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


 
                     COMPENSATION IN THE FINANCIAL 
                   INDUSTRY--GOVERNMENT PERSPECTIVES 

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 25, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-103

                               ----------
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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:
    February 25, 2010............................................     1
Appendix:
    February 25, 2010............................................    35

                               WITNESSES
                      Thursday, February 25, 2010

Alvarez, Scott G., General Counsel, Board of Governors of the 
  Federal Reserve System.........................................    11
DeMarco, Edward J., Acting Director, Federal Housing Finance 
  Agency.........................................................     9
Feinberg, Kenneth R., Special Master for TARP Executive 
  Compensation, U.S. Department of the Treasury..................    13

                                APPENDIX

Prepared statements:
    Welch, Hon. Peter............................................    36
    Alvarez, Scott G.............................................    37
    DeMarco, Edward J............................................    53
    Feinberg, Kenneth R..........................................    60

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Letter to James B. Lockhart III, Director, Federal Housing 
      Finance Agency, dated March 19, 2009.......................    66
    Letter to Chairman Frank from James B. Lockhart III, 
      Director, Federal Housing Finance Agency, dated March 20, 
      2009.......................................................    67
    Letter to Honorable Barney Frank, Honorable Spencer Bachus, 
      Honorable Christopher Dodd, and Honorable Richard Shelby 
      from Edward J. DeMarco, Acting Director, Federal Housing 
      Finance Agency, dated February 2, 2010.....................    69


                     COMPENSATION IN THE FINANCIAL
                   INDUSTRY--GOVERNMENT PERSPECTIVES

                              ----------                              


                      Thursday, February 25, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2:02 p.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Watt, Sherman, 
Moore of Kansas, Clay, McCarthy of New York, Green, Cleaver, 
Ellison, Perlmutter, Donnelly, Carson, Speier, Adler, Kosmas; 
Bachus, Royce, Biggert, Capito, Hensarling, Garrett, Gerlach, 
Neugebauer, Jenkins, Paulsen, and Lance.
    The Chairman. The hearing will come to order. This is a 
hearing on the question of what restrictions are appropriate in 
compensation for people being paid with public funds. I have to 
announce that Ken Feinberg is, unfortunately, stuck on a train. 
He is on a train from New York that was behind a train that was 
involved in a fatal accident. He is trying to get here.
    Given the time constraints we are facing as a result of 
having been snowed out, we can't really postpone things. So we 
hope he will get here at some point, but we're going to have to 
see.
    And I recognize the gentleman from California, Mr. Sherman, 
for 2 minutes for an opening statement.
    Mr. Sherman. Thank you, Mr. Chairman. Those who have repaid 
the TARP money are not truly independent of Federal 
involvement, for they enjoy the implicit Federal guarantee if 
they are too-big-to-fail.
    We are told that old contracts must be honored, even if 
they were signed by entities which, by all rights, are 
bankrupt. And, therefore, enormous money must be paid to those 
who drag us and their companies down.
    We are told the new lucrative contracts must be signed at 
AIG and elsewhere, so that we can have talented croupiers 
involved in continuing to gamble at taxpayer expense, when in 
fact, AIG should be liquidated. And you don't need talented 
croupiers to do that.
    And we are told that we shouldn't focus on the enormous 
size of amounts being paid to those who are employed by 
government-subsidized entities, we should only focus on whether 
there are perverse incentives.
    I think it's difficult to construct any contract that 
doesn't offer perverse incentives to somebody who is running a 
division of one of these big banks, since by taking enormous 
risks, they could justify getting the grant of an enormous 
amount of restricted stock, which restricted stock will turn 
out to be valuable unless the heads of the other divisions have 
screwed up and the people taking enormous risks in their own 
division have no reason to think that everybody else is going 
to bring down the company.
    So, these bonuses and compensation plans are outrageous, 
and the justifications of pre-existing contract--``We're done 
with TARP,'' or, ``We need to preserve the assets for the 
benefit of the taxpayer''--don't hold water when you really 
examine them. I yield back.
    The Chairman. I thank the gentleman. At the last hearing we 
had on executive compensation, the gentleman--our colleague 
from Vermont, Mr. Welch, had a statement he wanted to put in 
the record. I neglected to ask for permission to do that, so I 
now ask unanimous consent to include in the record the 
statement from Mr. Welch of Vermont on executive compensation. 
Hearing no objection, it will be included.
    The gentleman from Alabama is now recognized for 4 minutes.
    Mr. Bachus. Thank you, Mr. Chairman, for holding this 
hearing. We are the largest and strongest economy in the world. 
America didn't get there by having the government run 
businesses.
    The traditional view, which I share, is that we have the 
number one economy in the world because of the free enterprise 
system, in which it is inappropriate, ineffective, and 
dangerous for the government to impose controls on the 
executive compensation practices of privately-owned companies. 
It is inappropriate, because such companies' practices should 
be controlled by their shareholders, who are the owners of the 
money which is being paid to the executives. It is ineffective, 
because government bureaucrats have shown themselves to be 
particularly inept at making decisions governing executive 
compensation. Most critically, it is dangerous, because 
government bureaucrats and politicians inevitably allow 
political considerations to distort their decisions.
    There is no need to elaborate on the first point. It is the 
stockholders' money. And unless the government is a 
shareholder, the government has no right to tell them how they 
may disburse it. The pretense that this is a safety and 
soundness issue is simply an excuse to disallow pay that many, 
myself included, often find excessive. But shareholders already 
have the power to stop their money from being paid to 
executives who do not deserve it.
    To ensure stockholders have the information and access they 
need to exercise their control, Republicans have supported 
giving shareholders of publicly traded companies a triennial, 
non-binding shareholder vote on executive compensation. This 
approach is far preferable to entrusting more power to the same 
government whose regulatory failures have caused the financial 
meltdown.
    The ineffectiveness of bureaucratic controls is clearly 
shown by the experience of Fannie Mae and Freddie Mac, which 
the government does own. I am particularly pleased that we will 
hear today from the acting Federal Housing Finance Agency 
Director, Mr. DeMarco, about the Christmas Eve decision to 
award multi-million dollar pay packages to the executives of 
Fannie and Freddie. The $6 million pay packages given to each 
of their CEOs--an amount 15 times more than the President 
makes, and 30 times more than a Cabinet Secretary--represents 
just one example of what happens when the Federal Government is 
given the responsibility for regulating compensation.
    Employees of AIG, another company owned by the taxpayers, 
were awarded $100 million in bonuses this year.
    Executives at General Motors, a firm that already has 
received $52.4 billion in bailout money, was recently given a 
waiver to receive compensation in excess of a $500,000 pay cap. 
In addition, GM's ousted former CEO is being brought back to 
serve as a consultant, and will receive compensation of $3,000 
an hour.
    These are two companies controlled by the government. The 
greatest danger is that dramatically increasing government 
micromanagement of compensation packages will provide 
politicians with a powerful tool to influence business 
decisions for political or policy purposes, but not economic 
purposes. Every society that has followed that path has come to 
grief. Governments should not be micromanaging private 
business.
    We need to end the bailouts, and let businesses rise or 
fall on their own merits. Letting the government decide who 
prospers and who doesn't and bailing out those who fail is not 
how we became the most powerful economy in the world. Thank 
you.
    The Chairman. I just want to, off the cuff, say I have this 
very nice, very sharply delineated clock here, that tells me 
when there is only 1 minute left. I did not realize that other 
Members didn't have it. So sometimes you get used to things and 
you don't realize. And it is theoretically there, but I can't 
see it. Maybe somebody else can. I cannot see it.
    I have asked our very hard-working clerk, who puts up with 
a lot, to get us better graphics. Until we do that, it would be 
up to the Members. Would Members, because I have it here, like 
for me to say when it's 1 minute, or do a tap with the gavel 
when there is 1 minute?
    Some people might find it disruptive. But I would just, 
when there is 1 minute, do that so that people would know that, 
because--
    Mr. Bachus. And when it's up, two taps.
    The Chairman. Yes. Oh, no.
    [laughter]
    The Chairman. But yes, if that's not going to be 
disruptive--so--and I apologize, because I have said to 
Members, ``Well, why did you wait so late,'' and then I 
realized that people did not know that. We are going to try and 
get a better set of graphics. And until then, that will mean 
that the Member has 1 minute left, to summarize.
    And with that, the gentleman from Indiana is recognized for 
2 minutes.
    Mr. Carson. Thank you, Mr. Chairman. I was outraged to hear 
earlier this month the latest move by AIG to, again, reward 
employees who nearly drove that company, and our Nation's 
economy, into the ground. Giving huge bonuses after such a 
colossal failure is horribly irresponsible, and simply 
unconscionable.
    Millions of experienced Americans are struggling right now. 
They have played by the rules, and did everything asked of 
them. But today they are out of work after falling victim to a 
steep recession that was fueled by foolish gambles taken by 
Wall Street. Despite all of this, AIG and its executives 
continue down the same path of greed and excess.
    Americans aren't necessarily opposed to considerable pay 
packages. But injustice is quite another matter. And the 
Nation's ongoing financial crisis has provided numerous 
occasions for public fury. The recent discussion in controlling 
executive compensation has called for establishing a ratio 
between a CEO's salary and the average wage, for controlling 
the use of stock options, and for capping certain salaries.
    I would argue that we should also look to remove 
impediments that prevent shareholders from playing the role 
that economic theory says they are supposed to play. I want 
executives to create shareholder value and be rewarded when 
they are successful. But I fail to see the need for excessive 
pay packages when they fail. Executives currently have abundant 
opportunities to enrich themselves at shareholders' expense, 
and to pursue business strategies that serve their own 
interest, rather than those of their companies' owners.
    I look forward to today's testimony. I yield back my time. 
Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas, Mr. Neugebauer.
    Mr. Bachus. And, Mr. Chairman, the next 6 speakers have 1 
minute. So I guess we will depart from the tap rule.
    The Chairman. I will do it in advance.
    Mr. Neugebauer. You all aren't using my time, are you?
    The Chairman. The gentleman from Texas. I'm tapped out.
    Mr. Neugebauer. I see. Thank you, Mr. Chairman. On 
Christmas Eve, the taxpayers got a gift from the government 
that they want to return.
    And, given the choice, they would exchange the Treasury's 
decision to give GSEs unlimited support for a limit, or 
removing the unlimited support on the tax dollars that can go 
into Fannie and Freddie from the treasury. They would exchange 
this multi-million dollar salary package approved for the GSEs 
for salaries along the same scale as senior Federal Government 
employees, since Fannie and Freddie are now essentially 
government agencies.
    When it comes to GSEs, the government must be more honest 
and transparent. What the taxpayers are looking for is truth in 
government. Taxpayers need to know how much this bailout is 
really going to cost them, and when they're going to get their 
money back. While we can't shut down Freddie and Fannie right 
now without a replacement system of financing mortgages, 
Congress must start a plan for the transition now that puts 
plans in place to end this bailout.
    We have to stop. And the reason we shouldn't have done 
these bailouts in the first place is because of the 
conversation we are having today.
    The Chairman. The gentleman from California, Mr. Royce, for 
1 minute.
    Mr. Royce. Thank you, Mr. Chairman. Since the 
conservatorship back in the fall of 2008, there have been 
several missteps in the handling of Fannie Mae and Freddie Mac, 
the two institutions at the epicenter of the financial 
collapse.
    About a year ago we, heard from the FHFA that despite $60 
billion in losses, Fannie and Freddie would be paying out 
$600,000 in bonuses to top executives at these failed 
companies.
    In September of last year, despite even deeper losses, we 
learned that taxpayers had paid $6.3 million in legal defense 
bills for 3 top former executives. Then, last Christmas Eve, 
along with opening up these institutions to limitless losses, 
the Administration approved the payment of $42 million in 
additional compensation packages, bonuses to 12 top executives 
at these institutions.
    It seems as though the bigger the bailout gets, the bigger 
the bonuses get. These institutions are essentially wards of 
the state, and they should be treated as such. I yield back.
    The Chairman. The gentleman from Texas is now recognized 
for 1 minute.
    Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, I want to 
speak for those who agree with me. I don't always know who they 
are, and I don't always know who they aren't. But I say this: 
We don't want to regulate pay, per se.
    We want to regulate pay that creates systemic risk--i.e., 
the yield spread premium, a kickback, lawful though it may have 
been, that was accorded persons who would get buyers to go into 
higher interest rates that they--when they qualified for lower 
rates, and get a bonus for it. We want to make sure that the 
shareholders are properly empowered. If they could have done 
this without some assistance from us, they probably would have, 
and we wouldn't be in the predicament we are in. I yield back.
    The Chairman. The gentlewoman from West Virginia for 1 
minute.
    Mrs. Capito. Thank you, Mr. Chairman. Like many of my 
constituents, I was shocked when the Treasury Department and 
the Federal Housing Finance Agency approved compensation 
packages for the chief executive officers of Fannie and Freddie 
of $6 million each, including $2 million incentive payments. 
These compensation levels are 30 times more than a Cabinet 
Secretary, and were approved by entities that have borrowed 
$100 billion from our treasury.
    This is an insult to the hard-working families across the 
country who are tightening their belt, trying to make ends meet 
in this economic downturn. But these compensation packages are 
but one of the many examples why this Congress should and needs 
to tackle the difficult task of GSE reform.
    The chairman has indicated his desire to move forward on 
this. Unfortunately, the Administration has signaled that they 
do not want to put forth serious reform proposals until next 
year. I hope we move forward with GSE reform, and I would like 
to thank the chairman for holding this hearing. Thank you.
    The Chairman. The gentlewoman from Illinois for 1 minute.
    Mrs. Biggert. Thank you, Mr. Chairman, and thank you for 
holding today's hearing. And I would like to thank Ranking 
Member Bachus for inviting FHFA Acting Director DeMarco.
    I look forward to hearing the Administration's proposals to 
reform the GSEs. It's important that we have a plan to end the 
conservatorship and the taxpayer subsidy, and take this 
Administration out of financing nearly three-fourths of the 
Nation's mortgages.
    The public deserves clear, easily accessible information 
about the actions of FHFA, and about the actions of the Fed and 
Treasury that are supplying unlimited, unprecedented funds to 
keep Fannie Mae and Freddie Mac on taxpayer-funded life 
support.
    Mr. DeMarco, your staff has reached out to my staff and 
indicated that you are familiar with and want to discuss my 
legislation to improve GSEs' transparency and accountability, 
and I look forward to our discussion today, as well as our 
meeting.
    And I would hope that Congressman Moore would consider my 
request to add this language to another bill we introduced to 
establish an FHFA Inspector General.
    The Chairman. I will yield myself the remaining 5 minutes 
on my side.
    I shared the dismay at the announcement of the bonuses. I 
did try a couple of things to stop it. On March 19th--and I 
would ask unanimous consent to put in the record a letter I 
sent to James Lockhart. James Lockhart was Mr. DeMarco's 
predecessor. He was the appointee of the previous 
Administration. Continuity is one of the clear themes here. Mr. 
Lockhart was the appointee of the Bush Administration. He was 
continued for a while in the Obama Administration, and then 
replaced.
    And I wrote and said, ``I am writing to urge strongly that 
you rescind the retention bonus programs at Fannie Mae and 
Freddie Mac, prohibit any further payment of bonuses to 
executives under that program, and pursue repayment of any 
already-paid bonuses.''
    Mr. Lockhart wrote me back the next day, March 20th, and 
said, ``No.'' And he said that Fannie Mae and Freddie Mac had 
important responsibilities, and he needed to keep them. The 
loss of key personnel would be devastating to the company's and 
to the government's efforts to stabilize the housing system.
    So, I regretted that. I thought they were a mistake. I 
wrote to him to try and stop it. When that didn't work, we 
talked about legislation. In fact, the House did pass two bills 
on compensation last year. One was, I understand, somewhat 
controversial because it would have imposed--and it's still 
pending in the Senate, a phrase you hear a lot these days--
restrictions involving purely private companies. And I believe 
that's appropriate as to the perverse incentive structure. But 
I understand Members' objections to it.
    But we had an entirely separate bill that came out of this 
committee to restrict compensation to those entities getting 
public funds, the TARP, and specifically--and it says, ``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, etc.''
    We specifically included Fannie Mae and Freddie Mac, and 
what we said was they couldn't get compensation if it provides 
for compensation that's unreasonable or excessive, defining 
standards established by the Secretary, in consultation with 
the chairman of the oversight panel, includes bonuses, 
supplemental payments, etc.
    In other words, this was a piece of legislation that dealt 
only with TARP recipients in Fannie and Freddie. Of course, 
many of the TARP recipients have now paid back, so they would 
not be covered.
    What we have here is a bill that would have covered Fannie 
and Freddie. And so, as I said, when they issued these bonuses, 
I wrote a letter to Mr. Lockhart, the hold-over appointee, and 
objected. He said he was going to use his authority to keep 
them in place.
    We then did what we, as the Congress, can do when an 
executive refuses to accede to a request from us. We passed the 
bill. Unfortunately, the bill was somewhat partisan. I'm not 
sure why. Again, I understand why there was a debate about the 
bill to restrict purely private companies--although I agreed 
with what we did--but this was for TARP recipients, and those 
TARP recipients that were covered and--of course those who paid 
it back are not covered--and specifically Fannie and Freddie.
    So, yes, they did put those through. We would have banned 
that with our legislation. The bonuses that came on Christmas 
would have been severely restricted had the legislation passed. 
It didn't pass, unfortunately, in the Senate. It passed in the 
House. And that's one of the reasons why we are in this 
situation.
    I should add that I also believe the time has come to 
proceed to a total reorganization of housing finance, and I do 
want to mention again that I had--and this was on my 
initiative, although I knew there was an interest on both sides 
in doing this--scheduled a hearing for next Tuesday, and 
invited the Secretary of the Treasury and the Secretary of HUD 
to testify.
    As we all know, we're not socialized. Some invitations are 
more happily received than others. These were not invitations 
which were met with a gushing, ``Oh, thank you, I can't wait,'' 
but we are going to begin that process.
    I then had to postpone it. I want to make it very clear. It 
was my constituency issues that intervened. They called a 
hearing on fishing in the City of Gloucester. It is very 
important for me. As I said, I had to decide, literally, to 
fish or cut bait, and the response will be a postponement of 
the hearing. That hearing will be rescheduled for March 23rd. 
Members will be aware we have a pretty packed hearing schedule, 
partly because we lost that week of snow.
    But the Administration is on notice that they are going to 
be asked on March 23rd--and I will say this--had they appeared 
next Tuesday and told us they were still in a preliminary 
stage, I would have been more understanding. Now that they have 
another couple of weeks--3 weeks--to come, I expect them to be 
better prepared on March 23rd with an outline of what they 
think should be done than there would have been on March 2nd. 
So I hope, in terms of preparation, not much time is lost.
    So, in summary, I did object to those bonuses when they 
were issued, and the holdover appointee kept them. And we did 
try to pass legislation to stop it.
    The gentleman from Texas. Yes? The gentleman from Alabama?
    Mr. Bachus. I would like to commend the chairman. He set 
the hearing very promptly. So, had he set it for the date that 
it now postponed to, it would have been fine. And it was set, 
and I happened to visit that area of Massachusetts, just 
coincidentally, and saw what a hot item that fishing issue is 
up there. And--but I did want to commend the chairman. And the 
postponement was done with my consent. Thank you.
    The Chairman. I thank the gentleman. But again, I would say 
the Administration has 3 more weeks. But it won't be acceptable 
for them to be no better prepared on March 23rd than they would 
have been on--
    Mr. Bachus. And I actually think that it may be a more 
appropriate time, because I think there can be more 
preparation, and that they be prepared to go forward.
    The Chairman. The gentleman from Texas for 1 minute.
    Mr. Hensarling. Thank you, Mr. Speaker. I heard one of my 
earlier colleagues mention executive compensation and systemic 
risk. It's interesting that most of the evidence we have seen 
has shown that many financial firms have the same compensation 
packages, and some went belly up and some didn't. So the 
connection is tenuous, at best, which suggests to me we ought 
to be guided by one overarching rule: What people do with their 
money is their business; what they do with the taxpayer money 
is our business.
    And, certainly, I have seen--in the past, I know of no more 
outrageous use of the taxpayer money than on Christmas Eve, to 
announce these multi-million dollar bonuses for Fannie and 
Freddie, and simultaneously lift the cap on taxpayer exposure.
    So, I am looking forward to having some explanation, 
because it wasn't a particularly merry Christmas for the 
taxpayers, who are looking at the mother of all bailouts with 
Fannie and Freddie, to know that they are looking at trillions 
of dollars of exposure, and then paying for the privilege at 
the same time. It is objectionable. I yield back.
    The Chairman. The gentleman from New Jersey.
    Mr. Garrett. Thanks, Mr. Chairman. Yes, it was actually 
just about a couple of months ago that the ranking member and I 
did request from the chairman that we have a hearing, both on 
the issue of the bonuses and also, as Jeb says, with regard to 
the ``Christmas Eve Massacre,'' as we call it, which is the 
lifting of the limits on the bailouts of Fannie and Freddie.
    And this hearing today is important, with regard to the 
bonus issue. But really, as I say, the larger issue is the 
lifting of this cap, of going to $200 billion, to $400 billion, 
and now basically no limit whatsoever on the bailouts of the 
GSEs. This is certainly what we're hearing from our 
constituents back home.
    To the chairman's point about having the Secretary come 
here next week, or in a couple of weeks, that's all well and 
good. But he was over at the Budget Committee just yesterday. 
And in Budget yesterday, the Secretary was asked, ``When are 
you going to roll out a plan, as far as doing something about 
this,'' and he said, ``Well, maybe we will have principal some 
time this year, but our plan is going to be next year.''
    Conversely, we had the Chairman of the Fed here yesterday 
and we asked him the question, ``When should we do something 
about this,'' and I'm on the same page as the chairman as far 
as doing something quickly, and you heard the chairman 
yesterday say, ``We should be doing something about this right 
away.''
    The Chairman. I thank the gentleman. You said--to clarify--
obviously, the question--I would consider that, and have--and I 
should have been more explicit--fully within the subject of the 
hearing. That is, because again, that hearing is about housing 
finance, not simply about Fannie and Freddie.
    So, the implications of what they did is very much on the 
table. And they will be on notice that they should be expected 
to addressed that. They would have been on Tuesday, and they 
will on the 23rd.
    We will now begin with our witnesses. And again, I 
explained that Mr. Feinberg is being held up--by a train wreck, 
literally. Beyond that, I do want to--because the gentleman 
from Georgia, Mr. Price, asked a very good question as to why 
the FDIC is not here, since they are proposing a compensation 
scheme, and the answer is that's exactly why they're not here. 
I did invite them, and wanted them to come.
    What they advised me is that, because--precisely because 
they have a proposal now pending to tie down compensation for 
some of those that they are working with, they are legally 
barred from saying anything because the comment period is gone 
now, and they have to keep that open, and they will be able to 
talk again at the end of the comment period.
    So, once the comment period is over, we will invite them 
back. But that's why the FDIC is not here. And I apologize, 
obviously, for the fact that Mr. Feinberg--or I regret that he 
can't be here.
    And we will begin with Mr. Edward DeMarco, who is the 
Acting Director of the Federal Housing Finance Agency. And 
aren't you glad you took the job?
    Mr. DeMarco. Thank you.
    The Chairman. And any material that the witnesses want to 
submit will be put in the record.
    And again, I would get unanimous consent to put the 
correspondence between myself and Mr. Lockhart in the record. 
Without objection, it is so ordered.

   STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, FEDERAL 
                     HOUSING FINANCE AGENCY

    Mr. DeMarco. Very good. Thank you, Mr. Chairman. Thank you 
for putting my prepared remarks in the record.
    Chairman Frank, Ranking Member Bachus, and members of the 
committee, thank you for the opportunity to testify on this 
important subject. Compensating the executives at Fannie Mae 
and Freddie Mac--or the Enterprises, as I will refer to them--
in conservatorship has raised numerous issues, many similar to 
those arising at other federally-assisted institutions, but 
some unique to the Enterprises.
    Our principal aim in addressing these issues has been that 
Enterprise compensation be sufficient to attract and retain the 
executive leadership needed to ensure ongoing functioning of 
the Nation's secondary mortgage market, while minimizing 
taxpayer losses.
    At the inception of the conservatorships, the incumbent 
CEOs were replaced. They received no severance payments. 
Because most of their compensation had been in the form of 
Enterprise stock, roughly two-thirds of their previously 
reported pay during their tenures vanished with the collapse of 
the market price of their shares.
    Ultimately, five of the six highest-paid Fannie Mae 
executives and the top four Freddie Mac executives left in one 
fashion or another, but none of them received severance or 
other golden parachute payments.
    While today's hearing is on executive pay, I would like to 
add that many of the more than 11,000 Enterprise employees also 
had large portions of their life savings in Enterprise stock, 
and suffered accordingly.
    In developing a new compensation structure for senior 
Enterprise executives, FHFA consulted with Mr. Feinberg on how 
we could adapt the approach he was developing for TARP 
institutions to the Enterprises. In making that adaptation, a 
major consideration was that compensating Enterprise executives 
with company stock would be ineffective, because of the 
questionable value of such stock.
    Further, large grants of low-price stock could provide 
substantial incentives for executives to seek and take large 
risks. Accordingly, all components of executive compensation at 
the Enterprises are in cash.
    Another consideration is the uncertain future of the 
Enterprises as continuing entities, which is in the hands of 
Congress and beyond the control of Enterprise executives.
    It is generally best to focus management's incentives 
toward its institution's performance over the long run, rather 
than just the near term. In the case of the Enterprises--
    The Chairman. Mr. DeMarco, let me interrupt you briefly.
    Mr. DeMarco. Certainly, sir.
    The Chairman. Mr. Feinberg has arrived, and I just want to 
thank him--it hasn't been an easy day for him--and just 
reassure him that the next witness will be Mr. Alvarez, so he 
will have at least 7 or 8 minutes to collect himself. We 
understand that there was, literally, a train wreck, and we 
thank you for making every effort to come here.
    I apologize, Mr. DeMarco. Please continue.
    Mr. DeMarco. In setting target compensation for the most 
senior positions, we considered data from consultants to both 
Enterprises, the data received earlier from our own consultant, 
and the reported plans of TARP-assisted firms. It was important 
to set pay at levels sufficient to compete for quality talent, 
because the Enterprises had many key vacancies to fill, 
potential departures to avoid, and pay had been a significant 
issue in some cases.
    FHFA settled on a target of $6 million a year for each CEO, 
$3.5 million for the chief financial officers, and less than $3 
million for executive vice presidents and below. I know $6 
million is a considerable sum of money, but that amount rolls 
back Enterprise CEO pay to pre-2000 levels. It is less than 
half of target pay for Enterprise CEOs before the 
conservatorships. And for all executive officers, Fannie Mae 
and Freddie Mac have reduced target pay by an average of 40 
percent.
    The basic compensation structure for senior executives at 
both Enterprises, as at institutions receiving exceptional TARP 
assistance, comprises three elements: base salary; a 
performance-based incentive opportunity; and deferred salary. 
My written statement details these components.
    In my judgement, we have achieved the right balance between 
enough compensation to acquire and retain quality management, 
while preventing compensation from exceeding appropriate 
bounds.
    In sum, the directors and senior executives tied to the 
financial collapse at each Enterprise are no longer with the 
companies. The group of senior executives who remain, as well 
as those who were recently hired, are essential to the 
Enterprises fulfilling their important and challenging 
responsibilities. And in attempting to do so, the Enterprises 
must operate with an uncertain future that will be the source 
of much public debate.
    As conservator, I believe it is critical to protect the 
taxpayer interests in the Enterprises by ensuring that each 
company has experienced, qualified people managing the day-to-
day business operations in the midst of this uncertainty. Any 
other approach puts at risk the management of more than $5 
trillion in mortgage credit risk that is supported by the 
taxpayers.
    Thank you and I am pleased to answer questions.
    [The prepared statement of Mr. DeMarco can be found on page 
53 of the appendix.]
    The Chairman. Next, Mr. Scott Alvarez, General Counsel of 
the Federal Reserve.

   STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Alvarez. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for the opportunity to 
discuss incentive compensation practices in the financial 
services industry.
    Compensation arrangements serve several important and 
worthy objectives. For example, they help firms attract and 
retain skilled staff, and promote better firm and employee 
performance. However, compensation arrangements can also 
provide employees with incentives to take excessive risks that 
are not consistent with the long-term health of the 
organization. This misalignment of incentives can occur at all 
levels of a firm, and is not limited to senior executives.
    Having experienced the consequences of misaligned 
incentives, many financial firms are re-examining their 
compensation structures to better align the interests of 
managers and other employees with the long-term health of the 
firm.
    For firms that have received assistance from TARP, that 
includes ensuring their compensation structures are consistent 
with the Special Master's rules designed to protect the 
financial interests of taxpayers.
    The Federal Reserve has also acted as a prudential 
supervisor. In October, we proposed supervisory guidance on 
incentive compensation practices that would apply to all 
banking organizations that the Federal Reserve supervises. The 
guidance, which we expect to finalize shortly, is based on 
three key principles.
    First, compensation arrangements should not provide 
employees incentives to take risks that the employer cannot 
effectively identify and manage. Financial firms should take a 
more balanced approach that adjusts incentive compensation, so 
that employees bear some of the risks, as well as the rewards 
associated with their activities over time.
    Second, firms should integrate their approaches to 
incentive compensation arrangements with their risk management 
and internal control frameworks. Risk managers should be 
involved in the design of incentive compensation arrangements, 
and should regularly evaluate whether compensation is adjusted 
in fact to account for increased risk.
    Third, boards of directors are expected to actively oversee 
compensation arrangements to ensure they strike the proper 
balance between risk and profit on an ongoing basis.
    Recently, the Federal Reserve also began two supervisory 
initiatives to spur the prompt implementation of improved 
practices. The first is a special horizontal review of 
incentive compensation practices at large, complex banking 
organizations. Large firms warrant special supervisory 
attention, because the adverse effects of flawed approaches at 
these firms are more likely to have consequences for the 
broader financial system.
    Although our review is ongoing, we have seen positive steps 
at many of these firms. However, substantial changes at many 
firms will be needed to fully conform incentive compensation 
practices with principles of safety and soundness. It will be 
some time before these changes are fully addressed. 
Nonetheless, we expect these firms to make significant progress 
in improving the risk sensitivity of their incentive 
compensation practices for the 2010 performance year.
    The second initiative is tailored to regional and smaller 
banking organizations. Experience suggests that incentive 
compensation arrangements at smaller banks are not nearly as 
complex or prevalent as at larger institutions. Accordingly, 
review of incentive compensation practices at these firms will 
occur as part of the normal supervisory process, a process that 
we expect to be effective, yet to involve minimal burden for 
the vast majority of community banks.
    Incentive compensation practices are likely to evolve 
significantly in the coming years. This committee's efforts in 
developing and passing H.R. 4173 will promote the uniform 
application of sound incentive compensation principles across 
large financial firms beyond those supervised by the Federal 
Reserve. In this way, H.R. 4173 would encourage financial 
firms, supervisors, shareholders, and others to develop 
incentive compensation practices that are more effectively 
balanced and reward and better align incentives.
    We appreciate the committee's efforts in this area, and 
thank you for the opportunity to testify on this important 
topic. I would be happy to answer any questions.
    [The prepared statement of Mr. Alvarez can be found on page 
37 of the appendix.]
    The Chairman. Thank you.
    And next, Mr. Kenneth Feinberg, who is the Special Master 
for TARP Executive Compensation at the Department of the 
Treasury. And I reiterate, Mr. Feinberg's train was behind a 
train where there was an unfortunate accident. So it's an 
unusually stressful day, and we are deeply appreciative, Mr. 
Feinberg, seriously, of your appearing.
    And please go ahead.

   STATEMENT OF KENNETH R. FEINBERG, SPECIAL MASTER FOR TARP 
    EXECUTIVE COMPENSATION, U.S. DEPARTMENT OF THE TREASURY

    Mr. Feinberg. Thank you, Mr. Chairman. It is a distinct 
honor for me to appear before your committee, before you, as 
chairman, and the ranking minority member, and I thank you for 
the invitation.
    I will just summarize my written statement by pointing out 
highlights of what appears in the statement.
    First, as this committee well knows, my jurisdiction is 
extremely limited, by statute. Right now, I am determining 
compensation for just the top 25 compensated officials at 5 
companies that receive the most TARP assistance: GM; GMAC; 
Chrysler; Chrysler Financial; and AIG. If one of those 
exceptional assistance participants or recipients has repaid 
all of what they owe the taxpayer, they are automatically 
removed from my jurisdiction. And, as a result, Bank of America 
and Citigroup are no longer subject to my 2010 compensation 
determinations. It is, by statute, a very limited role.
    I am also responsible, under the statute, for those 5 
companies, for determining compensation structures for 
officials 26 to 100 in those 5 companies, only. Just those 
five. And again, we did that in 2009. We are moving forward, 
doing the same for the 5 companies, 1 to 25, 26 to 100, for 
2010.
    The second point I want to emphasize is under the statute, 
there are some principles laid out that I am obliged by law to 
follow in determining my compensation decisions. And when you 
read the statute, there they are. We shall make sure that 
compensation determinations maintain the competitiveness of 
these five companies, so that key employees will be retained, 
the companies will thrive, and they will repay the taxpayer.
    But the compensation determination should be made in a way 
that avoids excessive risk-taking at these companies, that 
there will be an appropriate allocation between short-term 
compensation, in the form of cash, and long-term compensation, 
in the form of salaries and TARP stock that must be held for an 
extended period of time. The fortunes of the individual should 
rise or fall, depending on the performance and the fortunes of 
the company.
    I should examine comparable structures and payments at 
other companies. I should consider empirical data on 
compensation levels at various companies that are similar in 
kind to the companies that fall under my jurisdiction. I have 
enjoyed the benefit of expert input from professors at Harvard 
Business School and the University of Southern California in 
advising me and my excellent staff--most of whom are here 
today, by the way, behind me--in reaching these compensation 
determinations.
    As a result of the statute and the accompanying regulations 
promulgated by Treasury, there are a few basic conclusions that 
I have reached about executive compensation at these companies.
    One, guaranteed income should not be permitted. 
Compensation of key officials at these companies that owe so 
much to the American taxpayer should depend on performance, not 
retention contracts, not guaranteed bonuses. What you earn, 
other than your base cash salary, should depend on long-term 
performance, objective metrics promulgated by the company, in 
consultation with my office.
    Second, base cash salaries should rarely exceed $500,000, 
and only then for good cause shown, and should be, in many 
cases, well under $500,000.
    Third, the Special Master reserves the right to claw back 
excessive compensation, which is granted based on what proved 
to be material misstatements. And we will exercise that 
authority to claw back excess compensation in appropriate 
cases.
    The final summary points I want to make concern an inquiry 
made by this committee, when the committee asked me to comment 
on a rather interesting question posed by the chairman and the 
members of the committee: What is unique about what I am doing? 
Are there unique features in this statute that really make the 
job I have undertaken particularly challenging? And I want to 
mention just a couple of those unique features that neither the 
Federal Reserve nor Fannie Mae have to deal with, the way I 
have to deal with it.
    One I have already mentioned. My role is extremely limited.
    The Chairman. If I may, we are over the time, so if you 
have already mentioned it--
    Mr. Feinberg. Second, I have no authority to restructure or 
demand a restructuring of old retention contracts that were 
entered into long before the TARP law was implemented.
    And finally, I have the distinct challenge of actually 
calculating individual compensation for these top 25 officials 
in these 5 companies.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Feinberg can be found on 
page 60 of the appendix.]
    The Chairman. Thank you. Let me begin. Mr. DeMarco, when 
did you take over?
    Mr. DeMarco. September 1st of last year, Mr. Chairman.
    The Chairman. All right. And I gather there has been 
continuity on the compensation issues between yourself and--was 
it Mr. Lockhart, basically, who was your predecessor?
    Mr. DeMarco. I would say that is correct.
    The Chairman. Let me ask all of you. One of the things we 
have to deal with is people threatening to walk away if the 
compensation isn't higher. How credible has that been?
    At some levels, it seems to me not too credible, at least 
at some levels that these limits were applied across-the-board, 
unless someone is a heck of a shortstop, and there is probably 
not another place where they are going to make equal amounts of 
money.
    But let me ask all of you. How credible? Do we have 
evidence of people walking away because they are inadequately 
compensated? Let me start with Mr. DeMarco.
    Mr. DeMarco. Yes, Mr. Chairman, we do. As conservator of 
these two companies--let me put it this way; it was a 
business--a senior executive business line manager at one of 
the Enterprises who had a critical role at that company, 
specifically to manage and reduce losses on foreclosed 
mortgages and the properties that are then taken in by the 
company afterwards. And this individual left the Enterprise to 
join another very large, well-known financial institution at a 
considerable increase in pay.
    The consequence of this individual's departure is that the 
head of this area of management at the Enterprise was vacant 
for a number of months. We lost several of the lieutenants in 
that particular part of the company as well, given the upset in 
there, and the opportunities that those individuals had because 
this is a significant area and there are a lot of financial--
    The Chairman. All right, thank you. Let me ask Mr. 
Feinberg. I want to get to Mr. Alvarez last. Mr. Feinberg, 
what's your sense--
    Mr. Feinberg. I am dubious about that claim. Now, I will 
say this. First, the determinations we have made were only made 
last October, last December. We don't see any exit of 
individuals from these companies. Whatever individuals were 
exiting these companies, I suggest exited long before 
compensation determinations were made by this office. There 
were quite a few vacancies when I took over this assignment.
    But I don't see exiting. We have to take that into account. 
It certainly impacts our decisions on compensation. But I am 
rather dubious about that claim.
    The Chairman. Let me ask Mr. Alvarez. And I held you for 
last because, to the extent that we do these in a uniform way, 
and diminish competitive advantage in that, it's helpful. Now, 
I notice two things.
    First of all, the Federal Reserve has promulgated, under 
its existing statutory authority, limitations. And again, am I 
correct? Not limited to TARP recipients. What the Federal 
Reserve Board of Governors--was there any dissent on the Board 
of Governors over that?
    Mr. Alvarez. No.
    The Chairman. Thank you. So what we have is--because it has 
been appointed by several Administrations.
    So, the Board of Governors has imposed restrictions on all 
financial institutions that minimizes this as between--if the 
compensation restrictions are the same, you don't get that.
    But also I gather--and I was gratified, frankly, that you 
expressed your support for those elements of H.R. 4173--I know 
the Federal Reserve is not for all elements of H.R. 4173, our 
financial regulatory bill--but that you do like the notion that 
we apply those across-the-board so that you would not have the 
theoretical competitive disadvantage, if there was one in 
retention, between the institutions that you regulate and other 
financial institutions. Is that accurate?
    Mr. Alvarez. That's absolutely right. There is what the 
economists call a first-mover problem here. Many people 
recognize that incentive compensation structures need to be 
changed, that the incentives are not always aligned properly--
sometimes very badly misaligned. But the first person who 
changes to fix those policies is concerned that they are going 
to lose personnel to others who don't change the incentives.
    So, one of the things we can do--and you have helped us 
do--is to set a policy that broadly applies across the 
industry, has everyone subject to the same policies and 
principles, and that removes that difficulty.
    The Chairman. And my time is close, so I won't start a new 
line. The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman. Mr. DeMarco, I know 
you were a career--had a career position. So I guess when the 
President asked you to take that position, you didn't have a 
lot of choice, did you?
    Mr. DeMarco. Well, Representative Bachus, I was honored 
that the President asked me. I still am a career official. I 
have spent my entire professional career as a civil servant at 
the Federal level at a variety of agencies. I am honored to 
serve as the Acting Director of FHFA, until such time as the 
President nominates and the Senate confirms a permanent 
director.
    I believe we are at a very critical juncture, and I am very 
honored to lead an agency that is working incredibly hard right 
now to oversee these companies and to help bring stability back 
to the housing--
    Mr. Bachus. Thank you. That's a good answer. I appreciate 
that.
    Mr. DeMarco, last year, the Administration's Regulatory 
Reform Blueprint indicated that the Administration would 
present a reform plan for Fannie and Freddie this month. 
Yesterday, Secretary Geithner testified before the House Budget 
Committee that the plan would not be ready until 2011 at the 
earliest. Congressman Garrett made reference to that.
    Then, in testimony before this committee yesterday, 
Chairman Bernanke recommended we take steps to determine the 
future of the GSEs this year.
    With the American taxpayers exposed to literally hundreds 
of billions of dollars in losses from Fannie and Freddie to 
continue operations, do you agree with Chairman Bernanke that 
we cannot afford to wait until next year to decide the GSEs' 
futures?
    Mr. DeMarco. Congressman, I believe the time is now to be 
figuring out what are the proper questions we need to be asking 
and answering, for example, what is the proper role of the 
government in the housing finance system and what is the future 
structure and objectives of the housing finance system that 
policymakers believe is in the best interest of the country.
    I believe there are plenty of important questions and it is 
time to start asking and working towards answering those 
questions right now.
    With that said, I appreciate the difficulty and the 
challenges in getting to specific answers and getting to a 
final structure. I understand that is going to take a while. I 
believe we ought to absolutely take the time to get it right.
    I would be happy to work with this committee to start going 
through what some of those key questions are. I am ready for 
the discussion to get started.
    Mr. Bachus. Thank you. If you look at August of 2008, when 
we first had the bailout of Fannie and Freddie, I think we have 
had an adequate amount of time.
    I appreciate you saying now is the time to start making 
those changes or at least advancing ideas.
    Mr. Alvarez, in your testimony you said the misalignment of 
incentives is not confined to the top level executives. When 
the Federal Reserve or others start looking at these pay 
incentives, where do you stop? Do you include all employees of 
all financial institutions?
    Mr. Alvarez. Congressman Bachus, what we are speaking of is 
employees who are given incentive compensation. A lot of 
organizations do not provide incentive compensation to the vast 
majority of their employees. It is selected groups that receive 
targeted incentives.
    An example of the type of lower level non-executive 
employee that we would consider an organization should look at 
would be their mortgage brokers, where volume of mortgages 
produced--compensation is often tied to the volume of mortgages 
produced.
    We have seen in this crisis that can encourage some 
employees to generate mortgages with weak underwriting so they 
can increase their own compensation.
    Mr. Bachus. When you get down to incentives for volume, 
would it not be better if they make bad loans, the bank would 
want to get rid of them?
    Mr. Alvarez. You are exactly right. We would not try to set 
the compensation for those employees. What we ask is that the 
bank have a procedure in place to monitor the incentives it is 
creating and to take action when those incentives are 
misaligned.
    Mr. Bachus. I see. Mr. Feinberg, what did you think of the 
compensation packages awarded to the Fannie and Freddie 
executives that were announced Christmas Eve?
    Mr. Feinberg. Very high, but Fannie and Freddie, although 
they are not on my watch, pose some unique problems that I do 
not have to address with the five companies I am now dealing 
with.
    First, the future of Fannie and Freddie is sufficiently 
uncertain, as you well know, so that attracting people to 
Fannie and Freddie with the talent necessary to administer that 
program is more problematic. Not impossible, of course, but 
more problematic.
    Second, it is not easy to develop a pay package that has 
long-term performance-based delay, like I have with the five 
companies before me, when long-term performance-based delay is 
uncertain with a company like Fannie and Freddie.
    You cannot simply say, we will pay you over 4 or 5 years 
out, when there is a question as to what Fannie and Freddie 
will look like 4 or 5 years out.
    Finally, a major component of what I am doing and what the 
Office of the Special Master is doing is tied to stock. The 
fortunes of the individual will depend on the fortunes of the 
company. Your stock's value will depend on how well the company 
is doing. With Fannie and Freddie, there is no stock. It is 
cash.
    The Chairman. The gentleman's time has expired.
    Mr. Bachus. Thank you.
    The Chairman. The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. Looking at 
executive compensation, Mr. Feinberg, I believe we share the 
view that for firms who repaid TARP, the government should not 
set specific pay levels for the private sector, but to better 
protect investors and taxpayers in the future, I believe we 
should look at pay structure more broadly to ensure risk taking 
is properly aligned with rewards and does not impose a systemic 
risk.
    For firms like AIG, GM, and Chrysler who continue to depend 
on taxpayer assistance, I believe more scrutiny of executive 
compensation is warranted.
    I filed a bill, H.R. 857, the Limit Executive Compensation 
Abuse Act, that would limit compensation for employees of TARP 
firms to the same level of compensation the President receives.
    Mr. Feinberg, in your work, have any of the TARP firms you 
have worked with conducted a cost/benefit analysis or other 
analysis of any employee making more than what the President 
receives, $400,000, or anyone making more than $1 million 
annually, so we have a better idea of what kind of taxpayer 
returns we should get from these employees in exchange for the 
compensation packages?
    If not, would you provide a written response providing a 
cost/benefit analysis along those lines?
    Mr. Feinberg. I will be glad to provide you a written 
analysis. I would say, Congressman, that we have examined the 
prospective data as to what type of individual should receive 
what level of compensation.
    It is a bit premature for us to draw any conclusions about 
the compensation determinations made just in the last few 
months because we will be monitoring that performance over 
time.
    Mr. Moore of Kansas. Very good. I appreciate that.
    Same question to you, Mr. DeMarco, has FHFA performed any 
cost/benefit analysis of these compensation packages for Fannie 
and Freddie executives and would you be able to provide us 
details in writing along the lines I have discussed with Mr. 
Feinberg?
    Mr. DeMarco. We have not done what I would call a cost/
benefit analysis, Congressman. We have analyzed what the market 
for financial executives with the requisite expertise is, and 
that certainly was a key input into the pay setting that was 
done.
    We also have market experience in terms of the effort and 
what it has taken to recruit the senior executive positions 
that we had to fill at each company.
    I would be glad to provide some more information along that 
line to you in writing.
    Mr. Moore of Kansas. I appreciate that very much, and I 
thank the witnesses for their testimony. Mr. Chairman, I yield 
back.
    The Chairman. The gentleman from Texas.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Mr. DeMarco, I probably want to change the direction of 
this a little bit in that I really want to talk about what 
activities are going on at Freddie and Fannie right now. 
Basically, you have two entities that are insolvent.
    What is going on with their portfolios? How much portfolio 
growth are those two entities experiencing right now?
    Mr. DeMarco. Since the time the conservatorship was 
established, Congressman, the portfolios have risen modestly, 
from the low- to the mid-$700 billion range. They are on a path 
for the portfolios to gradually decline. They have a dollar cap 
at which the portfolios must be at the end of each year.
    For this past year, 2009, the cap had been at $900 billion. 
For the end of this year, it is $810 billion, and will continue 
to decline by 10 percent per year.
    I have made clear to the companies and I have communicated 
to the committee that it is certainly my objective as 
conservator to see that those reductions take place so the 
companies keep their portfolios within those caps. I believe 
the cap room they have today will be used principally for the 
purpose of pulling delinquent loans out of mortgage-backed 
security pools and to then seek loan modifications or other 
loss mitigation activity on that.
    That is what the net additions to the portfolio will be, 
working on delinquent mortgages and trying to minimize the 
losses on those delinquencies.
    Mr. Neugebauer. Is portfolio reduction just primarily 
principal reduction in the portfolio or have you been able to 
sell any of the portfolio? What kind of activities are going on 
in that area?
    Mr. DeMarco. There is actually a fair amount of run-off 
every month in terms of the portfolios paying down. That leads 
to the decline. The additions are principally driven by loans 
coming out of mortgage-backed security pools so that they can 
be worked on.
    If I followed the first part of your question, you were 
asking about the approach taken with respect to loss 
mitigation. The first approach taken by the Enterprises is 
consistent with and follows HAMP, the Homeowner Affordable 
Modification Program, and that is driven principally by 
reductions in interest rates and extending the term of the 
mortgage to try to get to an affordable mortgage set at 31 
percent of the borrower's monthly income.
    If that does not work as a loss mitigation strategy, the 
Enterprises are quite active and rigorous in seeking, whatever 
the circumstance for that particular borrower is, what is the 
way to resolve that delinquent mortgage at the lowest cost to 
the company, and hence, the lowest cost to the taxpayer. And 
that could include a short sale, it could include deed removal 
and foreclosure or a loan modification that does not follow 
HAMP.
    But at the end of the day, if none of those are going to be 
able to produce a better outcome, then we will be moving 
expeditiously to foreclose on the mortgage and try to reduce 
the loss to the company and hence, to the taxpayer.
    Mr. Neugebauer. What about the securitization activity? 
What are your volumes seen there?
    Mr. DeMarco. Basically, they are securitizing almost all of 
the new business that they do, and they are responsible for 
about three out of every four mortgages that are being made in 
this country, with FHA representing most of the balance.
    Mr. Neugebauer. What are the credit quality and 
underwriting standards being used?
    The Chairman. One minute remaining.
    Mr. DeMarco. The credit quality of the new book is 
substantially superior to that of the middle part of the past 
decade. The loan to value at origination is lower. The credit 
scores of the borrowers are higher. These are much sounder 
loans.
    Mr. Neugebauer. Thank you.
    The Chairman. The gentleman from Missouri.
    Mr. Clay. Thank you, Mr. Chairman.
    Mr. Feinberg, have you examined companies like Goldman 
Sachs who received pass-through TARP funds from AIG? The 
American public had to endure announcements recently from 
Goldman of record profits and record bonuses.
    Can you determine if any of that pass-through money went 
toward paying those bonuses and if so, did you ever address it 
with them?
    Mr. Feinberg. Goldman is not one of the companies that 
falls under my mandatory jurisdiction. Unlike the others, the 
other seven, now five, I have no mandatory jurisdiction over 
Goldman.
    There is a provision in the law that requires me to seek 
information about Goldman's pay practices, which we will do, 
and we will examine that data. We have no mandatory 
jurisdiction to set compensation at Goldman.
    Mr. Clay. Do you think any of the pass-through money went 
towards posting their profits and paying out record bonuses? We 
had to wait to see with bated breath, I guess, for most, what 
Mr. Blankfein's bonus was going to be, when the average 
American is trying to pay their mortgage.
    Mr. Feinberg. I share that concern. My role is somewhat 
limited, Congressman. I do have this one opportunity to inquire 
shortly, and we will do so.
    Mr. Clay. Thank you for that response. As a follow-up, what 
did you finally decide was fair compensation for AIG employees, 
and did you take any action toward their Financial Products 
Division, the sector of the company at AIG that devised and 
traded derivative swaps?
    Mr. Feinberg. We certainly did. There is a company that 
does fall within my jurisdiction. The retention contracts that 
were entered into are grandfathered, legally binding contracts 
that I could not invalidate.
    I asked AIG Financial Products to roll those contracts 
forward, like other companies did. Instead of asking for the 
cash, put it into long-term stock, so that whether what it may 
be worth will depend in the long term on the future of the 
company.
    Mr. Clay. On the performance, did they follow your advice?
    Mr. Feinberg. They did not follow my advice. In 2009, last 
year, since they did not follow my advice, we slashed the base 
salaries, which I could do under the law, and reduced 
substantially the overall compensation of those officials, 
mainly in the 1-25 group, that refused to roll those retention 
contracts over. We are now in 2010, with Financial Products, in 
negotiations to do the very same thing.
    Mr. Clay. Thank you. I hope it goes well.
    Citi comes under your jurisdiction also, right?
    Mr. Feinberg. Citigroup did come under my jurisdiction last 
year, Congressman. They have repaid the taxpayer all they owe 
and they are no longer within my jurisdiction in 2010.
    Mr. Clay. While they were under your jurisdiction, did they 
have compensation issues that you had to negotiate?
    Mr. Feinberg. Yes. We did negotiate with Citi. We did roll 
over their grandfathered retention contracts to long-term 
stock.
    The Chairman. One minute left.
    Mr. Feinberg. We did negotiate and work out appropriate 
compensation at those levels, all under $500,000, base cash 
salary, which we were comfortable with.
    Mr. Clay. I am glad to hear that. Thank you so much for 
your responses. Mr. Chairman, I yield back.
    The Chairman. The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Mr. DeMarco, I mentioned the legal defense bills paid by 
the taxpayers to the ousted executives at Fannie Mae and 
Freddie Mac. Is the $6.3 million figure from September 6, 2008, 
to July 21st of last year accurate?
    Mr. DeMarco. Yes, sir.
    Mr. Royce. That is the total amount that has been paid out 
to date?
    Mr. DeMarco. To my understanding.
    Mr. Royce. How is paying out $6.3 million for the legal 
defense of former executives consistent with the 
conservatorship which requires you to preserve and conserve 
assets and property and to put the company in a sound and 
solvent condition?
    Mr. DeMarco. The payment here is covered under 
indemnification agreements that were in place and are in place, 
and that is the grounds for it. We also have considered looking 
at the ongoing litigation and the issues that are in play at 
the moment, i.e., what is the approach that best satisfies 
those goals of conservatorship. It is our judgement, 
Congressman, that proceeding as we have is the appropriate 
course of action.
    Mr. Royce. Let me ask you this, if Fannie Mae and Freddie 
Mac move into receivership, should these institutions move into 
receivership, would you be able to do anything about those 
funds?
    Mr. DeMarco. I do not know the answer to that question at 
this moment, Congressman. I would have to look at that.
    Mr. Royce. Again, I raise this issue not because this $6.3 
million is going to make Fannie and Freddie solvent again, but 
because as we look at the housing boom and bust, which caused 
the financial collapse, one of the roads leads to Fannie Mae 
and Freddie Mac.
    Some of us were raising alarms about these institutions 
long before their failure and well before their accounting 
scandals, and we understood the fundamentally flawed structure 
of socialized losses and privatized profits. We saw the 
overleveraging and the build-up in junk loans there.
    Frankly, the Federal Reserve came and warned us about it. 
We had an obligation to the taxpayers to prevent their failure, 
but we failed, largely because of Chuck Hagel's bill the Fed 
had requested which passed out of committee on the Senate side 
and was blocked by the lobbying of Fannie and Freddie.
    Fannie and Freddie executives leaned in and said no, in 
terms of those portfolios, in terms of the issue of the 
overleveraging and the arbitrage which the Fed was trying to 
get a handle on, we want to block that, and that legislation 
was blocked.
    Now, because of that failure, the taxpayers own 80 percent 
of those companies. We now have an obligation, I think, to see 
that those most responsible for this failure are held 
accountable.
    If the FHFA fails to take action to: first, get the money 
back from the legal defense fees; and second, curb these 
executive payouts, then I hope Congress would intervene. These 
are wards of the state. In my view, at the end of the day, they 
should be treated as wards of the state.
    I will yield back, Mr. Chairman.
    Mr. DeMarco. If I may, Congressman, just to respond, FHFA 
did, as a follow-up to its special examinations of both Fannie 
Mae and Freddie Mac, pursue former executives of those 
companies and reached settlements for certain payments.
    To your larger point, Congressman, I would just like for 
you to be assured that it is personally my goal and it is 
absolutely the goal and the endeavor of the employees of FHFA 
to assure that the operation of the conservatorships of Fannie 
Mae and Freddie Mac are done in a way to meet the goals of 
conservatorship as Congress has set forth in the statutes. 
Those are to preserve and reserve the assets of the company, 
but most of all, we are focused on doing everything we can to 
minimize the losses that the taxpayer ends up incurring as a 
result of what has happened with these companies.
    Everything we do is directed at that objective, of 
minimizing these losses. We have made that quite clear to the 
new Boards of Directors and the new senior managers.
    I view what we are doing in the area of bringing in new 
executive leadership of these companies as part and parcel of 
that overriding objective, of minimizing losses.
    Mr. Royce. Thank you, Mr. DeMarco. Thank you, Mr. Chairman.
    The Chairman. The gentlewoman from New York.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. It is 
good to see you, Mr. Feinberg.
    I was sitting here when you came in, and I am wondering, 
how do you get these jobs? Mr. Feinberg, very graciously, you 
took over the 9/11 Fund and did a tremendous job with those 
victims, and we have you here in front of the committee again 
working on these issues.
    I think you explained what your mandatory jurisdiction is, 
and I think a lot of people need to understand that, especially 
with the exceptional assistance that you are doing with the 
TARP recipients.
    My concern is the companies that are not in that status and 
may have resumed the excessive compensation structure, and if I 
understand this correctly, a company needs to be competitive in 
compensation for retention purposes.
    However, if banks are free to start diverting increased 
revenues towards compensation, that leads them down the road to 
being less capitalized and ultimately unstable once again.
    The question is, how are the financial institutions who are 
now not under your regulatory power handling compensation? Do 
you see them reverting back to their old ways or are they going 
along with your guidance?
    Just to follow through, we all know you want top people at 
the top of the company, but when you have seen this whole 
financial mess starting going back, is there one person 
actually who deserved any of the compensation, being that they 
got this whole country and in my opinion, the world, into the 
mess we are in right now.
    Mr. Feinberg. First, I would like to think that much of the 
private sector that is not within my jurisdiction is adopting 
many of the prescriptions that fall in my jurisdiction, low 
base cash salaries, stock rather than cash, no guaranteed 
bonuses.
    Goldman, Morgan Stanley, Wachovia, Wells Fargo, I get the 
early signs that in terms of the criteria for compensation, 
they seem to be following voluntarily the prescriptions I have 
entered into.
    In terms of long-term compensation, what I am doing is 
really as you know, Congresswoman, merely one small part of a 
much broader menu that the chairman and the committee know a 
great deal about, corporate governance reform, regulatory 
reform, the G-20 principles promoted by the Secretary, to make 
sure that foreign government corporations are doing what we are 
doing.
    The Federal Reserve, Mr. Alvarez's efforts. The FDIC, the 
legislation of the chairman, there are a lot of other 
initiatives out there that can have an impact on those 
companies that are not part of my jurisdiction, including some 
advanced by the Administration concerning bank fees and other 
initiatives.
    I take no position on all those other than to say that if 
you examine all of the items that are out there, that are being 
considered by this committee, it seems to me there is an 
appreciative opportunity to reign in some of that excessive pay 
that we see now that partly got us into this mess.
    Mrs. McCarthy of New York. I agree.
    Mr. Alvarez, following up a little bit on that, especially 
when we start talking about the international community, we saw 
that France and the U.K. have put a fine onto their high 
bonuses, a 50 percent tax.
    The Chairman. One minute remaining.
    Mrs. McCarthy of New York. Additional British action, they 
have put a one-time tax on the bonuses.
    How do you think that might work with our companies that 
are international over there? Do they have to look at basically 
what we are saying to them to do? Do they have to bring that 
over to the foreign land?
    Mr. Alvarez. A U.S. company that has an international 
presence, how it would have to deal with compensation rules 
abroad depends on its structure.
    For example, if it were to own a bank, a U.S. bank owns a 
bank in France, the bank in France would likely have to abide 
by the compensation structures in France.
    If it had a branch or some other extension of itself that 
was not a separate corporate entity, it would abide by the U.S. 
compensation standards on a worldwide basis.
    That is one of the things that we tried to do in our 
guidance, to have the management focus on incentive 
compensation on a worldwide basis.
    The Chairman. The gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Feinberg, you are the pay czar?
    Mr. Feinberg. That is the characterization. I do not like 
that characterization, but that appears to be sticking in the 
public minds.
    The Chairman. If the gentlewoman would yield, if his 
grandparents heard him referred to as a ``czar,'' they would be 
very upset.
    [laughter]
    Mrs. Biggert. Who is the job czar? Is there a job czar?
    Mr. Feinberg. I have enough trouble keeping track of my 
``czarism.''
    Mrs. Biggert. I wish we would focus on the unemployed 
workers. I guess there is no job czar.
    Mr. DeMarco, as your staff indicated, you reviewed the 
legislation; is that right?
    Mr. DeMarco. Yes, Congresswoman. I have taken a quick look. 
It has just come out. I am looking forward to looking at it in 
more depth and talking to you about it.
    Mrs. Biggert. It is having the Inspector General reporting 
to Congress, the FHFA Inspector General reporting to Congress 
about a couple of things. For example, a description of the 
total Federal Government and taxpayers' liability of Fannie Mae 
and Freddie Mac.
    Would you have a problem with that?
    Mr. DeMarco. Actually, as I have looked at some of the 
things you are interested in having reported, one of the things 
I am looking forward to going through with you is how much of 
that we are doing today. I can help indicate where this 
information is available now, and if it would be more useful to 
provide it in a different format or structure or to make it 
more readily known, some of this data is already being 
published either by FHFA or by the companies themselves. We 
would look forward to doing that and going over that with you.
    Mrs. Biggert. This would be in statute. We have SIG TARP 
that reports to us. Is there any difference between SIG TARP 
and the Inspector General?
    Mr. DeMarco. TARP is not a supervision program. The Special 
Inspector General for TARP has a somewhat different function 
than the Inspector General for FHFA will have.
    The thing to make clear about this is I am looking forward 
to the Administration nominating an Inspector General for us. 
The role of that Inspector General, though, will be to monitor 
and evaluate and report both to me and to the Congress on the 
efficiency and effectiveness of FHFA carrying out its 
responsibilities.
    FHFA in turn is the Federal agency responsible for 
monitoring and overseeing and reporting on the activities of 
Fannie Mac, Freddie Mac, and the Federal Home Loan Banks.
    Yes, I do think the structure Congress originally 
envisioned does include an IG, and I look forward to that piece 
of the structure being put in place.
    Mrs. Biggert. Would not the GSEs with the conservatorship 
already be doing all these things? Reporting these things?
    Mr. DeMarco. Much of it they are reporting and a good bit 
of the information--
    Mrs. Biggert. The problem is that Congress never really was 
able to question them about it.
    Mr. DeMarco. That is what I look forward to, figuring out 
what we can be doing, without waiting for additional 
legislation. I would be happy to see what we can be doing to 
get the information out.
    Mrs. Biggert. Just like the bonuses and compensation paid 
to Fannie and Freddie, if this would come up on a quarterly 
basis with the Inspector General, it seems it would solve a lot 
of problems that we are having right now.
    Mr. DeMarco. Okay. In the meantime, as I said, I will be 
glad to respond to you or any other member who would like to 
have more information.
    The Chairman. One minute.
    Mrs. Biggert. Can you tell us what losses Fannie Mae and 
Freddie Mac have incurred to date?
    Mr. DeMarco. They have run through all of the shareholder 
equity they had pre-conservatorship, and combined between the 
two of them, through the third quarter of 2009, they have drawn 
$111 billion from the senior preferred stock purchase agreement 
with the Treasury.
    They have run through all of their initial shareholder 
equity and an additional $111 billion.
    Mrs. Biggert. Are there any other anticipated losses?
    Mr. DeMarco. I would expect there will be additional draws 
on the senior preferred agreement.
    Mrs. Biggert. Do you think those losses could be more than 
TARP?
    Mr. DeMarco. TARP was initially authorized at $700 billion. 
If you are asking that, I would say it is not my expectation 
that combined we will be seeing $700 billion as to Fannie and 
Freddie.
    The Chairman. The gentleman from Indiana.
    Mr. Donnelly. Thank you, Mr. Chairman.
    Mr. Feinberg, when we look back, Goldman was very close to 
going over the cliff. Morgan Stanley was very close to going 
over the cliff. They were saved by money from everybody's 
paycheck in this country.
    When you talk to them about these bonuses, what I was 
wondering is, did you ever ask them if they felt, as they were 
talking to you about these bonuses, any obligation to the 
people of this country to not conduct themselves this way?
    Mr. Feinberg. The answer is ``yes.'' First, remember that 
Goldman is not on my watch.
    Mr. Donnelly. I understand that.
    Mr. Feinberg. Goldman and some others have asked my advice 
in following the prescriptions that I have laid out for the 
companies that are under my watch. I have at the request of 
Goldman and others not on my watch urged them to take into 
account the very reality that you are pointing out; yes.
    Mr. Donnelly. Obviously, they have the choice to do what 
they want, but they owe their very existence to the people who 
are riding the bus and heading to work every day.
    Did they feel it was at all unseemly that when these small 
businesses, people who enable them to survive, cannot find 
credit because of the very actions that were taken, that it was 
inappropriate for these bonuses to be given?
    Mr. Feinberg. I do not know if that discussion took place. 
I do not think I am the right person to ask as to what they 
felt or what they thought.
    Mr. Donnelly. Did they ever express that to you?
    Mr. Feinberg. I do know that Goldman, for example, has 
tried somewhat to accommodate the principles I have annunciated 
with my office, with no cash bonuses, bonuses that will be paid 
in stock over many years, the CEO of Goldman refusing to take 
any cash at all. The CEO of Morgan Stanley refusing to take any 
cash bonus at all.
    I think there is some effort. Whether or not that effort is 
satisfactory in light of the financial uncertainty you posit is 
a very fair question, but I think it has to be directed at 
them, not me.
    Mr. Donnelly. If you see them in your travels, as Mrs. 
McCarthy said, you are a widely traveled man, in your travels, 
the biggest problem we find is the ability to obtain credit, 
and we have company after company, not only in my home State of 
Indiana, but elsewhere, who cannot employ additional people 
because they cannot get the credit to go out and buy an 
additional piece of equipment or because their line of credit 
has been reduced, that if these funds were used for credit 
purposes instead of bonus purposes, it would be a great way to 
let the American people know we are all in in bringing this 
economy back.
    If you have $20 billion plus in bonuses that are given out, 
if that was used for lending purposes, think of the job 
creation that could cause.
    The only other question I have for you is this, I read an 
article where it said a gentleman that you talked to about 
compensation and the mention of $9 million, and he said to you, 
why don't you like me?
    Is there any connection between the reality of what the 
rest of the people in this country go through and this kind of 
mindset?
    Mr. Feinberg. Not much connection. I am amazed in my work, 
Congressman, at the perception of Wall Street versus the 
perception of Main Street. It is one of the most difficult gaps 
that I am trying to bridge in doing what I am obligated to do 
under the statute.
    Mr. Donnelly. Thank you very much for your service, sir. 
Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Mr. DeMarco, I do have to ask this question, and that is 
the Christmas Eve question, when many Americans were singing, 
``over the river and through the woods, to grandmother's house 
we go,'' we end up with this release saying that the executives 
of Fannie and Freddie are going to end up with millions of 
dollars of bonuses, and then across town, we have the United 
States Treasury saying oh, by the way, U.S. taxpayer, we were 
only going to use $400 billion and now it is unlimited, the sky 
is the limit.
    I would like to at least understand, since conventional 
wisdom would seem to indicate if you send out a press release 
on Christmas Eve when you do not want anybody to pay attention, 
what was the timing of this announcement?
    Mr. DeMarco. The timing of this announcement was rather 
regrettable, Congressman. That was not the original target 
date. The original target date that my staff and I had for 
making the compensation announcement was the previous Friday, 
December 18th.
    We set that date several weeks in advance. We knew it was 
an aggressive date. We had a lot of work to do to try to get it 
out by then.
    Congressman, it did not happen.
    Mr. Hensarling. I understand. Let me ask you another 
related question. I think the gentlelady from Illinois was 
trying to find out what your estimate was of ultimate taxpayer 
losses for the GSEs.
    The Congressional Budget Office estimates $389 billion over 
10 years. Originally, there was a $400 billion limit. Clearly, 
the Administration thinks it is going to be north of $400 
billion. Otherwise, why did they go to unlimited taxpayer 
exposure.
    I think I just heard you say you believed some number south 
of $700 billion. Do you have an estimate of the ultimate 
taxpayer loss for Fannie and Freddie?
    Mr. DeMarco. We are regularly running scenarios and 
examining the range of potential losses still to be incurred by 
these companies, still to be recognized, probably already 
incurred.
    Mr. Hensarling. If you do not have an estimate, I am just 
asking, is there no estimate at the moment that you have?
    Mr. DeMarco. There are a range of estimates, many of them 
rather conservative, that would suggest that for each company, 
the total losses will remain less than the $100 billion per 
company, Congressman.
    Mr. Hensarling. The less conservative estimates range up 
to?
    Mr. DeMarco. Most of the range stays below that 200 number, 
Congressman. I would say the Treasury Department needs--
    Mr. Hensarling. That is fine, Mr. DeMarco. My time is 
limited. If I could move on, recently there was a story in the 
Wall Street Journal on February 9th. I think there was an 
interview with Freddie Mac's chief executive, Charles 
Halderman.
    In that Wall Street Journal article, Mr. Halderman is 
quoted as saying, ``We are making decisions on loan 
modifications and other issues without being guided solely by 
profitability that no purely private bank ever could.''
    What does that tell us about taxpayer protection?
    Mr. DeMarco. I will have to check that quote and talk to 
Mr. Halderman. The approach that is being taken in modifying 
loans is to minimize the loss on that loan, and loan 
modification is typically going to be a--
    Mr. Hensarling. If this article is accurate, he clearly has 
a different opinion.
    Mr. DeMarco. That is fine. I do not believe he does. He and 
I talk regularly about the objectives we have, and it is to 
minimize losses and loan modifications. They are a key 
instrument in doing that.
    Mr. Hensarling. Perhaps the Wall Street Journal got it 
wrong. Perhaps it was taken out of context.
    Mr. DeMarco. One of the ways that happens is if these loan 
modifications result in a recognition of accounting losses.
    The Chairman. One minute.
    Mr. Hensarling. Apparently, he was also quoted in the same 
article as saying, ``They--which I assume is Freddie Mac--were 
fortunate to have such a clear mission,'' the governance 
foreclosure prevention drive, and we are doing what is best for 
the country.''
    As I look at the foreclosure mitigation programs, 
apparently we have HOPE for homeowners, the last information 
that I have seen, fewer than 100 families helped, authorized up 
to $300 billion; making homes affordable, 116,000 permanent 
modifications out of 3 to 4 million predicted; $75 billion, $50 
billion from TARP, $25 billion from the GSEs.
    I believe the last report I saw from SIG TARP, it was 
estimated the taxpayer would get zero, zero back from these 
programs.
    Once again, it would seem to me to suggest that at least 
this GSE, Freddie Mac, does not have taxpayer protection 
anywhere in its business plan.
    I yield back.
    The Chairman. The gentleman from Minnesota.
    Mr. Ellison. Thank you, Mr. Chairman.
    Forgive me if other members have asked these questions. We 
are running back and forth.
    One of the complaints that I have heard from some folks who 
object to Congress weighing in on executive compensation is 
that it will chase away financial talent and send it overseas.
    Could you offer your views? Have you heard this 
observation, and if you have, what do you think about it?
    Mr. Feinberg. I stated earlier, Congressman, in a question 
from the Chair, that I am dubious about that in my work. 
However, the statute does require that in my role in 
determining compensation, I must at least take that into 
account in determining appropriate compensation for the top 25 
officials and compensation structures for some others.
    It is a factor. It is a factor annunciated in the statute. 
I have not yet seen that as a result of compensation decisions, 
there is a mass exiting of people.
    Mr. Ellison. Would either of the other two gentlemen care 
to comment on the question?
    Is greater scrutiny on executive compensation from the U.S. 
Congress going to cause us to bleed financial talent?
    Mr. Alvarez. That is a slightly different question than the 
first one, I think.
    Mr. Ellison. Answer the one you like.
    Mr. Alvarez. There certainly is a lot of fear about losing 
people built into the compensation decisions that organizations 
are doing. We are hearing this quite a lot.
    There has not been much time to see if it really is true. 
We have only had bad times for now 2 years. Everyone is 
experiencing that bad time.
    I understand and feel the same as Mr. Feinberg does, we 
hear this but we have not seen it. It is clearly built into the 
calculus. That is one of the things we are trying to strain out 
of the calculus, so that it is not such an important part of 
the decision.
    Mr. Ellison. I have heard it. I think everybody has heard 
it. I doubt it. It just seems like it is self-serving, do not 
scrutinize my pay because I might go to Borneo, but nobody is 
going to Borneo.
    If you find information on that, I would be interested in 
looking at it.
    Another question is, how would changing corporate 
governance help align the risks properly such that we did not 
undercompensate executives and we did not overcompensate them, 
they just got compensated based on the market signal?
    It seems to me there might be some things we could do in 
corporate governance to have a better, more accurate reflection 
of what compensation should be.
    Do you have any ideas about that?
    Mr. Alvarez. That is at the heart of what we are trying to 
do with our guidance, to have a system that takes the risks 
that employees take into account and when those risks mature 
and companies lose money, that is reflected in the compensation 
that is given to the employees.
    Mr. Ellison. I understand that is what you are doing. I 
guess what I am curious to know, and perhaps I can send you a 
question on this, but what is the range of ideas, what is the 
menu? What are our options?
    We have worked on pay. There are other things. I am curious 
to know what the full range of thinking is. Maybe we can get 
together on that.
    Mr. Alvarez. I would be happy to. There are a lot of ideas. 
In fact, we have listed some in the guidance, but we would be 
happy to discuss more with you. Mr. Feinberg has pioneered a 
lot of those.
    Mr. Ellison. One more question I better get out because my 
time is running short. We are talking about executive pay at 
the top higher echelon.
    The Chairman. One minute remaining.
    Mr. Ellison. One of the things that concerned me is I was 
speaking to some people who were working at the bank and these 
folks were just regular folks, like managers at the bank. They 
were saying they were getting low pay but high incentives to 
sell people accounts they may not need and push different kinds 
of financial products they do not need.
    I know that is probably not within your purview, but have 
you thought about this and how does that impact the issue of 
risk, particularly for the individual, but maybe even economy-
wide.
    Mr. Alvarez. That is one of the things we do in our 
guidance. We go beyond just the executives to any employee or 
group of employees that take on extra risk for the 
organization. We would say compliance risk is part of the risk 
the organization should be checking on.
    Mr. Ellison. Have you seen this as a phenomenon? Is this 
something you have picked up, some of these lower echelon 
workers are being paid a little bit but being given this bonus 
structure so they can move product?
    Mr. Alvarez. We have seen that, and in fact, we brought 
enforcement actions against organizations where they have 
encouraged violations of law, for example, because their 
compensation was so motivating towards volume.
    Mr. Ellison. Thank you.
    The Chairman. The gentleman from New Jersey.
    Mr. Lance. Thank you, Mr. Chairman. Good afternoon to you 
all.
    I have been following this in my office as I have also been 
following the health care debate. Thank you for your 
participation in this important panel.
    I tend to be a free market Republican and do not like 
overregulation by the Federal Government in private matters. I 
certainly believe, however, regarding the GSEs, since the 
American people now own such a high percentage of them, it is 
somewhat different. I am sure this area has been well discussed 
in the hearing.
    Specifically regarding deferred compensation, Mr. Feinberg, 
as I understand it, the compensation was roughly $900,000 in 
base salary with another $3.1 million in deferred compensation.
    Could you explain, sir, in a little greater detail what is 
meant by ``deferred compensation'' and why that amount was 
chosen?
    Mr. Feinberg. In most cases, ``deferred compensation'' 
means stock, not cash.
    Mr. Lance. Yes, sir.
    Mr. Feinberg. That stock, if it involves one of the top 25 
individuals in the company, like the CEO, by law that Congress 
enacted, that stock must vest immediately at the same time that 
individual gets a paycheck but we have established rules that 
defer the transferability of that stock.
    Stock that is issued that is part of compensation cannot be 
sold or redeemed; one-third after 2 years from date of grant, 
one-third after 3 years from date of grant, and one-third after 
4 years. We want to try and tie the long-term performance of 
the company to the individual compensation that goes to that 
official.
    Mr. Lance. I believe that this compensation is extremely 
generous, to put it mildly, whether or not it is immediate or 
deferred.
    You are stating to us that there is a statutory framework 
under which these companies must operate, the deferral has to 
be as you have suggested, and that is by statute?
    Mr. Feinberg. That is not by statute. That is by our 
interim regulation. The statute talks about the vesting 
requirements that are required in the law.
    Mr. Lance. Would you recommend, sir, and perhaps you have 
covered this in previous testimony, amending either statutory 
law or the regulations as have been promulgated?
    Mr. Feinberg. It might be a good idea if we were starting 
over to allow a delay in how soon that compensation stock can 
vest, so that a corporate official has to stay on the job for a 
certain period of time before he or she even has a right to 
that stock, but the law prohibits that now. The law requires 
that salarized stock vest immediately.
    Mr. Lance. Thank you. An observation regarding companies 
that are largely owned by the government, GSEs, largely in my 
judgement, since the President of the United States makes what 
he makes, it is not clear to me that the compensation should be 
so generous.
    I distinguish between those who are involved in any way in 
governmental service and I believe those at Fannie Mae and 
Freddie Mac certainly are, given the current ownership by the 
American people, and distinguish that from the private sector, 
where I repeat, I tend to be free market in my views.
    Certainly, regarding these amounts of compensation, given 
the fact that the Federal Government is so heavily involved 
now--
    The Chairman. One minute.
    Mr. Lance. This certainly is an area where I think we 
should review the situation.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    The Chairman. I will recognize the gentleman from Missouri 
and will take 10 seconds to note that in fact the House voted 
on a bill that came out of this committee giving power to 
control the salaries at Fannie Mae and Freddie Mac. It was 
unfortunately a partisan vote. For some reason, my Republican 
colleagues opposed it.
    It dealt only with TARP recipients and Fannie Mae and 
Freddie Mac, and then died in the Senate. It is still alive in 
the Senate. Maybe my Republican colleagues who voted against it 
will tell the Senate they changed their minds. Maybe their 
example will inspire them.
    The gentleman from Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman. I was going to 
mention what you just mentioned.
    I have been going to town hall meetings. I had two last 
week where obviously people are concerned about this subject. I 
do not have any answers beyond what we have from the experts 
and from the legislation that the House has already approved.
    Is there a culture on Wall Street in the financial centers 
that is different from the American culture?
    Conscience is that thing which hurts when everything else 
feels good. I know they feel good about the bonuses and the 
compensation. I just wonder whether they hurt knowing that we 
have almost 10 percent unemployment, 17 percent African-
American unemployment, 13 percent Hispanic unemployment, and 
then if we start dealing with underemployment and people who 
are on the rolls, it just explodes.
    I would like to understand the culture. The three of you 
ought to write a book on the culture. I want to understand why 
these people can do what they are doing in the face of what is 
taking place in our country.
    Mr. Feinberg. I will start my third of the book by simply 
stating, Congressman, that you have articulated a truism for 
me. In my work, I do see a real cultural divide between Wall 
Street thinking and Main Street thinking.
    The reason for that divide or the genesis of that divide, I 
am not sure why. I do see that when we sit and meet with 
companies and talk about the requirements of the law, that we 
compare competitive salaries and competitive compensation, take 
that into account, there is a view constantly expressed by the 
companies under my jurisdiction that they are entitled to more 
and more and more.
    That is the competitive market data they provide us. We 
have substantially reduced sometimes by up to 90 percent the 
cash that these individuals received, and up to 50 percent 
slashed their compensation overall, but there is this divide 
and this different perception on what is worth for a job. That 
is just the way it is.
    Mr. Cleaver. I understand that is the way it is. What I 
want to be able to say is that is the way it used to be. I 
guess the struggle is how do we get to that point where we can 
put it in past tense.
    Mr. Feinberg. Well, we are trying in the Office of the 
Special Master to reduce this compensation, provide benchmarks 
and criteria and principles.
    I think Mr. Alvarez and the Federal Reserve are trying to 
do the same.
    I am sure Members of Congress will be watching to see if 
there is a trend towards more reasonable compensation.
    Mr. Alvarez. That is absolutely right. I do think there is 
a divide, and there are other pockets of this, movie stars, 
athletes. There are different parts of our society who think 
differently about themselves than the rest of us.
    One of the things that is at the heart of what we are doing 
is to try to make sure that the pain that companies feel as a 
result of the action of employees is actually reflected in the 
salary of the employees. It is not only heads, I win; tails, 
you lose. If there is a loss, that loss is then taken back to 
the employee.
    That is a new mindset. It is going to take some time to 
change that mindset. We are definitely working in that 
direction.
    Mr. DeMarco. I would concur with that. One thing that has 
struck me is the fixation or concern about compensation by 
those who are the most highly compensated in a financial 
institution.
    I do think as Mr. Alvarez just said, and Mr. Feinberg 
before, we are in a transition and coming to, I believe, 
perhaps a different understanding about the role of 
compensation and thinking about both its size and its 
structure.
    I think the gentlemen on my left have done a terrific job 
in providing leadership and helping to provide those guideposts 
and helping that transition along. I would like to see it 
continue.
    Mr. Cleaver. I would agree. Thank you, Mr. Chairman.
    The Chairman. I would just ask for 30 seconds to pose one 
question to all three of you. One of the arguments we get is 
well, if we overregulate, the United States will be at a 
competitive disadvantage.
    I am pleased to say with general regulatory reform, that 
does not appear to be the case, with great consensus.
    With regard to compensation, you three gentlemen may have 
some idea, my impression is we do not have to worry about that 
because we are so far ahead of other countries in compensation 
at this level of activity, that there is no danger that the 
kind of restrictions we are talking about are going to drive 
people to other countries.
    Mr. Feinberg, you looked at this.
    Mr. Feinberg. First, I think that is absolutely right. 
Secondly, I note the work of Secretary Geithner in trying to 
coordinate executive compensation decisions and principles with 
the other members of the G-20.
    I think in both respects, you are correct, and again, I am 
dubious that there is going to be an exit of talent to foreign 
companies.
    The Chairman. Mr. Alvarez, is that something the Federal 
Reserve has to take into account?
    Mr. Alvarez. Absolutely, it is. In fact, we have been 
working with the Financial Stability Board in Europe to try to 
get the same kind of principles and standards that we are 
implementing here.
    It is something we have to watch. It is something we have 
to work on globally.
    The Chairman. You have confidence that what you are 
proposing now, I assume, is not going to do us that kind of 
damage?
    Mr. Alvarez. That is right.
    The Chairman. Thank you. The hearing is adjourned.
    [Whereupon, at 3:51 p.m., the hearing was adjourned.]

































                            A P P E N D I X



                           February 25, 2010

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