[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
             EXECUTIVE COMPENSATION: HOW MUCH IS TOO MUCH? 

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 28, 2009

                               __________

                           Serial No. 111-35

                               __________

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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York         DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       JOHN J. DUNCAN, Jr., Tennessee
WM. LACY CLAY, Missouri              MICHAEL R. TURNER, Ohio
DIANE E. WATSON, California          LYNN A. WESTMORELAND, Georgia
STEPHEN F. LYNCH, Massachusetts      PATRICK T. McHENRY, North Carolina
JIM COOPER, Tennessee                BRIAN P. BILBRAY, California
GERALD E. CONNOLLY, Virginia         JIM JORDAN, Ohio
MIKE QUIGLEY, Illinoia               JEFF FLAKE, Arizona
MARCY KAPTUR, Ohio                   JEFF FORTENBERRY, Nebraska
ELEANOR HOLMES NORTON, District of   JASON CHAFFETZ, Utah
    Columbia                         AARON SCHOCK, Illinois
PATRICK J. KENNEDY, Rhode Island     BLAINE LUETKEMEYER, Missouri
DANNY K. DAVIS, Illinois             ANH ``JOSEPH'' CAO, Louisiana
CHRIS VAN HOLLEN, Maryland
HENRY CUELLAR, Texas
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
JUDY CHU, California

                      Ron Stroman, Staff Director
                Michael McCarthy, Deputy Staff Director
                      Carla Hultberg, Chief Clerk
                  Larry Brady, Minority Staff Director






















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 28, 2009.................................     1
Statement of:
    Feinberg, Kenneth R., special master for TARP Executive 
      Compensation...............................................    11
    Roberts, Russell, professor of economics, George Mason 
      University; and William K. Black, associate professor of 
      economics and law, University of Missouri-Kansas City......   195
        Black, William K.........................................   201
        Roberts, Russell.........................................   195
Letters, statements, etc., submitted for the record by:
    Black, William K., associate professor of economics and law, 
      University of Missouri-Kansas City, prepared statement of..   203
    Burton, Hon. Dan, a Representative in Congress from the State 
      of Indiana, prepared statement of..........................   244
    Connolly, Hon. Gerald E., a Representative in Congress from 
      the State of Virginia, prepared statement of...............   243
    Feinberg, Kenneth R., special master for TARP Executive 
      Compensation, prepared statement of........................    15
    Issa, Hon. Darrell E., a Representative in Congress from the 
      State of California, prepared statement of.................     9
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, prepared statement of...................   242
    Roberts, Russell, professor of economics, George Mason 
      University, prepared statement of..........................   197
    Towns, Chairman Edolphus, a Representative in Congress from 
      the State of New York, prepared statement of...............     4


             EXECUTIVE COMPENSATION: HOW MUCH IS TOO MUCH?

                              ----------                              


                      WEDNESDAY, OCTOBER 28, 2009

                          House of Representatives,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 11:03 a.m., in 
room 2157, Rayburn House Office Building, Hon. Edolphus Towns 
(chairman of the committee) presiding.
    Present: Representatives Towns, Issa, Maloney, Cummings, 
Kucinich, Tierney, Clay, Connolly, Quigley, Kaptur, Van Hollen, 
Cuellar, Murphy, Welch, Foster, Speier, Driehaus, Chu, Burton, 
Souder, McHenry, Bilbray, Jordan, Flake, Luetkemeyer and Cao.
    Staff present: Brian Eiler and Brian Quinn, investigative 
counsels; Jean Gosa, clerk; Adam Hodge, deputy press secretary; 
Carla Hultberg, chief clerk; Marc Johnson, assistant clerk; 
Mike McCarthy, deputy staff director; Steven Rangel, senior 
counsel; Jenny Rosenberg, director of communications; Joanne 
Royce, senior investigative counsel; Leneal Scott, IT 
specialist; Ron Stroman, staff director; Alex Wolf, 
professional staff member; Gerri Willis, special assistant; 
David Rothany, counsel; Lawrence Brady, minority staff 
director; John Cuaderes, minority deputy staff director; Ron 
Borden, minority general counsel; Jennifer Safavian, minority 
chief counsel for oversight and investigations; Adam Fromm, 
minority chief clerk and Member liaison; Kurt Bardella, 
minority press secretary; Seamus Kraft and Benjamin Cole, 
minority deputy press secretarys; Christopher Hixon, minority 
senior counsel; Hudson Hollister, minority counsel; and Brien 
Beattie and Mark Marin, minority professional staff members.
    Chairman Towns. The committee will come to order.
    Good morning. Before we begin, I would like to extend a 
warm welcome to a new member of the committee on the majority 
side, Representative Judy Chu from the 32nd District of the 
great State of California, which includes East Los Angeles. Dr. 
Chu is a long-time elected official at the State and local 
level, so she brings that experience to our committee. She also 
holds a Ph.D. in psychology--now, you know we need her; we need 
her desperately--which also may be useful on this committee.
    I yield to the ranking member, then, and, of course, after 
that, I would like to yield some time to Dr. Chu.
    Congressman Issa.
    Mr. Issa. Well, I would like to join with the chairman in 
welcoming my colleague both to the committee and obviously as a 
fellow Californian. I might only comment that perhaps if your 
degree was in child psychology, it would be more useful in 
Congress. But we look forward to your comments.
    Yield back.
    Chairman Towns. We will take any degree.
    Dr. Chu.
    Ms. Chu. Well, thank you, Chairman Towns and Ranking Member 
Issa, for that very, very warm welcome. Well, actually, it is 
Judy Chu.
    But I am so grateful to be the newest member of the 
Committee on Oversight and Government Reform. This jurisdiction 
will allow us to delve into the major issues of the day that 
affect our constituents in our Nation, such as foreclosures, 
the financial crisis, and Government waste, fraud, and abuse. 
The economic downturn has hit my district hard. The number of 
foreclosure filings in California are very, very high and in 
L.A. County has hit 12.7 percent. Yet, we have read for the 
past year how well CEOs and bank executives are doing, and 
compensation levels are at an all-time high. So today's topic 
couldn't be more timely and I look forward to hearing more in 
today's hearing as a member of this committee.
    Thank you and I yield back.
    Chairman Towns. Thank you very much, Dr. Chu. We welcome 
you to the committee.
    There is little doubt that executive compensation schemes 
were a contributing factor in the Wall Street meltdown. Top 
executives had grown accustomed to receiving enormous bonuses 
on top of fat salaries, regardless of how their companies 
performed. When their companies did well, they received big, 
big bonuses. And when their companies did poorly, they still 
received big, big bonuses. Even the chairman of Goldman Sachs 
has admitted that the perverse incentives created by these 
schemes helped send the industry into the brink.
    It is not surprising that the taxpayers were outraged when 
they realized that their money was being used to bail out 
companies that still planned to pay their executives millions 
of dollars, even though the company was not doing well. If it 
were not for taxpayer bailouts, these companies would no longer 
be in existence. We wouldn't be reviewing their salary plans, 
we would be reviewing their liquidation plans.
    After these bailouts, and after the outrage last spring, 
you would think that the top brass would have recognized there 
was a problem with excessive compensation.
    The Obama administration made a good decision when they 
appointed a special master, Mr. Ken Feinberg, to review 
executive compensation at companies receiving taxpayer 
bailouts. Mr. Feinberg performed the first review of 
compensation for the highest paid employees of the seven 
companies which received the most TARP dollars. He found what 
many feared: the top brass still does not understand. Another 
way to put it, they still don't get it.
    Despite record losses and near bankruptcies, the executives 
at these companies were still planning to cash in and continue 
to do business as usual. I am happy to say that Mr. Feinberg 
ordered substantial cuts in their pay. No doubt there is 
howling in the executive suites, but I don't think the 
taxpayers are going to be shedding any tears over this.
    These huge pay packages are offensive during these 
difficult times and Americans are angry about it. I hear the 
anger in church, on the street, and wherever average Americans 
congregate you hear from them as to how angry they are about 
what is going on.
    Some on Wall Street have justified their huge pay packages 
by comparing themselves to superstar athletes. But Tiger Woods 
and A-Rod didn't crash the economy. They haven't asked for any 
Government bailouts, either. And let me be clear. The issue 
today is not whether the Government should dictate how much 
people should be allowed to earn. The issue today is whether 
banks, that were saved from bankruptcy only by taking billions 
of dollars in taxpayer money, should be rewarded with salaries 
that give new meaning to the word ``generous.''
    It is a shame to have Government get involved in bank 
compensation issues, but Wall Street can no longer be trusted 
to control themselves. Some constraints on these companies are 
necessary to protect the safety and soundness of the entire 
financial system. We need more than just a special master; we 
need to give the shareholders a way to get this under control.
    Today we welcome Mr. Feinberg, who will testify about his 
efforts to ensure that our tax dollars are not being squandered 
on excessive compensation.
    I want to also thank Professor Black and Professor Roberts, 
who will likewise share their insight on executive 
compensation. I look forward to hearing their testimony.
    I am certain that most of you know the American people are 
really angry about what is really going on.
    [The prepared statement of Chairman Edolphus Towns 
follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman Towns. I now yield 5 minutes to the committee's 
ranking member, Darrell Issa, of California, for his opening 
statement.
    Mr. Issa. Thank you, Mr. Chairman. Mr. Chairman, I ask 
unanimous consent that mine and all Members' opening statements 
be placed in the record in their entirety.
    Chairman Towns. Without objection, so ordered.
    Mr. Issa. Mr. Chairman, I will be brief and paraphrase my 
opening statements.
    I join with you in the comment you made in your opening 
statement that we need to empower the stockholders of public 
companies to better manage the package of pay and incentive 
packages of their key executives.
    I also would say that, in 1992, the word ``perverse'' 
perhaps would be based on the efforts by this Congress to rein 
in pay by simply saying compensation for more than $1 million, 
if it is not tied to performance, would be double taxable.
    Although well meaning, clearly what we have done is we have 
created an environment in which a board, acting on behalf of 
their stockholders, is not able to link whatever amount of 
money they would like to pay in a long and perhaps deferred 
compensation way but, rather, begin by saying, for their key 
executives, how do we work around that law? How do we link it 
to performance?
    There is an entire industry that has built up over the last 
almost two decades of people who in fact helped key executives 
get more money into their incentive plans, then proceed to 
advise boards as to whether those plans are reasonable, and the 
upward spiral has continued.
    I would say that we pay, often, more than we need to as 
stockholders for the work done by key executives. But, Mr. 
Chairman, that is not the issue before us today. The issue 
before us today is do the American people have a stake in 
seeing that compensation is limited by these seven companies in 
order to ensure timely repayment of as much or all of what we 
have loaned to these companies as possible.
    Mr. Chairman, I would say that these seven companies are 
very different. Mr. Chairman, AIG will in all likelihood not 
return anywhere close to 100 cents on the dollars to the 
American people. On the other hand, it is likely that Bank of 
America, Goldman Sachs and others quickly returning to the 
money and, in fact, perhaps returning it sooner if we were not 
concerned about the ongoing stability of our economy, would 
soon be likely to return the money and, as such, in my opinion, 
we would no longer have a legitimate right to oversee their pay 
and compensation.
    Notwithstanding that, Mr. Chairman, since this committee 
has had a keen interest for a period of time in executive 
compensation and whether in fact the stockholders are being 
well represented, I would join with you gladly to continue the 
process of looking at whether or not public companies currently 
meet the obligation of ensuring that the compensation is a 
compensation that best is in line with the interest of the 
stockholders and whether or not those stockholders, if fully 
informed, would validate that pay.
    Mr. Chairman, I believe that is the reform that we have an 
ongoing nature for, not necessarily any one person's pay today. 
I look forward to hearing from our witness and our panel to 
follow on whether or not we in fact are making the link between 
the $700 billion TARP and the moneys that have been loaned and 
the American people getting paid back.
    I hope that we all will leave today's hearing realizing 
that if we go too far, we endanger the American people's system 
of capitalism and limited free market that has allowed us to be 
the envy of the world. Yes, we do prevent antitrust; yes, we do 
have rules of the road; and, yes, we do have controls over 
public companies. But, Mr. Chairman, the successes of the past 
in America should not in fact be wiped away because of the sins 
of a few on Wall Street who, perhaps, realizing that bulls and 
bears were both making money, decided to become pigs.
    Mr. Chairman, I yield back the balance of my time.
    [The prepared statement of Hon. Darrell E. Issa follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Towns. Thank you very much. I thank the gentleman 
for his statement.
    Today's hearing will consist of two panels. Our first panel 
witness is Mr. Kenneth R. Feinberg, who serves as the special 
master for TARP Executive Compensation. Mr. Feinberg has just 
completed a report regarding the compensation proposal of the 
25 highest paid employees of the seven recipients of 
exceptional assistance under TARP.
    We welcome, you, Mr. Feinberg, and I want to thank you for 
all your hard work. I can only imagine how difficult it was to 
balance the competing interests. I know you did not make many 
friends with your rulings. I understand that.
    It is committee policy that all witnesses are sworn in, so 
if you would stand and raise your right hand.
    [Witness sworn.]
    Chairman Towns. Let the record reflect that Mr. Feinberg 
responded in the affirmative.
    We generally move forward with the lights on--it starts at 
green and then it goes to yellow and then turns to red--but we 
want you to go without the lights. We are just so anxious and 
eager to hear what you have to say, so why don't you just begin 
and, of course, try to do it within 10 minutes.

   STATEMENT OF KENNETH R. FEINBERG, SPECIAL MASTER FOR TARP 
                     EXECUTIVE COMPENSATION

    Mr. Feinberg. You may regret that, Mr. Chairman.
    First of all, I want to thank you, Mr. Chairman, for 
inviting me, and the ranking minority member for inviting me. 
It is an honor and a privilege to be here today, the first time 
I have addressed a committee here in the Congress on my recent 
report of last week.
    I just want to mention at the outset, Mr. Chairman, I want 
to thank you and the ranking minority member once again for how 
much you helped me 8 years ago, during my administration of the 
9/11 Victim Compensation Fund. The two of you and other members 
of this committee were extraordinarily helpful to me in meeting 
with the families and discussing with them the benefits of the 
9/11 Fund, and I thank both of you really again for your help 
in that regard.
    I now have a new challenge, executive compensation. I 
should say at the outset, one reason that this committee 
hearing room is so crowded is virtually my entire staff is 
here. I don't think anybody is working today at Treasury from 
the Office of the Special Master, and I am grateful for their 
hard work and help.
    For the last 5 months I had a narrow mandate under the law, 
and that was to determine pay compensation packages for the top 
25 officials in just seven companies that received the most 
TARP assistance--Citigroup, AIG, Bank of America, General 
Motors, GMAC, Chrysler, and Chrysler Financial. That is the 
limit of my jurisdiction. I have no authority, no mandatory 
jurisdiction to determine pay for any other than these seven 
companies. And even as to these seven companies, only the top 
25 officials in each of those companies.
    The report, which I have submitted, which is now public, 
and which I have attached to my testimony, is a comprehensive 
report that explains in great detail the method I used and the 
conclusions I reached strictly following the statute passed by 
Congress and the accompanying Treasury regulations.
    In your letter of invitation you raised three questions for 
me to respond to in the course of this testimony, and I will 
summarize my response. My more detailed response is found in my 
written testimony.
    First, you asked what principles guided me in my decisions. 
The principles that guided me were the legal principles laid 
out in the statute and the accompanying regulations--``Mr. 
Special Master, make sure that these companies, as the ranking 
minority member mentioned, make sure these companies stay in 
business with compensation packages that will make them thrive, 
hopefully, and, above all, will help them return to the 
taxpayers the money that was loaned to them initially.''
    But the law also spells out that, in establishing these 
compensation packages, I should consider various other factors: 
one, let's avoid guaranteed contracts, retention payments, 
salaries, bonuses, commissions, long-term severance packages; 
etc.; let's tie, as best we can, compensation to performance; 
let's encourage executive officials to stay on the job and 
continue to work at these companies; let's establish 
compensation packages that will avoid excessive risk taking.
    These were all principles laid out in the statute that 
guided me in my work. And my simple summary answer to the 
principles and the terms and the conditions that I used in 
reaching my conclusions are found in the public law and the 
public regulations, and I did my best to enforce the law and 
the regulations without fear and without favor.
    The second question you asked is how did you go about 
determining the compensation packages; what was the process; 
how did it work; where did you find the companies acceptable, 
where did you find their recommendations flawed.
    I requested and received comprehensive submissions from 
each of the seven companies explaining their view of what they 
thought they needed for their 25 top officials in the way of a 
comprehensive package. I examined those submissions with the 
utmost care and scrutiny, and I concluded that in six of the 
seven submissions the information requested, the compensation 
packages urged on me by these companies were contrary to the 
statute, contrary to the regulations, and contrary to the 
public interest. They were contrary because each of the 
submissions, or six of the seven, wanted too much cash 
guaranteed salary; they wanted stock that would be immediately, 
on the day it is issued, transferrable; they wanted to tie 
their salary and their compensation to vague, ambiguous 
performance standards; they made no mention, or insufficient 
mention, of the perks that were part of their overall salary--
private airfare, golf club dues, country club dues, etc.--and 
they demanded, as part of their submission, that I honor all 
old prior grand-fathered contracts for compensation that were 
entered into with officials long before this law was passed and 
long before I arrived on the scene as the special master.
    So what did we do in this report? We evaluated the 
submissions and then we made some, what I think, material 
changes in the overall program. First, we greatly reduced the 
amount of cash that would be made available to these senior 
officials. We reduced that cash by approximately 90 percent.
    Now, I read with great interest in today's newspaper an 
article that implied or stated that I had actually raised cash 
base salaries with a number of these officials. It all depends 
what you mean by cash base salaries. If somebody is getting 
cash salary, guaranteed last year, of $3 million, and now they 
are getting, under my program, $300,000 in cash, that sounds to 
me like a 90 percent reduction. The article today cited one 
example of a Citi official where the base salary for that 
official, according to the article, was raised by the special 
master to $475,000, an increase of 111 percent. What the 
article does not point out is, last year, that same official 
received from Citi $13 million in cash. And under my report 
that cash was reduced by 98 percent.
    So I am very comfortable in defending my report and saying 
that, overall, one of our primary objectives succeeded in this 
report for these seven companies was to reduce absolute 
guaranteed cash by 90 percent.
    Second, we required, in addition to the cash salaries, that 
when we issue stock in the company that is salarized stock, 
that is part of the salary, that stock may not be cashed out 
for up to 4 years. The stock can be cashed after 2 years one-
third, 3 years another third, and 4 years the last third. We 
want to keep people on the job with a vested interest in the 
company. If you want salarized stock, the value of that stock 
is tied to the performance of the company and the goal--the 
ranking minority member couldn't have said it better--the goal 
is keeping the company moving so that the taxpayers get their 
money back.
    Third, we said no more unlimited perks. No more private 
jets, no more golf club dues, no more country club dues. Perks, 
under the report, are limited to $25,000 per individual. 
Anything more than $25,000 you have to come back to the special 
master for approval and monitoring of those requested excessive 
perks.
    Finally, what did we say with these companies about these 
old grand-fathered contracts that are purportedly in the 
hundreds of millions of dollars? Well, we worked with the seven 
companies. They were very, very cooperative. Very cooperative. 
And in almost every case we worked out a system whereby any 
grand-fathered amounts that were due and owing as compensation 
would be voluntarily rolled over into prospective stock under 
our rules, 4 years before it totally vests, and we removed 
almost all of those grand-fathered valid contracts and got the 
companies to voluntarily agree that it would be ill advised, 
unwise to demand payment on those old contracts. And, instead, 
in almost every case we mutually agreed that those grand-
fathered amounts should be rolled over prospectively into 
future stock with a vested interest in the company.
    That is what we did, spelled out in some detail in the 
report.
    Finally, your letter of invitation, Mr. Chairman, asked me 
to comment on any recommendations I might have going forward in 
dealing with executive compensation. I should remind the 
committee that my first obligation, right now underway, under 
the law is to design a compensation structure for officials 26 
to 100 in each of these seven companies. Right now we are 
actively doing that. By the end of this year we will have 
designed and implemented not individual pay packages for 26 to 
100, but overall compensation structure for employees 26 to 100 
in these seven companies. Then, if the Secretary of the 
Treasury so requests, I will turn my attention immediately in 
January to compensation packages for 2010 for these same seven 
companies and the 25 individuals in 2010 that are covered by 
the statute.
    So those two objectives--26 to 100, 2010--the law spells 
out expressly. Those are part of my ongoing obligations.
    I want to just finally address a point that the ranking 
minority member just made. I do not believe that this law 
should be extended to encompass other companies. The law was 
enacted to deal with the taxpayers of this country as creditors 
of these seven companies, and whatever one might think about 
whether or not it is a good idea or a bad idea for the Federal 
Government to be involved in setting compensation for private 
companies, I suggest that what Congress was stating was that 
this is an exception. These seven companies are owned by the 
taxpayers and the taxpayers, as creditors, are asking these 
companies to rein in compensation and come up with compensation 
packages that will maximize the likelihood, first and foremost, 
that the taxpayers will get their money back; and that is my 
primary objective.
    I do not believe, as the administration has stated 
elsewhere, that we should be micromanaging other companies in 
the private sector. I am hoping that the report that I issued 
and the recommendations that I have made as to these seven 
companies will have some effect, voluntarily, in influencing 
how the private sector goes about establishing compensation 
practices, and one of my objectives is, hopefully, that, with 
my recommendations, other companies on Wall Street and 
elsewhere will take to heart what I have suggested, what is 
mandated for these seven companies, and hopefully the model 
that is created in my report will trickle and expand beyond 
these seven companies.
    But I agree with the minority member that I am perfectly 
comfortable, thank you, limited to these seven companies. That 
is enough work for me and I am hopeful that the committee will 
find my report helpful and useful.
    I am prepared to answer any questions and, frankly, I am 
prepared, in the weeks and months ahead, to work with this 
committee, to consult with the committee as the committee deems 
appropriate.
    Thank you, Mr. Chairman, for this summary.
    [The prepared statement of Mr. Feinberg follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
     
    Chairman Towns. Thank you. Thank you very much for your 
testimony and thank you for the job that you have done.
    Let me begin by asking you do they really get it, the fact 
that the American people are angry about this excessive pay?
    Mr. Feinberg. Well, you will have to ask the seven 
companies. I found that the submissions did not adequately 
address the major concerns expressed by the American people.
    Chairman Towns. How did you deal with the contract 
situation, where a person has a contract which has been signed 
and, of course, now, all of a sudden, you are asking that he 
gives back? What was the reaction to that or how did you handle 
it?
    Mr. Feinberg. The law that was enacted gives me three 
options when it comes to old contracts for compensation that 
were entered into long before this law was passed and my office 
was created. First, I examined the contract to determine 
whether or not, in my independent judgment, I found the 
contract to be valid or not. I want the committee to understand 
that the sanctity of contract under the Constitution is very, 
very important and I was loathe to find contracts invalid when 
they were entered into years ago between officials and the 
company. So there was not a case where I terminated or 
invalidated a contract.
    But that is just the beginning of the inquiry, Mr. 
Chairman. The law then said if I found a contract valid, I 
could, under the law, attempt, with the company and the 
official, to renegotiate that contrary voluntarily. That worked 
very well. With one or two or three exceptions, in every single 
case the company worked with me and my staff in renegotiating 
those old contracts so that they would be turned into stock in 
the company moving forward and would be subject to the same 
rules and restrictions as 2009 salarized stock.
    Then the law said if a company refused to negotiate a valid 
contract--and that was very, very rare--the law permitted me--I 
have to honor that contract, but the law permitted me to take 
that contract amount into consideration in setting 2009 salary, 
and that's what I did in those cases. You want that contract 
enforced? It is a valid contract? The Constitution protects it? 
OK. But I am going to look at the amount of that contract and I 
am going to factor into my prospective 2009, 2010 salaries the 
fact that we had to honor that contract because it wasn't 
renegotiated. And I think we have done that fairly 
successfully.
    Chairman Towns. Thank you very much. This is on AIG. Can 
you do anything to stop AIG from paying nearly $180 million in 
bonuses next year to employees in the very AIG division most 
responsible for the failure of AIG, that is, the Financial 
Products Division?
    Mr. Feinberg. You pose a question which the special master 
will have to address very quickly in 2010, when those allegedly 
guaranteed contracts come up, and we are going to have to see, 
with AIG--and let me just say AIG has been quite cooperative in 
this process. We have met with them numerous times. We will 
have to sit down with AIG in 2010, in a couple months, January, 
and I am admonished by your question, Mr. Chairman, that this 
committee is looking at these contracts, and we will see what 
we can work out with AIG going forward in an effort to satisfy 
the statute, satisfy the regulations, satisfy the American 
people; and I view that as a top priority.
    Chairman Towns. Because you have to recognize people feel 
that if you failed, you should not be rewarded for your 
failure. That is a big issue and that is why the American 
people are so angry because, in many instances, the Government 
is now bailing out people who failed, and they are getting a 
bonus.
    I now yield to the ranking member 5 minutes.
    Mr. Issa. Thank you, Mr. Chairman.
    I want to go through something before I actually wade into 
questions, just because I want to set the tone of this hearing 
so that it not be in any way confrontational.
    Is it fair to say--and I am going to make the assumption it 
is, but I will ask you for confirmation--General Motors was 
bankrupt, Chrysler was bankrupt, and their financial divisions, 
GMAC and so on, not because of the financial crisis; they were 
already in trouble, had a real problem with their cost of doing 
business, etc., and then they were caught up in that last nail 
in the coffin. So four out of your seven companies, it is fair 
to say these are companies that are bankrupt and not even 
directly related to the collapse, but tangentially related to 
the collapse and, as such, are under your purview. Is that fair 
to say?
    Mr. Feinberg. I guess it is fair to say, Congressman. I 
have enough problems focusing on executive comp without 
figuring out exactly what caused the bankruptcies, but I guess 
that the assumption in your question is accurate, yes.
    Mr. Issa. Second, we own those companies because whatever 
amount we took, we took and do not expect to get it all back, 
because we put a lot into them that is not coming back, 
particularly Chrysler, I think, notably.
    Mr. Feinberg. That is correct.
    Mr. Issa. Or Chrysler division of Fiat, however we want to 
put it.
    So I am going to leave those companies alone for a moment 
and I am going to concentrate on the big three.
    AIG. In my opening statement, I said that AIG was unlikely 
to return all of the money. Do you share that with us, that you 
are trying to maximize the return, but without an expectation 
that we are going to, whether we pay them a little or a lot, we 
are not probably going to get $180 billion back?
    Mr. Feinberg. I think that is right, and I think that in 
the submissions that AIG provided us and in our conversations 
with AIG, that is a fair assumption.
    Mr. Issa. OK, so, again, we own 80 percent of AIG; we are 
not likely to get paid it all back. You are managing it on 
behalf of the stockholders, which are the American people.
    OK, we will go to the top two. Citi, it now looks like, was 
really in a lot more trouble than people understood; B of A not 
so much. Fair to say. B of A is likely to return all the money 
over a period of time that is reasonably maybe 3 years or 
whatever; Citi, there is still a little bit of doubt.
    So when you are managing all seven of these, do you manage 
them to maintain the best 25 people to maximize the return to 
the American people?
    Mr. Feinberg. I deal with each of the seven differently, as 
you point out. And you are absolutely right that my primary 
statutory obligation is to set compensation so that the 
taxpayer gets their money back. That is correct.
    Mr. Issa. And now I get into the little bit harder part of 
this. Looking at B of A and AIG, more than half of their top 25 
people have left. Does it concern you that many of those people 
had contracts and they had to balance, OK, I can make nothing 
going forward or I can renegotiate my contract, or I can take 
what I am entitled to and leave? Do you believe that this 
limitation that was put on to your maneuverability led to some 
of those people leaving and has it hurt--it is hard to 
measure--hurt having that question of do we have the best 25 
people to maximize the return to the American people?
    Mr. Feinberg. I can't answer that question because I am not 
sure the vagaries and the various reasons that people leave a 
company. They may have left because they didn't want to be 
under the thumb of the special master. They may have left 
because----
    Mr. Issa. But you are so nice.
    Mr. Feinberg. I am sorry? Well, that is what you say.
    They may have left because they had another job 
opportunity. They may have left because they didn't even want 
the public glare. I don't know the reasons they left, but I 
agree with you, Congressman Issa, that it is of concern, yes.
    Mr. Issa. Well, following up on that concern, because the 
details of the breadth and width of what you can negotiate, 
Ford is doing better and Ford is innovating and Ford is able to 
be sort of the standalone one American company that isn't under 
scrutiny. Are you concerned that they will hire the best and 
the brightest from Chrysler and GM? Similarly, with only Citi, 
AIG, and B and A [Bank of America]--we will leave AIG out, but 
Citi and B of A under your direct control, is it very possible 
that some of these individuals will leave the best for better 
pay and, as a result, yes, we will get people that will work 
for the wages we set, but will we in fact be hurting B of A's 
long-term future on behalf of the stockholders, of which we are 
only a temporary stockholder?
    Mr. Feinberg. Yes. And the statute agrees with you in 
spelling out that one important factor I must consider is the 
retention and attraction of good people to these companies in 
order for them to thrive and repay the American taxpayer.
    Mr. Issa. Mr. Chairman, if I could ask just one quick 
followup.
    If that is the case, should we look at a statute that 
envisions, particularly as to Citi and B of A, a vote of the 
stockholders or some kind of affirmation by the long-term 
stockholders of these companies that in fact they agree with 
the pay packages we are setting as in the best interest? 
Obviously, the board commenting, you commenting, but leave 
something to those stockholders that the chairman and I both 
said we had to further empower into the pay decision?
    Mr. Feinberg. You and other Members of Congress are now 
looking at this whole question of corporate governance, how to 
empower shareholders, independent compensation committees, 
independent consultants on comp. That whole area of corporate 
governance is something that is worthy of consideration by 
Congress, yes.
    Mr. Issa. Thank you.
    Thank you, Mr. Chairman.
    Chairman Towns. Thank you very much.
    I am wondering if Wall Street will curb its excessive bonus 
culture without Government intervention based on what he was 
saying. Do you think that will happen?
    Mr. Feinberg. Again, it is a murky crystal ball, Mr. 
Chairman.
    Chairman Towns. Congressman Clay from Missouri.
    Mr. Clay. Thank you, Mr. Chairman.
    Thank you, Mr. Feinberg, for being here. I applaud your 
diligence in the difficult task that was set before you. 
Reeling in excessive executive compensation is an important 
mission and is of great benefit to our economy and to the 
American taxpayer. I continue to be alarmed by the reported 
trends in executive compensation that expose the 
disproportionate nature of corporate pay packages. According to 
the research, pay to CEOs is at an all-time high at over 400 
times the average worker's pay. How has executive pay grown to 
these extreme amounts and what factors contributed to these 
trends?
    Mr. Feinberg. I am not a historian in terms of the causes 
of the growth. I confronted, under the statute and the 
regulations, clear directives to rein in compensation, while at 
the same time making sure these companies repay the taxpayers. 
Others have written on the various reasons that the gap has 
grown between executive compensation and line workers, and I 
have tried to take that into account in limiting executive comp 
under my mandate.
    Mr. Clay. You know, I have long been concerned about 
guaranteed bonuses. As we have seen with AIG, guaranteed 
bonuses and incentives do not seem to encourage productivity. 
Aren't guaranteed bonuses of any kind inconsistent with 
effective risk management?
    Mr. Feinberg. Well, I think they are. I don't know about of 
any kind; there may be some that haven't crossed my desk. But 
you will find in my report, I think it is fair to say, other 
than base cash salary, a complete rejection of the notion of 
guaranteed compensation. Instead, we tie the overwhelming 
amount of compensation for these executive officials to 
performance, not guarantees, and have worked as best we can to 
eliminate guaranteed payments as part of any compensation 
package.
    Mr. Clay. In order to hold TARP recipients fully 
responsible, is there any possibility of nullifying prior 
payment obligations to executives?
    Mr. Feinberg. Yes. We have been very successful in doing 
that. As I mentioned to the chairman and the ranking minority 
member, in almost every case where we confronted a prior 
guaranteed contract, we were able to negotiate voluntarily with 
the companies and get them to yield on that guaranteed contract 
and, instead, roll that amount into stock going forward over 4 
years tied to performance.
    Mr. Clay. Have any employees or recipients taken legal 
action because of your or because those corporations' actions?
    Mr. Feinberg. No.
    Mr. Clay. No?
    Mr. Feinberg. No.
    Mr. Clay. OK.
    Mr. Feinberg. We are very persuasive.
    Mr. Clay. Have the huge bonuses led to a culture of 
entitlement? In other words, do executives now expect packages 
like this regardless of performance?
    Mr. Feinberg. I think huge guaranteed bonuses undercut 
performance. If you are guaranteed a huge cash salary, or you 
are guaranteed a bonus regardless of performance, or you are 
guaranteed commission payments regardless of sales, I think 
that what we learned is that undercuts the statutory directive 
that we tie compensation more to the overall financial health 
of these seven companies; and that is what we tried to do in 
the report.
    Mr. Clay. Thank you for your response, Mr. Feinberg.
    Mr. Feinberg. Thank you.
    Mr. Clay. Mr. Chairman, I yield back.
    Chairman Towns. Thank you very much.
    I now yield to the gentleman from Indiana, Mr. Burton.
    Mr. Burton. Thank you, Mr. Chairman.
    Here is a quote by an executive from one of the companies, 
he says, ``There is no question people have left because of 
uncertainty of our ability to pay. It is a highly competitive 
market out there.''
    One of the things that concerns me is that you have top 
talent, and you said that you had some people that were making, 
what, $13 million and you cut them down to $350,000 or 
something like that. Why would anybody in their right mind, if 
they are an executive for a company like that, who has the 
talent to manage and run a company, why would they take a pay 
cut from $13 million down to $350,000? And does that damage the 
company?
    Mr. Feinberg. Absolutely it would damage the company, and 
that isn't what we did. What we did is we took--Congressman 
Burton, we took $13 million in guaranteed cash, reduced it to 
$350,000 in guaranteed cash and told that executive we will 
give you $13 million, or $9 million or $8 million--I don't know 
the exact amount--in stock. Now, you have a vested interest in 
that stock. If that stock, over the next 4 years, goes up, you 
may get more than this.
    Mr. Burton. Let me interrupt you, Mr. Feinberg.
    Mr. Feinberg. So we tried to tie it.
    Mr. Burton. Well, if a person has a contract--and I think 
you used the term alleged contracts--if they have a contract 
that guarantees a certain amount of money and you say you want 
them to renegotiate that and pay them $350,000, what would be 
the rationale for them to take the $350,000 and not go ahead 
with the contract and take their money?
    Mr. Feinberg. The rationale would be, A, that they want to 
stay at the company and redeem that stock in value that may be 
even more than $13 million.
    Mr. Burton. Well, I can understand that you believe these 
people have the best interest of the company at heart, and 
probably they do, but when you are talking about that kind of a 
cut and whether or not somebody could get that money 
immediately within the contract, it seems to me that most 
people would take the money and run. And as I said before, this 
quote says very clearly that they said it is a highly 
competitive market out there and they are jumping ship.
    Now, if they jump ship and you don't have top talent 
running these companies, the American taxpayer, who is the 
majority stockholder, has inferior people running the company. 
Doesn't that concern you?
    Mr. Feinberg. It sure does.
    Mr. Burton. So what do you do about that?
    Mr. Feinberg. I think that if you look at the levels of 
total compensation that we established in our determination, we 
think--I made this recommendation, my conclusion--they won't 
jump ship. They won't. I think that----
    Mr. Burton. Well, they already have.
    Mr. Feinberg. Some have before my recommendations.
    Mr. Burton. First of all, I understand you are doing what 
you have been instructed to do, but it doesn't make any sense 
to me, if somebody has a contractual guarantee of a certain 
amount of money, that they are going to take $350,000 and then 
say, OK, I will take it in stock, when you have an economy like 
we have right now and they could take the money and go. And if 
they go to another company, they could make the same amount of 
money or maybe even more than they were making where they are. 
So the top talent, it seems to me, would be encouraged to 
leave.
    Now, the other thing I wanted to ask you is this. Who do 
you answer to when you make these decisions?
    Mr. Feinberg. Under the law, I make these--I have final 
authority, non-appealable. These decisions are mine and mine 
alone. I serve at the discretion of the Secretary of the 
Treasury----
    Mr. Burton. But he doesn't--once you make a decision, you 
don't say to him this is what my recommendation is; the 
decision is final.
    Mr. Feinberg. Under the law as written, the regulations 
afford me final binding authority to issue those 
determinations.
    Mr. Burton. That is a Treasury regulation, it is not a law, 
is it not?
    Mr. Feinberg. That is the Treasury regulation that evolve 
out of the statute, yes.
    Mr. Burton. But the point is, as far as accountability is 
concerned--and I am not inferring that you are not doing a good 
job, I am just saying that you really don't answer to anybody.
    Mr. Feinberg. Well, I answer to this committee and other 
committees with oversight functions.
    Mr. Burton. Well, come on, let's be straight about this. 
You are the czar; you make the decision, that is it, right?
    Mr. Feinberg. Under the law, I make the decision.
    Mr. Burton. OK. So if these people leave these companies 
because they are not being compensated as was in the contract--
and I am not saying they didn't make too much money and they 
were accountable and didn't do their job properly, I am just 
saying when you need top talent to run a company like General 
Motors or Chrysler or AIG, you want people there that can 
really do the job. Now, they may not have done their job right 
in the past, but they may have the knowledge and the talent to 
do the job. And you are saying to them, here, we are going to 
renegotiate your contract, and you take $350,000 and we will 
extend it and give you stock for the $13 million that you were 
going to get; and they say, hey, the heck with that, I want my 
money and I am going to leave. So you have people that don't 
have the knowledge and the competence to run that company, so 
the stockholders, the American people, are in danger of seeing 
their money, the TARP money, going down the tubes because the 
company doesn't respond.
    Mr. Feinberg. My response to you, Congressman, is this. I 
have tried my best in this report to implement that statutory 
directive that they stay on the job and that the taxpayer get 
his money back. I will defend these recommendations.
    Now, you may say, if I were doing your job, I would have a 
different level of compensation or do it differently. Fine. I 
did the best I could to try and maximize the very objective you 
are stating, which is keep these people on the job, and I think 
we have done that.
    Mr. Burton. Mr. Chairman, may I have one final question, 
please?
    Chairman Towns. I would be delighted to yield to the 
gentleman an additional minute.
    Mr. Burton. The Federal Reserve issued guidelines under 
which the Fed would review, if necessary, amend, or reject the 
compensation policies of all banks regulated by the Fed. Are 
you familiar with that?
    Mr. Feinberg. That just came out last week, yes.
    Mr. Burton. That really concerns me because what we are 
talking about is you or somebody going beyond where you are 
right now and regulating people that did not get TARP money 
simply because they are regulated by the Fed. What do you think 
about that?
    Mr. Feinberg. Congressman, my limit, what I am doing to 
these seven, and only these seven companies--what the Federal 
Reserve is proposing or whatever is not on my watch and you 
will have to ask the Federal Reserve about the scope of those 
regulations.
    Mr. Burton. Thank you, Mr. Chairman.
    Mr. Feinberg. Thank you.
    Chairman Towns. Thank you very much.
    I now yield 5 minutes to the gentlewoman from Ohio, Ms. 
Marcy Kaptur.
    Ms. Kaptur. Thank you, Mr. Chairman, very much.
    Mr. Feinberg, thank you for coming today. From whom did you 
receive the first call suggesting you be appointed to your 
present position?
    Mr. Feinberg. I received the first call from the Deputy 
Secretary of the Treasury, Neal Wolin.
    Ms. Kaptur. All right. And who else did you hear from prior 
to your appointment?
    Mr. Feinberg. The only other person is the Secretary of the 
Treasury.
    Ms. Kaptur. And approximately when did those calls happen, 
earlier this year?
    Mr. Feinberg. I am sorry?
    Ms. Kaptur. When did those calls happen, earlier this year?
    Mr. Feinberg. Yes, I think about 5 or 6 months ago.
    Ms. Kaptur. All right. Is your Federal position classified 
as Schedule C or are you classified as Civil Service or some 
other category?
    Mr. Feinberg. Special Government Employee.
    Ms. Kaptur. Special Government Employee?
    Mr. Feinberg. Yes.
    Ms. Kaptur. Does that mean you have a special contract with 
the Treasury?
    Mr. Feinberg. I believe that is the case.
    Ms. Kaptur. All right. And that is a matter of public 
record?
    Mr. Feinberg. Yes, it is.
    Ms. Kaptur. Thank you. For whom did you work prior to your 
current position?
    Mr. Feinberg. I was in a private law firm in private 
practice.
    Ms. Kaptur. OK. And could you state the name of that firm 
for the record?
    Mr. Feinberg. Yes. The name of the firm is Feinberg Rosen, 
LLP.
    Ms. Kaptur. All right. And where are they located?
    Mr. Feinberg. Washington, DC and New York City.
    Ms. Kaptur. New York City. Where is their principal 
headquarters?
    Mr. Feinberg. Washington, DC.
    Ms. Kaptur. Do you have any relationship with that firm 
now?
    Mr. Feinberg. Yes.
    Ms. Kaptur. All right. Could you state the relationship 
with that firm?
    Mr. Feinberg. I am the founding partner of the firm.
    Ms. Kaptur. You are a founding partner.
    Mr. Feinberg. Yes.
    Ms. Kaptur. Is it true that three of the institutions whose 
compensation you are supervising are or have been clients of 
that firm, including Citigroup, CitiBank, AIG, and Bank of 
America with the acquisition of Merrill Lynch?
    Mr. Feinberg. No, that is not true.
    Ms. Kaptur. That is not true.
    Mr. Feinberg. No.
    Ms. Kaptur. It has been reported in the press that is 
actually the case, so the client list----
    Mr. Feinberg. It may be reported in the press. It is not 
true.
    Ms. Kaptur. It is not true. Are any of the institutions 
under your purview, have they been clients of that company?
    Mr. Feinberg. No.
    Ms. Kaptur. They have not. All right. Let me ask you, you 
stated that it is a good idea to tie the stock opportunities 
for employees of these companies to a 4-year term, all right? 
And you said it pays out a third in what year?
    Mr. Feinberg. A third after 2 years, a third after 3 years, 
and a third after 4 years.
    Ms. Kaptur. All right. You know, that doesn't sound very 
long-term to me. How did you arrive at 4 years?
    Mr. Feinberg. Well, it is a very difficult question. We 
concluded that asking individuals to delay the payment of their 
salary beyond a 4th year would simply work too much of a 
hardship, that is a problem of keeping them on the job and 
trying to get the taxpayers' money back. We concluded that a 4-
year payout of salary was a fair limitation.
    Now, what we also did, Congresswoman, which is implicit in 
your question, we also required that any additional stock that 
might be issued to these officials would not vest for at least 
3 years and would not be redeemable at all until TARP loan 
money was repaid to the taxpayer. So that was the balance we 
struck.
    Ms. Kaptur. I guess I just find it surprising. If you look 
at a 2-year time horizon, a 3-year time horizon, a 4-year time 
horizon, the way I look at the world, that isn't a very long 
time at all.
    Mr. Feinberg. Well, it may not be a long time--I guess it 
is relative--but our concern was that if we are reducing 
compensation for these officials across the board by about 50 
percent, and we are obligated to keep these companies in 
business to repay loan taxpayer money, that asking these 
officials to wait more than 4 years to redeem their salarized 
stock was simply too onerous. Now, maybe it should have been 5 
years or 6 years. We thought 4 years was a pretty good 
compromise.
    Ms. Kaptur. On the outer edge, but on the inner edge it is 
2 years. You were quoted in the New York Times, October 23rd, 
stating anybody making $100 million a year is engaged in 
excessive risk. You approved compensation packages worth $9 
million or more for six executives, including one at AIG, two 
at Bank of America, and three at Citigroup. That $9 million is 
23 times as much as the pay for the President of the United 
States, 46 times the pay for the Fed Chair and Treasury 
Secretary, and more than 50 times as much as a military 
general. How did you determine that amount was not contrary to 
the public interest?
    Mr. Feinberg. Well, we did it in a number of ways. First, 
we gathered all the data we could gather and examined the data 
as to what constitute competitive marketplace compensation. 
Then what we did is we made sure that $9 million or $8 million 
was not guaranteed compensation. The cash component of that $9 
million is likely to be $500,000 or less. The rest of it, as 
Congressman Burton pointed out, the rest of it is tied to stock 
which cannot be redeemed at once, has to be held 2, 3, 4 years; 
and a big chunk of that compensation cannot be redeemed by the 
official until and unless TARP money is repaid to the taxpayer.
    So it may be $9 million in theory, but in practice, we 
believe, it will be a lot less than that.
    Chairman Towns. The gentlewoman's time has expired.
    Ms. Kaptur. Thank you, Mr. Chairman. I would like to place 
in the record information we have about the clients of the 
gentleman's law firm and would appreciate response. Thank you 
so very much.
    Chairman Towns. Without objection.
    The gentleman from Indiana, Mr. Souder.
    Mr. Souder. Thank you, Mr. Chairman.
    I am sure it doesn't shock Mr. Feinberg that some of us on 
the Republican side, as outraged as we are about the salaries, 
as outraged as we are about the corruption and the crisis that 
was triggered by greed, that we have deep uncomfortability 
about the Government, in effect, taking over a majority of 
these companies or having somebody setting their salaries.
    I will say the word czar does fit you, and you seem to fit 
comfortably in the word czar, as we have debated, because if 
you don't have anybody directly that you are reporting to and 
you are explaining how you make these decisions, but it is 
still a little scary, as an elected official or as people 
watching in the country, to see one person with this much power 
over major institutions in our society; and the challenges to 
how you are making decisions, who are you are talking to, why 
aren't you reporting to any elected official directly in the 
Treasury Department or the President is not a good precedent 
for a democracy.
    Now, let me ask you a fundamental question. AIG we talk 
about like it is one company. In reality, it is 80 financial 
and 120 insurance, or the other way around. Did you separate 
out in this top 25 those who--and not all divisions were bad. 
Did you separate out which divisions actually caused the 
problem?
    Same at Bank of America. Bank of America and Citibank had 
traditional banking things that were regulated, and their 
compensation might have been fair inside that industry, but 
they had these non-bank rogue divisions that went crazy. Are 
you doing all 25 evaluations as if it is one institution, 
rather than, in fact, separate institutions, some of which 
clearly caused the problem and some of which didn't because of 
incompetent management?
    Mr. Feinberg. Under the law, I am looking at the top 25 
compensated individuals at AIG as the parent. In other words, I 
am not looking at 7 people at this unit and 5 people at that 
unit in determining the top 25. That was really submitted to us 
by the company itself under the law, and we worked from that.
    Mr. Souder. In other words, my question is, then, Congress 
didn't separate, we blended them all together.
    Now, let me go back, because what the American people are 
frustrated with was that we had--and I voted for TARP every 
time it has come up, OK, because I believe our country was 
going to collapse because some of these people didn't look at 
basic--you know, the economy is growing at 16 percent over 4 
years; housing is going up at 200 percent. What kind of 
incompetent person can't figure out that people may, for 
example, be self-reporting income? How in the world nobody 
looked at the risk of securitization? Why didn't they ask, in 
the bonding companies that we have had in here, the rating 
companies, why didn't anybody at these different companies say, 
hey, isn't it strange that these companies are getting AAA for 
selling us bad credit? Why were they only checking 10 to 20 
percent and then paying bonuses if you cleared these?
    The question I have is are we aimed at the wrong thing? Why 
are we looking at compensation here, rather than do you think 
we could have looked at--because one of the questions, oh, we 
have to pay these people this or they will go to another 
company. What about stigma here, that you were incompetent? 
Wouldn't we have been better off analyzing what actually went 
wrong in these companies, finding out which managers were 
clearing it, holding them accountable by whether they performed 
their basic duty or whether they looked the other way to get 
profit in their company in an effect through investigations 
whether it was a violation of the law or incompetence, putting 
a stigma on them and all of a sudden pay would have been 
different?
    The problem in an oligopolistic situation right now is we 
don't have pure capitalism working. The bonding companies 
didn't work like capitalism is supposed to work. The 
stockholders and the boards weren't paying enough attention. In 
an investigation here, isn't the real problem not the 
compensation, but the people who did crummy jobs aren't being 
singled out? Wink wink. The next tier of management wink 
winked, and you are treating Bank of America and Citibank and 
AIG, those who participated in this huge coverup and 
incompetence, the same as those who were running the 
traditional banking part, and they are all part of the parent?
    Mr. Feinberg. Congressman, I can only say, in response to 
your----
    Mr. Souder. I asked your opinion, now, not just what you 
are required to by law.
    Mr. Feinberg. Well, but, I mean, I think that is a fair 
answer. I am confronted with a statute and some regulations, 
and I am asked to very expressly and explicitly deal with what 
Congress has asked me to deal with. You are raising some very 
good questions, but----
    Mr. Souder. I am asking you. You are inside now. You are 
looking at these. You have to be measuring these different 
execs, and one of them maximized his return and in fact could 
go over to Chase or somebody. If you are trying to keep him 
there, don't you look at whether they were competent in their 
area?
    In other words, if you adjusted some of their pay by 
whether or not they were over an area that unbelievably 
rewarded people who were behind in their mortgages as more 
value and securitization than people who were paying, now, that 
is some kind of stupidity. No risk management. Yet, you are 
analyzing and people--isn't that one of the valuables even 
under statute that would measure whether or not they are 
employable?
    Mr. Feinberg. I think, to the extent that you are asking do 
we also look at the importance of the role of the individual, 
how long they had been at the company, what capacity they 
served, yes, we do look at that.
    Mr. Souder. Did they handle these toxic things and 
overlook?
    Mr. Feinberg. I also think, if I may, Congressman, 
implicitly, you are raising a very important question raised 
earlier, which is the extent to which, quite apart from my 
compensation decisions, what about corporate governance reform 
designed to rein in the discretion of some of these officials, 
and that is a subject which is, of course, worthy and is now 
being considered by Congress.
    Chairman Towns. The gentleman from Texas, Mr. Cuellar.
    Mr. Cuellar. Thank you, Mr. Chairman.
    Thank you, Mr. Feinberg, for being here with us. I 
understand you have a very difficult job and I appreciate it.
    I guess if I can look at the scenario, this is what the 
scenario is. You have companies that have received TARP 
dollars, companies that have not received TARP dollars, and, of 
course, you have the regulators also, the Federal regulators; 
and I guess the basic premise is if you received Federal 
dollars, therefore, we can dwell into your compensation, 
regardless of your performance or not. And if you have not 
received Federal TARP dollars, we are not going to get into the 
free market forces. Is that pretty much?
    Mr. Feinberg. Correct.
    Mr. Cuellar. OK. Now, we talked about compensation, and I 
think in the past, when AIG took off all those conferences that 
they went off and there was an outrage from the public saying 
why are they going to those conferences and meeting in those 
luxurious resorts, people were saying you have to watch how you 
spend those dollars. Do you remember that?
    Mr. Feinberg. Yes, I remember that.
    Mr. Cuellar. All right. So I guess one of the things we 
have to look at as legislators is sometimes the public looks at 
perception, saying if you all are the regulators, then you have 
to watch what you do also. And I am just reading something that 
just came out in the Washington Post, I believe it was on 
October 19th. The Fed chairman, Ben Bernanke, and I think 
several of his employees went to an October 19th San Francisco 
Fed conference on Asian and global financial situations. They 
went and they traveled to the Bacara Resort & Spa near Santa 
Barbara, CA, I guess. Some of those suites go up to $2,000 a 
night, and you can go on and on and on and on and on.
    I think out of the 100 participants there, I believe one-
third of the participants there were Federal employees. Now, 
whether they got good discounts on the hotel rooms, it was not 
during the season, I guess--and I know that is not under your 
watch and I don't mean to put you on this, but I guess that is 
one of the things we have to be very, very careful, because if 
you have TARP, non-TARP entities, and then you have the Federal 
regulators saying you have to watch what you do and spend the 
money, we just have to be very careful how we regulate.
    Any comments, without you going----
    Mr. Feinberg. I completely agree with your comment about 
being careful. I assure you that the Office of the Special 
Master is very, very cognizant of your concern about image and 
how it looks with the regulators. I can't speak for the Federal 
Reserve, but I can tell you that our office is very cognizant 
of that concern about perks and excessive compensation, travel 
allowances, etc.
    Mr. Cuellar. Thank you very much.
    Mr. Feinberg. Thank you.
    Chairman Towns. I now yield 5 minutes to the gentleman from 
North Carolina, Mr. McHenry.
    Mr. McHenry. Thank you, Mr. Chairman.
    Thank you, Mr. Feinberg, for your testimony. I appreciate 
how candid you are. I was saying to a colleague that your 
extreme confidence is necessary with the extreme job that you 
have. But I also appreciate your just being frank with us. That 
is what we need.
    Now, I just want to touch on a couple things quickly and I 
have some other questions. You report to the Secretary of the 
Treasury, he is your boss, is that correct?
    Mr. Feinberg. Correct.
    Mr. McHenry. How often do you meet with Secretary Geithner?
    Mr. Feinberg. I have met with the Secretary probably three 
or four times in the last 5 months.
    Mr. McHenry. In the last how many months?
    Mr. Feinberg. Five months.
    Mr. McHenry. Five months. OK. So every other month, 
roughly. OK. And in terms of this discussion about cash, in 
your testimony you discuss cash, and when people hear that and 
when I read the Wall Street Journal story, I think that the 
language differential here is important, the distinction. You 
are talking about cash as your monthly salary or weekly salary, 
however they pay, and then if you get a cash bonus at the end 
of the year, that is your cash package, correct?
    Mr. Feinberg. Correct.
    Mr. McHenry. OK. Now, the Wall Street Journal story that 
you reference in your opening statement says that you raised 
the base pay for 89 individuals; you cut it for a couple 
others; you left it the same for others. That is their base 
salary that they receive monthly, is that correct?
    Mr. Feinberg. That is what the Wall Street Journal says. My 
definition of base salary is quite different. My definition of 
base salary is not only what you get twice a month, but also 
draws that may be provided you over the course of the year, 
guaranteed commissions, guaranteed bonuses. The example, 
Congressman, that the news article referred to said that in one 
case with Citibank I had raised the base salary by 111 percent, 
to $475,000. I pointed out earlier to the committee that the 
total cash that official received last year was $13 million, 
and I reduced it by 98 percent.
    Mr. McHenry. And that $13 million figure is not any stock 
awards.
    Mr. Feinberg. That was cash.
    Mr. McHenry. That was cash.
    Mr. Feinberg. Cash.
    Mr. McHenry. OK. All right. I just want to understand this 
distinction because I read in the Wall Street Journal and then 
I hear your testimony, which is different, and I just want to 
understand. You are talking about that twice a month. Their 
comparison here is the twice a month pay or monthly pay to what 
you are now setting as their monthly pay.
    Mr. Feinberg. I guess that is right. It is unclear to me in 
that story what they mean.
    Mr. McHenry. OK. So what you are looking at is you would up 
that base guarantee in that factor, but the rest you are having 
with stock. Now----
    Mr. Feinberg. I am also eliminating all cash guarantees, 
like bonuses guaranteed regardless of performance, like 
commissions guaranteed regardless of sales, like any other type 
of cash guarantee. Those are completely eliminated under my 
program.
    Mr. McHenry. OK, I want to discuss a larger issue here. Do 
you use compensation consultants within your office?
    Mr. Feinberg. In the Office of the Special Master? Yes.
    Mr. McHenry. OK. Are these compensation consultants that 
have other clients?
    Mr. Feinberg. No. No, they may have clients that I am not 
aware of. They are both academics.
    Mr. McHenry. Both academics. OK. All right. Now, in terms 
of compensation consultants, there has been a lot of discussion 
about this, but I think there is another piece here, which is 
the tax ramifications for salary and bonuses. Have you 
encountered this as a challenge in dealing with these 
institutions?
    Mr. Feinberg. We certainly have.
    Mr. McHenry. Can you discuss--because we are in Congress 
here; we set the tax rules. What can we do to make the tax code 
more effective so that executives' actions are tied to 
shareholders' interests?
    Mr. Feinberg. Well, that is a complicated question about 
the tax code. I would have to get back to you on that. I can 
tell you that you are absolutely right, Congressman, that we 
run into these problems every day in establishing deferred 
compensation. You know, it may vest today under the law, but it 
is not redeemable for 2 years, 3 years, 4 years, what are the 
tax consequences of this. We have run into that problem and I 
would be glad to get back to you and lay out some of the tax 
issues that have arisen in the course of my 5 months on the 
job.
    Mr. McHenry. I would certainly appreciate that.
    Mr. Feinberg. I will.
    Mr. McHenry. Finally, the number of 25. I find it 
arbitrary. Do you find it arbitrary?
    Mr. Feinberg. Of course it is arbitrary.
    Mr. McHenry. Have you encountered this as a problem, where 
you have two executives, one makes marginally more than the 
other; one is the No. 26th executive, the other is the No. 
25th; and then perhaps you have a class of people that are very 
similar to the 20th or 25th executive that fall under your 
purview? Have you seen anything currently that you have 26th 
executive making more than the people that you have just given 
new rules to?
    Mr. Feinberg. No, we haven't seen that yet. Of course, we 
haven't got to the new top 25 in 2010, which may vary. We 
haven't seen the problem yet of the difference between No. 25 
and No. 26. What we are seeing is the arbitrariness of 26 to 
100 when the 100th person is cutoff at 100 and there may be 
hundreds or thousands of employees at 101 and 102 and 1,000 and 
5,000 and 10,000 that are subject to the same compensation 
structure. So we are running into that problem a little bit, 
but hopefully we will be able to come up with a program that 
will take that into account.
    Chairman Towns. The gentleman's time has expired.
    Mr. McHenry. Thank you for your testimony.
    Mr. Chairman, if I may submit for the record a question I 
have about contracting out services that are not under your 
purview as well.
    Chairman Towns. Without objection, so ordered.
    I now recognize the gentleman from Vermont, Mr. Welch.
    Mr. Welch. Thank you, Mr. Chairman. Thank you very much.
    Mr. Feinberg, I thank you and I thank your staff for their 
tremendous work that you have been doing. I think we all really 
appreciate it. I have questions in two areas, but first a brief 
statement.
    Trying to figure out what is the ``right level of 
compensation'' ultimately is an arbitrary decision, but there 
has been a premise in corporate America that the more you are 
paid, the more you are worth. Disgraced and incompetent 
executives who walked away with hundreds of millions of 
dollars, Stanley O'Neal, Richard Fuld, the list goes on, have 
proven that to be wrong. And I think the two concerns that we 
have here in Congress are, one, what compensation practices are 
going to drive a constructive business model so that bankers 
make money by lending rather than ripping folks off in kite 
schemes like subprime mortgages; and then, No. 2, with respect 
to the taxpayer bailout, which was presented to us as something 
that had to be done even if we didn't want to do it, how can we 
get some of that money back for the American taxpayer?
    And this isn't in your purview, but it is a question I want 
to ask because you probably have more practical experience on 
this than anyone in America, certainly more than any of us on 
the committee. Among the TARP recipients was Goldman Sachs. 
They have since paid that money back with interest. And Goldman 
Sachs is good at what it does and it is now on track to have 
another year of record profits and likely to award bonuses in 
the range of $21 billion to $23 billion to its employees. Part 
of their bottom line profit came from part of the taxpayer 
payment to AIG, which totaled over $100 billion. AIG took the 
taxpayer money and wrote a $12.9 billion check to Goldman to 
cover collateralized debt obligations and some of these exotic 
instruments that were in jeopardy because of the collapse of 
AIG.
    Do you have an opinion as to whether or not Goldman Sachs 
should repay taxpayers that $12.9 billion before it awards $23 
billion in bonuses to its employees?
    Mr. Feinberg. Congressman, I don't have an opinion. I have 
read that story, just as others have. I have enough difficulty 
focusing on the seven companies that are on my watch. And 
whether or not Goldman should either voluntarily or by force of 
Congress, congressional directive, repay----
    Mr. Welch. Let me ask you this. I understand you have a 
limited purview, and I can't tell you that nobody is listening 
and it is just between us, but I know that one of your concerns 
is taxpayer fairness; and, again, that is in the eye of the 
beholder, but it is a fairness standard.
    One of the things that we have learned in this entire 
catastrophe of the financial meltdown is that most of the 
things that were done that are truly outrageous and harmful to 
taxpayers and our economy were all legal. Legal but not fair 
and not right. And if we are going to restore some sense of 
fairness that the American taxpayer needs, do you think that we 
have to address such transfers where the goal of the taxpayer 
bailout was to revive the financial system, but not to reward 
any individual firm?
    Mr. Feinberg. Yes. I am hopeful that the model that we have 
developed for the seven companies that is in this report--and 
executive compensation is not the answer to all of these 
problems, but to the extent that executive compensation has a 
role to play going forward in improving the economy and 
promoting fairness, I would like to think that the 
recommendations we have made in this report might be adopted 
voluntarily by other companies on Wall Street and might be seen 
as one step among many that can be taken to deal with the 
overall problem.
    Mr. Welch. OK, thank you.
    I yield back.
    Thank you, Mr. Feinberg.
    Chairman Towns. Thank you very much.
    I now yield to the gentleman from California, Congressman 
Bilbray.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Mr. Feinberg, I guess with my wife on the other side of the 
continent, I spent some quality time with Publius Hamilton and 
the Federal papers last night, and I am just thinking of what 
our Founding Fathers must be thinking watching the entire 
process that we are talking about today, the concept of the 
Federal Government is actually looking at these kinds of 
private sector jurisdictions that have changed.
    And I think, rightfully so, we should be looking at it. I 
think one of the greatest things when you read the Federal 
papers is the concept of rights and responsibilities go 
together, and when the taxpayer was required to take on 
responsibilities, those rights obviously start following, and I 
appreciate your working on this part of it, breaking very new 
ground. Let's just hope it is not ground that we have to cover 
ever again in the future, and let's work on that.
    I think that your comment about the regulation that we are 
considering, one of the concerns I see is basically continuing 
the process of the Federal Government deciding salary rather 
than empowering stockholders, who are actually the ones who 
bear the financial responsibility and should have it. Wouldn't 
you agree that is the vehicle that we probably should be 
looking at, is those who pay play and determine who get----
    Mr. Feinberg. I think that is right. As I said earlier, the 
asterisk to that general view, which I share, is that at least 
as to these seven companies, Congress spoke and said that since 
the taxpayer is the primary creditor of these seven companies 
who received the most TARP assistance, as to these seven, and 
only these seven, there should be more monitoring and 
determination of pay.
    Mr. Bilbray. Because rights and responsibilities--the 
fiscal responsibility leads the right to be able to intervene. 
What worries some of us is that we are starting to see this as 
being an excuse to intervene in other companies where the 
responsibility has not been taken over but the right is being 
proposed to be preempted.
    Mr. Feinberg. I can't speak for the Federal Reserve or 
others. I know that I have publicly and again today expressed 
the view that my jurisdiction should not be extended beyond 
these seven companies, and only as long as they still owe the 
taxpayers money.
    Mr. Bilbray. And I appreciate that. How many members of 
your team were drawn from your private law firm?
    Mr. Feinberg. I think myself and two others.
    Mr. Bilbray. Would you mind naming them?
    Mr. Feinberg. Ms. Camille Biros, who is sitting right here, 
and Ms. Jacqueline Zins, who is also sitting next to Ms. Biros.
    Mr. Bilbray. OK.
    Mr. Feinberg. The rest are all Treasury officials.
    Mr. Bilbray. OK. All the rest of them are Treasury.
    Mr. Feinberg. Yes, I believe so.
    Mr. Bilbray. Do you have the names of the Treasury 
officials?
    Mr. Feinberg. They are all here; I can get you those names, 
yes.
    Mr. Bilbray. OK. Appreciate that.
    Now, there are a lot of reports going around, but the 
latest is, according to those reports, your team includes 
academic consultants.
    Mr. Feinberg. Two, Professor Lucian Bebchuk from Harvard 
and Professor Kevin Murphy from the University of Southern 
California.
    Mr. Bilbray. I appreciate that. And that is the kind of 
clarity I think that President Obama really wanted to set as a 
new example, rightfully so, pointing out the previous 
administrations have not been as transparent as we hope; and 
that creates concerns that really so many times just don't need 
to be there.
    At this time, will you provide to the members of this 
committee the names and the subjects and the venues of all the 
individuals that you rely on to work out this issue?
    Mr. Feinberg. I would be glad to do that. I can tell you 
right now, summarily, there are the two academics at Harvard 
and Southern Cal, and there are the people here at Treasury 
with two others from my law firm, and that is about it, about 
15 people. But I will get you the information and, in 
transparency, lay it out to you and let you have all that 
information.
    Mr. Bilbray. Thank you very much. That is how we avoid all 
of the he says/she says or we hear reports and we don't have 
it. Thank you very much.
    Mr. Issa. Would the gentleman yield?
    Mr. Bilbray. I yield to the gentleman from California.
    Mr. Issa. Being an old employer, I couldn't resist asking 
one question. You have had more than half of the key 25 of AIG 
and B of A depart. How many outside individuals under similar 
pay to the people that you are losing did you hire? In other 
words, not from within, not people that are already No. 26 or 
28, but how many new outside people have entered the ranks of 
the top 25 of those two companies under the conditions you are 
willing not pay?
    Mr. Feinberg. I don't know the answer to that, Congressman. 
It is a fair question and I will try to get you that answer.
    Mr. Issa. If you would get back to us on that.
    Additionally, Madam Chair, I would like to enter 
Bloomberg.com's article into the record at this time because it 
has been brought, and then just ask one closing question, which 
is if the credit default swaps had not been paid at full value, 
but at 60 cents on the dollar, which was the negotiated amount, 
wouldn't that amount that wouldn't have gone to Goldman Sachs 
and other companies, wouldn't that have been greater than all 
of the executive compensation that you are going to handle over 
your tenure?
    Mr. Feinberg. I am not sure, but I----
    Mr. Issa. By a magnitude of many?
    Mr. Feinberg. I am not sure, but I will assume, based on 
the ranking minority member's question that the answer is a 
definitive yes.
    Mr. Issa. Thank you.
    Thank you, Madam Chair. I yield back.
    Mr. Bilbray. I yield back.
    Mrs. Maloney [presiding]. Thank you very much.
    Mr. Foster is recognized for 5 minutes.
    Mr. Foster. Thank you, Master Feinberg, for appearing 
today. I really appreciate it.
    The first question I have is sort of technical. When you 
attempt to align compensation incentives with long-term company 
performance using stock that has to be held over time or vests 
over time, do you encounter problems in preventing employees 
from simply hedging against a possible decline in the stock 
value?
    Mr. Feinberg. Prohibited by our rules and regulations. Very 
good question.
    Mr. Foster. And who enforces this, especially for former 
employees that are holding the stock that is going to vest over 
time?
    Mr. Feinberg. I would guess with any of our final 
compensation determinations, if there is a violation, I would 
assume that would be referred to the Department of Justice.
    Mr. Foster. OK, but do they have to report? If you leave 
the firm and then, you know, for the next several years you 
have to go and file some piece of paper that says I have not 
taken a hedging position in some offshore derivative market 
that you don't know about?
    Mr. Feinberg. I think we would monitor that and be required 
to do that, yes.
    Mr. Foster. OK, so there are financial statements that have 
to be filed----
    Mr. Feinberg. I think so.
    Mr. Foster [continuing]. Years after you are terminated. 
OK. And your staff is at least not shaking their head. OK.
    All right, so now----
    Mr. Feinberg. I may get corrected in the next hour, and, if 
so, I will let you know.
    Mr. Foster. OK, thank you. Now, down the hall in the 
Financial Services Committee, that I also serve on, we have 
broader concerns about the compensation structures for 
systemically important firms, and not just TARP recipients. So 
based on your experience in dealing with the corporate culture 
and so on, I was wondering if I could have your reaction, in 
writing if you are not comfortable doing it now, to two 
possible structural changes in compensation that might help 
going forward in systemically important firms.
    The first one is the requirement of periodic stress tests 
for systemically important firms with negative implications for 
executive compensation in the case that the stress test didn't 
come out well. So that if you are seen to be operating a 
company that will not withstand a 20 percent decline in asset 
values, or whatever the stress test would be based on, that 
actually that would have a negative implication for the bonuses 
this year. So that is suggestion one.
    Suggestion two is that, as you probably are aware, the 
administration or the Treasury and the Financial Services 
Committee staff jointly proposed industry-wide assessment into 
an FDIC-like insurance fund, and it would be post-funded so 
that this would be after--if a too-big-to-fail firm failed, the 
whole industry or at least firms above, I believe, $10 billion 
in assets effectively have to pay into this fund to cover the 
losses. And I was wondering if you have a reaction, or could 
provide one, against making that assessment not only against 
the firms themselves, but against the highly compensated 
individuals, perhaps even using a clawback provision.
    Mr. Feinberg. Again, those are questions I will get back to 
you. Those corporate governance questions are very important. 
They are all part of the total determination of what 
constitutes credible compensation. To the extent that over the 
next few months we are dealing in designing compensation 
structures for employees 26 to 100, which is on my watch, it is 
suggestions such as yours, Congressman, that we should take a 
look at. I don't know if it should be part of my report or be 
part of the broader corporate governance reform effort that is 
underway. But clearly those are suggestions that ought to be 
considered, yes.
    Mr. Foster. So what I am looking for is a response of you 
personally, not as special master, because you have been on the 
front lines of this, you have dealt with the corporate culture, 
you have seen what makes people jump and what makes them shrug, 
and that is what we have to understand.
    Mr. Feinberg. I will honor your request and get back to 
you, then, as a layman, as a private citizen.
    Mr. Foster. Thanks very much.
    Mr. Feinberg. Thank you.
    Mr. Foster. With that, I yield back.
    Mrs. Maloney. Thank you.
    Mr. Jordan from Ohio.
    Mr. Jordan. I thank the Chair.
    And I apologize, I was over on the floor handling a few 
suspensions for this committee, so if I ask some things that 
have already been asked, bear with me, if you would.
    Mr. Feinberg, we appreciate your being here, and your staff 
as well.
    In some of your responses to Congressman Bilbray you talked 
about the independence of your place. Was there any 
coordination last week when your findings came out along with 
what the Fed is planning to do? And as I read what the Fed is 
planning to do, I think about Security National Bank in Urbana, 
OH. It looks like the president there could be, in fact, 
potentially having the Government look at his or her 
compensation. So was there any coordination or is it just the 
luck of the way the world works that they happened to come out 
the same day?
    Mr. Feinberg. We have been--it was the luck that it came 
out the same day, frankly. We have coordinated with the Federal 
Reserve in terms of keeping each other apprised of what I am 
doing. We had no input that I am aware of, none, in terms of 
what the Federal Reserve released last week in terms of the 
content of its proscriptions.
    Mr. Jordan. So not relevant to content, but relative to 
timing there was----
    Mr. Feinberg. No, no. As a matter of fact, we did not. I 
had no contact with the Federal Reserve concerning the timing 
of their release, no.
    Mr. Jordan. Complete coincidence that those two came out 
the same day.
    Mr. Feinberg. All I can tell you, Congressman, is that 
there was no coordination and no communication in that regard.
    Mr. Jordan. All right. Again, sort of picking up where 
Congressman Bilbray was, in the big picture sense, are you 
troubled--you know, you think about car czar, pay czar, TARP 
program, energy czar, stimulus package, bailouts for the auto 
industry. As you look back--and you can probably guess where I 
come from--do you think we might have been a little better off 
if we had never started down this road in the first place?
    Mr. Feinberg. I am not going to second guess Congress; I 
have learned over the years that is a mistake.
    Mr. Jordan. The American people sure do and I sure do.
    Mr. Feinberg. I can only say, Congressman, as I have said 
it publicly, that my role is relatively very, very limited. It 
is these seven companies that are owned by the American people 
that I am focused on, and that is all I am focused on.
    Mr. Jordan. Let me ask you this, Mr. Feinberg, then. The 
slippery slope argument. Are you nervous--in light of comments 
by people like Senator Schumer, who has talked about expanding 
this to any publicly traded company--I guess I just look at 
this and I am thinking who would have thought, in the United 
States of America, we would have the Federal Government, the 
special master of executive compensation telling a private 
American citizen what they can make?
    Sometimes, if you step back and ask the fundamental 
question, I think you stop and think wow, this is amazing where 
we are at today in the United States of America, and that is a 
concern. And it is also a concern that, when you think about 
it, you know, we are a country of over 300 million people and 
we have this huge market. We are the largest economy in the 
world and now one person, one single person is deciding what 
people make. To me, that is a dangerous, dangerous place we are 
going.
    And then when you couple it with, again, what Senator 
Schumer has said, where this potentially can take us as a 
Nation, it is no wonder Americans are frightened, and, frankly, 
some Members of Congress are pretty scared too where we are 
headed.
    Mr. Feinberg. I have two answers to your concern. One, my 
job and my office and what I am doing was established by 
Congress in a Federal statute, accompanied by official Treasury 
regulations. I am serving under the law and I am obligated to 
serve under the law.
    Mr. Jordan. Mr. Feinberg, I understand that, and I get it, 
and I get the fact that these companies, these firms held out 
their money and took the taxpayer dollars. I get that. My 
question is does it trouble you, as the person who has that 
responsibility, where it could potentially lead and the 
implications of taking this step, when you already have Members 
of Congress, frankly, important Members, influential Members 
like Senator Schumer, talking about where it goes next?
    Mr. Feinberg. I am troubled, and I say so in my public 
statement. I am troubled at the notion that my role currently 
with these seven companies, I am troubled at the notion that it 
could be expanded. That is a mistake.
    Mr. Jordan. Well, it is important that you emphasize what 
you said earlier: it stops here. That is what scares people, 
and God bless you for saying it, but it is important that you 
stick to it.
    Now, let me ask you one quick question; I have a couple 
seconds left. It seems to me that the administration has gone 
to great lengths to keep you. You met with the Treasury 
Secretary a couple times, you don't meet with the Obama 
administration. So tell me about that, tell me the relationship 
you have with Treasury Secretary Geithner.
    Mr. Feinberg. I have an excellent relationship not only 
with the Secretary of the Treasury, I would like to think, but 
with other officials at Treasury and at the Federal Reserve in 
terms of consulting with them concerning these decisions that I 
am making, suggestions that I am making. They have been 
extremely cooperative in offering their advice to me at my 
request.
    Ultimately, the decision is mine, but I have sought out a 
wide range of views--the academics that I mentioned earlier 
that are our consultants, individuals at Treasury, individuals 
at the Federal Reserve--in an effort to come up with a report 
that I think is balanced, that is fair, and, most importantly, 
complies with the statute and the regulations.
    Mr. Jordan. Thank you, Madam Chair.
    Mrs. Maloney. Thank you. The gentleman's time has expired.
    Dr. Chu.
    Ms. Chu. Thank you, Madam Chair.
    And thank you, Mr. Feinberg, for testifying before us 
today. I know you have the limited purview of these seven 
companies, but Goldman Sachs, JP Morgan Chase, and Morgan 
Stanley, of course, had substantial loans. They have paid it 
off since and they are no longer under executive pay 
restrictions. However, with their profits recovering from the 
Government bailouts, all three firms are expected to make huge 
payments to their executives this year and, in fact, according 
to Attorney General Cuomo, Goldman earned $2.3 billion in 2008, 
yet paid out more than twice that amount, $4.8 billion, in 
bonuses.
    What authority would it take to stop such negligent and 
reckless behavior? What can we do to stop this? This is very 
upsetting to the American people, as you know.
    Mr. Feinberg. Well, that is a huge legitimate question, 
what authority. Historically, the authority has been the self-
regulating marketplace. Now, to the extent that is supplemented 
by the Federal Reserve, by the regulators like the SEC, the 
FDIC, that is a subject that Congress may want to revisit.
    I want to emphasize my reluctance to attempt in any way to 
broaden my jurisdiction beyond these seven companies where I am 
trying to collect money representing the taxpayers as a 
creditor. I am not saying it is not a legitimate concern, I am 
just saying that it is a subject that goes well beyond my 
jurisdiction, it seems to me.
    Ms. Chu. Well, there is one company, GMAC, which is under 
your jurisdiction, and it has already received $12.5 billion of 
TARP money. However, they are asking for a third bailout. How 
do you plan to ensure that the additional $5.6 billion that 
they are requesting doesn't go toward these unscrupulous 
compensation practices?
    Mr. Feinberg. We are very vigilant in making sure that the 
compensation practices that we have articulated in this report 
are fair, are reasonable, and will be paid by GMAC to its 
employees as part of this program. I am not sure where that 
extra requested funding will go, but we want to make sure, 
under the law, that there are sufficient funds at GMAC to pay 
these officials, and we will make sure of that.
    Ms. Chu. And for them to control their compensation 
practices?
    Mr. Feinberg. They control their compensation practices 
subject to our rules and regulations, which we have mandatory 
jurisdiction, Congresswoman, to make sure that we are 
monitoring those compensation practices.
    Ms. Chu. Well, let's talk about AIG. I know that you made 
some major exceptions to pay cuts for three senior AIG 
executives who had signed contracts for multi-million dollars 
bonuses prior to your appointment. You stated that you are 
reluctant to invalidate contracts prior to the enactment of 
this current law, but do you have the authority to override 
these contractual rights? What can be done about this 
situation? You have AIG employees who--well, let's see, four 
employees made over $4 million, one employee made $10.5 
million.
    Mr. Feinberg. We have authority under the law to attempt to 
work with the company in renegotiating those contracts. We have 
been successful in almost every case, although that is the 
exception that you have referenced, three individuals at AIG. 
What we did with those three individuals at AIG, they had a 
contract, they insisted on honoring that contract, they had 
every right to insist on honoring that contract, and, 
therefore, under the law, I took those contracts into account 
in reducing their 2009 compensation. Beyond that, I had no 
authority to act, and I think that is what I did under those 
circumstances.
    Ms. Chu. OK, well, there are alarming findings that 
executive compensation is actually increasing, even though 
there is this outrage by Americans. Now that you have had the 
experience with these seven companies, what would be your 
recommendation on a going forward basis?
    Mr. Feinberg. I think, going forward, we will continue, 
first, to implement the recommendations in our report that call 
for a reduction in cash compensation of around 90 percent; a 
reduction in overall compensation of around 50 percent, cash 
plus stock. In addition, I am hoping--and we have also reined 
in perks; we have also tied compensation to long-term 
performance; and I am hoping that our recommendations will be 
followed not only by these seven companies, which are required 
to follow them, but I am hoping that some of our 
recommendations will voluntarily be adopted by other companies 
seeking to improve their compensation practices. We shall see.
    Ms. Chu. Thank you.
    I yield back.
    Mrs. Maloney. The gentlelady's time has expired.
    Mr. Cummings is recognized for 5 minutes, to be followed by 
Mr. Connolly.
    Mr. Cummings. Mr. Feinberg, I want to thank you for your 
testimony. I have listened to you very, very carefully and I do 
believe that you have done what you have been instructed to do, 
and I think you have done an outstanding job.
    Mr. Feinberg. Thank you.
    Mr. Cummings. Let me just try to get down to where the 
rubber meets the road. You know, I think part of the reason why 
this is going on, why you are doing what you are doing and why 
the Congress asked you to do what you are doing is so that--and 
you have implied this in your testimony. Part of the reason is 
to try to get other companies to do this, beyond the seven.
    I know you have gotten maximum cooperation, I think you 
said, with AIG and I have had an opportunity to meet with the 
former head of AIG, Mr. Liddy, and to listen quite a bit to 
what he had to say, and I read the papers just like you do. I 
have absolutely no confidence, none, that the things that you 
are able to do--and it has nothing to do with you. There is a 
culture along Wall Street that will cause them to reduce 
salaries consistent with what you just said a minute ago. And 
you are a very bright and straightforward person. What would 
cause them to even do it? Because my dealings with them is like 
we are on two different planets. I think when they talk about 
multi-million dollar bonuses, it is like shoe shine money to 
them. I am serious.
    And when I talked to Mr. Liddy about my constituents, who 
were being thrown out of their houses because of foreclosure, 
losing their savings, everything, and they still wanted to give 
money to the financial products division, and to seem to not 
even have a clue or not give a hoot about these folks, and at 
the same time handing out millions. I mean, I just can't see 
how, with all your fine work, that is going to be turned 
around. I just don't. I have been around a long time.
    No. 2, I was wondering what advice--do you have 
conversations with the President? Because, let me tell you, I 
believe that the American people--in order for all of the 
things that the President is trying to do to right this 
economic ship, if the American people aren't there and if they 
feel like they are getting screwed every which way, and 
certainly it goes beyond these seven companies, so the question 
becomes, what do we see, what do you see?
    I mean, I know what you are hoping, but Mr. Barofsky said 
something the other day that really impressed me, when he was 
giving us a little talk about his report. He said that 
Secretary Geithner and others, whenever he comes before us, 
they listen. So here you are before us. You are the man with 
the seven companies. I am trying to figure out what will it 
take, if anything--this may be a culture that is impossible to 
turn around--to make these folks move in another direction.
    Mr. Feinberg. Congressman, you are asking a political 
science question about the gap, the gap between Wall Street and 
Main Street thinking on this subject. A, I can play whatever 
role I can play, hopefully, in impressing upon Wall Street 
generally the value of what is in this report. Whether or not 
Wall Street will pick up on any of this I do not know.
    Mr. Cummings. And give me your best argument. That is what 
I want to hear. You are talking to Wall Street and you say, 
Wall Street, we have a great rapport here. This is why you 
should do this. Your best argument.
    Mr. Feinberg. My best argument would be to Wall Street that 
this is why you should do this, because if you don't do this, 
there may be a time when Congress or others will rein in pay 
and will limit your discretion and will limit your unilateral 
ability to determine what to pay people. I mean, to the extent 
that these modest proposals--modest in the sense that they only 
apply to seven companies--to the extent that they are ignored 
in the private marketplace, ignored, well, I mean, the question 
is will Congress, in its wisdom, sit by and allow compensation 
to go forward under the old regime and the old way of doing 
things. I don't know.
    I have enough problems, as you have witnessed this morning, 
dealing with these seven companies, and suggesting that my role 
should definitely not go beyond these seven companies, to 
express a view on what global decisions should be made by 
Congress to try and rein in Wall Street. That is a subject 
beyond my jurisdiction and one that I wisely don't want to get 
near because I don't want to undercut my credibility and my 
effectiveness in terms of dealing with these seven companies.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Chairman Towns [presiding]. We might need another Master to 
do that.
    Congressman Connolly.
    Mr. Connolly. Thank you, Mr. Chairman.
    Mr. Feinberg, thank you for your willingness to serve. You 
know, in listening to some of the rhetoric about this subject 
on the other side of the aisle, one would think, if one knew 
nothing, that Congress and the Federal Government just have 
this irrational compulsion to interfere in the private sector 
and arbitrarily set compensation limits. Well, what is your 
understanding of why your job was created, Mr. Feinberg?
    Mr. Feinberg. My job was--it is clear. My job was created 
by Congress and the Treasury to establish compensation 
determinations designed with one primary objective in mind, to 
get the taxpayers' money back. And that is the primary 
objective. Now, how we do that----
    Mr. Connolly. Mr. Feinberg, I understand that, and thank 
you. But why? Did something go wrong? Why did we decide on 
these seven companies?
    Mr. Feinberg. These are the seven companies that were 
allowed, I guess, to survive on the back of the taxpayers' 
willingness to contribute these funds.
    Mr. Connolly. Ah. So the private sector, the free market, 
in fact, had failed, is that correct?
    Mr. Feinberg. Correct.
    Mr. Connolly. Let's take one of the seven companies you 
oversee, AIG. The largest corporate quarterly loss in American 
history was in the last quarter of last calendar year, and it 
was none other than AIG, is that correct?
    Mr. Feinberg. Correct.
    Mr. Connolly. And AIG has been the biggest recipient of 
bailout funds, is that correct?
    Mr. Feinberg. I think that is--yes, that is correct.
    Mr. Connolly. So it had the largest loss and the largest 
single taxpayer bailout in American history, is that correct?
    Mr. Feinberg. Correct.
    Mr. Connolly. Does the public have any interest at all in 
wanting to see some kind of rational compensation limits in a 
company it has bailed out, the biggest in its history?
    Mr. Feinberg. Insofar as the public's view is reflected by 
the statute that I am working under, yes.
    Mr. Connolly. Does that seem a rational concern on our part 
to you?
    Mr. Feinberg. No.
    Mr. Connolly. You think it is not rational?
    Mr. Feinberg. I think it is, it is a rational response to 
the crisis, yes.
    Mr. Connolly. In protecting the public's interest.
    Mr. Feinberg. Yes.
    Mr. Connolly. Thank you.
    Let me ask you this question. One of the four broad 
mandates that Congress gave you in creating the statute that 
created the special master was to review prior payments. When 
your office reviewed prior payments to senior executives in 
AIG, what did you find? Because presumably you found something 
wrong in the fact that you have chosen to roll back some of 
that compensation.
    Mr. Feinberg. With most of the companies we found that, 
prior to the enactment of the law, there had been prior 
payments actually made. There was nothing nefarious or illegal 
about it; those were contracts that were entered into prior to 
the enactment of the statute creating my office.
    What we did find, going forward under my tenure, we did 
find that there were pending payments that were obligated to be 
made under prior contracts, and we were able, through 
negotiation with the companies, in almost every respect except 
two or three cited earlier, to get those contracts voluntarily 
invalidated; and, instead, we rolled the amounts that were 
involved in those contracts into prospective performance-based 
stock.
    Mr. Connolly. Ah, performance-based.
    Mr. Feinberg. Yes.
    Mr. Connolly. When you looked at compensation, prior 
compensations, and in your report you are submitting today, 
looking forward, I assume that there is some rational basis for 
your coming up with the recommendations you came up with. For 
example, we have heard some rhetoric here today that would seem 
to suggest that the sky is the limit; we have no business even 
talking about limiting executive compensation, even in 
companies we have bailed out. And you agree that within some 
reason any limit is arbitrary.
    Mr. Feinberg. I think that is right.
    Mr. Connolly. But, would you not agree, however, if I said 
the CEO's compensation in Company X ought to be 200 percent of 
Company X's entire profit for the year, that would be an 
irrational compensation, would it not?
    Mr. Feinberg. I think it probably would.
    Mr. Connolly. So it is not entirely arbitrary.
    Mr. Feinberg. Oh, no. Our decisions weren't arbitrary. Our 
decisions absolutely, I think, were based on reasonable 
evaluation of the data and the anecdotal information we 
received from the seven companies. I would defend my report as 
being not at all arbitrary, but very, very principled, very 
rational, and very reasonable. Now, people may disagree, but I 
think it is clearly a reasonable and defensible report that was 
submitted to the Secretary.
    Mr. Connolly. And you used the words performance-based. 
Could you just elaborate on that? Because that is where we get 
into the rational or arbitrary here. It is tied to some kind of 
rational expectation of financial performance on the part of 
the company, is that correct?
    Mr. Feinberg. That is absolutely correct. We rejected out 
of hand the notion that regardless of company performance there 
should be guaranteed salaries, guaranteed bonuses, guaranteed 
commissions, guaranteed perks, guaranteed, guaranteed, 
guaranteed. And what we said in our report, and what I 
recommended, is that the era of the compensation guarantee is 
over and, instead, other than small cash-based salaries, the 
remainder of the compensation package should be tied to 
performance; and not only tied to company performance, but tied 
to company performance over a period of time so that you cannot 
simply short the stock, sell it after a year, roll it over, you 
have to hold it for up to 4 years.
    And then we are hoping the long-term benefit of holding 
that stock will tie the officials' compensation to the overall 
value of the company as reflected in the stock. In addition, 
one other point, we also offered up the notion of long-term 
incentive-based stock, in addition to salary. But that stock 
cannot be redeemed, it cannot be sold until and unless the 
taxpayers get their money back.
    That is the formula we tried to use to correct what we 
thought in our report were the problems with executive 
compensation practices in these seven companies.
    Mr. Connolly. I thank you.
    My time is up, Mr. Chairman. Thank you.
    Chairman Towns. Right. Thank you very much.
    I yield 1 minute to the gentleman----
    Mr. Jordan. Oh, I appreciate the chairman yielding.
    I just want to make a point on my friend and colleague from 
Virginia. They talked about the private sector failing. I think 
this is important to understand. The private sector didn't 
fail; we had some institutions that had some major problems. 
But to argue that the private sector failed is just, in my 
judgment, fundamentally wrong. Institutions fail in the private 
sector every single day in this country and across the planet. 
That is part of capitalism. The problem is once we start down 
the road, that is when we get into all these questions and all 
these problems.
    Chairman Towns. Thank you very much.
    Let me just say this before I yield to the gentlewoman from 
New York. There is a lot of concern about these folks who 
failed going to another company. I am not sure that anybody 
would be too excited about hiring people that fail. I don't 
think you have to worry about that too much. One company in the 
ground and then you expect to get big money to go to another 
one and do the same thing? So I don't know that is a real 
concern.
    Mr. Feinberg. Well, we hear the argument all the time, and 
the argument goes--you expressed one view and the ranking 
minority member has expressed a view. There are a lot of 
vacancies. The question is those vacancies are now gone and 
whoever was going to leave would have left. I don't know. We 
are trying to implement the statute keeping in mind both of 
those positions. It is a balancing act.
    Chairman Towns. You know, I think about Members of 
Congress. We think we are so great, but when we leave somebody 
takes our seat. They do real well.
    I yield now 5 minutes to the gentlewoman from New York.
    Mrs. Maloney. Thank you, Mr. Chairman.
    First, I would like to welcome Mr. Feinberg and mention his 
truly outstanding work as a special master for 9/11 during a 
very difficult period in our country. With a very difficult 
topic you did a very fine job.
    I would like to ask how we are faring internationally in 
terms of our compensation compared to foreign countries. We are 
in a global market now; we are competing with firms across the 
world. How does U.S. executive pay compare to, say, pay in 
Japan and in European countries?
    Mr. Feinberg. I can get you that data, Congresswoman. I can 
tell you that what I do know is that there has been a great 
deal of recent G-20 and other cooperation between Treasury and 
the Secretary and other countries in trying to come up with a 
common set of international standards governing compensation. 
How much American compensation varies from Japan or Germany or 
Italy, I don't know, but I can certainly get you that data.
    Mrs. Maloney. I would like to know. I also have read that 
the United Kingdom adopted say on pay rules or a shareholder 
vote on executive pay. Are you aware of that and has that made 
any difference in pay scale? Have you followed what has 
happened in the United Kingdom?
    Mr. Feinberg. Again, I think that is of recent vintage. I 
will, again, try and secure some information concerning the 
impact of that in the United Kingdom.
    Mrs. Maloney. The United Kingdom's five largest banks have 
reportedly agreed to abide by the G-20 executive compensation 
rules. Have U.S. banks, likewise, agreed to accept these 
conditions, which include an independent compensation committee 
and clawbacks for poor performance?
    Mr. Feinberg. Not on my watch. I don't know. I am limited 
to these seven companies. And, again, at the risk of 
disappointing you, I will get you answers to these questions, 
Congresswoman.
    Mrs. Maloney. Are you aware of any other legislative fixes 
or actions that we should be taking in terms of tying executive 
pay more to performance?
    Mr. Feinberg. Well, that raises the whole question that I 
have discussed earlier about corporate governance and what 
Congress is considering, as I understand it, in both the House 
and the Senate concerning both corporate governance reforms in 
Federal legislation and corporate regulatory reform. And both 
of those subjects certainly are part of the overall concern 
about total compensation, even though those two subjects aren't 
directly part of my jurisdiction.
    Mrs. Maloney. OK, the law gives firms the right to appeal 
within 30 days of the compensation determination. Do you 
anticipate appeals, and, if so, how will they be conducted?
    Mr. Feinberg. I haven't received any appeals as yet. I am 
hopeful there won't be any appeals. If there are, under the 
law, we will certainly give due consideration to those appeals, 
but as of today, Congresswoman, we don't have any appeals.
    Mrs. Maloney. The New York Times reported that Citigroup, 
as well as other banks, continue to offer grant guaranteed 
bonuses to employees. Does that violate the Treasury 
regulations?
    Mr. Feinberg. It all depends whether those employees that 
are getting those grants, allegedly in the New York Times, fall 
within my jurisdiction of 1 to 25 or 26 to 100. Citigroup and 
other companies under my jurisdiction at least legally have the 
authority to act independently if they are not part of my 
mandatory jurisdiction. Now, I could, under the law, issue some 
advisory opinion if I knew more about such bonuses, and we will 
look into that.
    Mrs. Maloney. Do you have the authority to override 
contractual rights?
    Mr. Feinberg. No. If the contractual rights are found by my 
office to be valid, legal, and binding, then we give due 
deference to the Constitution and the fact that the sanctity of 
contracts should be upheld. But, as I said earlier, we do have 
under the law two ways to deal with these old contracts that 
might be found to be valid: one, we can seek to renegotiate 
those contracts with the company--we have been very successful 
in doing that--and getting the company to voluntarily yield on 
those contracts and roll it over into performance-based stock. 
Second, if a company refuses to voluntarily modify the 
contract, we can take those contracts into account in 
establishing prospective compensation. So we do have some 
weapons at our disposal.
    Mrs. Maloney. Thank you. My time has expired. We have been 
called to a vote. Thank you again for your service to our 
Nation.
    Mr. Feinberg. Thank you again. And, Congresswoman, thank 
you for all your help on 9/11. You were a stalwart in 
convincing your constituents to come into the fund, and I will 
always be in your debt for that. Thank you.
    Mrs. Maloney. Thank you.
    Chairman Towns. Thank you very much.
    Let me thank you for your testimony. You were an 
outstanding witness, no question about it. We want to let you 
know we appreciate that, appreciate the work that you have 
done, and we really, really want to continue to stay in touch 
with you as we move forward, because, as I indicated earlier in 
my opening statement, the American people are angry; and, of 
course, you are helping to sort of calm them down. Thank you so 
much.
    Mr. Feinberg. Mr. Chairman, you and the ranking minority 
member need only call and I will be up here as soon as 
possible. Thank you all very much.
    Chairman Towns. Thank you very much. Thank you.
    Now, our second panel consists of two witnesses, Professor 
Black and Professor Roberts. As with the first panel, it is the 
committee's policy that all witnesses are sworn in, so please 
stand and raise your right hands as I administer the oath.
    [Witnesses sworn.]
    Chairman Towns. Let the record reflect that the witnesses 
answered in the affirmative.
    William K. Black is associate professor of economics and 
law at the University of Missouri, Kansas City, and author of 
the book, ``The Best Way to Rob a Bank Is to Own One.'' Of 
course, we welcome you to the committee.
    Russell Roberts is professor of economics at George Mason 
University and a research scholar at Stanford University, 
Hoover Institution. Welcome.
    Your entire statement will be placed in the record and I 
would like to ask you if you would assume the time. The clock 
starts on green, then goes to yellow and then it turns red, so 
we would like for you to do it within 5 minutes. We might have 
to stop you because of the fact we have votes on the floor but 
we want to get as far as we can before.
    Thank you very much. Why don't we start with you, Mr. 
Roberts?

 STATEMENTS OF RUSSELL ROBERTS, PROFESSOR OF ECONOMICS, GEORGE 
MASON UNIVERSITY; AND WILLIAM K. BLACK, ASSOCIATE PROFESSOR OF 
     ECONOMICS AND LAW, UNIVERSITY OF MISSOURI-KANSAS CITY

                  STATEMENT OF RUSSELL ROBERTS

    Mr. Roberts. Thank you, Chairman Towns, Ranking Member Issa 
and distinguished members of the committee.
    Americans are angry about executive compensation. 
Rightfully so. The executives at General Motors and Chrysler do 
not deserve to make a lot of money. They made bad products that 
people did not want to buy.
    The executives on Wall Street do not deserve to make a lot 
of money. They were reckless, they borrowed huge sums to make 
bets that did not pay off and they wasted trillions of dollars 
of precious capital, funneling it into housing instead of 
health innovation, high mileage cars or a thousand investments 
more productive than more and bigger houses.
    Everyday folks who are out of work through no fault of 
their own, want to know why people who made bad decisions not 
only have a job but a big salary to go with it. No wonder they 
are angry at Wall Street, but if we keep getting angry at Wall 
Street, we will miss the real source of the problem. It is 
right here in Washington.
    We are what we do, not what we wish to be, not what we say 
we are, but what we do. What we do here in Washington is rescue 
large companies, large financial institutions and rich people 
from the consequences of their mistakes. When mistakes don't 
cost you anything, you do more of them.
    When your teenager drives drunk and wrecks the car, you 
keep giving him a do-over, repairing the car and handing him 
back the keys, and he is going to keep driving drunk. 
Washington keeps giving bad banks and Wall Street firms a do-
over. Here are the keys, keep driving. The story always ends 
with a crash.
    Capitalism is a profit and loss system. The profits 
encourage risk-taking. The losses encourage prudence. Is it a 
surprise that when the government takes the losses instead of 
investors, that investing gets less prudent. If you always bail 
out lenders, is it surprising that firms can borrow enormous 
amounts of money living on the edge of insolvency?
    I am mad at Wall Street, but I am a lot madder at the 
people who gave them the keys to drive our economy off a cliff. 
I am mad at the people who have taken hundreds of billions of 
dollars of taxpayer money and given it to some of the richest 
people in human history. I am mad at President Bush, President 
Obama, Secretary Paulson, Secretary Geithner and Chairman 
Bernanke, and I am mad at Congress. You helped risk-takers 
continue to expect that the rules that apply to the rest of us, 
don't apply to the people with the right connections. You have 
saved the system, but it is not a system worth saving. It is 
not capitalism, it is crony capitalism.
    Using a special master for compensation to get our money 
back is too little, too late. Many people argue that because 
the government handed out the money, the government has a right 
to dictate how it is spent, but in a constitutional democracy 
like ours, it is not the government that has rights. We, the 
people, have rights. The Constitution exists to restrain 
government, not to empower it.
    Whether government has the right to limit pay is not the 
question. The question is whether it is a good idea for the 
government to have the power to set compensation. Despite our 
anger, the answer is no.
    Haye, the Nobel Laureate economist, said: ``The curious 
task of economics is to demonstrate to men how little they 
really know about what they imagine they can design.'' The 
special master imagines he can design compensation packages 
that ``align incentives,'' while ``retaining key talent,'' but 
it is impossible for any one person, no matter how wise, to 
anticipate the consequences of such decisions. Nor does he have 
any incentive to acquire that knowledge. He has no skin in the 
game.
    A single individual has been given enormous arbitrary power 
with insufficient accountability or transparency. This is not 
good for the rule of law, democracy or capitalism. By focusing 
on those who owe the government TARP money, the special master 
distracts us from other firms that benefited from government 
rescue such as Goldman Sachs and JP Morgan Chase.
    The comfort we receive from seeing compensation reduced 
distracts us from the policies that created the problem in the 
first place, the rescue of Wall Street from its own 
recklessness. It is a charade of political window dressing to 
make crony capitalism look respectable.
    I want my country back. Let us get the government out of 
the auto business, out of the banking business, and out of the 
compensation design business. We need explicit timetables to 
disengage from government ownership, including a plan for how 
the Federal Reserve will draw down its balance sheet. Most of 
all, we need to stop trying to imagine we can design housing 
markets, mortgage markets and financial markets and 
compensation.
    I want my country back. I want a country where 
responsibility still means something, where rich and poor, Main 
Street and Wall Street live by the same rules. We don't need a 
special master to level the playing field; we just need to take 
the crony out of crony capitalism so we can get back to the 
real thing.
    Thank you very much.
    [The prepared statement of Mr. Roberts follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Towns. Thank you very much.
    Professor Black.

                 STATEMENT OF WILLIAM K. BLACK

    Mr. Black. I join Russ in thanking you all for having us 
and making this opportunity. I would certainly agree with him 
strongly that what we have is crony capitalism, but it isn't 
crony capitalism that occurs simply because of bail-out. That 
is critical to understand. The same process occurred when 
creditors were wiped out, when subordinated debt holders were 
wiped out, when shareholders were wiped out, it happened when 
there were absolutely no bail-outs, Enron and WorldCom. All of 
these circumstances, it was the same mechanism, executive 
compensation that drove those frauds. It is what is produced, 
the crony capitalism.
    You can stop the bail-outs, and I think you should, but you 
are still going to have this problem unless you deal with pay. 
You have to deal with not simply executive compensation, you 
have to deal with compensation more broadly. Look what 
happened.
    In the savings and loans crisis, there was an exhaustive 
investigation of what happened. The National Commission found 
that in the typical, large failure, fraud was invariably 
present and that the means of the fraud was accounting fraud 
and that the way you convert the firm assets to the benefit of 
the CEO is through modern compensation mechanisms. You saw that 
in abundance with Enron and WorldCom, the use of the rank and 
yank system to incent people to commit frauds.
    In other words, we have known for at least 35 years how to 
do incentives. It came, not from government, but from a very 
conservative libertarian, Michael Jensen who said, ``We're 
doing it all wrong, we need to change compensation. We need to 
go to much more aggressive performance-based pay,'' and he set 
out how you should do it.
    What did Mr. Feinberg just report? That 35 years later, 
even after these disastrous failures, they could not get it 
right, that they designed systems and tried to run it past him 
which obviously further misaligned the interests of 
shareholders from those of the managers.
    We need to stop that system. That is the system that has 
caused this crisis. Why did loan brokers bring in bad loans, 
consistently? Because they were put on incentive systems based 
solely on volume and not on quality. Why did appraisers get 
inflated? It is because compensation created a Gresham's 
dynamic in which bad ethics drove good ethics out of the 
marketplace. There are really good quantitative numbers on 
this.
    Chairman Towns. Professor Black, we are going to have to 
interrupt you. We have to run to vote and we will be back 10 
minutes after the last vote.
    [Recess.]
    Chairman Towns. Let me apologize, Professor Black. We 
thought we would be able to get your testimony finished, but we 
ran out of time. You have to vote around here and if you don't 
vote, you constituents will talk about it. We talk about anger, 
that is the same kind of anger we get with this compensation, 
if you don't vote, so we had to run over to make the vote.
    If you will continue, please?
    Mr. Black. To resume, the critical thing to understand 
about accounting control fraud in connection with executive 
compensation is that it is a sure thing. It is a very simple 
formula for how you optimize. You grow really rapidly, you make 
very, very bad loans, you have extreme leverage and you put in 
minimal loss reserves.
    If you do those four things, you will produce, not just 
profits, but record profits. Then you can use seemingly normal, 
corporate mechanisms of compensation to convert firm assets to 
your benefit as the CEO. It is the perfect crime, if you do it 
without giving orders to engage in the accounting fraud. You 
can give that order through modern executive compensation.
    I cannot send a memo at Fannie Mae that says to 10,000 
employees, we want to commit accounting fraud, but I can do the 
same thing with my compensation system. All I have to do is 
extend it, not just to the top 100, these modern compensation 
systems go much farther down in the organization, and you will 
get, as a relatively junior officer, an incredible increase in 
your income, and as a more senior officer, even more. All you 
have to do is fudge the numbers. Then all I have to do as the 
CEO is not care and pay you a maximum bonus based on those 
fudged numbers.
    The degree of this fudging is extraordinary. IndyMac losses 
on Alt A, liars loans, are running roughly 80 percent it 
appears. OTS, the Office of Thrift Supervision, reports 
overall, Alt A loans are causing losses of 55 percent. Those 
are staggering numbers. The FBI has publicly testified that it 
would be irresponsible to discuss the current crisis without 
discussing the role of fraud in it.
    So, no, compensation isn't what directly causes the largest 
losses. Compensation, incents you to make deliberately bad 
loans to grow very rapidly to produce financial bubbles. That 
produces catastrophic losses and that is the system we have 
right now.
    I don't know where I am in terms of time. I think I have 
probably done 5 minutes and I will stop. I know the day is not 
young.
    [The prepared statement of Mr. Black follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Towns. Thank you very much. Let me thank both of 
you for your testimony. Again, I apologize for the break and 
the interruption that we had.
    Let me begin with you, Professor Black. Please explain the 
relationship between what you term accounting control fraud and 
excessive executive compensation.
    Mr. Black. This exists both in the criminology literature 
and the economics literature, and indeed, we work together on 
it. The most famous piece is by the Nobel Prize winner, George 
Akerlof, and Paul Romer, then at Berkeley, now at Stanford. 
They had an article in 1993 entitled, ``Looting, Bankruptcy for 
Profit.'' This is how it works.
    I gave you the optimization condition. You grow really 
rapidly, make deliberately very bad loans, you have extreme 
leverage, you don't put on loss reserves. If you do those 
things, it must be the case that you will record record 
earnings. That was true in the savings and loans crisis where 
Lincoln Savings and Vernons, the two worst control frauds in 
America, recorded at different time periods obviously that they 
were the most profitable savings and loans in America.
    By the way, as a footnote, this also screws up any 
econometric analysis. It produces perverse results.
    So, now we have record income. Directly, of course, under 
modern executive compensation which is extremely large and 
heavily oriented toward short term accounting gains, this 
produces maximum bonuses. Frank Raines, in the context of 
Fannie Mae, when he was still running it, was asked by Business 
Week, why do we have all these frauds, referring to the Enron 
and WorldCom frauds, and he said, it is because of modern 
executive compensation, that when you put enough money in front 
of people, good people will do bad things. The exact quotation 
is in my testimony, but that last line is, I think, word for 
word.
    Chairman Towns. Thank you, very much, Professor Black.
    Professor Roberts, I understand your aversion to the bail-
out, but given the existing relationship between the government 
and the seven largest bail-out firms, how would you address 
executive compensation issues until such time as the government 
has been repaid and able to get out of the companies?
    Mr. Roberts. Special Master Feinberg, I thought, did a 
masterful job defending what he is doing in those seven firms. 
As he said, he is helped by consultants, Lucian Bebchuk and 
Kevin Murphy, two economists I have a lot of respect for, but 
unfortunately, there is no way that they can successfully 
figure out the consequences of their decisions. The mix of 
short term and long term pay, the special master talked about 
it as if it is a science. It is not a science; it is really a 
wild guess. I think the real danger of his enterprise, besides 
the violation of the rule of law, the arbitrariness, the non-
transparency, the lack of accountability, the biggest problem 
is that it distracts the American people. It makes them feel 
good; oh, we are taking care of these seven firms, but it 
distracts people from the real cause of the crisis and the real 
reason they were so over compensated which is those government 
bail-outs.
    I think we ought to be focusing on the incentives that 
those bail-outs created for egregious executive pay and 
outrageous pay. I think if we do that, we have a chance of 
preventing it from happening again in the future. If we stick 
with this system of trying to knock it down, ex post in an ad 
hoc way, I am worried we are going to miss the real lesson.
    Chairman Towns. You don't think that through this process 
that the folks on Wall Street would get the message?
    Mr. Roberts. No, I don't think they will actually. I don't 
think they will get the message at all. I think we have seven 
firms being told that they have to behave; the rest of the 
firms are getting away with it. Goldman Sachs and JP Morgan 
Chase and some of the other members mentioned are making record 
profits. The reason they are making those record profits is, 
with my money as a taxpayer, because of the incentives we 
created for them and their expectation that they would get 
bailed out.
    That expectation came true and they acted profligately and 
irresponsibly. I think the whole system needs to be fixed. The 
only way to fix it is not from the top down with these ad hoc, 
arbitrary decisions, but rather, by taking away the very system 
that allowed them to thrive which is the government rescue. 
That is what has created the expectation and that created the 
current problem, and it will create the next problem if we 
don't fix it.
    Chairman Towns. What else do you think we need to do?
    Mr. Roberts. Well, politically, since there is a lot of 
anger on Main Street, I would go after some folks over whom you 
have direct legislative control. I think it is a good time to 
get rid of some corporate welfare; it is a good time to get rid 
of payments to millionaire agribusiness folks; it is a good 
time to get rid of the sugar quota which makes ever American 
pay more for food, takes jobs out of America into Canada where 
they don't have such sugar quotas. Politically, I think it is a 
great time to do some things that are often hard to do. I would 
love to see Congress do that.
    In terms of the financial crisis, I think we are going to 
have to have recognition of the Government's role and I hope 
the housing market will change. I hope we have learned 
something about the challenges and dangers of trying to create 
home ownership for every American. That is not the American 
dream; it is the dream of the National Association of 
Homebuilders and the National Association of Realtors. That has 
been a mistake. Fannie and Freddie are going to cost us at 
least $100 billion. You budgeted $400 billion and I am worried 
it is going to be more than that. The Federal Reserve holds $1 
trillion or so of their loans, many of which will turn out to 
be bad loans, so I am worried about where that is going.
    I would like to see, if possible, Congress put some 
pressure on the Fed to get out of that business, get out of the 
mortgage business which it is in now, have the Federal 
Government get out of the mortgage business, but most 
importantly, we have to get out of the banking business. I 
don't want a banking system that is run implicitly or 
explicitly by Washington. It is not going to work. It is just 
going to create the next set of problems like the ones we are 
in the middle of now.
    Chairman Towns. We have to get our money back.
    Mr. Roberts. I am worried about that too. I understand that 
urge and politically, it is very important to get your money 
back, but I hate to say this, it might be a mistake to get the 
money back. It could be that by propping up these organizations 
in desperation to keep them going, we are going to cause other 
distortions, other problems, other waste that we don't see 
because we want our money back.
    The special master is worried about losing key personnel. 
Maybe he ought to lose them. Maybe they ought to go do 
something else. Maybe these organizations ought to go out of 
business and let some other organization thrive. We are still 
funneling capital and scarce resources into them.
    We talked earlier about GMAC. GMAC wants another bail-out. 
Maybe we ought to say, hey, enough. It is a mistake. We are not 
going to get our money back. I am not going to keep throwing 
good money after bad because that is the risk we are playing 
right now, that we are going to continue to throw money at 
these folks. It is what we are doing with Freddie and Fannie, 
it is what we are doing with AIG. Maybe we ought to cut our 
losses and get out.
    I understand the political pressure on you to get our money 
back, but may be that is a bad risk. To be honest, the special 
master has no incentive to care about whether that is a good 
decision or not. He is tasked with trying to get the money 
back. Again, I understand the advantages of that politically, 
but economically and for citizens as a whole, it may be a 
mistake.
    Chairman Towns. My time has expired and I yield to the 
gentleman from California, Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman.
    I will start with Professor Roberts. Ironically, the 1992 
act felt that executives were not linked to enough risk. In 
other words, their pay was not at risk in those days and it was 
going up, so peoples' compensation was less linked to 
performance. The law, particularly double taxing, was designed 
to minimize the growth in the base pay and maximize the growth 
in risk win.
    Can you comment on what we should do differently if we want 
to see a change in that?
    Mr. Roberts. Earlier I quoted Frederick Hayek, the Nobel 
Laureate, an economics economist, who talked about the purpose 
of economics to be to tell people that what they imagine they 
can design, they cannot really design. There is an inevitable 
tendency on the part of Congress, and everyone wants to do 
this, to try to create the perfect system as if it is like the 
engine of a car. We are going to tweak the carburetor, add some 
more oxygen and gasoline and a mix of this, and it is a bit of 
a fantasy to think that the wisest people in the world could 
tinker and fine tune the mix of current and future compensation 
to get the right level of risk taking, especially if in the 
background you have the feeling, and the expectation, and it 
turns out to be true, that if you mess up, someone is going to 
rescue you and bail you out. Particularly the bail out of 
lenders to those folks is what is really dangerous. That is 
what we have done over and over again.
    Mr. Issa. Thank you for answering my question and 
describing the Fed. That is what they do. They sit there 
saying, we can tinker with the economy and there will be no 
recession, there will be no inflation, everything will be 
perfect until it isn't.
    Professor Black, you talked about Franklin Raines. We have 
a special regard for Franklin Raines here at the dais. What 
part of the catastrophe that the world felt do you put on 
Freddie and Fannie taking on, knowingly, willingly and in fact, 
demanding to take on, trillions of dollars of loans which had 
no underlying net value? In other words, they had no equity, no 
skin in the game by the individuals and thus, no skin in the 
game for the banks once they got them onto Freddie and Fannie, 
or Countrywide.
    We are talking executive compensation, you are complaining 
about it, but in a sense, wasn't a great deal of this growth in 
financial communities profit at the expense of the taxpayers 
from day one because we were taking the risky investments 
deliberately under the Federal balance book?
    Mr. Black. No. It is actually a more complicated story.
    Mr. Issa. I appreciate the more complicated, but no 
deserves an explanation. No, the GSEs did not take sub prime 
onto their books?
    Mr. Black. Fannie and Freddie took less of it onto their 
books than did purely private entities.
    Mr. Issa. Let us go through that. Freddie and Fannie took 
trillions onto the books, right?
    Mr. Black. No.
    Mr. Issa. $1.9 trillion?
    Mr. Black. Of sub prime?
    Mr. Issa. Of sub prime?
    Mr. Black. No.
    Mr. Issa. What figure do you have?
    Mr. Black. For sub prime, they have very little actually. 
Relatively speaking, they have relatively little sub prime. 
They have much more of Alt A.
    Mr. Issa. You are talking about liars loans?
    Mr. Black. You may be under the impression I am here to 
defend Fannie and Freddie. I assure you I am in a very 
different position.
    Mr. Issa. Let us go through it. If you take AIG's FP 
division providing AAA rating for products that were sub prime, 
you take Freddie and Fannie taking on sub prime and Alt A, you 
are right about one thing, Alt A is the other name for that 
basket of loans which did not have ordinary income ratios and 
equity.
    The fact is the banks that took that and flipped did very 
well and their executives deserved all that great pay because 
they managed to make money with no risk if they got it off 
their books. Isn't that right?
    Mr. Black. In general, no. In general, these things were 
sold with recourse put backs.
    Mr. Issa. So you bought a credit default and then you wrap 
or ensured the failure?
    Mr. Black. Perhaps you did. We don't know about the credit 
default swap market, you have to understand. That market is 
still almost completely opaque.
    Mr. Issa. Professor Roberts, perhaps you have more 
transparency in this particular area if you don't mind 
answering the same question?
    Mr. Roberts. The question is, what about Fannie and 
Freddie's involvement?
    Mr. Issa. And Franklin Raines who was compensated 
incredibly well.
    Mr. Roberts. Ninety million dollars over a 6-year period. 
He had to give some of that back with an accounting fraud 
problem in 2004, but he did very well and those are the facts.
    As you point out, sub prime is an elusive definition. The 
way it should be defined is troubled loans which could be for 
many reasons. The most interesting statistic that I know of 
Fannie and Freddie is that in 2007 at the beginning of the 
collapse when almost everyone started to realize this was going 
to have trouble, 23 percent of Fannie and Freddie's home 
purchase loans that they purchased, loans they purchased that 
were used to buy a house, had less than 5 percent down. One in 
every four loans they were buying had very little skin in the 
game. I think right those loans are on the books of the Fed. I 
don't think they are going to turn out very well when they 
reset.
    Mr. Issa. Thank you, Mr. Chairman, very much.
    I would only note that Chairman Kucinich was actually 
holding a hearing during that time in which those loans were 
still being put on, showing the destruction that was happening 
in Cleveland at the time and the foreclosure rate that was 
climbing.
    Chairman Towns. Thank you very much.
    I yield 5 minutes to the gentleman from Missouri, Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman.
    I want to thank the witnesses for participating today.
    Professor Black, you have stated that government regulation 
and prosecution are the only solutions that can prevent an 
issue like this from occurring again. We now see corporations 
going so far as to sell derivatives on life insurance policies 
greatly increasing their risk. One can easily see the slippery 
slope at work here. Corporations will risk more, assuming that 
taxpayer dollars will be used to save them once again.
    You have referred to the need for effective regulators. In 
your view, what jurisdictional power would these regulators 
have?
    Mr. Black. We should be regulating the financial lenders of 
America. Not regulating the loan brokers and mortgage bankers 
was a disastrous policy. My counterpart talked about how you 
can screw up regulation. That is quite true. That is why we 
don't do it that way.
    Let me tell you what we did and why it was so effective in 
dealing with non-sub prime crisis of 1991-1992. We didn't try 
to adopt perfect rules. We looked in the industry for their 
best practices. We didn't go al the way to the best practice. 
We said what do the prudent lenders do? We had rules that said, 
you have to act in accordance with prudent members of the 
industry. That worked phenomenally well. It stopped what would 
have been a sub prime crisis in those years.
    We deregulated and de-supervised after that point and 
thought it was illegitimate, impossible to regulate. It isn't, 
but you don't do it by creating every dot and jot. That is not 
the way good regulators do it.
    Mr. Clay. Professor Roberts, anything to add to that?
    Mr. Roberts. Yes. There is always the hope that this time 
will be different. When we find ourselves back in the same 
place, you do start to think that maybe there is some 
fundamental mistake we are making. I think there is a strong 
desire to see an improved regulatory system. We are going to 
get a different regulatory system, but the question is, is it 
going to be improved.
    The challenge is that Fannie and Freddie, to take an 
example, had their own regulator, OFAO which wasn't distracted 
by anything. Why did OFAO stand by and watch Fannie and Freddie 
make worse loans than they did before, increasingly risky 
loans, loans without documentation, zero down payment loans, 
loans with 103 percent of the value of the house? Why did they 
sit and do that and also stand by and catch accounting fraud 
way too late after it had already been spiraling out of 
control?
    The answer is, politics. The people involved in the 
regulation got leaned on, partly by Congress, partly by Fannie 
and Freddie, as is well known. They were got in a vice, 
Congress wants Fannie and Freddie to be more active in getting 
loans to people who can't otherwise get a loan. That is a 
wonderful idea. Can't disagree with it. Everybody likes it. 
Fannie and Freddie want to make a lot of money, so they are all 
of a sudden pushing to take riskier loans. Everybody is happy 
until the taxpayer foots the bill.
    The fundamental question is, why is the next regulatory 
system going to be insulated from that kind of political 
pressure. The answer is, it won't be. I would suggest we look 
for a different mechanism. I would say again, as long as 
lenders and financial institutions think they will be bailed 
out of their mistake, this problem will happen over and over 
and over again.
    Mr. Clay. You left out Treasury and Federal Reserve.
    Mr. Roberts. In which part?
    Mr. Clay. As far as OFAO?
    Mr. Roberts. They are also involved. They were also 
involved in regulation, but I would even go further. We could 
go to Basel II and Basel II's role in trying to regulate 
investment banks. Think about how great this was. Basel II 
said, we have to have stiffer capital requirements to make sure 
that these investment banks are sufficiently capitalized so 
that they will not go broke. We are going to make sure they are 
AAA and we are going to give them more leverage if they are 
backed by housing because we know housing can't go down.
    That was a bit of an error that helped, not just create, 
but was a huge factor in this because it gave banks an 
incentive to create something that looked like AAA, which it 
was not, the toxic assets which we are talking about.
    Mr. Clay. Going back to compensation, these regulations 
that you speak of, should they apply to compensation for all 
corporate employees or just executives? I would like to hear 
from both, Professor Black and Professor Roberts.
    Mr. Black. You don't want to make the cutoff the executives 
because they can define that in any way and get around 
anything. I put a quotation in here, since we are talking about 
Fannie Mae. I was an expert witness for the government against 
Frank Raines, you do understand, on these issues in which the 
complete internal audit system at Fannie Mae was destroyed by 
the compensation system.
    If you leave it to private structures, we know empirically 
what they will do and that they have done for 35 years. They 
will systematically misalign the incentives to produce 
precisely this disaster which, again, did not arise because of 
government bail-outs. There were no government bail-outs of 
Enron or WorldCom. There were no government bail-outs of Drexel 
Burnham Lambert which was the big investment banking firm 
before this.
    Under the theory we have heard, private market discipline 
should have been very effective because there were no bail-
outs. It was completely ineffective. It was completely 
ineffective this time again. If you rely on private market 
discipline, you will be back here and the only question is 
whether it is 3 or 5 years from now, with a bigger disaster on 
your hands.
    Chairman Towns. Thank you very much. The gentleman's time 
has expired.
    I now yield for 5 minutes to the gentlewoman from Ohio, 
Marcy Kaptur.
    Ms. Kaptur. Thank you, Mr. Chairman.
    Mr. Roberts, I am hearing you say that regulation was the 
problem. Am I simplifying too much your statement?
    Mr. Roberts. Not so much regulation, but the anticipation 
of a bail-out.
    Ms. Kaptur. Anticipation. Thank you.
    If we go back to the 1980's when the S&Ls were bailed out, 
that was a big green light.
    Mr. Roberts. Yes.
    Ms. Kaptur. And they went and did more and much worse and 
now bailed out again.
    Mr. Roberts. Yes.
    Ms. Kaptur. You heard the testimony this morning and, Mr. 
Black, you did as well. I want each of you to react to the 
special master's statements about 2 and 4 year bonuses and 
stock opportunities and whether you think that time period will 
really work to exert any restraint inside the system.
    My big question to you really is, looking at the mess we 
have now, what do we do as a country to put the wheels back on 
this financial system? There are all kinds of proposals up here 
for consumer credit agencies, new powers for Treasury, systemic 
risk councils and all of the rest. Cut through all of that. 
What do we need to do to restore a banking system to prudence 
in this country and to get our hands on the bank holding 
companies and all these other contortionists that turn 
themselves into something every time they get into trouble? 
What do we do? What would you advise the President? What would 
you advise us?
    Mr. Roberts. I would put away the checkbook. That would be 
the first thing I would advise because I believe, contrary to 
Professor Black, although we agree on a lot. I agree that the 
availability of that government checkbook is a huge driver of 
the irresponsibility that we have seen.
    I totally agree with you about the 2 to 4 year thing; that 
is window dressing. That gives the illusion that it is long 
term. First of all, 4 years is not long term. Second, 3 years 
into it, 4 years is not long term. They are going to have an 
incentive and unfortunately, it has happened in the past, to 
have the stock price go up and down a lot because when it goes 
down a lot, then you get your options at a low price. When it 
goes up a lot, you exercise them. So it takes a year and you 
only get a third of them, or 2 years you only get a third of 
them but still a bad incentive under the current system.
    One of the common things you hear is we need to recreate 
securitization, get into the old model. People are scared of 
securitization. They should be.
    Ms. Kaptur. I am scared of it. Look what it did to us.
    Mr. Roberts. Right. People say we have to recreate Fannie 
and Freddie. You know what the benefit of Fannie and Freddie 
was for the person who took out a mortgage? It was a quarter of 
a percent. That is dwarfed by the hundreds of billions of 
dollars that we as taxpayers are going to be on the hook for. I 
want more transparency. Let us not try to recreate what we have 
but make it safer which is a mirage and an illusion. Let us be 
cautious. We should be cautious, we had a very bad experience.
    My first lesson is, don't try to recreate what we had 
before but safer. That is an illusion. Second, don't think you 
can arbitrarily steer this and that like the 2 to 4 year thing 
and think, oh, we have solved the problem because we have the 
right incentives. Take away the checkbook so that people have 
to bear their losses.
    My view is if we are back here in 5 years with the kind of 
crisis that Professor Black is worried about, I will say good 
riddance. You drove your company into the ground, too bad. We 
are not going to bail you out. You lost your money, you took 
your chances. It is over and people learn a lesson from it and 
it will improve.
    The current system has no incentive for learning or 
improvement. It is a disaster.
    Ms. Kaptur. Mr. Black.
    Mr. Black. I certainly agree that the bail-out is a 
disaster. I think probably 98 percent of Americans believe that 
the bail-out is a disaster. You are always going to hear from 
anyone who teaches economics and teaches criminology you have 
to change the incentive structure. The incentive structure is 
broken. It will produce recurrent, intensifying crises. It 
produces perfect crimes under this system. If you allow that to 
continue, the idea that we are going to have a cleansing every 
5 years of a global crisis, is not appealing to me. We can do 
better and we have done better.
    If you appoint people to run agencies who do not believe in 
regulating, of course you will have a disaster. There is an 
article by the FHA/HUD person, very conservative, Hudson 
Institute, about Fannie and Freddie who was in charge of 
monitoring the regulation of Fannie and Freddie. What does he 
say? It had nothing to do with incentives for housing. It is 
entirely driven by compensation and profit. He is a very 
conservative gentleman in a position to know.
    The person running OFAO, I met with the Director as part of 
all this. This is a conservative, partisan, Republican who 
hates regulation. OFAO had perfectly adequate regulatory powers 
to stop Frank Raines and his successor, Mudd, who was every bit 
as bad from doing what they did which is going to cost America 
$200-plus billion. They did nothing because they didn't believe 
it was legitimate to regulate. I met with these people--we 
can't regulate a place. How could we affect compensation? That 
is their decision. Maybe if the losses have actually occurred, 
then maybe we could act.
    In the savings and loan crisis, because we recognized 
accounting fraud, we targeted Lincoln Savings while it was 
reporting it was the most profitable savings and loan in 
America. Can you imagine how different that is than the modern 
world? You talk about putting up with pressure. Charles Keating 
wrote, ``Get Black. Kill him dead.'' He hired private 
detectives twice to investigate me. He sued me for $400 million 
in my individual capacity in a Bivens action.
    He got a majority of this House to co-sponsor a resolution 
calling on us not to go forward with re-regulation and got the 
Speaker of the House, James Wright, Jr., to go after us. One of 
the proposed charges of the Independent Ethics Counsel was the 
effort of James Wright to fire William K. Black and we got five 
Senators who I blew the whistle on, the Keating Five.
    We took it and we re-regulated the industry and we stopped 
control frauds that were growing at an average of 50 percent a 
year and would have produced a crisis of this magnitude if it 
had been allowed to go on.
    Yes, you are right. The leadership is vital and we have to 
have a system in which we have real Civil Service and where we 
have a real Justice Department. Your effort to get at least 
1,000 additional FBI agents assigned to deal with these frauds 
is absolutely critical. The Justice Department, in terms of 
prosecutors, needs help as well.
    We have to change the incentive structures. One way is 
through deterrence, the whole theory of conservatives about how 
you deal with crime, but another is to get rid of the perverse 
incentives that now produce the perfect crimes.
    Chairman Towns. The lady's time has expired.
    The gentleman from Maryland?
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Following up on what you just said, Professor Black, the 
President of the United States calls you in tomorrow and asks 
the question I think Ms. Kaptur asked of Professor Roberts, 
what do I do to fix this mess and no matter what I have to do, 
I am going to do it, even if it is just one term because I 
don't want to see my country go through this again. What would 
you do, Professor Black?
    Mr. Black. Change your senior leaders of your effort 
because they don't believe in regulation. I mean Summers, and I 
mean Geithner.
    Mr. Cummings. All right.
    Mr. Black. Two, we have a series of actings running most of 
our Federal agencies and to the extent we don't, for example, 
Sheila Bair at FDIC, trying to do things, we have Treasury 
fighting a war against Sheila Bair. Stop that. Put the 
Brooksley Borns, the Sheila Bairs, the Mike Patriarcas--a name 
you probably haven't heard of--in charge of these agencies.
    Increase the FBI immediately. Increase the Justice 
Department. Direct that the priority in these cases be against 
the large specialty entities. The FBI currently has one-fifth 
as many agents working this crisis as it had working the 
savings and loan crisis. In this crisis, the only question is 
how many orders of magnitude worse is it than the savings and 
loan crisis. It is a farce. They are being overrun.
    It is 2\1/2\ years since the secondary market collapsed and 
there has not been a single indictment, much less conviction of 
anyone for the related loans. There are specialized actions on 
Bear Stearns on insider trading mostly and false disclosures.
    We need to do those things. We need to fix executive 
compensation and not just executive compensation. It is what is 
destroying our system of appraisals. Is there anybody in 
America that doubts that they can get a highly inflated 
appraisal?
    Mr. Cummings. Let me ask you this. I want to sit right 
where you are. When I look at the Wall Street crowd, I believe 
there are certain things that may be illegal, but I believe 
there are other things that are not illegal but to me are 
unethical and wrong. I am not sure where the line is drawn 
there.
    To give you an example, the New York Times reported last 
Friday that many former Freddie Mac employees had signed non-
disclosure or secrecy agreements as part of their severance 
package. However, now both Freddie Mac and its Government 
Conservator, the Federal Housing Finance Agency, are invoking 
those secrecy agreements in class action securities litigation 
lawsuits against the mortgage giant. Do you think such secrecy 
agreements are reasonable corporate tactics? While criminal 
investigations can penetrate these agreements, civil securities 
litigation can be thwarted by the silence of key departed 
decisionmakers. This seems to run counter to your testimony on 
the defeating fraud control. I am just curious.
    Mr. Black. I agree. I think that it is terrible public 
policy--those things should be void as against public policy. I 
will give you an example. After I gave one of my talks on 
control fraud, a gentleman came up to me and said, I was the 
guy that hired the elite MBAs for Exxon and it is true that we 
lost a number of folks originally to Enron in those years, but 
you know what, I kept getting phone calls a year later, 2 years 
later saying, is that job still open, this is not a place I 
want to be.
    This kind of executive compensation, when it rewards fraud, 
think of what it creates as a culture. Whenever we talk 
business ethics, it is incessantly tone at the top. When the 
tone at the top is fraud, they create a culture of fraud. The 
folks at Enron were not the smartest guys in the room, they 
were the least moral guys left at the place after the best 
people had left.
    By the way, the average CFO in America lasts 3 years. You 
can talk all you want about long term perspective but until we 
change that, it ain't going to happen. That is one of the 
reasons why you are going to have very high turnover at any of 
these places.
    Mr. Cummings. Let me ask you this. When we see Goldman 
Sachs giving all this money in bonuses and whatever, let us say 
the money didn't go there, would it then go to shareholders? 
Should shareholders be playing a bigger role? Do you follow? If 
you have billions of dollars going out the door in bonuses, it 
seems to me that money should be going somewhere and the 
logical place for it to go would be shareholders.
    Mr. Black. Well, it is worse than that. We, first, have 
gimmicked the accounting rules at the behest of the industry. 
This is something where Congress has culpability, frankly, in 
my view. You put pressure on FASB so that banks no longer have 
to recognize their losses.
    Second, the quotation in my testimony from Standard & 
Poor's about how they never, ever looked at the quality of the 
loans, put those two things together and we are paying bonuses 
based on purported profits that are accounting gimmick numbers. 
Why would we allow bonuses until they clean up the accounting 
and find the actual loan quality by reviewing a sample of the 
underlying loan files which nobody is doing and which that 
farcical stress test never even looked at.
    Mr. Cummings. Thank you, Mr. Chairman.
    Chairman Towns. Thank you very much. Let me ask a couple 
questions.
    Professor Black, you stated in your written testimony, 
Americans are not nearly as angry as they should be about 
executive compensation. If they knew more, they would be 
angrier. Could you look into the camera and in one or two 
sentences, summarize what more they need to know or what more 
they need to do?
    Mr. Black. They need to know that it isn't merely a 
populism issue, that it is the key driver along with non-
regulation that produced recurrent, intensifying crises and 
will do so again in the near term unless we fix it. They are 
producing perfect crimes and people will act on incentives, 
they will commit these perfect crimes.
    The way you commit this perfect crime is to make huge 
amounts of bad loans with extreme leverage. What does that 
produce? It produces a bubble and it produces a crisis. It does 
so whether you bail them out or not. You shouldn't bail them 
out, we agree on that. We agree that it makes the incentives 
work, we agree on that. It is not a necessary condition.
    Chairman Towns. Let us reverse positions for a moment. You 
are now a Member of Congress. When they come to us and say this 
particular company is too big to fail, what do we do then, when 
they come and tell you that? It is too big to fail?
    Mr. Black. That is nonsense. The idea that you could keep 
them alive if it were true is worse than nonsense because they 
have just defined these. In their lexicon, they want a good 
word, so they call them systemically important, gold star. It 
sounds good. They are systemically dangerous institutions. By 
definition, if a single one of them fails, under Treasury's 
logic, it causes a global economic crisis.
    Why would we allow such entities to exist and then unhinge 
further any discipline and maximize moral hazard? It is like we 
were trying to produce a bigger and badder disaster. We have 
closed very large institutions in the past, we do it through 
receiverships. We do a pass through receivership and the place 
closes on a Friday and it opens on a Monday and the ATMs work 
most of the weekend. This is something that can be done. What 
is lacking is the will.
    Chairman Towns. Professor Roberts, do you want to add 
something to that?
    Mr. Roberts. Yes. I want to tell a story. I was 
interviewing Alan Meltzer for my weekly pod cast, econ talk, 
and he mentioned the power of FDICIA, the FDIC Improvement Act, 
and he told me how it could have been used to help this 
transition. It would let some people go out of business, some 
would have and some wouldn't have. I said why didn't anyone 
suggest that to the Treasury? He said, I told Secretary Paulson 
that we should use FIDICIA and he said, well, I asked the 
bankers and they were against it. I guess they would be.
    It really is a question of will and the challenge is, as 
you say, too big to fail. Guess who thinks they are too big to 
fail, the people whose money they want to get back, and it is 
up to politicians and policymakers, it is up to Bernanke, 
Paulson and Geithner to say no.
    Bear Stearns is a perfect example. In March 2008, Bear 
Stearns was insolvent, there was a worry it was going to have 
systemic risk. It is an interesting question of whether it 
would or would not. I don't know but when we decided to bail 
them out, Lehman Brothers which had a very similar balance 
sheet, decided to double down. They borrowed more money because 
I think they thought they were going to be bailed out.
    One of their largest lenders was a money market fund which 
is supposed to be extremely conservative. Reserve Primary, 
actually the very first money market fund, was lending money to 
Lehman Brothers to finance their mortgage-backed securities. 
Why would they do that? I suggest it is because they probably 
thought they would get baild out.
    They weren't, as it turned out, the only one, and we have 
drawn the lesson that was our mistake that we didn't bail them 
out. I think our big mistake was bailing out Bear Stearns. By 
the way, even when we did not bail out Lehman Brothers, the 
stock market didn't tank for a week. Everyone said that was the 
crisis, that was when it started. It actually may have been 
when Secretary Paulson came up here and said, if you don't give 
me a blank check $700 billion, the world is going to hell in a 
hand basket, we are going to have an apocalypse. The whole 
economy of the world is going to be dissolved. That kind of 
scare talk I think had a big effect. John Taylor from Stanford 
has written about this and how it affected how people behave. I 
think we have made some terrible mistakes in not having the 
will to say no.
    Mr. Black. Can I add it is not even a matter of deciding to 
use FIDICIA, the Prompt Corrective Action Law was passed after 
the savings and loan crisis in the belief that excessive 
regulatory forbearance had helped cause the crisis. The act, in 
general, is mandatory, particularly for deeply insolvent places 
but it has a terrible weakness we told people about back when 
they were considering it. It can be gamed by accounting and it 
is gamed by accounting. That is why these places aren't closed. 
You actually tried to mandate it.
    Chairman Towns. I now yield 5 minutes to the gentleman from 
California.
    Mr. Issa. Thank you, Mr. Chairman.
    This is a sort of an anecdotal question. Do either one of 
you believe for a moment that the executives who took their 
deferred compensation that had become due--in other words, 
their accrued contracts before Mr. Feinberg took over and 
rolled them into future stock appreciation plans, meaning they 
rolled that many dollars into a plan that would mature in 3 to 
5 years that would essentially execute at the price of the 
stock--believe, for example, at BofA that was not simply people 
saying am I better off taking my money here or better off 
taking it here, realizing that the top 25 at Bank of America, I 
assume, are the most knowledgeable, best negotiators and 
smartest bankers on the planet, notwithstanding the crisis?
    Remember, all bankers on the planet don't look as smart as 
they used to, but do either of you doubt for a moment that when 
we went to negotiate that part, we basically were negotiating 
an if it is better for you, you will roll it over and if it 
isn't, you will do something else situation, the idea that we 
would negotiate out existing contracts? It is sort of a comment 
on the quality of those people that we gave a deal.
    Mr. Roberts. I was deeply inspired by the special master's 
comments about his respect for the Constitution. They were then 
followed by remarks where he said, if they didn't voluntarily 
agree, we would make them. I think it is a very bad situation 
when the power of a single individual with no appeal and very 
little transparency was relying on the Wall Street Journal, 
unfortunately, to find out what was really going on. We will 
find out in more detail how accurate that is, I assume. He 
disputes it naturally, but I think it is a very bad situation.
    I am very sympathetic to Chairman Towns' point of what 
alternative do these folks have? The standard view is, they are 
the best people in the business, they have lots of 
alternatives. The alternatives are a lot smaller, there are 
fewer than there used to be, so I think a lot of these folks 
were maybe doing the best they could. They certainly did the 
best they could for themselves. There is political pressure on 
the special master from them, lobbying him to do what is good 
for them.
    Mr. Issa. I agree.
    I wanted to continue the line you were already on, 
Professor Black. That was that our bail-out was inherently the 
wrong statement. In other words, we put in new money as 
basically subordinated money. We are a preferred stock and 
preferred stock comes after all debt.
    Do either of you doubt for a moment as a practical matter 
that the world would have been different had we told the 
creditors and stockholders of these entities that we would come 
in only if we came in as senior debt? In other words, we will 
come in, we will provide x-amount but you will subordinate your 
existing debt in order for us to keep your companies alive. 
Wouldn't that have changed the dynamics dramatically of where 
we would be, which would be in the first position, what their 
interest would be to get us out so that their other lenders and 
stockholders would have a value again?
    I realize there are some regulatory questions at FDIC about 
how you legitimize that as equity, not debt, but we had the 
power to call it whatever we wanted. We called it equity so 
that we could say that their capital position was improved. 
Bill Isaac and other people who gave us lots of alternatives 
felt that we ignored every one except the one we took and the 
one we took was the one that froze the markets when Secretary 
Paulson said you have to do it now, it is a crisis, we can't go 
the weekend.
    Would either of you comment on that alternative from a 
purely incentive basis to cause their interests to be aligned 
with ours?
    Mr. Black. I said not very nice things about Geithner and 
Summers. Let me add Paulson to the list as well.
    Mr. Issa. They are all going to have to write their own 
books.
    Mr. Black. I would not want him negotiating on my behalf if 
I was the United States of America. I don't believe that is how 
he acted when he was at Goldman. I think he was a very 
unfaithful agent to the interests of the American people.
    Mr. Issa. Professor Black, I am going to followup on that. 
Earlier, I talked about the fact that Secretary Geithner's 
operation, maybe not him but his operation at the New York Fed 
took an opportunity to negotiate credit defaults at some 
amount--probably 60 cents on the dollar, maybe less, they were 
certainly worth less at that point--and put on 100 cents on the 
dollar. Do you believe the New York Fed acted in the best 
interest of the American people when they paid out 100 cents on 
the dollar with our tax dollars?
    Mr. Black. No. I think they acted completely contrary to 
the interest of the American people. More than that, why were 
we baling out AIG anyway?
    Mr. Issa. Or at least the British division.
    Mr. Black. AIG was never federally insured. I am a 
signatory with a number of folks, including some very 
conservative folks, about what we propose should have been done 
at AIG which is a separate bankruptcy for the trading arm. 
These two things you put together for a reason.
    In both cases, even if we were going to do a bail-out, 
which we shouldn't have, we did it in a way that was incredibly 
harmful to the American people and so obviously harmful that an 
experienced Goldman Sachs executive would never do that 
accidentally.
    Mr. Issa. Or several of them.
    Professor Roberts.
    Mr. Roberts. I think the key point is the idea that you 
would only pay 50, 60 or 80 cents on the dollar, any of those 
would have been better than the complete bail-out of creditors 
because creditors are the people who restrain risk taking. The 
creditor only cares about one thing, down side. They want to 
make sure that the organization stays solvent. Stockholders get 
the up side benefit.
    By taking the skin out of the game for creditors, which is 
what we have consistently done with these bail-outs and the 
bail-outs starting in 1984, Continental of Illinois basically 
says to creditors, lend money, you will get it back in the 
first case scenario. That is a disaster.
    The story you are talking about, which was reported by 
Bloomberg, that when Tim Geithner was head of the New York Fed, 
he interrupted a negotiation where they were only going to pay 
60 cents on the dollar and said, we will pay the whole thing, 
it is terrifying.
    If a Martian came down and said, what is the U.S. financial 
system designed to do, I am afraid they would say, it is 
designed to funnel money to Goldman Sachs. That may not be 
true, but the fact that it looks to be true is not a healthy 
thing for a democracy.
    Mr. Issa. No, not at all.
    Mr. Black. And in the most opaque way possible.
    Mr. Issa. On that note, Mr. Chairman, we continue on a 
bipartisan basis, to want to audit the Fed, so perhaps that 
could be one of the things we glean from it.
    Mr. Chairman, in closing, I just want to say that I think 
today's hearing has created an opportunity for us to revisit 
how we would effectively look at Freddie and Fannie, and our 
friend, Franklin Raines, and their participation in the 
disaster that befell America. I would ask that we do some 
background discovery in preparation for a hearing where we 
could work together to find a common way to figure out what 
their role was and how to prevent it since the GSEs are here, 
at least for the time being.
    I yield back.
    Chairman Towns. I understand your concerns and these are 
things we can look at as we move forward but also remember that 
we are running out of time in terms of this session.
    Is there anyone of this side seeking to be recognized 
before I recognize Mr. Burton? Yes, Congresswoman Kaptur.
    Ms. Kaptur. Thank you, Mr. Chairman.
    When I think back to last fall, Mr. Paulson used the tactic 
of fear that intimidated the Congress, in my opinion, and many 
people in the country. The argument that was used was, if we 
don't do this, TARP and the bail-out, the country would be 
worse off for it.
    I keep looking back at what has happened and I am thinking 
what could be worse in a district like mine with over 13 
percent unemployment, foreclosures up by 94 percent, no credit 
being lent because the supervisory fees and the FDIC fees being 
paid by the banks that didn't do anything wrong have gone up 20 
times. Credit unions are being asked to pay these exorbitant 
additional fees. They ground credit to a halt. I am thinking 
what could be worse than what has been done.
    You are saying that if we had resolved this in a different 
way, perhaps the American people would have taken some nicks, 
but I am saying to myself, didn't they do it in the worst way. 
My question to you is how do you react to their argument today 
if we hadn't done that, it would be worse?
    Mr. Roberts. That is always the argument. They can always 
come back with that. The first question is, were they right and 
the second question is, did they actually make it better, can 
we point to things they did to make it better?
    The thing I think that is often forgotten is the connection 
between Wall Street and Main Street. The claim is if we hadn't 
saved these organizations, these financial giants, the turmoil 
would have spilled over into Main Street and the average 
American would have paid a fierce price.
    As you point out, they paid a fierce price anyway. We have 
unemployment on the rise headed toward double digits. Contrary 
to all the economists who think they can see the future, I want 
to let you know they can't. They don't know whether it is going 
to get better or not, we don't know if we are on the mend.
    I would suggest the single biggest mistake we have made, 
whether it was for the right or the wrong reasons, whether you 
are cynical or whether you are an idealist, the biggest mistake 
we have made is that we have created an incredible environment 
of uncertainty about the future for both policy, compensation, 
who is running the auto industry, what is health care going to 
be, what about the environment. We have all this great stuff we 
are trying to do, but no matter whether it is good or not, 
whether you agree with this piece or that piece, the 
fundamental situation is that for the average American 
businessperson who has to take risks with their own money on 
the line outside of Wall Street, there is still this thing that 
if you go out of business, you lose all your money.
    The biggest problem right now is that for small business 
and any business that is not on Wall Street, they are scared 
and rightly so.
    Ms. Kaptur. Do you know what they are doing, Mr. Roberts? 
They are now talking about going after the small business 
sector and securitizing any loans made to them. They are trying 
to vacuum what is left in the country of equity again.
    Mr. Roberts. It is a mistake. My point is that because of 
the uncertainty about what is coming down the road, in a 
desperate attempt to give people ad hoc power to fix, as a 
result we have created an atmosphere where people don't know 
what the rules of the game are, they can't plan for the future. 
Everybody is waiting to see maybe I will get mine, maybe I will 
get a bail-out, maybe I will get a tax increase. Everybody is 
sitting on the sidelines waiting.
    Until that gets fixed, I would suggest that Main Street 
will not recover. All the stimulus money in the world, all the 
new improved this and that, until we get people confident about 
the future, we are not going to make progress.
    Ms. Kaptur. Mr. Black and Mr. Roberts, one effort that you 
might put in the area of game theory, if they had put you two 
in charge, even though you have different points of view on 
some things, you have come together on others and it would be 
very interesting for me and perhaps other Members, going back 
to September, involving others in our country. You mentioned 
Mr. Patriarca. I happen to think a lot of Mr. William Isaac who 
resolved a lot of institutions back in the 1980's. Put some of 
those minds in the room and say, if you could unwind what was 
done and you could start from scratch, what would you have 
done, just in the form of game theory, to resolve these big 
ones.
    I will tell you what is being said to us. Well, 
Congresswoman, you don't really understand because you never 
really understood credit default swaps and collateralized debt 
obligations. Because those were involved, we couldn't resolve 
the institutions and take them into receivership as we normally 
would with the FDIC. You get all this flak.
    Mr. Black. The truth is they didn't know. The truth is this 
was an entire marketplace built on don't ask, don't tell where 
no one, and I mean no one, looked at the underlying loan files 
until Fitch does in November 2007 because the secondary markets 
tanked and they are not going to lose any business. Then they 
say the results were disconcerting, that there was the 
appearance of fraud in nearly every file. You could see it on 
the face of the files. So they don't want to look because what 
they are going to see in that box is a bad thing, not a good 
thing. Let us put the burden on them. Make them make the case 
publicly with full disclosure exactly why they made these 
decisions, what decisions they made and when they made them, 
and who made them.
    Chairman Towns. The gentlelady's time has expired.
    I now yield to the gentleman from Indiana, the former Chair 
of this committee, Mr. Burton.
    Mr. Burton. That is my picture up there. Do you think I 
look like that?
    Chairman Towns. Your high school picture.
    Mr. Burton. Thank you, Mr. Chairman. I apologize for not 
getting back quicker. We had two Foreign Affairs meetings and I 
couldn't get back.
    Do you think the pay czar is constitutionally permissible? 
What do you believe the implications are for giving somebody 
this kind of authority, a czar like this, either of you?
    Mr. Black. I think it probably will pass a constitutional 
test, particularly with this Supreme Court. I don't know there 
will even be a challenge to it on a timely basis. I think 
everybody agrees it is not the right way and it is not even a 
theory of 2nd best--maybe it is somewhere like 12th best--on 
the way to approach these things.
    The best way was not to do nothing in the sense of allowing 
the incentives to remain perverse. If you are going to close 
the places, of course that takes care of the perverse 
incentive.
    Mr. Burton. What do you think about the approach that he 
has taken by reducing compensation for these people say guys 
making $12, $13 million, including bonuses, and he says, we are 
going to cut your salary to $450,000 and will give the rest to 
you in stock as time goes by? What do you think that does to 
the competent people who run these companies? What do you think 
is going to happen or what is happen? I think Bank of America 
has lost half of their people, their top management people.
    Mr. Black. As I said, senior officers in America have 
incredibly short tenures without this program. CFOs average 3 
years, so you are going to get huge turnovers at these places 
and turnover is particularly high on Wall Street because all of 
these guys have zero loyalty to the organization. They are 
always in play.
    Mr. Burton. So you don't think this would increase the 
likelihood that they would leave faster?
    Mr. Black. I think it will increase the likelihood of some 
people. In economics, we think about things on the margin. On 
the margin, it has to do that but that is inevitable whenever 
you go to performance pay.
    Mr. Burton. I would disagree with you. I think if I were a 
person who had that kind of salary commitment and they said 
they were going to cut it to $450,000 a year, I would say, I 
think I will go out on the street, take my $13 million and see 
if I can't get a job with the same kind of compensation. What 
do you think about that, Professor?
    Mr. Roberts. Some of them, maybe they can't which means you 
are stuck with whoever you have but as you say, I think a lot 
of them left because they saw the handwriting on the wall and 
knew they could do better somewhere else and they are gone. 
Again, I want to emphasize it is clear we want to try to get 
back that money. Obviously the taxpayer would rather have more 
money than less money. The idea that we are going to pour money 
into AIG or into Bank of America or into City Group with the 
idea that we have to get our money, maybe they ought to 
disappear.
    Mr. Burton. What does that do to the management people who 
may have the talent and know-how to help get a company out of 
this kind of mess and they leave and you go to second or third 
tier executives?
    Mr. Roberts. And you are counting on them looking forward 
to getting that stock bonus down the road in 2, 3 or 4 years. 
What is their optimism about that if they know the best people 
are gone? It is really not a good system.
    Mr. Burton. I just think the taxpayers who are the 
stockholders ought to be very concerned about having top notch 
people in these executive positions to try to get some of their 
money back.
    I have a couple more quick questions. The Fed has indicated 
that they may start talking about expanding the salary 
conditions on all banks. What do you think about that, what do 
you think the possibility is?
    Mr. Roberts. Everybody likes more power, except for the 
special master. He said he didn't want any more, he is happy 
with seven.
    Mr. Burton. I know he said that.
    Mr. Roberts. That is what he said but the Fed, I am sure, 
would grow and survive. I think as I said before, that is the 
wrong way to fix the problem. The wrong way to fix the problem 
is to say, you are out of control, you take too much risk, so I 
am going to take away some of your goodies so that you behave 
better in the future. It is not good for our financial systems, 
it is not good for our capital system or investment. It is not 
good for productivity and innovation.
    As Professor Black said, a lot of people went out and took 
loans that they didn't investigate. Why would they do that? The 
answer was because they had the incentive to do that, but we 
have to keep our eye on the prize that they were financing 
those lousy investments with borrowed money, money from the 
other players in the game. Why would people lend folks money 
for lousy, risky loans? The answer is, because they thought 
they were going to get the money back.
    If we solve that problem, we don't have to have this top 
down, micromanaging of salaries. Forget whether it is possible, 
the political implications of it are extremely destructive.
    Mr. Burton. I have two more quick questions and then I will 
let the chairman adjourn the meeting if he so chooses.
    Do you think Freddie Mac and Fannie Mae should have the 
same kind of salary restructuring done on them?
    Mr. Roberts. I think it is shocking that they don't. They 
put us $100 billion in the red so far and I think it is on the 
way to maybe $200-$400 million. We don't really know and I 
think if you do audit the Fed, I would really like you to look 
at those mortgages they are holding because they are not market 
to market.
    Mr. Burton. The thing that bothers me is that we have done 
this to these executives and they were responsible, at least in 
part, for this, but Freddie Mac and Fannie Mae haven't done 
anything about that.
    The last thing I would like to ask, can you compare the 
crisis we face now with the financial institutions to what 
happened in the S&L crisis back in the last 1980's?
    Mr. Black. The crisis is vastly larger. It was a much 
easier crisis to stop; this was far more obvious. There was 
almost complete destruction of regulation this decade. It 
started in the decade before.
    Mr. Roberts. I see it as a spillover of the same mistaken 
attempts for a free lunch. Everybody wants a free lunch. I want 
a very high return investment but no risk, of course. I want it 
safe and an extremely high rate of interest. That desire of the 
American people, of every human being, for that kind of free 
lunch should not be indulged.
    Mr. Burton. They handled the S&L crisis much differently 
than they did this one.
    Mr. Roberts. That is correct.
    Mr. Burton. And it worked out.
    Mr. Roberts. Unfortunately, the roots of it are the same, 
an attempt to tell people there is no risk. You put in your 
deposits, don't worry about it. It is all taken care of. The 
government guarantees it. That government guarantee explicit 
there, implicit with Fannie and Freddie, implicit with the 
investment banks, is the fundamental source of the problem. It 
is a desire to deliver politically a free lunch. You will make 
your money but no risk of loss.
    We ought to be treated like grown-ups. I would like to be 
treated like a grown up. I take my risk, I profit if I make a 
good choice, I am prudent. I make a bad choice, I lose my 
money. That is what capitalism is about and we have lost and 
have to get it back.
    Chairman Towns. Thank you very much. The gentleman's time 
has expired.
    I yield to the gentleman from Maryland, Mr. Cummings.
    Mr. Cummings. Thank you very much.
    Earlier, I asked Mr. Feinberg where are we going from here. 
It was his hope that if he controlled the compensation for the 
seven companies, that they might follow by example. I told him 
that I just don't see that happening. I wish it would.
    I am just wondering as I listened to you talk about what 
you might do, it is hard for me to see some of those things 
happening. What do you foresee? Let us be realistic. Let us 
assume the things you talked about don't happen. Mr. Black, 
Geithner is not going anywhere. I am just telling you that--
probably not. I am not trying to take away from what you have 
said, so what do you foresee?
    Mr. Black. First, our motto was it is not necessary to hope 
in order to persevere. I would say the circumstances were 
vastly worse in the savings and loans crisis in terms of the 
correlation of political forces.
    President Reagan's Justice Department threatened to indict 
the chairman of our agency criminally for re-regulating the 
industry under the Anti-Deficiency Act under the argument that 
we were closing too many insolvent institutions. That was the 
world that we lived in, so I don't give up.
    I know these things seem improbable, I know the forces 
opposing us seem unbeatable, but America has not been 
characterized by crony capitalism and it is up to us to keep it 
from going that route. If we give up and aim real low in terms 
of reforms, that is exactly what we will get because the master 
is frankly wrong on that point you asked about.
    Some well run corporations may listen to him. That is not 
where the problem is. The problem is in the majority of 
corporations, that is what the statistics show, that they 
deliberately and egregiously misalign the interests through 
their compensation system. They will not listen to the Master, 
they will continue to produce further crises whether or not we 
bail out the institutions.
    Mr. Cummings. Professor Roberts.
    Mr. Roberts. On an optimistic note, whether most 
corporations or some corporations adopt the idea of 
incentivizing long term incentives through stockholdings, many 
corporations already do that. Of course some are flawed, some 
make mistakes, but most of them don't come to Washington with 
their hand out. That is a problem right now of the auto 
industry because of their special political pull and the 
financial sector through an even more special political pull, 
their long term relationship with Washington. That is what has 
to be stopped.
    On the optimistic side, true, Mr. Geithner is not going 
anywhere but you here in Congress want to stay in office, you 
are going to listen to the American people. If the American 
people say, we had to have these rescues, we have to recreate 
what we had before and make sure we stay as before, you are 
right, nothing is going to change.
    If they say, which I think they are increasingly saying, we 
want to stop giving money to really rich people and the right 
way to fix that is not to take it away at the last minute from 
seven of them but to destroy the incentives that allow them to 
take it in the first place, then I think we have a chance to 
really fix the problem.
    It is not going to be easy. As Professor Black said, it is 
a long road. We all, I hope, have something to contribute, some 
of us a very small bit, some of you a lot larger, but it is not 
a force of nature. It is a matter of will and that will be 
bolstered by the American peoples' outrage not just at the fact 
that people make a lot of money, but the way they made it, 
through taking risks with money that was borrowed on the 
presumption that it would be paid back by the taxpayer.
    That is corrupt. That is the crony capitalism we have to 
stop and it is in your hands. The next time the Congress as a 
whole confirms a candidate for the Chair of the Fed or 
Secretary of the Treasury, I would like you to have him make a 
commitment--they may not keep it--that they will not return 
money dollar for dollar to lenders who make bad risks and 
finance bad bets.
    Ask them to commit to 50 cents on the dollar. Ask them to 
commit to encouraging losses. They may not keep that promise 
but that is where it starts, people putting at least their 
reputation on the line. I think there is hope there.
    Mr. Cummings. We see people being thrown out of their homes 
because of foreclosure. The Washington Post just had an article 
saying how in some instances it has doubled over last year and 
then you see people losing their jobs and what have you. Are 
you surprised there is not more of a balance here? In other 
words, we hear about spending $180 billion for AIG but we have 
people in our district that it would probably take, at best, 
$10,000 and they could stay in their homes. It is hard for the 
American people to understand it, it makes no sense. I think 
that adds insult to injury, the loss of jobs, savings, etc.
    Mr. Black. That is why crony capitalism destroys 
democracies over time as well, corrupts them. People understand 
after a while that it isn't what they do, it is who they know.
    One of the things that is unusual about America in polls is 
how few Americans have that view compared to other places. It 
is a real productive process not to have that view, to believe 
that merit really is something important. It is perfectly 
rational, as people see more and more cases of the rich getting 
bailed out, to say no, it is mostly a matter of who you know. 
It is a sick system and people start withdrawing from that 
system. Nations and even societies break down when it happens.
    Mr. Cummings. Thank you, Mr. Chairman.
    Chairman Towns. Thank you very much.
    Let me thank the gentleman from Maryland, his time has 
expired.
    Let me begin by thanking all the witnesses, Mr. Feinberg, 
you, Professor Black, and Professor Roberts.
    Let me thank the Members on both sides of aisle who 
attended the hearing. The American people are angry. They are 
angry that while millions of hardworking Americans are losing 
their homes, their life savings, that bank executives are 
rewarding themselves for failure.
    The idea that hundreds of thousands of dollars in salary, 
plus millions of dollars in stock options, is not enough for 
the executives, bailed out by the American people, is exactly 
the type of thinking that got us into this financial crisis in 
the first place.
    We need to link bank executive compensation to performance. 
I have never seen or heard of people that fail getting a bonus. 
Of course the answer is that if we do not give them a bonus 
after they have failed, they might leave. I think that you 
should say goodbye. That is exactly what the special master and 
Obama administration have done. Without this crucial link, we 
will continue to have perverse incentives for bank executives 
to take unjustified risks with taxpayers' money. This is unwise 
and unacceptable and must be stopped.
    Again, let me thank you, the witnesses, for being here and 
thank the Members for attending.
    The committee is now adjourned.
    [Whereupon, at 3:17 p.m., the committee was adjourned.]
    [The prepared statements of Hon. Dennis J. Kucinich, Hon. 
Gerald E. Connolly, Hon. Dan Burton, and additional information 
submitted for the hearing record follow:]

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