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




 
                 COMPENSATION IN THE FINANCIAL INDUSTRY

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 22, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-98



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    January 22, 2010.............................................     1
Appendix:
    January 22, 2010.............................................    41

                               WITNESSES
                        Friday, January 22, 2010

Bebchuk, Lucian A., William J. Friedman and Alicia Townsend 
  Friedman Professor of Law, Economics, and Finance, and Director 
  of the Corporate Governance Program, Harvard Law School........     9
Minow, Nell, Editor, The Corporate Library.......................    12
Stiglitz, Joseph E., University Professor, Columbia Business 
  School.........................................................    10

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    42
    Bebchuk, Lucian A............................................    45
    Minow, Nell..................................................    52
    Stiglitz, Joseph E...........................................    68

              Additional Material Submitted for the Record

Hensarling, Hon. Jeb:
    Written statement of the Center On Executive Compensation....    76
    ``Bank CEO Incentives and the Credit Crisis''................    82


                          COMPENSATION IN THE
                           FINANCIAL INDUSTRY

                              ----------                              


                        Friday, January 22, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Sherman, 
Moore of Kansas, Miller of North Carolina, Green, Cleaver, 
Bean, Perlmutter, Donnelly, Foster, Carson, Kilroy, Grayson; 
Bachus, Hensarling, Garrett, Neugebauer, Campbell, Lee, and 
Lance.
    The Chairman. The hearing will come to order. And we have 
10 minutes on each side. Since there are not many members here, 
we can get right into the questioning and have some 
significant--everybody will be able to ask questions. I will 
say that I want to announce that on February 5th, we are going 
to have a joint hearing with the Committee on Small Business on 
the question of why more money isn't being lent. And we are 
picking February 5th because we agreed to have a joint hearing 
which means that 100 Members of the House will be the operative 
body. So this will be one day where, if Members come to us and 
say I can't make it, we will not be totally unhappy; but we did 
feel that this is something that the Small Business Committee 
has a very real interest in this as well.
    We have the chairman and the ranking member of the Small 
Business Committee on this committee so we will do that one 
together.
    And this hearing will now begin. We have 10 minutes on each 
side for opening statements, and I begin by recognizing for 2 
minutes the gentleman from Indiana, Mr. Carson.
    Mr. Carson. Thank you, Mr. Chairman. As we all know, the 
American taxpayers are angry that their tax dollars lifted many 
financial firms in the time of crisis while some of these same 
firms now have reported record profits and are handing out 
lavish bonuses. Some of these firms have not turned around but 
continue to follow reckless compensation practices. This is 
because we currently have an irresponsible corporate culture 
where American CEOs are awarded large bonuses and generous 
stock options even when their companies perform poorly.
    There has been an increase in the typical CEO pay in the 
United States during the past 25 years. The total real 
compensation of CEOs in large publicly traded companies grew 
sixfold during this period. The case against the pay of 
American CEOs looks even more powerful by recognizing that the 
typical American company head receives greater total 
compensation than company heads in Great Britain, Canada, 
Japan, Spain, and in much of all developed countries. Clearly, 
American CEOs are being rewarded over CEOs elsewhere, even when 
per capita income of the countries do not differ by very much.
    While recent headlines on executive compensation are 
focused on financial firms, we cannot ignore other sectors. In 
fact, the corporate library recently ranked five CEOs, all 
outside of finance, the highest paid, worst performers. These 
CEOs are taking home more pay, despite the fact that their 
businesses have done so badly, that their stocks have tanked, 
and they have laid off many employees.
    American compensation structures are out of control and the 
existing compensation structure cuts to the ability of our 
corporate governance system to function. As we work to issue 
new guidelines on executive pay, we need to ensure firms begin 
to better align pay with stockholder value.
    I suggest moving beyond a nonbinding shareholder vote on 
executive compensation. There is continued frustration with 
company boards that either failed to act in response to a 
successful nonbinding shareholder resolution or a watered-down 
implementation of proposals. Boards can too easily amend or 
rescind board-adopted policies under the umbrella of fiduciary 
duty obligations.
    While I encourage open dialogue between shareholders, 
directors, and management, I do feel shareholders have the 
incentive to act responsibly in determining fair and equitable 
pay for executives of firms.
    Thank you, and I yield back the balance of my time.
    The Chairman. The gentleman from Alabama--I believe the 
gentleman used 2\1/2\ minutes, so we will have 7\1/2\ left. The 
gentleman from Alabama for 2\1/2\ minutes.
    Mr. Bachus. Thank you, Mr. Chairman. Mr. Chairman, since 
you have been chairman, I think you have been very fair to 
committee Republicans. You have invited witnesses that we have 
requested and often invited more than just one of our choices 
at certain hearings. Of course, it is traditional that the 
Republicans get to call one witness at a hearing. I have always 
appreciated your consideration and I know my colleagues have 
too. Because you have always been accommodating of our 
requests, the decision to deny Republicans our witness choice 
for this hearing is both disappointing and puzzling. I am not 
sure what makes this hearing any different from any other one.
    So I would ask why we were denied our choice of witness. 
That witness was Ed DeMarco. He is the acting director of the 
Federal Housing Financial Agency, which oversees Fannie Mae and 
Freddie Mac. He is the person who, along with the Treasury 
Department, approved a $42 million payday for 12 executives of 
the failed GSEs, including $6 million to the chief executives.
    During this hearing on compensation in the financial 
industry, we assumed we would be permitted to examine a real-
life case of excessive unreasonable executive pay at the two 
companies which have received more extraordinary taxpayer 
assistance over--$110 billion and counting--than any others. 
But we were wrong.
    Mr. Chairman, $6 million is 15 times more than what the 
President earns and 30 times more than what a Cabinet Secretary 
earns. The Christmas Eve announcement of these bonuses was 
greeted by one commentator by saying the taxpayers got 
scrooged. Because the regulators failed to use their authority 
to block these colossal paydays of government employees--you 
have referred to them as public utilities--Congress should step 
in.
    I and several of my Republican colleagues have introduced 
legislation to protect taxpayers from having to foot the bill 
for any more multibillion-dollar tax packages.
    Mr. Chairman, I think the taxpayers are right. Whether it 
is any financial company, if the government is heavily 
subsidizing that company, they have a right to ask--
    The Chairman. If you wish to continue--
    Mr. Bachus. Another 30 seconds. They have a right to ask: 
Are my tax dollars subsidizing these large salaries? And they 
certainly have the right to hear Mr. DeMarco and find out why, 
on Christmas Eve, they learned that they would be paying some 
tremendous bonuses.
    The legislation also expresses a sense of Congress that 
each executive should return the executive pay they received in 
2009 so we can reduce the Federal budget.
    Mr. Chairman, I do appreciate your pledge to invite Mr. 
DeMarco to testify at a hearing in late February, but I am 
disappointed that the American taxpayers will have to wait 
another 5 weeks for an explanation from the Obama 
Administration about this Christmas Eve raid on the Treasury to 
pay these executives.
    I yield back the balance of my time.
    The Chairman. The gentleman consumed 3 minutes. There will 
be 7 minutes on his side and 7\1/2\ on this side. I recognize 
the gentleman from California.
    Mr. Sherman. Thank you.
    The Chairman. For 2\1/2\ minutes.
    Mr. Sherman. Yes. I believe in capitalism, that means 
shareholder control, shareholder risk. That is why we should 
have a say on pay and it ought to be binding. After 13 years in 
Congress, I am not a real fan of nonbinding resolutions. There 
is a special circumstance where a company is too-big-to-fail 
because at that point, they have a quasi-Federal Government 
guarantee. The best solution is to break them up so that we 
don't have anyone who is too-big-to-fail.
    I commend the gentleman from Pennsylvania whose amendment 
would at least allow the Administration to do just that. Until 
then, those that are too-big-to-fail should face fees to recoup 
for the taxpayer the benefits that the organizations get from 
their implicit Federal guarantee.
    The bill we passed in this committee, in this House, does 
that, and, with Peter's amendment, allows those firms to pay 
for the past cost of the too-big-to-fail as well as provide it 
a before-the-fact fund to pay for the too-big-to-fail problems 
of the future. It also makes sense as long as there are those 
that are too-big-to-fail and enjoy the implicit Federal 
guarantee, if they are quasi-government entities or quasi-
federally guaranteed, they should play by government salary 
rules, which are a lot different from those that Wall Street is 
familiar with.
    The best solution is for these firms to voluntarily divide 
themselves so they are not too-big-to-fail. And we can go back 
to real capitalism--shareholder control, shareholder risk--and 
a Congress and a Federal Government that doesn't have to 
concern itself with salaries and other aspects of internal 
corporate decisionmaking
    I yield back.
    The Chairman. The gentleman has consumed, I believe, 1 
minute and 20 seconds. So that will leave us on this side about 
6\1/2\ minutes. And the gentleman from Texas is recognized for 
2\1/4\ minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. Let me see if I 
can get this straight. We are going to regulate the 
compensation for companies that paid the TARP money back, but 
we approved a multimillion-dollar pay package for Freddie and 
Fannie who will never pay any of that money back. Now, that is 
what I call picking winners and losers. And in this case, 
unfortunately, the losers win.
    Since the American people now own almost 80 percent of 
Fannie Mae, we need good management to stop the bleeding and 
see if we can recoup at least some of the taxpayers' money. But 
more importantly, we need consistent policy in this country.
    I think it is important to kind of reflect on what is going 
on today. We are going to regulate compensation, tell companies 
what they can and cannot do, break them up if some bureaucrat 
thinks they are too big, tax their products. By the way, I am 
not taking about Venezuela, I am talking about what is going on 
in the United States. The American people are getting tired of 
the government telling them what to do.
    So today, we are going to talk about more big-government 
intervention into America's companies. We are going to try to 
look tough on the financial institutions so we can appease the 
anger of the American people for committing trillions of their 
hard-earned money to bail these entities out in the first 
place.
    If any colleagues were so concerned about the taxpayers and 
not Wall Street, why did they bail out Wall Street at the 
expense of the American taxpayers?
    What the American people really want us to focus on is how 
can we raise their wages and create jobs for those who have 
lost theirs, instead of focusing on issues that don't create 
jobs and, in fact, are going to cause the American people to 
lose their jobs.
    Mr. President, we need you to focus on jobs, not raising 
taxes, growing government, and spending money we don't have on 
flawed stimulus packages. Where are the jobs you promised the 
American people? Instead of more government, the American 
people want more jobs. They sent you a wake-up call on Tuesday 
in Massachusetts, Mr. President. I hope you were listening.
    With that, I yield back.
    The Chairman. The gentleman from Kansas is recognized for 2 
minutes.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. Just like 
reasonable executive compensation rules to increase financial 
stability should not be bipartisan, reforming Fannie and 
Freddie should not be either. I am disappointed that some of my 
friends on the other side forget that when they controlled 
Congress for 12 years, they did not enact meaningful reform of 
Fannie and Freddie.
    Last year, the former chair of this committee, Mike Oxley, 
said, ``We missed a golden opportunity that would have avoided 
a lot of problems we are facing now if we hadn't had such a 
firm ideological position at the White House and the Treasury 
and the Fed.''
    I hope we can come together this time, Republicans and 
Democrats, to explore good policy options to deal with Fannie 
and Freddie later this year.
    Turning back to executive compensation, I have always felt 
that financial firms receiving taxpayer assistance should 
receive the most scrutiny with respect to their executive 
compensation practices. One example involves reports of large 
salaries for Fannie and Freddie executives. I wrote them about 
this last March when we first learned about it, and after 
receiving an unsatisfactory response from FHFA, I joined 
Chairman Frank and others to vote for H.R. 1664 to stop those 
unfair pay practices of TARP recipients. Protecting taxpayers 
should not be a partisan issue. So I was disappointed that some 
of my friends on the other side didn't join us to support that 
commonsense measure.
    Finally, for firms who have repaid TARP, I don't think the 
government should go in and set specific pay levels, but to 
better protect investors and taxpayers in the future, the 
government does have a role in looking at how pay is structured 
more broadly to ensure risk-taking is properly aligned with 
rewards and doesn't pose a systemic risk.
    I look forward to hearing from our witnesses and exploring 
issues in further detail, d I yield back the balance of my 
time, Mr. Chairman.
    The Chairman. The gentleman from Texas, Mr. Hensarling, for 
2\1/2\ minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. After upset 
defeats in the States of New Jersey and Virginia, and a 
stunning upset defeat in the Commonwealth of Massachusetts, I 
would have hoped that this Administration and this Congress 
would have gotten down to job number one, and that is to help 
create jobs for the American people. Instead, it really appears 
that the Administration is set upon an adventure in 
scapegoatism: Let's see if we can find an entity that perhaps 
is more unpopular than our Administration in the United States 
Congress. Thus we have this launching of the assault upon the 
investment community.
    Now, are there outrageous compensation systems out there? 
Yes. I am outraged by late-night comedians who make tens of 
millions of dollars to be mean to each other. I am outraged by 
professional athletes who make tens of millions of dollars and 
abuse their spouses and girlfriends. And, yes, I am outraged by 
compensation packages on Wall Street as well. But none, none, 
are more outrageous than those who use taxpayer funds to reward 
the execs at Fannie and Freddie.
    And so on Christmas Eve, this Administration decided to 
take out all the goodies from the stockings of the American 
taxpayer and hand it over to the executives of Fannie and 
Freddie, which are functionally owned by the United States 
Government, and hand them out, the two CEOs, $6 million pay 
packages, $42 million for the rest of their execs. And so we 
are paying these people bonuses to lose tens of billions of 
dollars for the United States taxpayer. Now, what people do 
with their money is their business; what they do with the 
taxpayer money is our business.
    And so I echo the comments of our ranking member. I have 
said privately and publicly that this is a committee that has a 
reputation for fairness under Chairman Frank.
    Now, I am unaware under his leadership, or his Republican 
predecessor in the 7 years that I have been here, that the 
Minority has ever been denied their request to have a witness. 
So we requested a witness, Ed DeMarco, the acting head of FHFA 
to ask a simple question--
    The Chairman. The gentleman's time has expired. If you want 
to take more time, it will come out of the 10 minutes.
    Mr. Hensarling. I yield back the balance of my time.
    The Chairman. Well, unanimous consent for an additional 15 
seconds to finish that thought, that wouldn't come out of 
everybody's time, if the gentleman would like.
    Mr. Hensarling. I was hoping that Mr. DeMarco could be here 
to answer the question why he has spent millions for bonuses to 
pay people to lose billions of dollars for the taxpayer, and 
unfortunately again for whatever reason, that request was 
denied. Thank you, Mr. Chairman.
    The Chairman. I yield myself my remaining time which I 
think is 3\1/2\ minutes; is that correct?
    I want to thank both the gentlemen from Texas and the 
gentleman from Alabama for their comments about the fairness of 
the committee. I am very proud that I think this committee 
holds the record for the number of amendments that we are 
debating on the Floor at markup time.
    We do have one difference here. The members of the 
Republican side have made the distinction between private 
sector and public sector entities when it comes to 
compensation. That is why I wanted to defer Mr. DeMarco to a 
hearing we will have with Mr. DeMarco, and I hope Mr. 
Lockhart--a Bush appointee who had that position before and it 
was was a holdover--and Mr. Feinberg, and probably Sheila Bair 
and Dan Tarullo. That is, I think it makes sense to separate 
the issues of what we do about private sector compensation 
where our role is a more limited one, as we all agree, and 
public sector compensation.
    The question for Mr. DeMarco is what do we do about public 
sector compensation?
    Now, I also want to say I am not usually the one who 
welcomes converts. That has generally not been my side of the 
street. But I do want to welcome my Republican colleagues to 
conversion to the notion that we should regulate the pay of 
Fannie Mae and Freddie Mac.
    Last year, this committee twice reported bills to the Floor 
which explicitly proposed restrictions on the pay of Fannie Mae 
and Freddie Mac, and the Republicans opposed it in committee 
and opposed it on the Floor. Indeed, in the case of one of the 
bills that wasn't on the private sector, because it wasn't 
clear what the status was at the time. The gentleman from 
Texas, Mr. Hensarling, offered an amendment to make sure that 
they were explicitly covered. We adopted the amendment. But 
that did not persuade the gentleman from Texas to vote for the 
bill on the Floor.
    So we have had two bills which passed the House which 
explicitly authorized regulation in the pay of Fannie Mae and 
Freddie Mac, and all the Republicans on this dais here voted 
against it both times. One Republican, Mr. Jones, voted for it 
one time. So I am a little skeptical as to why we have all of 
this coming up now.
    By the way, when we passed the bill that specifically would 
have done it for public-funded companies, we got a letter on 
March 20th--which I will put into the record--from James 
Lockhart, the Bush appointee who was running the Housing 
Finance Agency, held over, strenuously objecting to it. So it 
was the Bush Administration that first raised the objections of 
the Bush Administration holdover.
    I think the pay that was given to Fannie Mae and Freddie 
Mac was too high, and I think this: We will have a hearing with 
Mr. DeMarco, and others who administer pay schemes for public 
employees in a month. My colleague from Texas said he wanted to 
know the answer. I know he is a man of great patience and he 
has a very strong attention span. I don't think a month from 
now he will have forgotten the questions he wanted to ask. He 
could write them down and we will preserve them. But, yes, we 
will have this.
    I also believe what we have here is an embarrassment on the 
part of my Republican colleagues because they don't want to do 
anything about the excessive pay in the private sector, nor do 
they want to appear to not be doing anything about it, so they 
are changing the subject.
    By the way, we do not propose any specific limits on the 
pay in the private sector. We do say that the shareholders 
should vote--radical motion--but we also say that there is a 
public spillover effect; namely, that the structure of those 
compensation packages often incentivize excessively risky 
behavior. And we have mandated that the regulators end this 
``heads they win,'' ``tails they break even at worst.'' So that 
is what we are talking about, private and public sector. We are 
dealing with the private sector today, to the discomfort of my 
Republican colleagues. We will get to the public sector in a 
month.
    The gentleman from--the gentleman's side has 2\1/2\ minutes 
left. Does the gentleman wish to use it?
    Mr. Bachus. I would ask--
    The Chairman. We have 10 minutes for debate.
    Mr. Bachus. I would like to claim 15 seconds.
    The Chairman. The gentleman is recognized for 15 seconds.
    Mr. Bachus. The executive compensation the chairman refers 
to covered all companies, both private and public. It covered 
community banks and it covered all employees, not just top 
executives. It was a political response to AIG, but it was 
poorly written--
    The Chairman. Does the gentleman yield?
    Mr. Bachus. The Senate has never taken up that bill, and 
the last time I looked, the Democrats controlled the Senate. 
They realized it was a bad bill.
    Thank you, Mr. Chairman.
    The Chairman. Does the gentleman yield?
    Mr. Bachus. No, my time has expired.
    The Chairman. The gentleman from New Jersey is now 
recognized for 2 minutes and 15 seconds.
    Mr. Garrett. I thank the chairman, and I thank the ranking 
member. And as the ranking member has already outlined, and I 
concur with his position with regard to the appropriate request 
for someone else at this hearing, the acting head of FHFA, and 
I appreciate the chairman's explanation of why he thought we 
should segregate the panels in this manner. But that really 
doesn't go to the comment that I think the gentleman from Texas 
made that no one up here can remember the last time that a 
member of the Minority requested someone to come to the panel, 
be a witness, and a Majority party refused that appropriate 
request. As of this point, the chairman has yet to fully 
explain why they refused that request.
    As the gentleman from Texas also points out, Fannie and 
Freddie are different from these; they are under government 
control. The chairman of this committee, as a matter of fact, 
has recently stated they are basically, ``public policy 
instruments of the government.'' Fannie and Freddie are.
    So while I may think the Majority's initiatives in the area 
of executive compensation in that April legislation are 
examples of government overreach into the private sector, if 
there is one example, one case, one line of executive 
compensation that should be looked at, it is where taxpayer 
dollars are being used, and that is in the area of Fannie and 
Freddie.
    And beyond this point, the area of executive compensation, 
there is a bigger issue that really we should be looking at. 
That is the Christmas Eve announcement, when the Administration 
took action, without any congressional input whatsoever, of the 
unilateral lift of the $400 cap on Fannie and Freddie's bailout 
and authorized unlimited taxpayer funds to use, both firms, 
over the next 3 years. Again, we have requested a hearing on 
this, or the chairman to allow a witness on this, and again he 
has refused.
    Meanwhile, however, the Republican Party has come back with 
our proposals, but they have been ignored. The Republicans in 
this committee have put forth proposals to reform these 
institutions, because it is indisputable that Fannie and 
Freddie were the central role in the mortgage meltdown that we 
have experienced. They helped ignite the economic crisis that 
has left millions of Americans unemployed. So passing stronger 
GSE reform legislation should be at the very top of this 
committee's agenda.
    Thank you.
    The Chairman. The gentleman's time has expired.
    We will now proceed to hear from the witnesses, repeat 
witnesses in every case, who are always welcome in this 
committee because they are people who make very significant 
contributions not just in this testimony but even more 
importantly, obviously, in the debate over important public 
issues in the country and the world.
    We begin with Professor Lucian Bebchuk, who is a professor 
of law, economics and finance, and director of the corporate 
governance program at Harvard Law School.

STATEMENT OF LUCIAN A. BEBCHUK, WILLIAM J. FRIEDMAN AND ALICIA 
TOWNSEND FRIEDMAN PROFESSOR OF LAW, ECONOMICS, AND FINANCE, AND 
   DIRECTOR OF THE CORPORATE GOVERNANCE PROGRAM, HARVARD LAW 
                             SCHOOL

    Mr. Bebchuk. Chairman Frank, Ranking Member Bachus, and 
distinguished members of the committee, thank you very much for 
inviting me to testify here today.
    I would like to devote my introductory comments to making 
four points.
    First, there is a growing acceptance, including among 
business leaders, that compensation structures have provided 
perverse incentives. They have encouraged financial executives 
to seek to improve short-term results even at the expense of an 
elevated risk of an implosion later on. Let me illustrate this 
problem with the example of Bear Stearns and Lehman Brothers, 
the two investment banks that melted down in 2008.
    Many commentators have assumed that the executives of these 
firms sold their own compensation, their own wealth wiped out 
together with the firms', and then inferred from this assumed 
fact that the firms' risk-taking could not have been motivated 
by perverse incentives created by pay arrangements.
    In a recent paper, my coauthors and I did a case study of 
compensation at those two firms between 2000 and 2008, and we 
find that this assumed effect is incorrect. We estimate that 
the top five executive teams of Bear Stearns and Lehman 
Brothers derived cash flows of about $1.4 billion and $1 
billion, respectively, from cash bonuses and equity sales 
during 2000 to 2008, and these cash flows substantially 
exceeded the value of the executives' initial holdings in the 
beginning of the period. As a result, unlike what happened with 
the long-term shareholders, the executive net payouts for 2000 
to 2008 were decidedly positive.
    The second point I would like to make is that we cannot 
rely solely on existing governance arrangements to produce the 
necessary reforms. To be sure, some firms have announced 
reforms of the compensation structures. For example, they 
indicated that bonuses would be subject to clawbacks. But firms 
have generally not provided information that would enable 
outsiders to determine whether the clawbacks would be 
meaningful and affect behavior or would be merely cosmetic.
    This is an area where the devil is in the details. Because 
the changes that firms adopt appear to be at least partly 
motivated by desire to appear responsive to outside criticism, 
there is a basis for concern that arrangements with details 
that are not disclosed might not be sufficiently effective.
    What else should be done? The point I would like to stress 
is to improve arrangements, pay arrangements in particular, in 
governance more generally. We have to strengthen shareholder 
rights.
    In addition to introducing say on pay votes, which H.R. 
3269 would do, there are other things that need to be done to 
bring shareholder rights to the same level as the shareholders 
in the U.K. and other English-speaking countries enjoy. In 
particular, the following aspects of their existing state first 
deserves the Commission's attention. Many publicly traded firms 
still do not have majority voting. Shareholders still like the 
power to place director candidates under corporate bylaws. Many 
privately traded funds still have staggered boards, and many 
such firms have supermajority requirements that make it 
difficult for shareholders to change governance arrangements.
    Finally, in addition to strengthening shareholder rights, 
it remains important to have regulatory supervision of pay 
structures in financial firms, as the provisions of H.R. 3269 
would require.
    Opponents of regulatory intervention argue that such 
regulatory supervision would drive a talent away. However, the 
regulation under consideration focuses on structure, not on pay 
levels, and firms would still be able to offer packages that 
are sufficiently attractive in terms of pay levels. One of the 
established insights in economics is that it is never efficient 
to compensate agents using perverse incentives; in the 
financial sector, an especially important context to apply this 
established insight. Thank you.
    [The prepared statement of Professor Bebchuk can be found 
on page 45 of the appendix.]
    The Chairman. Next, we have Professor Joseph Stiglitz, 
university professor at the Columbia Business School.

STATEMENT OF JOSEPH E. STIGLITZ, UNIVERSITY PROFESSOR, COLUMBIA 
                        BUSINESS SCHOOL

    Mr. Stiglitz. It is both a source of pleasure and sadness 
to testify before you today. I welcome this opportunity to 
testify on this important subject, but I am sorry that things 
have turned out so badly thus far.
    In this brief testimony I can only touch on a few key 
points, and many of these points I elaborate in my book, 
``FreeFall,'' which was published just a few days ago.
    Our financial system failed to perform the key roles that 
it is supposed to perform in our society: managing risk; and 
allocating capital. A good financial system performs these 
functions at low transaction costs. Our financial system 
created risk and mismanaged capital, all the while generating 
huge transaction costs, as the sector garnered some 40 percent 
of all corporate profits in the years before the crisis.
    So deceptive were the systems of creative accounting the 
banks employed that, as the crisis evolved, they didn't even 
know their own balance sheet, so they knew that they couldn't 
know that of any other bank. We may congratulate ourselves that 
we have managed to pull back from the brink, but we should not 
forget that it was the financial sector that brought us to the 
brink of disaster.
    While the failures of the financial system that led the 
economy to the brink of ruin are by now obvious, the failings 
of our financial system were more pervasive. Small- and medium-
sized enterprises found it difficult to get credit, even as the 
financial system was pushing credit on poor people beyond their 
ability to repay.
    Modern technology allows for the creation of an efficient 
low-cost electronic payment mechanism, but businesses pay 1 to 
2 percent or more for fees for a transaction that should cost 
pennies or less. Our financial system not only mismanaged risk 
and created products that increased the risk faced by others, 
but they also failed to create financial products that could 
help ordinary Americans face the important risk they 
confronted, such as the risk of homeownership or the risk of 
inflation.
    Indeed, I am in total agreement with Paul Volcker. It is 
hard to find evidence of any real growth associated with many 
of the so-called innovations in our financial system, though it 
is easy to see the link between those innovations and the 
disaster that confronted our economy.
    Underlying all the failures a simple point seems to have 
been forgotten: Financial markets are a means to an end, not an 
end in themselves. We should remember, too, that this is not 
the first time our banks have been bailed out, saved from 
bearing the full consequences of their bad lending. Market 
economies work to produce growth and efficiency, but only when 
private rewards and social returns are aligned. Unfortunately, 
in the financial sector, both individual and institutional 
incentives were misaligned, which is why this discussion of 
incentives is so important.
    The consequences of the failures of the financial system 
are not borne by just those in the sector, but also by 
homeowners, retirees, workers, and taxpayers, and not just in 
this country but also around the world.
    The externalities, as economists refer to these impacts and 
others, are massive; and they are the reason why it is 
perfectly appropriate that Congress should be concerned. The 
presence of externalities is one of the reasons why the sector 
needs to be regulated.
    In previous testimony I have explained what kinds of 
regulations are required to reduce the risk of adverse 
externalities. I have also explained the danger of excessive 
risk-taking and how that can be curtailed. I have explained the 
dangers posed by underregulated derivative markets. I regret to 
say that so far, more than a year after the crisis peaked, too 
little has been done on either account. But too-big-to-fail 
banks create perverse incentives which also have a lot to do 
with what happened.
    I want to focus my remaining time on the issue of 
incentives and executive compensation. As I said, there are 
also key issues of organizational incentives, especially those 
that arise from institutions that are too-big-to-fail, too-big-
to-be-resolved, or too-intertwined-to-fail.
    The one thing that economists agree upon is that incentives 
matter. Even a casual look at the conventional incentive 
structures, with payments focused on short-run performance and 
managers not bearing the full downside consequences of their 
mistakes, suggested that they would lead to shortsighted 
behavior and excessive risk-taking. And so they did.
    Let me try to summarize some of the general remarks that I 
make in my written testimony that I hope will be entered into 
the record. Flawed incentives played an important role, as I 
said before, in this and other failures of the financial system 
to perform its central roles. Not only do they encourage 
excessive risk-taking and shortsighted behavior, but they also 
encourage predatory behavior.
    Poorly designed incentive systems can lead to a 
deterioration of product quality, and this happened in the 
financial sector. This is not surprising, given the ample 
opportunities provided by creative accounting. Moreover, many 
of the compensation schemes actually provide incentives for 
deceptive accounting. Markets only allocate resources well when 
information is good. But the incentive structures encouraged 
the provision of distorted and misleading information.
    The design of the incentives system demonstrates a failure 
to understand risk and incentives and/or a deliberate attempt 
to deceive investors, exploiting deficiencies in our systems of 
corporate governance.
    I want to agree very much with Professor Bebchuk's view of 
the need for reforms in corporate governance. There are 
alternative compensation schemes that would provide better 
incentives, but few firms choose to implement such schemes. It 
is also the case that these perverse incentives failed to 
address adequately providing incentives for innovations that 
would have allowed for a better functioning of our economic 
system.
    [The prepared statement of Professor Stiglitz can be found 
on page 68 of the appendix.]
    The Chairman. Nell Minow, who is the founder and editor of 
The Corporate Library.

     STATEMENT OF NELL MINOW, EDITOR, THE CORPORATE LIBRARY

    Ms. Minow. Thank you very much, Mr. Chairman, and members 
of the committee. It is a real honor to be back here again, 
and, like Professor Stiglitz said, I wish I had better news for 
you. In previous appearances, I have called executive 
compensation both the symptom and the cause of the instability 
of the financial services sector and our capital markets. I 
regret to say that the problem continues.
    Yesterday, the Supreme Court told us that a corporation is 
a person with First Amendment rights, but as Baron Lord Thurlow 
told us hundreds of years ago, a corporation has no soul to be 
damned, no body to be kicked, and that is why corporations 
essentially get away with murder in matters like compensation.
    The boards of Wall Street financial institutions 
implemented pay plans that were a major and direct cause of the 
financial meltdown. These purported bastions of capitalism 
protected themselves from risk by limiting their downside 
exposure and taking their pay off the top. Second, rinse 
repeat. They took bailout money and kept paying themselves as 
though they earned it. What they did before the bailout was 
counterproductive and misguided. What they have done since the 
bailout is an outrage, or, as my grandmother would have said, a 
``shanda.''
    Since the only portion of pay that TARP did not restrict 
was base pay, everybody got a raise. For example, Wells Fargo's 
board approved a 522 percent salary increase for the CEO from 
$900,000 to $5,600,000. The extra was paid in stock, and we 
have seen this throughout the center. They took the 
opportunity, when the stock market was at its rock bottom, to 
load everybody up with buckets of new stock and options. So I 
am predicting now that the next time you have me back here to 
speak, we will be talking about how outrageous it is that they 
got insane pay packages again; but now is when they are 
happening. And we will see the payout later on.
    These enormous grants of stock issued at historic low 
prices are resulting in enormous payouts based on the infusion 
from the bailouts in the overall market. I completely agree 
with what the members of this committee have said about 
taxpayer money. This is taxpayer money. They are getting paid 
as though they earned that money, the money that the taxpayers 
put into it. They are taking a piece off of the top of the 
taxpayers' money. That is absolutely right. That is an outrage.
    So the clawbacks that were required as a result of this 
committee's work are also being subverted. As Professor Bebchuk 
said, there is a lot of weasel language being instituted into 
the clawbacks, saying that bad faith has to be required, or 
some kind of emotion or feeling or intention has to be 
required. Clawbacks should apply no matter what the reason for 
the correction; otherwise, as Professor Siglitz said, they 
create a perverse incentive.
    I ask this committee to lead the way to put an end to too-
big-to-fail, the term and the concept. If a company is too-big-
to-fail, it is too-big-to-succeed, or, as the title of a 
thoughtful new book by Robert Pozen puts it, it is ``too-big-
to-save.'' If an enterprise is too-big-to-fail, it is a utility 
and it should be regulated like one and executives should be 
paid like public servants.
    Wall Street boards and executives have abused shareholders 
by creating perverse incentives for themselves, through their 
pay plans.
    The IMF has a very important new study linking lobbying 
expenditures and high-risk lending. In other words, it is 
another example of externalizing the risks onto everybody else 
and keeping the pay plans. They are now doing their best to 
perpetuate this system by pouring over $70 million so far into 
fighting any meaningful reform. This is just another example of 
diversion of assets to perpetuate the externalization of risk 
onto the shareholders and the taxpayers.
    I hope that Congress will address this attempt to subvert 
the efficient oversight of the market and restore the 
crediblity of our financial sector by removing obstacles to 
effective shareholder oversight of pay.
    [The prepared statement of Ms. Minow can be found on page 
52 of the appendix.]
    The Chairman. Thank you. Let me begin the question and--I 
want to give my Republican colleagues credit. They 
fundamentally want to take the attention away from the subject 
of excessive compensation, which is a legitimate public sector 
issue, probably because, as Ms. Minow just noted, they are 
paying money which they are able to have in part because of a 
significant public intervention; also because there are effects 
on the economy as a whole as to the way in which it is 
structured. And also, of course, because the notion that we are 
interfering in a private sector sphere when we set the laws for 
corporate governance is nonsense.
    Corporations are a creation of the law, even though the 
Supreme Court thinks God made them, and this can be regulated 
by us in many ways. They simply don't want to do anything that 
would interfere with that, but they have raised the Fannie/
Freddie thing.
    I want to respond to one point that the gentleman from 
Alabama raised when I pointed out that the Republicans twice 
voted in committee and on the Floor against legislation to give 
regulators the power over Fannie Mae and Freddie Mac salaries, 
which they now say they want. He said, well, that was in the 
bill that covered all the private sector. But there were two 
bills. The gentleman from Alabama forgot to mention one. The 
first bill that came forward was H.R. 1664, which specifically 
covered only those financial institutions that were receiving 
financial assistance--TARP money and Fannie and Freddie. It had 
nothing to do with the rest of the private sector.
    Page 2 of that bill: No financial institution has received 
or receives a direct capital investment under the TARP program 
or with respect to the Federal National Mortgage Association, 
the Federal Home Loan Mortgage Corporation or Federal Home Loan 
Bank, etc.
    So we had a bill that dealt only with TARP recipients, 
Fannie and Freddie, and put tough restrictions on them to be 
administered and they voted against it. So it is not my fault 
that there wasn't the power to do that more.
    Yes, I think they got too much money over the Christmas Eve 
period. I believe, though, that the remedy here is to in fact--
as I believe this committee will be recommending--abolish 
Fannie Mae and Freddie Mac in their current form and come up 
with a whole new system of housing finance. That is the 
approach, rather than the piecemeal one.
    But the fact is, there were two bills, and Republicans 
voted against both of them. One covered all private sector and 
public sector, but one bill they voted against specifically was 
limited to TARP recipients in Fannie Mae and Freddie Mac, and 
it passed the House and it failed. The gentleman is right; the 
Senate didn't take it up. If they want to blame the Senate, 
that is okay, I guess, for them to say it, but I don't know why 
the fact that the Senate might not be taking something up is a 
justification for a Member of the House to vote ``no.''
    So it is very clear, we put forward a bill that would have 
toughened restrictions on compensation at the TARP recipients 
and at Fannie Mae and Freddie Mac in April. They voted against 
it. Now, to divert attention from this subject which makes them 
uncomfortable because they don't want to do anything about it, 
they bring it up.
    Let me ask one question to Professor Stiglitz and the 
others. One of the arguments we have gotten against the 
President's proposal to tax large financial institutions to 
recoup the money that was paid out through the TARP and 
elsewhere that was of great assistance to the financial sector, 
this will diminish the amount of money they have available for 
loans and it will force them, over their great reluctance no 
doubt, to raise credit card and other fees.
    Does the size of the bonus pool and the amount of 
compensation have any relevance to that argument? Professor 
Stiglitz?
    Mr. Stiglitz. Yes, obviously funds are fungible, and money 
going out to bonuses reduces the capital base of the banks, and 
to an extent the money that has been paid out in bonuses, 
whatever the form, reduces their ability to lend. That is 
obviously a much more significant amount.
    Let me just emphasize one point, since we are talking about 
incentives. The intent of the President's proposal here is 
changing the current incentives of the banks to have excessive 
risk-taking, and excessive risk-taking led to the economy being 
brought to the brink.
    The Chairman. Tax structure--
    Mr. Stiglitz. That is right, these incentives partly arose 
from the fact that the tax structure was based on the amount of 
liabilities that they had. It was directed at--
    The Chairman. Tier 1 capital money.
    Mr. Stiglitz. Exactly.
    The Chairman. What is the relationship between the board of 
directors and the CEO currently?
    Ms. Minow. I know it is difficult for people who know what 
real elections are to understand that, but we use the term 
``election'' when we talk about boards of directors, even 
though essentially the CEO controls who is on the board. These 
arrangements are often very cozy.
    It was not that long ago that CEOs of Cummins Engine and 
Inland Steel served as chairs of each others' compensation 
committees. At another company, the CEO is the chairman of the 
local university's board of directors. The provost is on his 
compensation committee, etc. So therefore it is a very close 
circle. And until shareholders can replace directors who get it 
wrong, we are not going to see any change. So many of the 
directors, almost all of the directors of the bailout companies 
continue to serve.
    The Chairman. Thank you. The gentleman from Alabama.
    Mr. Bachus. Thank you. Ms. Minow, you have heard the 
chairman talking about his executive compensation bill that was 
introduced last year that the Republicans voted against along 
with many Democrats. You published an article on The Corporate 
Library Web site entitled, ``Right Question, Wrong Answer'' 
that was critical of the executive compensation legislation, 
and that was the legislation that Chairman Frank incorporated 
into the bill. He talks about criticizing us for not voting for 
it.
    In the article you say, ``I have the utmost respect for 
politicians and bureaucrats but I also recognize their limits. 
The government should not micromanage pay.''
    I happen to agree with that position. Could you elaborate 
to committee members on your specific concerns about entrusting 
political figures and government bureaucrats with the 
responsibility for designing incentive-based compensation 
structure?
    Ms. Minow. Certainly, as I said repeatedly before this 
committee, I do not believe that the government should set pay. 
I do believe in removing obstacles to allowing shareholders to 
provide that kind of feedback, as I just said to the chairman, 
by removing directors who do a bad job through say on pay. I 
think the bill was perhaps necessary but not sufficient, and I 
do share the concern of the members of the committee that some 
of the terminology in the bill was not--did not give enough 
guidance.
    Mr. Bachus. Thank you, I appreciate that. Obviously, the 
bill gave the Treasury Secretary really carte blanche authority 
to define unreasonable excessive compensation, and it wasn't 
just for top executives, it was for all employees. And I would 
vote against that bill today if it were up before me.
    Professor--is it ``Bibcock?''
    Mr. Bebchuk. ``Bebchuk.''
    Mr. Bachus. Okay. In the past, you have criticized GSE 
executive compensation packages as being decoupled from 
performance. Under the terms of the GSE executive compensation 
package that was announced Christmas Eve, two-thirds, or $4 
million of the $6 million cash compensation for each of the two 
CEOs, is completely unrelated to firm performance or any 
performance manager.
    Would you agree that the latest GSE executive compensation 
awards still failed to adequately link pay and performance?
    Mr. Bebchuk. The study you mention was one that was 
probably several years ago, and it was a careful analysis of 
compensation arrangements at the time, mainly with respect to 
the chairman at the time, Raines. And those were the 
conclusions then. I have not studied the most recent decisions 
and therefore I am not in a position to evaluate them.
    Mr. Bachus. If I say $4 million of that was not linked to 
performance and does not link pay and performance, you would 
still think that--you would still have your same objections to 
those compensation packages?
    Mr. Bebchuk. I don't think I can really offer a view about 
a package that I haven't really studied.
    Mr. Bachus. All right.
    Ms. Minow, in your written testimony you decry compensation 
arrangements that widen the gulf between pay and performance 
and between integrity and outrageousness. In your view, do the 
pay packages of Fannie Mae and Freddie Mac executives, most 
particularly the $6 million awarded to each of the CEOs, 
adequately link pay and performance?
    Ms. Minow. I have been a consistent critic of the pay 
packages at Fannie and Freddie, going back before the financial 
meltdown. And, again, they have a corporate governance 
nightmare. You can't be both a public and a private enterprise 
at the same time.
    Mr. Bachus. Do they meet your definition of outrageous?
    Ms. Minow. They are not as outrageous as the previous pay 
plans at Fannie and Freddie, but I think they are wrong.
    Mr. Bachus. They are wrong, but how about outrageous? Do 
they meet your definition of outrageous?
    Ms. Minow. No, no. If I am calibrating the word 
``outrageous,'' they are nowhere near the category of 
outrageous--
    Mr. Bachus. It might be like a class 4 instead of a class 5 
outrageous?
    Ms. Minow. They are troubling; how is that? They are 
troubling but not outrageous.
    Mr. Bachus. Thank you. I appreciate that very much. I yield 
back the balance of my time.
    The Chairman. The gentleman from Pennsylvania, and I want 
to take 15 seconds, if he will yield to me.
    My friend from Alabama continues to ignore the fact that 
there were two bills, one on executive compensation involving 
the private sector, another that only dealt with TARP and 
Fannie Mae and Freddie Mac, and he voted against it. So what he 
talked about before, what he quoted Ms. Minow about, was the 
one about general compensation.
    But there was a separate bill for Fannie Mae, Freddie Mac 
and the TARP that came after this question, and that is the one 
he voted against. There is one bill.
    It is not my time. The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you, Mr. Chairman. I will just open up 
first with some remarks to the panel, and I appreciate your 
opinions when I get to conclude. Very often, I have had the 
occasion over the last 6 to 9 months to make a speech in my 
district because I am trying to reach constituents to 
understand the overall complex problem of salaries and wages.
    Now, as a given factor in my congressional district in 
Pennsylvania, the average wage is about $13 an hour. And if you 
multiply that times 2,000 working hours a year, that comes to 
an annual income of, on average, $26,000.
    In the last 9 months or a year, I have had several 
witnesses who have appeared before my subcommittee, and we have 
gotten to this question of salary and compensation, and what we 
do about it. I, for one, am not certain that we put enough 
direct attention to the matter, and could get into difficulty 
if we start deciding that we are the final arbiter of what a 
fair salary is, because quite frankly, I will confess, I don't 
know.
    If hiring a brain surgeon, I guess, and I need brain 
surgery, there is no amount too excessive until after the 
success of the operation. Then I will be annoyed, whatever the 
bill.
    The reality is--that is not the topic of our discussion 
today--but in the hedge fund industry, they report--I remember 
one witness who was a little annoyed involving a cross 
examination: What did he make and what is his relationship? He 
earned about $2.5 billion a year, and I pressed him because I 
was offended that he only paid a tax rate of 15 percent because 
of the structure of his salary, putting him in capital gains as 
opposed to regular tax. After 15 or 20 minutes, with great 
annoyance, he finally put his hand in his pocket, leaned back 
and said, ``Congressman why are you picking on me? What did I 
do to you?'' I said, ``You did nothing; you happen to be a 
witness and I am trying to extract some information.'' He said, 
``Well, I want you to know I am only the 51st highest-income 
person in this country.'' This astounded me. I thought we had 
located the highest-income person. I found out he actually was 
not and is not, and there are some who make a great deal more.
    I guess the first question that I would ask is, what is too 
much? What is too high? Is it $5 billion, or $50 billion? And 
now I pose that question, because we always use numbers, and I 
go back to my congressional district of $13 an hour wage. The 
gentleman who was testifying before me, his hourly wage is 
$1,300,000. That is what he makes every hour of the year.
    Now, when you do the mathematics of that, he makes 100,000 
times the average wage of an average worker in my district. How 
do we get a sense? Regardless of what compensation we pass here 
or do on Fannie Mae, they are chickens; what do they get paid, 
$6 million a year? That is peanuts.
    I am wondering if we are approaching this from perhaps the 
incorrect direction. Should we be looking at, first of all, 
what do we need to get to a balanced budget? Because these 
people aren't just earning and taking corporate money or 
profits. These people are not picking up their burden in 
society in proportion to their income. And as a result now this 
year, we are ending up with a shortfall that we could make up 
if we didn't have these extraordinary ways of avoiding income.
    I am just wondering, should we approach this from changing 
the tax structure and perhaps get to a level field that way, as 
opposed to identifying particular people where we may be able 
to exercise power and those so that we cannot. And I am just 
curious. Let me throw that out there very quickly.
    The Chairman. Maybe 30 seconds for an answer.
    Mr. Stiglitz. I agree with you that the basic framework for 
thinking about equity should be through our tax system. 
Incentives are related, because the question is, would they 
work a little bit less hard if they paid higher taxes? I think 
the answer is clearly no, it would not have a significantly 
adverse affect.
    The issue that I talked about in my testimony is that the 
structure of the pay of the executives in these banks has 
strong effects. The reason we are interested in them is because 
those effects affected the taxpayers because it led to the 
economy falling apart. These pay structures imposed huge costs 
on the rest of us, and therefore they are a legitimate source 
of concern, as opposed to lots of other areas where people get 
high pay but are not as much a legitimate source of concern. 
The way we deal with that is through the tax system.
    The Chairman. The gentleman from Texas.
    Mr. Neugebauer. Thank you, Mr. Chairman. I think we have 
heard from the panel on where they think that there have been 
abuses in the pay structure, the corporate pay structure. I 
think one of the things that I would like to hear from the 
panel is who is doing it right? Where is the model that other 
companies should follow? Mr. Bebchuk?
    Mr. Bebchuk. Yes. I think that there is evidence that firms 
with shareholder rights are stronger, where you have less 
arrangement that would make it difficult to pay directors. 
Compensation in those firms is more sensitive to performance 
and also CEO turnover is more sensitive to performance. So we 
have evidence that relates, empirical evidence that relates the 
level of shareholder rights, both with firm value in general 
but also with the quality-of-pay structures.
    Ms. Minow. If you would like to have a specific example, I 
can tell you that Home Depot went from the very bottom of the 
list to near the top of the list by going from a CEO where 90 
percent of his pay was not related to performance to a CEO 
where 90 percent of his pay is related to performance.
    Mr. Stiglitz. I want to make one remark because we keep 
talking about pay related to performance. It is very difficult 
to identify what you mean by performance. When a company does 
well as measured by the stock going up, but the reason the 
stock is going up is because the stock market is going up, then 
it wasn't what an employee did that led to the company's stock 
going up. One of the points I make in my written testimony was 
that, in fact, if you look at the design of many of the so-
called ``pay for performance,'' they are not pay for 
performance. They merely have that in their name.
    Ms. Minow. I cover that in my written testimony as well.
    Mr. Neugebauer. One of the things that concerns me is when 
you start down the road of government designing these 
compensation plans--and now really what we are doing is we are 
saying, there are a few companies out there, and I think 
everybody is trying to point to the financial institution--but 
the question is, what about all the other companies that are 
actually doing it right? How do we justify whether we are going 
to pick the ones we don't think are doing it right and we are 
going to let the others fall?
    Mr. Bebchuk. Nobody is talking about the government really 
prescribing what the pay arrangements would be but, rather, 
giving shareholder rights and improving corporate governance 
arrangements. And if that happens, then the firms that are 
doing it right will continue to do it right, but those firms 
that didn't do it right because those were not sufficiently 
focused on shorter interest would hopefully improve their pay 
arrangements.
    Mr. Neugebauer. But the shareholder has the ultimate right, 
don't they? That is whether to own a share of stock or not. And 
if I I think that company CEO is making too much money and the 
boys are dividing the pie and the shareholders aren't getting 
much return, I just sell my share of stock and I move on.
    Mr. Bebchuk. Your ability to sell the share provides you 
with no protection. It providers insiders with no incentives to 
behave well. Why? Because let's suppose the price right now is 
$100, and you believe that if managed well, the company would 
be worth $120. If you sell, you would be getting--you would be 
passing this imperfectly managed share to somebody else who 
would pay $100. But your concern is that you should be getting 
to $120, and the ability to sell the share on the market for 
$100 in no way provides you access nor makes it likely that you 
will be able to capture the $120.
    Ms. Minow. I just want to say that is also kind of an 
outdated approach since up to 70 percent of the stock in most 
major companies are held by institutional investors that don't 
have the luxury of selling out every time; because of 
transaction costs and other issues, they are pretty much stuck. 
And so the question is, is it more beneficial for them 
economically to pursue better pay than to just abandon it and 
leave and invest in some other company that overpays their 
executives?
    Mr. Neugebauer. I don't think I can agree that people are 
stuck in any position. If you own a share of publicly traded 
company stock, you can send a message to the management. In 
fact, some of those larger investors can actually send a very 
strong message. If a large investor in a company moves a very 
large block of stock, sells that stock, that sends a signal to 
the rest of the market: Why did he or she do that? So to say I 
think people are stuck in a position is a little--
    Ms. Minow. The data actually goes the other way on that. 
And as far as large investors making a difference, you are 
right; they can call up the board of directors and ask for 
better. All we are asking is to make it more possible.
    Mr. Stiglitz. Can I make a general point, which is that 
corporations are a creation of the State. We write the laws 
that define a corporation. What I think Mr. Bebchuk and Ms. 
Minow have been emphasizing is that we want to think about how 
we write those laws to make sure that our whole corporate 
sector works more efficiently, which has to do with the systems 
of corporate governance. But what are those systems?
    I think that is really the debate here. There is going to 
be one system or another, so the question is, can we create a 
system that is better than the current system?
    The Chairman. The gentleman from California.
    Mr. Sherman. Thank you. Responding to the gentleman who was 
just speaking, I would say selling the stock is an imperfect 
way for shareholders to control things. First, they pay a big 
capital gains tax when they sell. Then they have transaction 
costs. As the witness pointed out, they get a low price for the 
stock because whomever buys it is buying into a company with 
miscompensated executives. And then finally, they have the 
opportunity to invest the proceeds into another company which 
has bad corporate governance and overpaid executives.
    I would like to start with an observation. It is obvious 
that the establishment in this country is under attack by 
populism in a way that has not occurred in most of our 
lifetimes. The results in Massachusetts were not the victory I 
think mostly for any one political party, but a victory for 
populism against the establishment. And it is not a coincidence 
the Supreme Court decided yesterday to overrule 100 years of 
precedents, something they would ordinarily find very painful, 
in order to arm the death star so that the empire could strike 
back; and whatever we do, whatever we say here today, could 
easily be drowned out by unlimited corporate publicity and 
propaganda.
    I want to pick up on the comments of the gentleman from 
Pennsylvania. I think this committee has done a good job on 
executive compensation when compared to the Ways and Means 
Committee which has continued to allow hedge fund managers to 
pay taxes at only 15 percent unless--I yield to the gentleman.
    The Chairman. If the gentleman would yield. The House in 
fact voted for the bill the gentleman is talking about. It is 
in the Senate. In fairness to our colleagues, they did bring up 
the right bill from our standpoint, which we voted for and sent 
over there.
    Mr. Sherman. It is always the Senate. In any case, the tax 
laws of this country not only allow a 15 percent tax on hedge 
fund managers, but a zero percent tax if they incorporate their 
hedge fund in the Caribbean. And you compare that to the 
probably 28 percent rate paid by the gentleman's constituents 
in Pennsylvania, and you see that we don't exactly have a fair 
tax system.
    I don't think that the gentleman who makes $1 million an 
hour is going to work less hard if his after-tax compensation 
is reduced to a paltry $600,000 an hour.
    When we talk about compensation, we ought to be talking 
about the entire compensation package, not just bonuses. And in 
this committee, we have made life a little difficult for top 
executives, particularly those who got TARP money. There is 
some social utility of that, beyond its obvious psychological 
benefits to those of us in the room. And that is, we have 
inspired these companies to pay back the TARP money far more 
quickly than they would have, and now we are focused on those 
who are too-big-to-fail. We are inconveniencing them to the 
greatest extent we can right now, and hopefully that will 
inspire them to break up so that we will have financial 
institutions, the demise of any one of which will not imperil 
the system.
    And so here we are, talking about their compensation. Last 
month, we imposed fees on those of over $50 billion in size. 
And I hope that they will get the message and become medium-
sized institutions.
    The problem I have is in this effort to try to design 
compensation systems that do not incentivize excessive risk and 
that properly reward performance; I am not sure we can do it. I 
would hope that there would be none of these companies getting 
Federal subsidies or implicit Federal guarantee, in which case 
I don't think we have to do it. But my problem relates to a 
circumstance where, let's say, you are trading a portfolio. And 
your aim, of course, might be to have one great year and get an 
enormous bonus, because in this country, we tend to tally 
things up at the end of the calendar year and give you 
something valuable. Now it said, well, we will give you 
restricted stock. But that still provides a pretty good 
incentive to take the big risk and to get the big bonus unless 
you believe the risks you are taking: (A) will turn out poorly; 
and (B) will turn out so poorly that they dramatically affect 
the value of the entire company or that they inspire your other 
executives to take equally enormous risks.
    So assume that somebody is managing 1 percent of the 
company's money. They do not believe that their behavior will 
affect their colleagues, and they choose to take enormous 
risks. They pan out as of the end of the year, they get a 
gajillion shares of restricted stock. How are they 
disincentived by getting restricted stock? I don't know if 
there is time for the answer.
    The Chairman. Let's take 30 seconds for an answer. We don't 
have an overburdened day.
    Mr. Bebchuk. The Congressman is exactly right. For 
executives who manage a limited part of the company, like 1 
percent, paying them with restricted stock does not give them 
incentives to avoid taking risks that might implode later on. 
The only way to do it would be to subject them to a clawback or 
to put their bonus in the bank that would be adjusted downward, 
not if the company does not do well on the whole, but when 
their own unit doesn't do well in the subsequent year.
    The Chairman. The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Before I make my 
comments, I would ask unanimous consent to enter two studies 
into the record relative to the subject: one is entitled, 
``Compensation in the Financial Industry'' by the Center on 
Executive Compensation; and the other is entitled, ``Bank CEO 
Incentives and the Credit Crisis'' from the Fisher College of 
Business from Ohio State University.
    The Chairman. Without objection, they will both be entered 
into the record.
    The gentleman is recognized.
    Mr. Hensarling. Thank you, Mr. Chairman. Again, the 
American people were presented with a great outrage on 
Christmas Eve when this Administration decided, after tens of 
billions of dollars in losses, $110 billion now, now to 
announce unlimited taxpayer exposure to the Government-
Sponsored Enterprises, those that are at the epicenter of the 
financial crisis, and to simultaneously--for all these losses 
that are costing the taxpayers all this money--to announce 
bonus structures of $6 million to each of the CEOs, $42 million 
in total for the executives.
    So again, as I said in my opening statement, I had hoped 
that we would have an opportunity to ask questions of the 
acting head of FHFA, Mr. Ed DeMarco, about this.
    And now I know the chairman in his comments said that we 
would have that opportunity next month. And he said that I am a 
patient man. Well, perhaps I am patient, but I am not sure, 
after the election results in the Commonwealth of 
Massachusetts, that the American people are patient. They don't 
want answers a month from now, they want answers yesterday.
    And so I am disappointed, again, that for whatever reason, 
the American people are going to have to wait a month to find 
out about the bonuses at the Government-Sponsored Enterprises, 
Fannie and Freddie.
    The questions, again, I had were for Mr. DeMarco, I was 
going to ask, in light of the fact that the companies have 
averaged $11 billion in taxpayer subsidized losses over the 
last 5 quarters, how were the executives chosen to receive the 
bonuses? Since Mr. DeMarco isn't here, I doubt this panel can 
answer that question. But if somebody knows Mr. DeMarco, has 
spoken to him, maybe he has insight.
    If not, the second question I had for Mr. DeMarco is, why 
were the bonuses to be paid in cash? This is an Administration 
that says, no, we have to make sure that payments are made in 
stock. We have to have longer-term vesting dates for everybody 
else, apparently, except the Government-Sponsored Enterprises. 
So why cash for them and stock for everybody else? I was going 
to ask Mr. DeMarco that question. Again, I assume you haven't 
spoken to him. Is anybody qualified to answer that question on 
Mr. DeMarco's behalf? I assume not.
    I don't have to be convinced that there are pay structures 
that can be poorly designed that can cause companies to fail. I 
know that. I used to serve on a compensation committee of a 
publicly traded company, traded on the New York Stock Exchange. 
I at least have some experience with these matters. I have 
studied some of these issues. So I know that poorly designed 
compensation packages can cause companies to fail. You don't 
have to convince me of that. But you do have to convince me 
that any one company in America is too-big-to-fail.
    And guess what? If you don't bail them out with billions of 
dollars of taxpayer money, then you don't have to use the heavy 
hand of government to impose pay structures.
    I know the chairman has brought up, on a couple of 
occasions now, H.R. 1664. I have a couple of observations. 
Number one, if this Democratic Administration, this Democratic 
Senate, this Democratic House, were serious about doing 
something about Fannie and Freddie pay, I assume they could 
have done it by now.
    Second of all, as I think the chairman knows, this just 
didn't deal with the execs. This was a bill that would have 
regulated the pay of the janitor at Goldman Sachs and provided 
a role for the Congressional Oversight Panel in policy matters. 
And as a former member of that panel, I assure you they are 
singularly unqualified for the task.
    So again I don't see why--the basic proposition is this, 
again. In America, the principle ought to be what you do with 
your money is your business; what you do with taxpayer money is 
our business. And if your compensation structure causes you to 
fail, don't take money away from the farmers, school teachers, 
and the firemen to bail them out. The purpose of government is 
not to bail out. The purpose of government is not to place 
artificial limits on the American Dream. It is to preserve 
freedom. I yield back.
    The Chairman. The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. I believe 
financial firms receiving taxpayer assistance should receive 
the most scrutiny with respect to their executive compensation 
practices. The most obvious and troubling case was AIG that 
provided $165 million in bonuses last year after taxpayers 
invested billions of dollars to keep the company solvent. I and 
others asked Ed Liddy, the CEO of AIG at the time, if he would 
encourage his employees to voluntarily return their bonuses. He 
said he would, and executives later agreed to pay back $45 
million of $165 million of those bonuses. But in December of 
last year, we learned that only $19 million has been repaid.
    I have joined Representative Mike Capuano and others to 
write Secretary Geithner about this, especially in light of 
another round of bonuses to be issued to AIG in March of this 
year.
    If as much in taxpayer dollars were immediately recovered 
today and AIG were allowed to go through bankruptcy, I doubt 
those bonuses would be paid. So I hope we can get some answers 
soon.
    Taking a look at these AIG bonuses, Professor Bebchuk, it 
is obviously frustrating to taxpayers, because if it were not 
for them, AIG wouldn't be around to pay out those bonuses in 
2009 and 2010. Are there specific things we should learn from 
the government's intervention with AIG as it relates to 
executive compensation, sir?
    Mr. Bebchuk. I think I would share your general sentiments 
that taxpayers have not charged financial firms sufficiently to 
make up for the substantial level of support that has been 
extended over the last year. And, more generally, I think that 
we can think about the pie that is being produced by the 
financial sector as being a result of contributions by 
taxpayers, by shareholders who provide capital, and by 
financial executives. And until now, the taxpayers have not 
been charging enough and shareholder interests have not been 
sufficiently protected. And the ultimate result of that is that 
financial executives--and AIG would be just one example, but 
more generally the sector--the financial executives might be 
getting an excessive fraction of this pie.
    Mr. Moore of Kansas. Ms. Minow, do you have any thoughts?
    Ms. Minow. Yes, I do. In the future, I hope we never have 
to do another bailout, but if we do, I hope we impose some 
conditions before we turn over the money. And condition number 
one should be that you take a discount on any incentive 
compensation for the amount that was subsidized.
    Mr. Moore of Kansas. Thank you. Mr. Stiglitz?
    Mr. Stiglitz. I would like to emphasize two things that we 
did not do when we turned over money to these banks. First, we 
didn't relate giving them money to their behavior, not just 
with respect to the issue of compensation schemes, but also 
with respect to lending, which was the reason we were giving 
them money. That relates to the issue of jobs that has come up 
here a number of times. The fact that compensation went out 
meant there was less money inside the banks and therefore less 
ability or willingness to lend.
    The second point is that the U.S. taxpayer was not, when it 
gave the banks money, compensated for the risk that they bore. 
In some cases, we got repaid. But we ought to look at the 
transaction that Warren Buffet had with Goldman Sachs, which 
was an arm's-length transaction. If we wanted what would have 
been a fair compensation to the taxpayer, the bailouts would 
have reflected the same terms, and we would have gotten back a 
lot more.
    Mr. Moore of Kansas. Thank you, sir. I am interested in 
better understanding how the culture of excessive lending, 
abusive leverage, and excessive compensation contributed to the 
financial crisis. This applies across-the-board for consumers 
who are in over their head with maxed-out credit cards and 
homes they couldn't afford, to major financial firms leveraged 
35 to 1.
    Is there anything the government can and should do in the 
future to prevent a similar carefree and irresponsible mindset 
from taking hold and exposing our financial system to another 
financial crisis? Professor Bebchuk?
    Mr. Bebchuk. Two things. One is, I think in retrospect it 
is clear that leverage ratios were allowed to be too high and 
we need to regulate those to be at the lower level. And 
stopping short of that, the approach that the Administration is 
proposing of imposing levies on liabilities is a useful 
approach, and that approach could be useful going forward, 
regardless of the issue of making up for a past contribution of 
the taxpayers just in terms of charging financial firms for the 
risk that larger liabilities are posing to the system and to 
taxpayer.
    Mr. Moore of Kansas. Thank you. Ms. Minow, do you have any 
comments?
    Ms. Minow. I agree with Professor Bebchuk.
    Mr. Moore of Kansas. Mr. Stiglitz?
    Mr. Stiglitz. Yes. Three things very briefly. It is very 
important to change the incentives, which is the subject of 
this hearing. If you have incentives for excessive risk-taking, 
you will do it. These incentives are both at the individual 
level and the organizational level, which is why the too-big-
to-fail bank issue is so critical. Even when we realign 
incentives, we will never do it perfectly, which is why we need 
constraints on leverage, on behaviors, and on products like 
derivatives.
    Finally, in order for our economic system to work, there 
has to be transparency. The way the system is set up right now, 
it is impossible for capital markets to exercise the discipline 
that is needed to make our system function well.
    Mr. Moore of Kansas. Thank you, sir. Thank you, Mr. 
Chairman.
    The Chairman. The gentleman from California.
    Mr. Campbell. Thank you, Mr. Chairman. I am going to throw 
out a few thoughts here on which I would like the panel's 
observations, or your thoughts. I am going to suggest to you 
that the executive compensation issues on which we all agree, 
the excessive risk, the excessive period, the short-term focus, 
etc., are more the symptom than the disease, and that if we 
treat the symptom we will be, at best, ineffective and, at 
worst, perhaps counterproductive. And that includes bills like 
the one the chairman talked about that was passed, whenever it 
was last year, the year before, and that the root of the 
problem--to get at the root of the problem, two things, one of 
which Ms. Minow already alluded to; and one is the greater 
ability for shareholders to express their displeasure with 
executives, the performance of the company, or executive 
compensation through the board by having an alternative vote of 
directors, given appropriate thresholds, so that ability is not 
abused.
    And so that would be one suggestion I would have as to get 
to the root of the problem. Rather than trying to micromanage 
the pay, give the shareholders a greater ability to express 
their displeasure, and the way that I think is appropriate is 
through the board rather than through direct control of the 
pay.
    And the second--and I know the chairman is going to have a 
hearing on this subject--is the short-term focus on pay, I 
would like to suggest, is perhaps simply a reflection on the 
short-term focus of the markets, and that maybe the problem is 
not so much the pay but the fact that ``buy and hold'' is dead 
and all kinds of other things like that, such that we are 
focused on quarterly earnings, quarterly earnings, and I too 
operated inside a public company at one time and it was all 
about this quarter. Everything was about this quarter. The 
whole world revolved around this quarter, next quarter, next 
year be damned. And that short term, that the short-term pay 
and excessive risk-taking in pay is simply a reflection of the 
short-term focus on the markets; that perhaps we should be 
looking at are there other things we can do to change that 
short-term focus on the markets? One of which I suggested is 
going to semi-annual financial statements rather than 
quarterly. Now, that is not a panacea, but there may be other 
things. So I will throw those out and love to hear the panel's 
thoughts on those thoughts.
    Mr. Bebchuk. The first issue, I completely agree with you, 
it is actually the main thesis of the book, ``Pay Without 
Performance,'' that Jesse Fried and I published 5 years ago, is 
that executive compensation is a symptom. It is a manifestation 
of underlying corporate governance problems, and all the panels 
have been discussing about changing governance arrangements in 
the ways you mentioned so as to produce better compensation 
outcomes, rather than micromanaging and dictating them.
    Mr. Stiglitz. Let me add two points. One of them is that I 
agree with your second point that the deeper problem of trying 
to make our markets less short-sighted has itself been a long-
term problem, but it has gotten much worse. One of the things 
that can fix this is tax policy. A capital gains tax structure 
that encouraged longer-term holding and discouraged shorter-
term holding is one of the few things we can do to move in that 
direction.
    Mr. Campbell. What would you define as ``long term?''
    I am curious. It used to be 1 year.
    Mr. Stiglitz. I would define it as longer than 1 year; 2 to 
5 years is longer term.
    The second point is that, while the reforms in corporate 
governance are the root of the problem that we have to deal 
with, we are always going to be imperfect on that. The result 
is that when it comes to institutions, like the financial 
institutions, which can put taxpayer money and our whole 
economic system at risk, we have to not only get at the root 
causes and reform corporate governance, but we actually also 
have to control, try to effect the actual behaviors.
    Mr. Campbell. Only basically for those systemically 
significant?
    Mr. Stiglitz. Exactly, for those that represent a risk to 
our systemic system. But that may be broader than just the big 
banks.
    The Chairman. Before we get to the gentleman, particularly 
with her concern with investors, this is a very important 
question. I am just going to allow Ms. Minow to go beyond. 
Please don't be concerned by the red light. I think your input 
on this issue, the quarterly, semi-annual, is something we very 
much want.
    Ms. Minow. Thank you, Mr. Chairman. I think that is a 
crucial question, and I think that one drives the other. I 
think the short-term focus on pay drives the short-term focus 
on numbers. It is really important to remember that the 
financial institutions themselves are very, very large 
shareholders, and so they look at their own quarterly 
performance in terms of the money that they invest, you know, 
so it creates a vicious circle. Clawbacks is one way of 
addressing that as an issue, because if you know that no 
matter, 10 years into the future if your numbers are revised, 
you are going to have to give the money back. That keeps people 
focused on the long term.
    But with regard to the issue of a holding period and 
looking at that in terms of taxes, I just want to remind the 
committee that the largest collection of investment capital of 
all, $6.3 trillion, is under ERISA, which is indifferent to tax 
consequences, so they are not going to be affected.
    The Chairman. Would you address the--because you represent 
investors, and I am attracted by the notion of not requiring 
quarterly reports, going to semi-annual. The counter argument 
is that the investors would feel maybe deprived of information.
    If the gentleman wouldn't mind, I would interested. We will 
probably get back to you. But I want to know your view on that, 
if that is all right with you.
    Mr. Campbell. Sure. That is fine.
    Ms. Minow. There is something sort of charming and poignant 
about making that suggestion in a world of Twitter and instant 
messages, everything else is becoming faster, and trying to 
slow that down. I think the fact is that one way or another, 
investors are going to get day-to-day information.
    We are very close to a point now where company financials, 
which are internally available on an almost real-time basis may 
someday become available to everybody. So I am not sure that 
really solves the problem, but I agree with you that is the 
right question to ask.
    Mr. Campbell. On clawback--
    The Chairman. Take 10 seconds.
    Mr. Campbell. We will discuss that another day when we have 
another hearing. I just wanted one thing on a clawback that I 
wanted to ask real quick was, you said that if someone--if it 
is restated. I don't know how that changes the short-term 
focus. If I am paid entirely on what happens in the next 30 
days, that would change the focus on accounting for it, 
perhaps, but if the consequences of that decision are very bad 
for a long term, you are not going to claw me back, so that 
doesn't change my behavior, does it?
    Mr. Bebchuk. Clawbacks cannot be based--to be effective 
they cannot be based only on accounting restatements. Even if 
the accounting was correct, but it turns out that the 
performance was illusory, the money should be adjusted.
    The Chairman. With the acquiescence of the charming and 
poignant gentleman from California, we will move on. But that 
is a question we will be dealing with, and I thank him for 
raising it. The gentleman from North Carolina.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Not only do I find myself agreeing with much of what Mr. 
Campbell had to say, but also with what David Stockman, the 
Director of OMB under the Reagan Administration, had to say the 
other day. I am pretty sure the Book of Revelation said that 
when I agree with both Mr. Campbell and Mr. Stockman, it is one 
of the signs of the Apocalypse.
    Mr. Stockman wrote the day before yesterday in the New York 
Times in op-ed, ``The economy desperately needs less of our 
bloated, unproductive and increasingly parasitic banking 
system.''
    Make no mistake, the banking system has become an agent of 
destruction for the gross domestic product and of 
impoverishment for the middle class. Mr. Neugebauer asked 
earlier, why didn't we have a hearing about jobs? This is a 
hearing about jobs. How do we stop the excess, the vulgar 
excess that is not rewarding productive conduct, but is 
rewarding what economists call ``risk seeking,'' what Dr. 
Stockman called ``parasitic,'' that is taking money from the 
middle class and taking money from the real economy. And it is 
certainly undermining all that we need to be doing to build a 
sustainable economy that works for the middle class, works for 
ordinary Americans.
    I have a couple of questions. Is the focus on executive 
compensation part of a bigger problem? I don't really want to 
regulate compensation. I would much rather the market regulate 
compensation. But the way the market is supposed to work, where 
there are competitive forces in place, is that competition 
squeezes profits and squeezes costs, including compensation; 
and, instead, in the financial industry we have seen, despite 
the fact that there are 8,000 banks, or more than 8,000 banks--
and God only knows how many other kinds of entities that were 
doing bank-like things, and four, five, six big banks, profits 
in that sector ballooned to, a couple years ago, or 
metastasized a couple of years ago, to more than 40 percent of 
all corporate profits and compensation was almost twice what 
ordinary Americans were making, when historically it had been 
about what ordinary Americans made.
    Are competitive forces working? And why not?
    And second, where were the boards of directors? Of all the 
institutions that failed in the financial crisis, the board of 
directors has to be near the top. Gretchen Morgenson wrote an 
article, a column, 3 or 4 weeks ago that looked at what had 
happened to the board members from all the companies that had 
failed, and found out they had gone out to serve on other 
boards with no apparent diminution in their reputation. They 
were not tarnished in any way.
    There was an article in the New Republic that I read last 
night that was very critical of General Tommy Franks for not 
having captured or killed Osama bin Laden in Tora Bora in 
December of 2003. And without necessarily agreeing with 
everything that he had to say, there was a snide reference he 
had now retired and joined the board of directors at Bank of 
America and Chuck E. Cheese, which gave me the impression that 
boards of directors were really more a part of celebrity 
culture than they were corporate governance, that a board of 
directors meeting was a celebrity appearance.
    What can we do to make boards of directors a full-time job, 
a real job, and we don't have people on there who just treat it 
as a celebrity appearance?
    Mr. Bebchuk. I think, actually, making directors full-time 
employees is not a good idea because that would make them like 
insiders, would make them more dependent on the firm.
    What we need to do is obviously have them spend enough 
time, but the most important thing is to make them dependent on 
the shareholders in a way that would give them the right 
incentives and the kind of governance arrangements we were 
discussing. Arrangements that enabled shareholders to replace 
directors more easily would produce such an outcome. And this 
would be not replacing market outcomes, it would just enable 
the market to work better.
    Mr. Stiglitz. I want to make two comments on what you said. 
The first is when you were talking about that 40 percent of all 
corporate profits were in the financial sector, we have to 
remember that a lot of that was phantom profits; that is to 
say, they weren't real profits. That shows the difficulty of 
measuring performance in the financial sector. They have 
enormous discretion to create money, as it were, to create 
profits, and then later on to have losses, making all the more 
important the issue that we have been talking about of a long-
term perspective.
    On the second point, I couldn't agree more. The fact that 
there is imperfect competition leads to sustainable above-
normal profits, and that is particularly true in the big banks. 
The point is, there has been a large increase in concentration 
in the financial industry, and when it comes to particular 
issues like credit cards, it is very clear that they are 
engaged in anticompetitive practices that allow them to garner 
those profits and then, obviously distribute those profits to 
the officials.
    Ms. Minow. May I address the issue of the boards of 
directors? I feel very strongly about it. My company rates 
boards of directors like bonds, A through F. And we have really 
encouraged our clients, to include director and officer 
liability insurers, to raise the rates, sometimes to raise them 
to make it prohibitive for repeat offenders to continue to 
serve. And I will continue to try to do that.
    But when I first came into this business, O.J. Simpson was 
on five boards. He was on an audit committee. So we have made a 
little bit of progress. I think Tommy Franks probably was a 
better director than O.J.
    The Chairman. The gentleman from New Jersey.
    Mr. Lance. Thank you, Mr. Chairman. Good morning to you 
all.
    Regarding your point, Professor Stiglitz, that Warren 
Buffet had an arm's-length transaction with Goldman Sachs, why 
don't you think the American people have that same arm's-length 
transaction? Was it just missteps by those in the Executive 
Branch?
    Mr. Stiglitz. You might say ``missteps.'' They were very 
much taken into the view that at that point, they had to give 
money to the banks; because they thought it was imperative so 
that the banks could return to the usual role that they had 
had. But the government officials were captured in an 
intellectual sense by the banking system. It was a very big 
mistake.
    Mr. Lance. And do you see improvement with Federal 
officials at the moment in this area?
    Mr. Stiglitz. If I look at the proposals that are being 
discussed recently, I see a very marked change. But if you 
looked at the bailouts that occurred in January, February, and 
the beginning of this year, they were as bad as those that 
occurred earlier.
    Mr. Lance. That is my point. And I began my questioning 
with what occurred at a prior time. But from what I have seen 
so far this year, there doesn't seem to me to be much of a 
change, and certainly in both last year, a year-and-a-half ago 
and in 2009, we the people, you and I together, the American 
people, were on one side and Warren Buffet with his arm's-
length transaction was on another side, a much preferable side. 
And it seems to me we ought to learn from mistakes. And so far, 
I haven't seen any great learning curve in this regard.
    Ms. Minow, your comments perhaps in this area?
    Ms. Minow. I have seen a learning curve. I think that the 
initial transaction, the initial bailout transaction was made 
in a moment of sheer panic, and it reflects that. But I think 
that the subsequent negotiations, and particularly the 
Administration's proposal of this week, do show that some 
lessons have been learned.
    Mr. Lance. Regarding Fannie Mae and Freddie Mac, how could 
these bonuses possibly have been given, in your opinion, as a 
matter of the court of public opinion, and what should we do?
    Ms. Minow. Mr. Lance, if these people could be embarrassed, 
we wouldn't be here talking about them. They seem to be 
unembarrassable. So the court of public opinion doesn't seem to 
matter to them.
    Mr. Lance. So what should we do to make sure this doesn't 
happen again?
    Ms. Minow. With regard to Fannie and Freddie?
    Mr. Lance. Yes.
    Ms. Minow. I support the chairman's notion of essentially 
rebooting the entire concept.
    Mr. Lance. Professor Stiglitz, your views?
    Mr. Stiglitz. I agree. I think that we really have to 
reexamine the whole structure of the GSEs: the concept of an 
institution that was in the private sector, which is what they 
were, and yet seemed to have by some people's account this kind 
of public role, which is a very peculiar mixture. We have been 
talking about corporate governance, and it was a system of 
governance that was almost bound to fail.
    Mr. Lance. Thank you. Is my time expired?
    The Chairman. No.
    Mr. Lance. Following up on Congressman Campbell, the short-
term focus versus the long-term focus, isn't this true 
throughout the whole society? People don't let me finish a 
sentence.
    The Chairman. Would the gentleman hurry up, please?
    Mr. Lance. I can never be as witty as the chairman.
    Isn't this the nature of society? And how are we going to 
overcome this? Ms. Minow, your point of view?
    Ms. Minow. It is the nature of humanity, I am afraid, but I 
do think that we have some structural perversities in the 
system that can be regularized to calm things down.
    Mr. Stiglitz. We will never perfectly overcome it. But I 
think some of the things that we have been talking about are 
ways to mitigate some of the consequences, and we have to 
recognize that in some ways things have gotten worse; and that 
shows that whatever it was, you know, is not inevitable. 
Changes in the rules, the tax structures, and so forth do 
affect the extent to which there is that shortsightedness.
    Mr. Lance. Thank you. I yield back the balance of my time, 
Mr. Chairman.
    The Chairman. The gentleman from Texas.
    Mr. Green. Thank you Mr. Chairman. Mr. Chairman, we are 
dealing today with the irony of ironies, because most who 
opposed raising the minimum wage to $7.25 an hour were 
supporters and are supporters of maintaining a bonus structure 
that creates systemic risk.
    Now, the public may not understand systemic risk and 
perverse incentives and proprietary trading, but the public 
does understand this: that it took us 10 years to raise the 
minimum wage to $7.25 an hour. And if a person--and there is 
such a person--who gets a bonus of $69.7 million, it will take 
a minimum wage worker 4,622 years to make $69.7 million. Some 
things bear repeating, 4,622 years.
    The public understands that when you explain that the CEO 
or the CEOs of the biggest companies make more in 1 day than a 
minimum wage worker makes in a year, and this CEO has reason to 
envy the hedge fund manager who makes more in 10 minutes than 
the average worker makes in a year, and only pays 28 percent--
pardon me, 15 percent, capital gains, not ordinary income.
    I am one who supports allowing people to make bonuses as 
large as they can make, as long as they don't do it based upon 
perverse incentives that create systemic risk. And that is what 
this is all about--perverse incentives that create systemic 
risk.
    Let people make as much they can. But let's not allow them 
to create perverse incentives that will bring down this 
economy. Enough already with this notion that we should just 
let the economy collapse. If we had not bailed out AIG--and I 
did not want to do it, I had to hold my nose and close my eyes 
to cast a vote--but if we had not bailed out AIG, Bear Stearns, 
the auto industry, would the world be a better place today, Ms. 
Minow?
    Ms. Minow. I think we could have done a better job of 
bailing them out, but I think we should have bailed them out.
    Mr. Green. Would the world have been a better place?
    Ms. Minow. No.
    Mr. Green. Sir, Mr. Stiglitz?
    Mr. Stiglitz. I agree that the way we bailed them out 
leaves a lot to be desired.
    Mr. Green. Leaves a lot to be desired. Would the world have 
been a better place if we had not?
    Mr. Stiglitz. I think that at the time, the perspective was 
that we thought we had to.
    Mr. Green. I want speculation. If I may intercede, my time 
is limited.
    Would the world be a better place today? Give me your 
speculation.
    Mr. Stiglitz. My speculation is the world would be a better 
place if we had let AIG fail.
    Mr. Green. The auto industry, Bear Stearns, and AIG?
    Mr. Stiglitz. I think we were forced to have some kind of a 
bailout for some of these.
    Mr. Green. Mr. Bebchuk?
    Mr. Bebchuk. I feel the world would have been better had we 
done a ``partial bailout,'' for example. Having some of AIG's 
counterparties--
    Mr. Green. If we had taken a laissez-faire, hands-off 
attitude and let things go, would the world be a better place 
today?
    Mr. Bebchuk. Compete laissez-faire, no. It would not have 
been a better place if we just took our attention completely 
away from those firms. The answer is no.
    Mr. Green. Just laissez-faire, let the world go wherever it 
is going.
    Mr. Bebchuk. That would have been a worse outcome.
    Mr. Green. Do you understand that we have Members of 
Congress who are advocating we should have just let the world 
go, just left it alone? Can you imagine where we would be if we 
had done nothing? Is it irresponsible to do just nothing at a 
time of crisis like this? Ma'am?
    Ms. Minow. Yes.
    Mr. Green. Sir?
    Mr. Stiglitz. I agree it would be irresponsible.
    Mr. Green. Is it irresponsible to do nothing?
    Mr. Bebchuk. It is not the right thing to do.
    Mr. Green. It is not the right thing to do. All right. I 
will help you. It is irresponsible.
    Friends, we at some point have to become adults about what 
we are dealing with. We are talking about perverse incentives 
that create systemic failure. Give me an example, please, 
ma'am, of a perverse incentive that creates systemic failure, 
please.
    Ms. Minow. Certainly. In the subprime industry, the 
individuals were paid on the number of transactions rather than 
the quality of transactions. So they had a perverse incentive 
to create as many transactions as possible.
    Mr. Green. Mr. Chairman, may I, with unanimous consent, ask 
that each other witness just give one example of perverse 
incentive?
    Mr. Stiglitz. The fact that the incentives in the financial 
sector were based on pay as measured by performance, whether it 
was through excessive risk-taking, increasing beta, or whether 
it was the result of greater efficiency, increasing alpha.
    Mr. Bebchuk. The fact that the top executives at Bear 
Stearns and Lehman Brothers were able to get in 2006 very large 
bonuses based on earnings which then they were able to keep and 
they were not clawed back, even though all those earnings, and 
more, were evaporated in the subsequent period.
    Mr. Green. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman. I have a number of 
questions so I am going to try to ask them quickly. But before 
I ask the questions, I was appointed to this committee in 2005 
with Mr. Green--I had to just recheck--and my recollection is 
that at the time, Mike Oxley was the chairman of this committee 
and our current chairman was the ranking member. And one of the 
first things we dealt with when I came on this committee was 
some proposed reform, assuming by Mr. Oxley, maybe both Mr. 
Oxley and Mr. Frank, dealing with Fannie and Freddie.
    I was talking to a reporter 2 days ago who said one of the 
problems in Washington is that the truth doesn't matter; it is 
whether or not you can say a lie over and over and over again 
so that everybody buys it. So my concern is that history has 
been a little distorted, because Mr. Oxley proposed trying to 
deal with the issue of Fannie and Freddie compensation, and as 
I recall, they didn't get any support from the White House. If 
I have misspoken, I would like to be corrected.
    The Chairman. If the gentleman would yield, Mr. Oxley's 
quote in the Financial Times was that what he received from the 
White House was the ``the finger salute.''
    Mr. Cleaver. I take that to mean I am correct.
    Mr. Bachus. Would the gentleman further yield?
    Mr. Cleaver. Certainly.
    Mr. Bachus. Chairman Frank opposed that legislation.
    The Chairman. Would the gentleman further yield?
    Mr. Cleaver. Yes.
    The Chairman. The gentleman from New Jersey and the 
gentleman from Texas derided it as very ineffective and weak, 
and it failed in the Senate. I voted for the bill in the House 
and in the committee. When it got to the House Floor and the 
Republican leadership put in an amendment restricting 
affordable housing, unrelated to the structural organization of 
Fannie and Freddie, I then voted against that. But I voted for 
the bill until they put that amendment in.
    I thank the gentleman and he will get an additional minute 
for yielding.
    Mr. Cleaver. The point I was trying to make, as somebody 
had said earlier, had transferred the conversation to Fannie 
and Freddie, and that we had not tried to deal with 
compensation with Fannie and Freddie. I wanted to try to clear 
it up as this reporter told me. It doesn't matter; people are 
going to continue to say it, just like we will hear over and 
over again that I guess President Obama started the bailouts.
    But where I want to go now is that the too-big-to-fail is a 
problem because I think they understand clearly that they have 
what it takes to take what we have. And if that is the attitude 
they have, which I think it is, we are going to lose.
    My questions are though--and I don't know the answer to 
this, and in this committee you probably should know the answer 
before you ask the question--but did the firms with better 
compensation perform better? Those with the better compensation 
structure, did they end up performing better? Did they get into 
trouble? Do any of you know that answer?
    Mr. Bebchuk. This is a subject that still needs to be 
investigated. What makes it not a straightforward question to 
answer is the question is, what does it mean to be compensated 
better? So if you believe that better compensation is one that 
provides less incentives to focus on short term, then you have 
to measure those dimensions and then to find how they have 
correlated with performance, and that is not something that has 
yet been kind of fully done.
    Mr. Cleaver. Don't you think that would be a worthy project 
to--
    Mr. Bebchuk. Definitely.
    Mr. Stiglitz. Part of the problem is that almost all of the 
big banks, those that are too-big-to-fail, had similar 
compensation schemes, so that you probably won't be able to get 
clear results. The differences were not big enough to overwhelm 
the perverse incentives that really dominated the whole 
industry.
    Mr. Cleaver. I was wondering if you could do an overlay 
with what happened with the mortgages--the banks, mortgage 
companies, that did not go into the subprime scam even though 
they didn't make as much money. Now, if you look at their 
books, they did better. And so the question that I raise was 
based on what I have seen with the subprime industry.
    And do you think that the--particularly the Wall Street so-
called investment banks will change their compensation 
structure without congressional legislative encouragement?
    Ms. Minow?
    Ms. Minow. As I discussed in my testimony, the fact that 
following the bailout just over the last year, they have 
essentially poured gasoline on the fire of excessive 
compensation suggests to me that they need a much stronger 
message from Congress.
    Mr. Stiglitz. I agree. There will be some cosmetic changes, 
but the question is, will the depth of those changes be 
anywhere near sufficient to address the kinds of concerns that 
have been discussed this morning?
    Mr. Cleaver. My final question. In talking with an 
investment banker in my district in Kansas City, Missouri, I 
found out that what the investment bankers like to do is--not 
the people out trying to make the deals, but the execs--give 
bonuses that stretch over a number of years. And my assumption 
is that they invest, you know, they give a bonus over the next 
4 or 5 years, and then they invest what they gave, they keep 
and invest what they gave. And so I am wondering whether or not 
that kind of system should be outlawed. The executives don't 
want to give compensation, all compensation in cash up front. 
They want to stretch it out over the years. Do you understand 
when I am saying?
    Mr. Stiglitz. Let me make one comment, which is they are 
very creative in trying to subvert the intention--that we have 
been concerned with--of getting better incentive systems. One 
of the concerns is that, if you look in more detail across 
corporations, much of what is called ``incentive pay'' is not 
incentive pay. It is a charade. If you look at overall 
performance and overall compensation, they are much less 
closely linked than the name would suggest.
    That was evidenced in the AIG case where, when they began 
to have problems, they just changed the name from ``performance 
pay'' to ``retention pay.'' They are very clever in undermining 
what we are really concerned about.
    Mr. Cleaver. I know you weren't trying to suggest this, but 
it almost sounds like you were saying they are trying to trick 
Congress and the public. Thank you, Mr. Chairman.
    The Chairman. The gentlewoman from Ohio.
    Ms. Kilroy. Thank you, Mr. Chairman, and thank you to all 
of the witnesses for your thoughtful testimony. And I thank my 
colleagues for their questions and discussion that we have had 
since then. It has been very useful and thought-provoking, and 
still the whole issue is still difficult to get your arms 
around here.
    Despite the financial crisis in the fall of 2008, and the 
resulting bailouts and further infusions of cash along the way, 
here we are again with the public outraged and Wall Street 
handing out this year a record $140 billion in bonuses.
    When we take a look at that kind of money and try to put it 
in some kind of perspective, in context, according to the 
Washington Examiner, this is 10 percent of the entire U.S. 
deficit, or 3 times the amount budgeted for education, or 4 
times the amount for Homeland Security. It is vastly more money 
than we have pledged for the reconstruction of Haiti and an 
amount that could prevent millions, hundreds of millions of 
home foreclosures.
    So it is no wonder that hardworking Americans who thought, 
as was brought out in questioning, that okay, we need to bail 
out Wall Street, we don't want to go over the cliff, and 
understood it was their hard-earned dollars that were going 
towards that, nevertheless wanted to see something other than 
banks buying up banks and handing themselves out bonuses as a 
result of trading activity, rather than making those loans or 
renegotiating those mortgages.
    So families understand that they have lost jobs and they 
have lost homes, and bankers still are getting billions of 
dollars, and we still haven't gotten a hold over all of the 
issues about the risky behavior that has brought us here to 
this date.
    Now, I listen to the bankers, and sometimes they tell me 
that they are offended that we are even talking about 
regulating their bonuses and their compensation, that we don't 
understand that they are the best and the brightest, or that it 
has to be now for retention; otherwise they would, I don't 
know, go do I don't know what. I get offended when they tell me 
they are the best and the brightest, because I happen to think 
that there are a lot of people who are very bright and very 
good. In fact, the best are involved and teach for AmeriCorps, 
in our public schools, or in our hospitals, or social workers, 
and they seem to work very hard with substantially less pay.
    So, you know, I serve on the Homeland Security Committee, 
and we had the Salahis in last week and they were all primped 
and dressed up and made up and these gate crashers struck me as 
incredibly self-centered and without regret, and sometimes, 
like some of the people that I hear saying that we can't touch 
their pay, they don't get how angry hard-working Americans are 
and how people in central Ohio think pay should somehow relate 
to your productivity. And they don't get it that when you ruin 
an economy, you get these kind of bonuses.
    So, you know, I know we have been around this a few times 
already, but what advice do you have for us so that we can 
fairly compensate people and try to define performance? And if 
the issue is, Ms. Minow, as you suggested, the central issue, 
board governance, if boards have this attitude that we all 
deserve that in the financial sector, that kind of 
compensation, how do we really get into, you know, changing the 
practices, both in order to protect us from further damage down 
the road, and to have a better handle on corporations and their 
governance?
    Ms. Minow. The focus on the post-Enron reform legislation, 
Sarbanes-Oxley, and the regulations has all been on what I call 
the supply side of corporate governance, what managers have to 
do, what accountants have to do. We have not really focused on 
the demand side, on what shareholders have to do. And the fact 
is that you should have in here the heads of all the mutual 
funds, the Assistant Secretary responsible for ERISA, these are 
people who routinely vote in favor of these boards of 
directors, in favor of these pay plans because no one is 
looking at them, no one is paying attention to them. I think we 
need to remind them what fiduciary obligation is all about and 
that it is in their economic interest to look at pay as a risk 
factor, and I think that would make a big difference.
    Mr. Stiglitz. I think the reforms in corporate governance 
that we have been talking about, both on the demand and supply 
side, are essential, but in the end I think they won't go far 
enough, for two reasons. One, those aspects of the structure of 
the compensation schemes that put at risk the national economy 
and the taxpayers' money have to be regulated in a whole 
variety of ways.
    The second point is that the tax structure as a whole has 
to be designed better to address the sense of equity in our 
system. The arguments that have been made before, that more 
progressive taxation or that taxing capital gains would have 
adverse incentive effects, are just wrong. We can have a fair 
tax system that actually would encourage greater efficiency.
    Mr. Bebchuk. I would put the $140 billion figure that you 
mentioned in context, not just by comparing it to the Homeland 
Security budget, but I would compare it, that would be the most 
relevant comparison, to what shareholders have received during 
this period and what taxpayers have received during this 
period. So what is disproportionate is the $140 billion 
relative to the contribution of the financial sector to the 
performance of the economy over the last decade. If you look at 
the numbers, you see that shareholders in the financial sector 
over the last 10 years still see somewhat negative returns over 
this long period. And we know about taxpayers.
    So what we need is to reallocate the pie, so to speak, in a 
more efficient way between shareholders, taxpayers, and 
financial executives, and the way to do it would be for 
shareholders to have stronger rights so that they can claim 
their share of the pie, and for taxpayers to begin going 
forward charging banks adequately for the support the taxpayers 
are providing.
    The Chairman. The time of the gentleman has expired. I just 
want to makes an announcement to others. And this again, the 
gentleman from California, Mr. Campbell, the gentleman from 
Michigan, Mr. Peterson, there has been a lot of interest in 
corporate governance. We tried to minimize the involvement of 
it with the financial regulatory programs. We want to deal with 
that. We are going to get into the corporate governance issue, 
and that includes, by the way, I would just say to Ms. Minow, 
jurisdiction being what it is, I don't think I can summon the 
Assistant Secretary of Labor before this committee who was the 
ERISA guy or woman. But we are going to continue with one of 
the things that the SEC did, which is to require that all these 
institutions publish how they vote. As you know, there was a 
lot of resistance to that. And the fact that it was kind of 
partisan is true, so it was imposed on the mutual funds, and we 
believe it should be imposed on any fiduciary. If you are the 
owner of the shares in your own right, you have a privacy 
right. But if you own shares as a fiduciary, we, I hope, will 
pass legislation that will require that you have to make public 
how you voted on all the proxies. We can't force them to do 
more, but I think that would be useful.
    Ms. Minow. No question about it. I would be delighted and I 
hope you will allow me to come back and testify in support of 
that.
    The Chairman. And we will be inviting people to that 
hearing. Before we get to the last questioner, the gentleman 
from Florida, one other question, I talked to the gentleman 
from Alabama, if I have just like 2 minutes, unanimous consent 
to say, one of the things we are told is well, we are given two 
arguments on compensation. One, we will all go to some other 
country. Well, the rest of the world is getting tighter than 
us. So now the argument is okay, we will go do something else. 
We will go into some other profession and won't you be sorry, 
all billion of us will no longer be trading CDSs with each 
other.
    My response is in part, well, I am not sure where you are 
going to go for that kind of money. But two, what if they did, 
if, in fact, fewer of the very brilliant people that the 
gentleman from Ohio was referring to decided that there was no 
longer enough money to be made in bond trading and went into 
other lines of work, would that be a social loss? Not that we 
would drive them away, but is that a by-product that we have to 
try to avoid?
    Ms. Minow. I was supportive of the remarks you made on this 
subject earlier this week, Mr. Chairman, when you talked about 
scheduling this hearing. And in my written testimony, I said I 
would love to see the demand curve on that one if all of the 
Wall Street guys rush out into the market. I think the pay 
package--
    The Chairman. Well, I think it is twofold. One, what is the 
demand curve and, two, even if there is a demand what is the 
social loss?
    Professor Stiglitz?
    Mr. Stiglitz. I addressed that in my written testimony. I 
said that not only is there a misallocation of financial 
capital, but there is also a misallocation of human capital 
that is costing our society even more. It would be a good thing 
for our society to reallocate this human capital.
    The Chairman. Professor Bebchuk?
    Mr. Bebchuk. There is a very interesting study by Claudia 
Goldin and Larry Katz from Harvard, and they track what 
happened to Harvard college graduates over a long period of 
time, and they report that a huge increase in the fraction of 
the class, the best and the brightest, they go into finance 
relative to what happened 30 years ago when larger numbers were 
going into science, engineering, medicine, and so forth. And 
this partly reflected response to market incentives, and now 
that we are reconsidering the contribution of financial to the 
wellbeing of the economy, we might conclude that having a 
smaller fraction going into finance might not be a bad thing.
    The Chairman. Thank you. Does the gentleman from Alabama 
want to take 2 minutes?
    Mr. Bachus. Yes, I do want to say this. I think we are 
dealing with executive compensation, and I think one thing that 
does trouble most Americans and Members on both sides of the 
aisle is that some of the very large banks do borrow very 
cheaply from the Fed, and that is taxpayer subsidized in one 
way or the other. Whether they invest them in Treasury bonds or 
carry trade, or whether they use them to trade and make 
additional profits, the original premise was that money would 
be loaned, and it is not.
    Now, I will say this: The flip side of the argument is that 
they are using those trading profits to cover some of their 
lending losses, and in some ways that makes the banks stronger 
and it may avoid the government having to come up and pick up 
liability. You know, that is one of their answers.
    Another one that they say is that there are no borrowers; 
they can't find borrowers who are qualified. Now, I talk to 
many people back in Alabama, and they say when they deal with 
the large banks, they say they are not interested in loaning 
someone $200,000. They are interested in $100 million deals. So 
I think that is a real problem. Particularly as banks get 
bigger and bigger, they are not lending on Main Street. They 
are lending to large corporations, but smaller businesses can't 
get loans.
    And I do think the American people do believe that by being 
able to borrow cheaply from the Fed and some of the guarantees 
that have been extended, that money is finding its way into 
compensation, which gives the appearance of being excessive. 
And so I think these are valid concerns.
    And also, the last concern, and I will close with this, and 
I think it is a concern we all have, as they do this trading 
they tend to be going back and doing what got them in trouble 
in the first place, and that is speculating, leveraging, and 
what happens, do we get right back into the problem we had? And 
if they are going to get in trouble, they say, you know, you 
don't want us to make bad loans. That is true. We also don't 
want them to make trades that are risky. And if anything, the 
trades benefit themselves, proprietary trading, whereas the 
lending at least gets the economy going.
    The Chairman. If the gentleman would yield, if they can 
make enough money doing everything but lending that may be a 
contributing factor to not lending. We will have an all-day 
hearing on Friday, February 5th, with borrowers and regulators 
and lenders, and we want to get into this question about why 
more loans aren't being made. It is a bipartisan concern. And I 
do think it is legitimate to inquire to the extent to which 
other opportunities to make a lot of money displace lending, 
either directly or indirectly. Let me just now--
    Mr. Bachus. And I do think one answer is to look at whether 
they are lending, and if they are not lending, the government, 
if they are going to make money available it ought to be to 
those institutions that are lending and lending on Main Street, 
and put some competition out there .
    The Chairman. Yes. And that will be our February 5th 
hearing. The last questions will be from the gentleman from 
Florida, Mr. Grayson.
    Mr. Grayson. Thank you, Mr. Chairman. In capitalism, 
winners have to win and losers have to lose. People are 
normally rewarded for success and they are punished for 
failure. Now, we went through an experience where, between the 
middle of 2007 and the end of 2008, that 18-month period, we 
lost $12 trillion in our country's net worth. According to the 
Federal Reserve figures, the net worth of America dropped from 
$62 trillion to $50 trillion, by 20 percent in the last 18 
months of the Bush Administration.
    Is there any sign since these bailouts began that the 
institutions and the individuals on Wall Street and in major 
banks who were responsible for the decisions that led to that 
loss of $12 trillion actually were held accountable for it? Any 
sign at all?
    Professor Stiglitz?
    Mr. Stiglitz. No.
    Mr. Grayson. Ms. Minow?
    Ms. Minow. No.
    Mr. Grayson. Professor Bebchuk?
    Mr. Bebchuk. I think some of them lost their positions. 
Some of them lost money, but by and large they have not been 
held sufficiently accountable. And the most important thing is 
we don't yet have incentives going forward that would make 
people do the right thing in terms of risk-taking.
    Mr. Grayson. Well, you raise an interesting point. I 
actually asked the head of AIG, who actually were the people 
responsible for their losses that led to the government bailout 
and he wouldn't even tell me their names. Isn't it possible 
that the people who actually led to this financial disaster, 
not only in America, but around the world, are still doing the 
same jobs, very often down the block from where they were 
before?
    Mr. Bebchuk. I think some of the key people did lose their 
positions. So some of the top people at AIG are no longer 
there. But I think that I agree with your sentiment that 
probably they have not been held sufficiently accountable. And 
most importantly, many of them have been able to pocket and 
still keep large amounts of money that were based on results 
that they had in 2006 and 2007, which were disastrously 
reversed in 2008.
    Mr. Grayson. What does it mean for a capitalist country 
like the United States if over a long period of time, failure 
is rewarded and capital destruction is rewarded? What does that 
mean in the long run?
    Ms. Minow?
    Ms. Minow. Bankruptcy.
    Mr. Grayson. For the country?
    Ms. Minow. For the country.
    Mr. Grayson. Professor Stiglitz?
    Mr. Stiglitz. It obviously has a very adverse effect on the 
efficiency of our economy. I have called it an ersatz 
capitalism, where you socialize the losses and you privatize 
the gains. That leads to distorted behavior, which is why a lot 
of what we are talking about is about going forward, not just 
dealing with the past. Unless we correct these incentive 
problems at the organizational and individual level, we are 
likely to have exactly the same kind of problem again.
    Mr. Grayson. And Mr. Bebchuk?
    Mr. Bebchuk. I really agree. The difference between what 
Professor Stiglitz called ersatz capitalism and real capitalism 
is very substantial and costly for the country's well-being.
    Mr. Grayson. Now, on Wall Street the gearing, the ratio 
between assets and equity is often 10 to one or more, right? 
Professor Stiglitz.
    Mr. Stiglitz. If it were only 10 to one, we would think of 
that as very conservative. It has been up to 30 or 40 to one. 
That is an example of excessive risk-taking with very little 
social benefit that you can associate with that high level of 
risk-taking.
    Mr. Grayson. Well, let's say it was only 10 to one. Isn't 
it true that every dollar that is paid on executive 
compensation means $10 less in loan ability for these 
institutions, the ability to lend out money to the rest of 
America? Professor?
    Mr. Stiglitz. Yes. We were talking about that at the 
beginning of the hearing, that money that goes out in bonuses 
is money that is not available in, you might say, the net worth 
of the bank and therefore not available as the basis of the 
leverage that the bank can lend out.
    Mr. Grayson. Now, do the managers of these institutions on 
Wall Street and the big banks around the country have any 
incentive all in an economy that is based on incentives like 
America's, any incentive at all to economize on their own 
compensation?
    Ms. Minow?
    Ms. Minow. No, I think it is the sky's the limit.
    Mr. Grayson. Professor Stiglitz?
    Mr. Stiglitz. The incentives are distorted. We have been 
talking about what would happen if they had long run 
incentives. If they had more effective long run incentives, 
then of course they would say if they keep the net worth of the 
company larger, it will make larger profits in the long run. 
Therefore, in the long run the company is doing better, and 
they will get an appropriate return. But that is not the way 
the current incentive structures are designed.
    Mr. Grayson. Mr. Bebchuk?
    Mr. Bebchuk. They don't have the right incentives. 
Privately they would be better off paying, having larger 
compensation even at some cost to the shareholders. We have 
seen this in firms that were making decisions whether to return 
TARP funding, and it seems that some executives were eager to 
return TARP funding, even when that was costly to their 
shareholders, as evidenced by market reactions, in order to get 
out of the restrictions the TARP funding had on the 
compensation.
    Mr. Grayson. Thank you, Mr. Chairman.
    The Chairman. I thank the witnesses. We will take further 
testimony, particularly on the question of how you deal with 
short-termers and some of these things that are ongoing and 
also on what I think I will title the ``so what'' part of this, 
which is, oh, if you don't let us make all this money, we will 
go off and do other things. We know they are not going to 
England. In fact, one of our major bank CEOs--we don't need to 
mention him here--complained to the Chancellor of the Exchequer 
that they were driving away his potential investment in Canary 
Wharf because of their compensation restrictions. So they 
really are trying to play us off against each other. I will be 
in Davos next week, and one of the things I will most focus on 
is reinforcing this agreement, both with compensation and 
regulation, that we are not going to be played off, and I think 
in fact America will wind up being a little bit more lax than 
many of the others. So then the question is, okay, we will go 
off and engage in other lines of work, and maybe if we got some 
more family physicians and less people doing mathematical 
models, it wouldn't be such a bad thing.
    Thank you all.
    [Whereupon, at 12:19 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            January 22, 2010


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