much in keeping with that of the Reagan administration and of this administration, of deregulation, let the good times roll, get government out of business. Pay no heed to what's going on. The market will take care of everything. But the question is, who then will take care of the public interest, the investors, and the interests of the government? The Treasury has consistently resisted efforts to have proper regulation, of banks, savings and loans, and government securities. And time after time, they, in concert with FDIC, FSLIC, the Treasury, rather the control of the Treasury, and the Fed have resisted efforts to address clear evidence of wrongdoing in the financial markets. We can look about and see savings and loans, banks, all of whom are turning out now to be vastly worse than anybody ever predicted or anybody ever thought. And this is a result of direct failure of supervision by the government supervisory agencies. All we have to do is look. Some some $750 billion in bad loans made around the world by banks in the late 70s and early 80s. All that fact alone is of significant concern. Huge loans made for mergers, leverage buyouts and takeovers. Loans, which were made under conditions when prudent economists warn that those same loans probably not only could not be properly serviced by the borrowers, but it was doubtful even in bad time that interests could be paid. The GAO and the Congressional Budget Office have suggested that the bank insurance fund is going to be insolvent by year end. Yet, the Congress is being pressed during time of expanding evidence of wrongdoing to move more rapidly and more rapidly towards consideration of legislation not imposing new regulation upon banks, but rather on the contrary, expanding their opportunities to move into new areas where wrongdoing incompetence and rascality will thrive and prosper, and where again the public will be called upon to make whole the results of wrongdoing, incompetence, incompetence, incompetent, impugling by greedy, avaricious, and incompetent people. It is clear that we are going to have to address the overall question of the bank insurance fund and insolvency. We will meet our responsibilities of addressing the question of what form the new legislation should take in this area. But there are important questions. Should banks be permitted
[40:46]
Otherto expand into broad other areas? For example, do we want the Bank of New England to move into first executive or vice versa? Or would we like them to move in to Penn Central or into Lockheed or into some other major failing US corporation? As I've said, we will carry out our responsibilities. It would be far better that we were to spend our time dealing with not only ferreting out what the wrongdoing is, but what should be done about it, and instilling into the administration a proper determination to see to it that the law are properly carried out, the public interest is protected, that wrongdoers do not profit at the public expense, and that the markets upon which this nation places so much faith and so much of its treasure and its confidence should be protected against both incompetence, wrongdoing, and disregard of the rules of law. I think that this hearing today, Mr. Chairman, is going to be an important one. It is one which will give us some appreciations of matters which are important to us. I am hopeful that when the Treasury appears before us, that they will be better prepared to give us proper answers to matters of concern that this committee has, to discuss in a much more informed and intelligent way some of the questions that this committee has, rather than saying we do not know where it is in the bill, or we think it's there, but we have not looked at the bill of late. Indeed, that is the kind of behavior which reflects small confidence in, and upon the Treasury. And it is something which I think should cause caution for the Congress and enable us to understand that perhaps we would be better served to look a little more carefully at this matter before we rush into some of the grand accretions of power to agencies which have found themselves not able to carry out their activities in the area of banking, in the area of public finance, and elsewhere. And so I commend you, Mr. Chairman. I welcome you, Mr. Buffett. This is going to be, I know these are difficult times for you, and we look forward to the benefits of your wisdom as you testify before us today. Thank you, Mr. Chairman. The gentleman's time has expired in all time for opening statements by members of the subcommittee has expired. We now turn to our first witness, and that witness is a distinguished one. Mr. Warren Buffett, the new chairman and chief executive officer of Solomon and brothers. Mr. Buffett is perhaps the nation's most prominent investment guru
[43:28]
Otherwho has followed the path of the straight, the true, and the fundamental while building his successes. While those values may have seemed to have been out of fashion in the Go-Go-Go 80s, I have a real sense that they're going to come back with a vengeance in the 1990s. And I hope that you, sir, can help us today. to help us to apply those values not only to the job you have in overhauling the Solomon Brothers structure, but also as to how we should overhaul the regulatory structure overhaul the regulatory structure over the entire government securities of marketplace. Mr. Buffett is joined at the witness table by our colleague from the state of Nebraska, Peter Hoagland. Mr. Buffett is from Omaha. Mr. Hoagland is here as well to give a brief introduction to Mr. Buffett. Welcome, Peter.
OtherChairman Markey, Congressman Ronald, other members of the subcommittee, it's my pleasure today to introduce one of Nebraska's most illustrious and inspiring citizens, a man who is typical of the people that we grow and nurture in the Midwest, and whose abilities we so often contribute to the rest of the country. Warren has been called up for a very special tour of duty to guide Solomon brothers through a crucial time. Nebraskaans and Kansans and others in the Midwest have always produced good citizens and leaders who could provide sound advice for New Yorkers. And I know that Warren Buffett will not hesitate to speak his mind. You all know Warren's reputation. He is America's premier investment manager. His company, Berkshire Hathaway, is considered to be on the leading edge of efficient, honest, profitable business practices. He is known as the sage of Omaha, and his investment savvy has been the talk of Wall Street and Washington for years. But Warren Buffett is a very unusual businessman. After all of his successes as CEO and chairman and the largest shareholder of Berkshire Hathaway, he continues to choose to live in a quiet, tree-lined neighborhood in Omaha, and he works in a modest midtown office building instead of moving to some financial center like New York City. Sound evidence, Warren, of your good judgment. And Warren is an even more unusual CEO. He prepares and files his own tax returns and has done so every year of his life since he was 13 when the money he earned on multiple paper routes pushed him over the minimum amount for filing. I do not know of any boy in America who has filed tax returns based on cash proceeds from paper routes.
[46:31]
OtherI think that much of Warren's success can be traced to growing up in Omaha, a beginning that instilled in him the old-fashioned values of integrity, discipline, and character. And Nebraska is full of people like him. Warren's friend, Charlie Munger, tells a story of a boy whose nickname when he was growing up in Omaha was booed. As an adult, Boo. Walt Boob moved to California and made a big fortune in a big hurry. But enough lessons from Nebraska for today. Warren is here because he has a responsibility of reforming Solomon Brothers for the future and protecting the well-being of the 8,000 employees and their families that had been thrust upon him. He is charged with restoring the public's badly shaken confidence in the integrity of the most important financial marketplace in the world. His honest, low-key style, his respect for the rules, and the proper role of government, and his keen financial mind will provide Solomon and the financial community reassurance and leadership. There is no more capable or honest person in the country to assume this challenge. It's an important job at a critical time in our nation's history. The country simply will not benefit from the destruction of a company employing 8,000 people for the misdeeds of a few. Instead, those few need to be punished and the company reformed and set straight. Nebraska is being sent in to help Wall Street in this effort, and those of us in Omaha are very proud of the man that has been chosen for this job. Warren. Mr. Buffett, whenever you feel comfortable, pull up to that microphone and please begin. Mine. Is this that it's working? Yes. Thank you for the opportunity to appear before this. subcommittee.
WarrenI would like to start by apologizing for the acts that have brought us here. The nation has a right to expect its rules and laws to be obeyed, and that Solomon certain of these were broken. Almost all of Solomon's 8,000 employees regret this as deeply as I do, and I apologize on their behalf as well as mine. My job is to deal with both the past and the future. The past actions of Solomon are presently causing our 8,000 employees and their families to bear a stain. stain. Virtually all of these employees are hardworking, able, and honest. I want to find out exactly what happened in the past so that this stain is borne by the guilty few and removed from the innocent. To help do this, I promise to you, Mr. Chairman, and to the American people, Solomon's wholehearted cooperation with all authorities.
[49:22]
WarrenThese authorities have the power of subpoena, the ability to immunize witnesses, and the power to to prosecute for perjury. Our internal investigation has not had these tools. We welcome their use. As to the future, the submission to this subcommittee details actions that I believe will make Solomon the leader within the financial services industry and controls and compliance procedures. But in the end, the spirit about compliance is as important or more so than words about compliance. I want the right words and I want the full range of internal controls. But I also have asked every Solomon employee to be his or her own compliance officer. After they first obey all rules, I then want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper to be read by their spouses, children, and friends with the reporting done by an informed and critical reporter. If they follow this test, they need not fear my other message to them. Lose money for the firm and I will be understanding, lose a shred of reputation for the firm, and I will be ruthless. I welcome your questions. Thank you, Mr. Buffett, very much.
OtherThe Chair will recognize himself for a round of questions. Let me begin by asking you the obvious question. Is Mr. Mosier's set of actions and the response of other executives to his actions at Solomon Brothers, something which is sui generis to just those individuals? Or do you think it reflects a larger culture which was allowed to be created during the 1980s, during the era of deregulation, that requires closer attention by Congress and by the firms to ensure that there is a new set of procedures which are put on the books, both official from a governmental perspective and internal from the institution's perspective, that ensures that we let all individuals in that marketplace know that business as usual has finally ended in this marketplace.
WarrenMr. Chairman, I understand that you are asking the question about the entire industry, as whether these fellow's actions were sui generis, basically. In Solomon as well. The culture that was created that made all of these activities possible. We have been looking through 45 auctions. We've had teams of lawyers there. They have not had these powers that regulatory authorities have in which I welcome. We have not found anything beyond what is in the submission, but the place is going to be honeycombed with not only
[52:19]
Warrenour own investigation but with others, and we will see where that leads. I know of nothing at Solomon that goes beyond what has been put into the submission. It's not over in terms of us looking at the problem. In terms of whether it's sui-generous or whether there's a larger climate that exists in Wall Street, I would say to some extent it's in between. I don't think that the only crimes that have occurred to Wall Street have occurred with the people we're talking about in this submission. I also don't think it is rampant throughout Wall Street. I think that I think that huge markets, I attract people who measure themselves by money. And I think that, I don't think that's the only type of people they attract, but I think that there is a special attraction of markets. And if someone goes through life and measures themselves solely by how much money they have or how much money they earned last year, sooner or later they're going to get in trouble in my view.
QuestionerWell, let me then follow up on your opening statement where you commented that it's not only important to look to the past but also to the future. And ask for your help then in looking at the legislative solutions that might help to ensure that we never again see a repetition of this kind of activity. And what I'd like to do, sir, if I could, is to walk you down a set of issues and to get your sense of whether or not any of these makes sense. The first would be mandatory firm procedures. That is that we mandate them legislatively. Along the lines of the mandatory firm proceeding, protect safeguards, which we mandated to be built into the Insider Trading Act of 1988 in order to monitor those kinds of activities, to require that all firms to deal in government securities internally build a formal system that ensures that that is the first line of defense. Do you believe that that would be something that is an appropriate response from Congress?
WarrenI have no problem with that. I would hope that at Solomon, we would go beyond anything that the regulatory authorities come up with, but I have no problem with tough rules, tough cops, and tough prosecution.
QuestionerExcellent. Secondly, large trade or customer reporting. In response to the market crash in 1987, this committee last year passed a piece of legislation, which gives to the appropriate regulators the ability to have access to the large trades that go on out of the market
[55:07]
Questionerso that on an ongoing basis they can have a snapshot of what's taking place in those marketplaces. Here, it seems to me, since many of the regulators fly blind without any actual knowledge as to what's taking place in this marketplace, we're considering building in a large trade of provision here as well so that they can have that information on an ongoing proprietary basis to have a sense of what's happening in that marketplace. Does that make any sense to you?
WarrenWell, Mr. Chairman, I'm not sure exactly what information the present regulators do obtain, but I see no problem with the appropriate authorities having information about large positions. I think, for example, now that unusual movements in stocks are monitored both the New York Stock Exchange and the SEC, and there are things that go on in markets that should be watched. I have no problem with that.
QuestionerOkay. Thank you. The next. point would be making the auction rules a direct violation of the securities laws so that those who might consider engaging in illicit activity in this area understand that there are much more severe penalties under the securities laws which they could invoke if, in fact, they did cross that line. I, Mr. Chairman, I've never written a statute, so I'm not going to try and and pick out exactly where it should be. But I have no trouble with there being very tough penalties administered by very tough people with anybody that fools around with the auction process. And let me, in this area, just finally ask the question of whether or not there should be government authority over how price information is sent out to the public, so that there can be some sense of integrity. a great sense of confidence which investors and the taxpayers can have in the information which is used in this marketplace.
WarrenMr. Chairman, my impression is that price information, at least to me as a purchaser of Treasury securities, I feel that I probably obtain good price and information. I think that the markets tend to be very close in that arena. And I think I can, I think I can find out, even though I'm never acted as a dealer or anything of the sort in that market, I've bought treasuries for my own account. I bought them for the account of Berkshire Hathaway, and I think I get good price information. Now, there may be some gap that I don't know about, but I'm not aware of a big gap on price information.
QuestionerWell, our problem is that unfortunately every investor is not Warren Buffett and every investor
[58:04]
Questionerdoes not have the access to information which Warren Buffett has. And unfortunately, the government happens to be in that situation right now. Well, the government should certainly have the information. There are many ways on an ongoing basis you seem to know more than many of the government regulators. The government should have good price information. Our concept here is that if we do it with stocks, we do it with options, we're now going to do it with penny stocks, why not do it here as well? Just so that information is public and basically certified by the government without in any way impeding upon any productive business activity. I have no problem with the government obtaining good price information. Excellent. Thank you. And just let me ask you one final set of inquiries, and that would be this. Could you provide to the members of this committee the following information in writing by the close of business on Tuesday, September 10th? A detailed accounting of the profit acquired by Solomon Brothers Incorporated, resulting from transactions from the following four auctions. December 27th, 1990, February 7th, 1991, February 21, April 25th, 1991, and May 22nd, 1991. An accounting of any compensation that Mr. Mosier personally received in each of these transactions, a duplication of all corresponding documentation held by Solomon for these auctions, including all tender forms provided to the first by the Federal Reserve as well as a reconciliation of the estimated bids and actual bids. And finally, a review of the 45 auctions that Solomon has reviewed internally, including the total Solomon bid and award, the total customer bid and award, and the individual customer bid and awards. Mr. Chairman, with your permission, I'd like to ask Mr. Denham to comment on the feasibility of providing everything you've asked for.
Otherasked for by September 10th. I mean, I simply, going back to your first point about the profit, for example, on the transactions, that sounds like a very easy proposition, but there can be offsetting positions in terms of future transactions. There can be movements in the general market which would cause any government security owned. We are in the process, as I understand it, we are in the process right now of working with the SEC, see to develop a model that will give us and them the best information we can about that question of just what money was made by Mr. Mosier's misdeeds and or what money was lost. I understand
[1:00:57]
Othersome money was lost, but I don't necessarily believe that until I see the model. You can understand, Mr. Buffett, from our perspective. Right. This information is the key information which we need in order to develop motivations on the on the part of the individuals in the marketplace that then help us to accurately frame the legislation to ensure that there are no repetitions. Mr. Chairman, you've got my total cooperation. I just don't know in terms of September 10th. I don't want to make any promises to you. I can't keep. Is Mr. Denham here?
OtherYes, Mr. Denham. Mr. Denham, could you provide us the information to the best of your ability as available by September 10th?
OtherWe have all information to the best of our ability. The most of it, most of the Can you move the microphone over Mr. Dunham, please? Mr. Chairman, we will provide the information you've requested to the best probability by September 10th. Most of the items that you requested, I believe we should be able to provide by then. As Mr. Buffett stated, the information about the profits from each auction is a little more complex. We will submit that to you as well as we can. as quickly as we can. The information about compensation as it relates to these auctions of Mr. Moser, that I think is not difficult and should be able to be presented quite quickly.
OtherThank you, Mr. Dunnick. Thank you, Mr. Buffett, very much. My time has expired. Chair recognizes the gentleman from New Jersey. Mr. Ronaldo. Thank you very much, Mr. Chairman. Mr. Buffett.
OtherDid the Board of Directors of Solomon Brothers approve Golden Parachutes for Mr. Gut Friend Strauss or Meriwether?
WarrenNo, sir, they did not.
OtherThank you. Your testimony, the written testimony that you provide, it says that senior management's delay in reporting the violations was inexplicable and inexcusable.
WarrenWell, I agree that it's inexcusable, but I think it can be explained. Don't you think, as a member of the board at Solomon Brothers, that senior management might have noticed Mr. Mosier's activity sooner and taken action quicker if he had been losing money? I think they probably would have noticed anybody's activities in the firm if they were losing a lot of money is, I can't argue with that. I would say this, Mr. Renalvo, I have described these activities as inexplicable and inexcusable. I hope before too long and with the aid of authorities who can immunize witnesses and subpoena
[1:03:47]
Questionerpeople and prosecute for perjury. I hope that it does not remain inexplicable indefinitely, it will always remain inexcusable. Thank you. I noticed on page 24 of your written testimony the statement that Solomon purchased $10.6 billion out of the 11.3 billion of two-year notes offered in May of 1991. Your statement, however, did not include a calculation of the percentages, but the way I calculated, it appears to be almost almost 94% of the competitive bids and approximately 86% of the total auction. Now that one firm could obtain that high a percentage of a U.S. Treasury auction is mind-blowing, and of course, it created a short squeeze. Perhaps as shocking is the revelation on page 30 of your testimony that Mr. Mosier proceeded to loan out the market he had cornered at an interest rate which he set. Now, apparently, the finance desk at Solomon just followed his instructions. In the descriptions of the responsibilities of the fired or suspended officers of Solomon contained in your testimony, none appear to have been responsible for the finance desk. Didn't the finance desk officers have to know of the corner Solomon had, and are they being held accountable for participants? in this manipulative scheme or haven't you gotten to them yet? Bob, have we interviewed the Finance Desk? Larry, can you give them any help on that?
OtherMr. Petowicz, who has been leading the investigation since July 8th. Members of the Finance Desk were interviewed.
QuestionerOh, you could you switch that, yeah. And identify yourself in full and the law firm or whatever other association you have.
OtherYes. My name is Lawrence Pedowitz. I'm a partner in the law firm of Wachtel, Lipton, Rosen, and Katz. Yes, members of the finance desk were interviewed, and it is perfectly clear that they were aware of the fact that they had the ability to set the collateral rate, but insofar as wrongdoing, it's entirely unclear whether they would have been aware of any impropriety in the following sense. The rules as they presently exist. Excuse me a minute. You said it is unclear as to whether or not they were aware of any impropriety? Yes, correct. I should say more accurately that I have no evidence that they were aware of any impropriety in the following sense. The rules that currently exist permit one a firm to bid for 35% of the market and also permit customers as well to bid for 35% of the market. In this particular instance, this 10.6 billion, which was a very, very high percentage of that which was available,
[1:07:17]
Otherwas for the most part, putting aside the so-called Tiger bid, legally obtained. That is, that the firm could control on under present rules, a very, very high percentage of the market, and then be free to set the collateral market to the best of its ability. Okay, I think that explains that adequately. I want to continue with a few more questions. Mr. Buffett. Mr. Buffett, how active was the Solomon Brothers Board of Directors in managing the company? How actively? The reason why I'm asking that question is that the board. of directors, as I understand, of a corporation such as Solomon Brothers, has a duty to oversee the officers of the company. Do you feel that perhaps the board should have been more active in overseeing the activities of the officers of the company, particularly the ones who are fired at your direction?
WarrenWell, I would say this, Mr. Renato. The board met perhaps eight times a year, something in that range, seven times. The primary sources of information for a board come from external auditors. That's why there's an audit committee who talks to the board in the absence of the internal management. The internal auditors of the firm, occasionally perhaps some anonymous letter or something of the sort comes in that might inform you. But overwhelmingly, the directors do get their information from the management of the firm. And if the management of the firm is withholding information until some event comes along, until the outside auditors pick up something which would not have been the case in this situation, they are going to lag if their information source is no good. Now, I think the test is what they do when they do find out about what has taken place. And in this case, I would say that it was a Wednesday afternoon. noon the 14th when the outside directors by phone, we were all hooked up. A couple were in England. One was in Alaska. And we at 1 o'clock Midwestern time, 2 o'clock, I guess, New York time, found out the dimensions of what had gone on. And we scheduled a meeting for the following Monday morning. It turned out because of subsequent events, we moved that up to Sunday morning at 10 o'clock. But the board went at found out acted. It did not have any information about these matters. I really don't see how if the four people were hiding it from the authorities that we were going to find out about it at the board level. So the board had no inkling of this prior to the date that you mentioned.
[1:10:22]
QuestionerWhat I would like to know, and I think you're taking a very aggressive and appropriate stance and trying to clean up a sorted mess. But what do you see the role of the board being in the future? And by that I mean, will it play a more direct role in overseeing the operation of the firm? Will any procedures be put into effect so that the board, although it's a policy-making body, will be in a better position to determine prior to an admission, in fact, that any illegal activity is being taking place because there seemed to be a culture or attitude at Solomon. by the officers that have since left that encouraged operating close to the line.
WarrenWell, tomorrow there will be a board meeting, the first one since that meeting of the 18th. It was scheduled for today. We moved it. And one of our first actions will be to set up a compliance committee of the board headed by Lord Young. And the chief compliance officers will report directly. directly to that committee. I'm not sure whether there is a compliance committee like this in existence in other publicly owned financial companies in the United States, but there's going to be one of Solomon starting tomorrow. There's been a firm nationally recognized auditing firm that not associated with past audits that is coming in to recommend any controls or compliance procedures that they think make sense, and believe me, we'll implement them. But I consider the most important thing to be on both ends of it. That's why essentially I'm the chief compliance officer, and I've sent a letter out the first day, which, first morning, which I've appended to, my submission, and all of the top people responsible for compliance and controls in Solomon have gotten my home phone number and they're supposed to call me first and then immediately go through normal channels if anything happens. And then at the other end, I essentially have deputate. every one of those 8,000 employees to behave in a way that can stand to be on the front page of the paper. And in between, we're going to have all the controls and all of that, but it has to be at both ends of the barrel also.
OtherThe gentleman's time has. Thank you, Mr. Brown.
QuestionerThank you. Mr. Buffett, that as part of that September 10th correspondence with us, that you also send along these new compliance procedures, which you are going to consider tomorrow, adopt, hopefully, hopefully, at the firm.
OtherThank you.
[1:12:59]
OtherAnd let me add as well, parenthetically, that along with Mr. Dingell and Mr. Wyden, we are drafting a comprehensive set of auditing reforms that will put legal responsibility upon outside auditors as part of our version of the banking reform bill that will ensure that we fill that hole that has been out there throughout the 1980s. And just for the record, that is going to be a part of any package that emanates from the the Energy and Commerce Committee. And Mr. Dingell and I and Mr. Wyden have been working on that over the last several months. Gentlemen from New York, Mr. Sawyer is recognized.
QuestionerThank you, Mr. Buffett. I applaud the early moves that you have made as Chairman of Solomon. It seems to me that adequate reporting and disclosure should be an absolute prerequisite for participation in the government securities market. It doesn't seem to me that that would be imposing onerous requirements on the industry. Would the required dissemination of such information of all kinds be a proper requirement across the board in your industry?
WarrenMr. Schroyer, you know, I agree that the ability to be a primary dealer is a privilege and that whatever the authorities think or the materials they need in order to do their job, they are going to get from us. I have no quarrel with that at all. Well, I think on top of that, we ought to even go beyond that in our own place, I understand. But I just don't think that you would want to reveal positions to the public that might tell what you thought was going to go up the next day or down the next day. But in terms of knowing where we stand, I mean, I mean, I think the position that Mr. Renalvo described is mind-blowing, I think that that is a pretty good description. I would accept that characterization and there shouldn't be mind-blowing positions that exist with government bond dealers.
OtherRight. Well, I don't think any of us want to overreact and impose onerous and expensive and difficult and time-consuming reporting requirements. But at least the minimum report it seems to most of us ought to be done. And it seems that a refusal to provide market information by Salomon's partners in the government securities industry certainly invites burdensome regulation by this Congress. And what we have to do, it seems to me, is to fine-tune what we require to what is necessary and appropriate. Mr. Shore, I think, you know, eventually what we would want is we would want the government,
[1:15:59]
Othergovernment, the U.S. government, to borrow it the lowest possible cost, consistent with all other external factors, and we would want the least cost to be interposed by the market between the issue of the securities and who finally ends up buying them, and what I would call the frictional cost of distributing the securities. And if the government gets the lowest interest cost and the lowest distribution cost, I think that, I mean, that's the eventual goal. That's the name of the game, and that's what we need to protect the public and investors. of all kinds overseas and at home. I thank the chairman. This time has expired. Chair recognizes the gentleman from Kansas. Mr. Slattery.
QuestionerMr. Buffett, I share Chairman Dingell's concern about whether our regulatory agencies really have the capacity to monitor what is going on in our financial markets these days, whether we're talking about the regulation of derivative securities in the international marketplace, or the kind of activity that we are learning about here today. And I'm just curious from your experience in Omaha prior to assuming your present duties, and based on what you've learned in the last month, do you believe that the SEC, for example, has the resources to do the job that the public really is expecting it to do?
WarrenWell, I don't know. I would say this. I do think more of my experience has been in equity markets than in debt markets. And I think the, I do think the United States has the best equity markets in the world. And I think that one of the reasons that we do, one of the major reasons, perhaps the major reason, but certainly one of the major reasons, is the fact that the SEC has behaved over the years as they have. They are recognized, I think, as being a tough cop. And I think that securities markets can use that. So I can't tell you exactly, I don't know the budget of the SEC, and I don't know that much about exactly even how it's distributed within it. But my guess is that whatever the enforcement division gets, they're earning their money.
QuestionerYeah. What's the talk among the people out on the street? I mean, do they look at the SEC as a tough cop they have to deal with? If they think of the SEC as an agency that you can work around pretty easy, I mean, what's sort of the talk on the street about?
WarrenI think the SEC has looked at as a tough cop. I do not think they are looked at as a paper tagger at all. The SEC has been a long reputation. You build that reputation over decades.
[1:18:47]
QuestionerAnd I think that people in enforcement in the SEC, I think there's a certain maybe type of, I mean this in the very best sense, but I think that there's a feeling they can attract young people out of school who could probably earn a lot more money elsewhere. and that there's a certain Marine Corps mentality about getting the job done, and I think they've done a great job in that. Mr. Buffett, I'm changing subject here on you, but how was Mr. Mosier compensated? Was he compensated with a salary and a commission, primarily commission, or do you know?
WarrenI do know. Almost all of the top executives of Solomon, including Mr. Mosier, were compensated by a what they would have regarded anyway as a relatively small salary and very large bonuses. The bonuses were not strictly, not commissions at all. I don't believe there's anyone at Solomon that's paid on a commission basis, including salespeople, but certainly it was a reflection in a significant way, not exclusively, but a significant way of the profitability of the areas under their control. So it was not a commission on any specific transaction or the month or anything of the sort. They would get big bonuses at the end of the year they got a bonus and the better the year they had, the bigger the bonus they expected.
QuestionerI would like for you, if you could, and I know in your written testimony you've provided some detail on this, but I'd like for the oral record to show a discussion and an explanation from your standpoint about really what happened. I mean, there's some very serious charges that are being. being made here. Charges about price fixing, the sale of billions of dollars worth of securities. This is a very, very serious charge. And I'm just curious, did it happen? Why did it happen? Tell us in layman's language what you think happened.
WarrenYou know, what we put in the submission, I believe, happened. I mean, at the end, it's hard to characterize it entirely, but it, and once I've said something is inexplicable, I guess I shouldn't try and explain it, but I will. So, in the middle of 1990, in July of 1990, Mr. Mosier, I believe it was July, I believe it was July, put in a bid with the U.S. Treasury for an issue that they were handling for, I believe, the Resolution Funding Corp, where he bid for more than 100 percent of the issue. And I believe at the time, there was no law against bidding for more than 100 percent of the issue.
[1:21:30]
QuestionerTell us how he did that.
WarrenI think, to my knowledge, you fill out a form and, and, and, and, uh, and, and, and, uh, and, you know, if the issue is $10 billion and you bid for $11 billion, at that time there was no rule against that. There was a rule that you could not obtain more than 35 percent of the issue so that the proration factor would be applied against this larger bid, and if you thought the issue would be heavily prorated down, you might bid for more than 100 percent, knowing that the 35 percent would be the maximum. The Treasury, as I understand it, found that bid so outrageous. and I have some sympathy for their feelings, that they rejected the bid entirely and then put in new regulations that said you could not bid for more than 35 percent of the issue, as well as not obtain more than 35 percent. Mr. Mosier was a critic of that rule, and in effect, I think in some way felt that, and I'm guessing at behavior, but that the Treasury was challenging him. And in December, operating under the new rule, he first did something that, that was illegal by submitting a bid for somebody else that he could not have submitted if it had been aggregated with Solomon, for somebody that had totally innocent party.
QuestionerWho did, who was that? Who was the other?
WarrenIt was Warburg, I believe, that.
QuestionerPardon me?
WarrenI think it was the Warburg firm that, that he did that in.
QuestionerThe Warburg firm. They are an innocent party. Let me just interject so that we can get a clearer understanding. So you are telling us then that in December, Mr. Mosier actually submitted a bid for the Warburg firm that he was not authorized to do.
WarrenAs far as I know, Warburg had never, never heard of it. He just pulled a name out of the hat, probably the name that he thought might cause him the least trouble. But he submitted a bid for Warburg, which Warburg had nothing to do with. And then when he obtained a proration on the bonds for Warburg, as he did on pro-euvre. He essentially transferred those over to the account of Solomon, so that Warburg never saw the bonds. I mean, they had no connection with it. And he ended up with more bonds from that auction than he would have obtained if he'd only submitted a legitimate bid. Now, that was the first one, the first one we know of, and we've looked at 45 auctions and we'll keep looking and we've got other people helping us look. But in February, a couple of months later,
[1:24:06]
OtherHe submitted three bids for 35% each, totaling 105% of the issue. It would have been interesting if they'd all been awarded to him. They used two other, used two names, again unauthorized, to obtain far more bonds than he could have if he'd followed the rules and just submitting a legitimate 35% bid. Now, that triggered, the second offense, triggered a Treasury reaction which led to the situation in late April where I think Mr. Mosier knew that events were underway that were going to cause him to be caught. And at that point, he informed his superior, who informed three other superiors so that four people in senior management of the firm became aware of what Mr. Mosier had done. He said he'd only, according to what they tell us, he only told him. only told them of the one incident. It really gets inexplicable at this point because clearly the whole thing was going to unravel at some point. The Treasury was looking at it. And Mr. Moser then in the May auction did the events, did the things that don't make any sense whatsoever. I mean, it's almost like a self-destruct mechanism. There was no way that you were going to have a security behave as that May 22nd issue behaved in the after market, which without attracting the attention of the whole world. Journalists were writing about it. The SEC looked into it. It was not the act of a rational man at all. My time has expired, Mr. Buffett, and I appreciate your response. And I guess the only point I would make in summation here is that Mr. Mosier's superiors superiors learned of his misconduct as early as April. And then late in April they learned. Subsequent to their learning of this. there was another auction where he had again repeated what he had done previously, sort of in spades. And is that not the...
WarrenThat's correct. That is correct.
OtherThank you. Thank you, Mr. Chairman, for your indulgence also. The gentleman's time has expired. The gentleman from Ohio. Mr. Eckert. Thank you very much. Mr. Buffett, I have a question not relevant to what you're doing right now at Solomon, but relevant to how this committee and the Congress should proceed given the reauthorization. It seems to me that there's a problem that exists here. We're in the 200th anniversary. The government bond market was created in 1791. And for an awful long time, we have sold an awful lot of debt, prosecute our wars, our ambitious undertakings as a nation.
[1:27:01]
QuestionerAnd we have now only over the last few years, really almost a a bit of a reluctant regulator and could create the risk if Mr. Michael Basham, Deputy Assistant Treasury Secretary, is to believe, where the issuer of the bond will also be the regulator of the market into which it is sold because Treasury says, well, I'm not sure we need to do anything, but if you're going to do anything, it ought to be us. You have a breadth of experience. Can I ask you to react to to react to that observation?
OtherWell, I don't think it's impossible for someone that is issuing, I guess counting all refundings and everything, many, many, many hundreds of billions of dollars with the bonds. They should have, and I believe they do have, but they should have a definite interest in getting that done at the lowest possible cost, the lowest possible distribution cost, and with a minimization of an elimination really of any question about the integrity of that market. So I would say the motivation would be there to do that job. I will tell you everything I know about and continue to, everything I know about how the market operates. I'll let you make the judgment when you get the facts in as to who can do the job best. I will go back to the fact that I absolutely believe that you should have tough rules, tough cops and tough prosecution. Now, whatever gets that job done best, I think is, I'm four. I guess my concern is that the secondary market seems to be the point of abuse. It's where you can go out and have some fun. And what we're perceived to be tiny cracks really are big crevasses, and to which most anything can fall. The GAO told us that sales practice rules that supplement the basic anti-fraud provisions of the security laws have become a fixture. Quote, if these rules make sense for other securities markets, then they also make sense for the government market as well because there are similar opportunities for abuse. You concur with that GAO observation?
OtherWell, I would say there are opportunities for abuse. I would say that the government market is somewhat different than the equity market. You're dealing with almost homogeneous securities, not identical. I mean, they'll, but But within any given maturity range, you're dealing with almost homogeneous securities. That is the reason why when the squeeze of sorts appeared in that May 22nd auction, everyone knew about it within a very short period of time. It was obvious. You could look at the yield curve
[1:30:05]
Warrenand you would see this one issue, 20 basis points out of line or something of the sort. You know that there's something going on in that issue. I should say, I do not believe anyone, any group could possibly, the Treasury market as a whole. But a given issue, like, I think there's some possibilities. I have one suggestion on that, incidentally. I would say this, that squeezes or corners have happened both accidentally and intentionally over the years. Probably the most famous one was the Northern Pacific corner in 1901, which was accidentally. You had two fellows that wanted to get control of a railroad, and they each bought more than half the stock, and that causes a problem. You've had plenty of people that have tried to, intentionally, corner securities. The one thing that does in a corner or a squeeze is more supply. I mean, in the old days when they tried to squeeze corn delivery in Chicago, they try and keep the railroad cars from getting there. And if the railroad cars got there, the corner was no good. And so the, an additional supply takes care of things. And it, as you put, it takes all the fun out of it. There, there's no sense trying to squeeze your corner something except for profit. The, if the Treasury, Treasury has a natural rhythm to it. It's financing. Anybody that finances as much as they ought to should have a natural rhythm because you don't want to surprise markets. But I, if they're probably like most simple solutions, there's probably something wrong with this. But I think if I were in a position to influence the policy, I would say that any time an issue appeared to be behaving abnormally in the market, I would have the world on notice that the Treasury was prepared to issue a lot more of that particular security in one hell of a hurry. And essentially, I think the game would be over in terms of people trying to squeeze issues in the secondary market. If the people who did whatever happened in the May 22nd auction, it felt that the Treasury might come back a month later with 10 billion more of those notes, and bear in mind they were selling it too low a yield basis so that, in effect, it's kind of advantageous financing, well, it wouldn't have happened in the first place if that that willingness had been understood. So I think the very presence of that attitude would tend to, I think it would eliminate the squeeze problem. Now, you've got a lot more problems than that, but I want to attack
[1:32:28]
Otherthat specific point. I'm afraid, though, that Congress may rush out to go spend the money to incur the debt to issue that new bond. I thank the Chairman. Mr. Chairman, this time has expired. The gentleman from Maryland, Mr. McMillan. Mr. Chairman. Mr. Chairman. Mr. Ruffin, I'm interested in what you possibly know about what the regulators knew about, what was going on and when did they know it, paraphrase an old expression. I was reading the post today and I was trying to ascertain what Chairman Breeden was saying about this in terms of the subpoenas that he has issued. And I'm not sure about this, but some of the conclusions I would reach it would be that the SEC waited until August to actually subpoena the market participants about the their trading activities when, in fact, the Commission knew about those activities prior to that, possibly as early as may. Are you familiar with any of the Commission's knowledge with this regard?
OtherMr. McMillan, I'm really not familiar with their timetable. I know what Treasury did that started the process in motion that caused the four people to be aware at Solomon in late April. And I'm quite clear on that. I'm not clear in terms of the Department of Justice in terms of the SEC. I'm not clear on timing. There was a letter request, and I remember this now, there was a letter request by the SEC in late June for information about the May 22nd auction. And that is, I know nothing about their internal procedures on timing after that.
OtherWell, let me back up a second. Just maybe some of your folks here could help. us on this. But what I'm interested in, I mean, I understand that primary dealers make regular reports to the Federal Reserve about their positions. What I'm trying to understand is what kind of reporting was done to the regulators that if there was a real watchful eye, they could have picked this up. It seems to me, unless these reports were, first question I want to ask, are there regular reports to some government agency that were would indicate the kind of position that Solomon Brothers took in these government auctions. And if I may ask Mr. Pedowitz, would they have been aware, would the reports have gone daily that would have shown, for example, the quantum position after May 22nd and then showed the total held by Solomon for itself and customers? I apologize. Or even earlier in some of the other transgressions. Yeah.
[1:35:25]
QuestionerThe Federal Reserve would have been receiving fairly regular reports. about Salomon's positions and would have been aware, was aware of the size of its position and its customers' positions at the end of May. So there is actual reporting that Solomon does to the Federal Reserve about its own account and its customer accounts to the Federal Reserve. Is that the only federal agency that would receive those kinds of reports?
OtherThat is my understanding.
QuestionerSo what you're saying is that the Federal Reserve would have had the information in hand to have detected this back at its earliest date?
OtherThey would have had information that would have permitted them to know the size of Salamans and its customers' positions, but would not have had the ability, I believe, to detect the illegality that was associated with that auction and earlier auctions.
QuestionerWhen was the first date that you heard from the Federal Reserve with regards to these problems, or approximately so?
OtherIt's the problem I'm having with the question is the suggestion that there was a problem. The Federal Reserve, I think, must have become concerned in May about the size of Salomon's position and its customers' positions. And there were, as I understand it, informal discussions between the government trading desk and the Federal Reserve concerning the size of those positions. And in addition, assurances were given that the government trading desk would not permit fails to occur in the collateral market.
QuestionerWell, I guess what I'm trying to understand before this committee goes forward with further legislation and further encumbrances, what I'm trying to understand is, is the flow of information right now sufficient to federal regulators to have detected this kind of activity? In the answer to that, presumably is yes. Is that correct?
OtherI'm sorry, I didn't hear the beginning of the question.
QuestionerIs the flow of information to the federal regulators sufficient to have detected these kinds of positions?
OtherInsofar as the illegal bids are concerned, clearly not, because nobody could have known that except the people that were perpetrating the crimes. I see what you're saying. But insofar as the very large positions that were associated with May as concerned, that is the Salomon position, together with the customer positions, the Federal Reserve was clearly aware of the size of the positions, and press reports suggest, in addition that the
[1:38:00]
QuestionerFederal Reserve, the Treasury, and the SEC had begun to look at this very carefully at the end of May and had decided that for reasons of investigation, that is to watch how this played itself out a little while before launching a full investigation. But in other words, the Federal Reserve knew in May that there were positions exceeding the 35 percent women. Is that correct?
QuestionerNo. No. What they would have been aware of is that Salomon had bid 35 percent and received very close to 35 percent, that Quantum Fund bid 35 percent and received 35 percent, which they were entitled to, and that the Tiger Fund had apparently bid $2 billion and received $2 billion. And all these funds are related to and who are these? The bids were put in through Solomon, and Solomon controlled the collateral. And that, as I understand it would have been available to the Federal Reserve and that would have looked like a very big number I would then.
QuestionerWell, again, I was trying to get to the heart of this, but again, the SEC decided to subpoena the market participants in August when in fact maybe in May they may have seen the red flags. I think they did see the red flags in May and in June, and the SEC had begun an investigation. I believe they were cooperating with the other agencies.
QuestionerWell, I appreciate giving us a better understanding of some of the timing on this because, again, it's my concern that so much of this regulation is after the fact, oftentimes when it's in the press, and I'm not sure that's a necessarily appropriate way to regulate our financial institutions by revelations in the newspapers. So I certainly appreciate your comments in that regard.
OtherThe gentleman's time has expired. Chair recognizes the chairman of the full committee, gentleman from Michigan, Mr. Dingell.
QuestionerMr. Biffett. I read here a list of the management of the market by government regulators. For example, in the case of the government securities, there is no review of the distribution process, but in the case of equities and corporate debt, there is. In the case of broker-dealer registration requirements, there is in each of the three markets, equities, corporate debt, and government securities. In the case of sales practice rules, there is no sales. practice rules applicable or formulated by any regulator with regard to people in government securities. But there are such rules in the case of equities and corporate debt.
[1:40:46]
OtherIn the case of broker-dealer personnel, testing, it is limited in the case of government securities, but it is mandatory in the case of equities and corporate debt. Record-keeping requirements are available in all three of the markets. Financial reporting is a available in all three markets. Financial responsibility in all three. Limited SIPC coverage in the case of government securities, but there is a requirement for it in the case of equities and corporate debt. In the case of a surveillance program, which appears to be something which is very important, there is one in the equities market and in the corporate and none in the corporate debt. But I note that there is no surveillance program in the in the government securities market. I note that there is no large trader reporting in the case of government securities. One is proposed in the case of equities, and one in the case of corporate debt. There are no rules by the commission or any self-regulatory agency of anti-manipulation rules in the case of government securities. In the case of equities, there is, and in the case of corporate debt. there are such rules. There is no requirement for transparency in the marketplace with regard to government securities, but there is such authority in the case each of equities in corporate debt. I'm curious, the 35% purchase that we have been discussing here, plus the purchase of other securities by the same individual nominally for some other person, apparently fell within the purview what could be the question of manipulation or anti-manipulation rules or manipulation of market. Am I correct in that understanding?
QuestionerWell, it certainly seems to me that it's a crime. I'm not sure what statute it comes under anything of the sort, but so when somebody puts in a phony bid to the United States government for bonds trying to get around their rules as to the maximum that should be bid for. Again, I don't know where it falls, but it should fall someplace. I'm not trying to put you in a pit. I want you to understand. This is not a trap or a question of that sort. I'm curious, though, is your efforts to supervise if you had anti-manipulation rules, you'd have an easier time. Would you not? If you were the supervisor, you ought to have plenty of rules that take care of people doing what happened. And if you had a surveillance program, it would be easier for the supervisors, would it not?
[1:43:39]
OtherYes, but I agree with that, Mr. Chairman. I just don't know what the surveillance was, but I agree that when people are participating in a market that involves hundreds of billions of dollars, that there should be a surveillance program. And I noted again that there are no sales practice rules. Again, for your supervision, that kind of rule would be easier for you to supervise. If you had such a service, rules in place by an appropriate federal regulatory institution would know. We're going to have plenty of rules of our own in, but I don't, you know, I think that government rules should be the appropriate ones and the minimum ones, and we hope to go beyond it. Now, I note, again, there's no distribution, no review of the distribution process in the case of government securities. Again, your task in supervising people would be made easier if you had something of that kind available. Would it not? I'm not sure whether we supply the names of all purchasers to the Fed. My impression is that in terms of the distribution that does take place, unless somebody is cheating and puts a phony ticket in and then has happened at Solomon in several cases, I think that I do think the Federal Reserve does receive the name of purchasers. Thank you very much.
OtherThank you, Mr. Chairman. The gentleman's time has expired. Let me ask you this, Mr. Buffett, in conclusion. Could you give us a one-minute summary of what you want us to remember is your core message as we move through the legislative process and consider also expansion of further deregulatory matters, areas of the banking industry over this coming fall?
WarrenI guess I'm not sure I can drag it out to one minute, Mr. Chairman, but I do believe in one with markets of this size, equities, debt, whatever, the integrity of markets is paramount, and I think that we will always have people who misbehave in our midst and probably too many will be attracted to large markets, but that the presence of tough rules and tough cops sure and swift prosecution is probably the the best thing that can be done to minimize it.
OtherMr. Buffett, we thank you. You once wrote, I believe in the Washington Post, that if you really wanted to make money, hold your nose and head towards Wall Street. While you are, the timing and the purpose of your trip to Wall Street may not have been similarly motivated, I hope that you can keep your hand on your own nose and the other firmly on the rudder of Solomon brothers as you continue to be in the vanguard of reform, not only in your own firm, but across this entire marketplace. And I think that your legacy can be one of tremendous public service. And I want to tell you that we admire and respect you for what you've done in the past and for your cooperation here today. Thank you very much, Mr. Pufford. Our second panel consists of the federal regulators who have a jurisdiction in this area. They consist of the Honorable Richard Breeden, Chairman of the Securities and Exchange Commission.