[Senate Hearing 111-844]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 111-844

              TARP AND EXECUTIVE COMPENSATION RESTRICTIONS

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

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                            OCTOBER 21, 2010

                               ----------                              

        Printed for the use of the Congressional Oversight Panel













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                                                        S. Hrg. 111-844

              TARP AND EXECUTIVE COMPENSATION RESTRICTIONS

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

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                            OCTOBER 21, 2010

                               __________

        Printed for the use of the Congressional Oversight Panel












                  U.S. GOVERNMENT PRINTING OFFICE
64-160                    WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001






                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                    The Honorable Ted Kaufman, Chair
                             Kenneth Troske
                           J. Mark McWatters
                           Richard H. Neiman
                             Damon Silvers










                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening Statement of Hon. Ted Kaufman, U.S. Senator from Delaware     1
Statement of J. Mark McWatters, Attorney and Certified Public 
  Accountant.....................................................     5
Statement of Damon Silvers, Director of Policy and Special 
  Counsel, AFL-CIO 9.............................................    10
Statement of Kenneth Troske, William B. Sturgill Professor of 
  Economics, University of Kentucky..............................    14
Statement of Richard Neiman, Superintendent of Banks, New York 
  State Banking Department.......................................    18
Statement of Kenneth R. Feinberg, Special Master for TARP 
  Executive Compensation, June 2009 through September 2010.......    21
Statement of Kevin Murphy, Kenneth L. Trefftz Chair in Finance, 
  University of Southern California, Marshall School of Business.    41
Statement of Fred Tung, Howard Zhang Faculty Research Scholar and 
  Professor of Law, Boston University School of Law..............    69
Statement of Ted White, Strategic Advisor, Knight Vinke Asset 
  Management; Cochair, Executive Remuneration Committee, 
  International Corporate Governance Network.....................    70
Statement of Rose Marie Orens, Senior Partner, Compensation 
  Advisory Partners, LLC.........................................    81

 
        HEARING ON TARP AND EXECUTIVE COMPENSATION RESTRICTIONS

                              ----------                              


                       THURSDAY, OCTOBER 21, 2010

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                    Washington, DC.
    The panel met, pursuant to notice, at 11:00 a.m. in room 
SD-538, Dirksen Senate Office Building, Senator Ted Kaufman, 
chairman of the panel, presiding.
    Present: Senator Ted Kaufman [presiding], Richard H. 
Neiman, Damon Silvers, J. Mark McWatters, and Kenneth R. 
Troske.

   OPENING STATEMENT OF HON. TED KAUFMAN, U.S. SENATOR FROM 
                            DELAWARE

    The Chairman. This hearing of the Congressional Oversight 
Panel will now come to order. Good morning.
    My name's Ted Kaufman. I'm the chairman of the 
Congressional Oversight Panel for the Troubled Asset Relief 
Program.
    This hearing is my first as the Panel's chairman, so I want 
to begin by thanking my fellow panelists and recognize their 
tremendous work to date. And I'm deadly serious about that. 
I'll tell you, they came into me the first day and they said, 
``Here, take a look at this.'' Twenty-four reports. What, 12 
hearings? It's just--it is really remarkable what the Panel's 
work can do.
    As we all know, the TARP has been among the most 
controversial government programs in recent memory; yet, month 
after month, this Panel has managed to cut through the noise 
and differing opinions to provide a perspective that is 
independent, fact-based, and consensus-driven. I hope to help 
carry our work forward in exactly that spirit.
    We are here today to examine the executive compensation 
restrictions in the TARP. In 2008, Congress authorized $700 
billion to bail out the financial system, but the money came 
with certain strings attached. As a condition of receiving 
taxpayer aid, the companies were required to align their 
executive pay practices with the public interest.
    No one can argue against the ``public interest,'' but in 
the context of executive pay, I think everyone would agree, 
it's very difficult to define or measure. After all, a paycheck 
represents many things. It represents the source of a family's 
livelihood. It represents an incentive to work hard and achieve 
results. It represents a tool for retaining workers. It 
represents the value that an employee adds to the workforce. It 
represents a cost to the employer's bottom line. In the case of 
bailed-out financial institutions, a paycheck represents a 
transfer of wealth from taxpayers to corporate executives.
    A paycheck that is too high is clearly out of step with the 
public interest. It risks rewarding executives whose 
mismanagement contributed to the financial crisis and 
potentially wasting taxpayer dollars. Yet, a paycheck that is 
too low creates problems, too. If a bailed-out bank cannot hold 
on to talented executives, it may struggle to stay afloat or to 
repay taxpayers.
    Even a paycheck that is neither too high nor too low may 
still create perverse incentives. A CEO paid $10 million in 
company stock may take reckless risks to drive it to $20 
million. A company can rein in this problem by requiring 
executives to hold their stock for several years. Yet, even 
then, executives may refuse to consider measures, such as 
bankruptcy, that would strengthen the public interest but 
diminish shareholder profits.
    For all these reasons, executive pay is complicated and 
controversial, but it's also of profound importance. If 
Treasury, acting on its authority and leading by its example, 
can get executive pay right, it could help to lay the 
foundation for long-term financial stability. Any mistakes, on 
the other hand, could contribute to the next financial 
collapse.
    Today, we will hear from witnesses--excellent witnesses--
who have long practiced in navigating these turbulent waters. 
We thank you for your time and look forward to your testimony.
    And now I'd like to turn to other colleagues in the Panel 
for their statement.
    Mr. McWatters.






 STATEMENT OF J. MARK McWATTERS, ATTORNEY AND CERTIFIED PUBLIC 
                           ACCOUNTANT

    Mr. McWatters. Good morning, and thank you, Senator, and 
welcome to the panel.
    The Chairman. Thank you.
    Mr. McWatters. Over the past 2 years, Members of Congress, 
policy wonks and academics, and private-sector participants 
have debated the existence of any linkage between the 
compensation structures employed by TARP recipients and other 
institutions and the financial contagion that erupted in the 
last quarter of 2008.
    Some contend that the cause-and-effect relationship exists 
between the structure of an employee's compensation package and 
the amount of risk the employee's willing to undertake on 
behalf of his or her employer. I refer to this as the ``show me 
the money'' theory. Under this theory, some mortgage lenders, 
for example, may have originated residential mortgage loans 
without conducting prudent due diligence investigations of the 
borrowers. Likewise, some TARP recipients and other 
institutions may have packaged mortgage loans and 
securitization vehicles, without having properly vetted the 
underlying collateral, and sold the securitized tranches to 
investors who, themselves, may have elected to forgo any 
meaningful investigation of the legal and financial integrity 
of the transactions.
    Other commentators, however, reject the ``show me the 
money'' theory and argue that the financial crisis of 2008 and 
beyond was not spawned by misdirected compensation policies, 
but instead arose from the failure of mortgage originators and 
securitization sponsors and investors to appreciate the 
magnitude of the risk inherent in the mortgage lending and 
pooling of loans into opaque securitization products. I refer 
to this as the ``white heart, empty head'' theory. Under this 
approach, directors, officers, and employees of TARP recipients 
and other institutions, from the perspective of pure self-
interest, would not have knowingly taken any action that could 
have resulted in the loss of their employment, the material 
devaluation of their incentive stock options and grants, or the 
bankruptcy, takeover, or liquidation of their firms. That is, 
these individuals possess no desire for self-immolation, and 
they discharged their duties accordingly.
    As in other instances, the solution to our inquiry may not 
reside solely within the domain of either theory or hybrid of 
the two. Although the ``white heart, empty head'' theory has a 
certain visceral appeal--and it is significant to note that 
relatively few investment professionals accurately foresaw the 
impending financial tsunami--those who dismiss the ``show me 
the money'' theory, however, may be disappointed as we discover 
more about how the sausage was actually made in the residential 
mortgage securitization factories.
    In the final analysis, I suspect that both theories may 
help explain the genesis of the recent financial crisis. The 
compensation packages offered by some TARP recipients no doubt 
encouraged a certain amount of excessive and unnecessary 
risktaking, the consequences of which, unfortunately, were not 
fully appreciated by the TARP recipients themselves, their 
Federal and State regulators, or the capital markets.
    The most challenging work remains ahead, however, as we 
struggle with the remaining fundamental inquiry: How does an 
employer structure a compensation program so as to identify and 
minimize unnecessary and excessive risktaking while encouraging 
managers to assume sufficient risk so as to assure the long-
term profitability of their employer?
    Thank you, and I look forward to our discussion.
    The Chairman. Mr. Silvers.



    
  STATEMENT OF DAMON SILVERS, DIRECTOR OF POLICY AND SPECIAL 
                        COUNSEL, AFL-CIO

    Mr. Silvers. Thank you, Mr. Chairman.
    Good morning. Let me first say what a pleasure and honor it 
is to be with our new chairman, Senator Ted Kaufman. Secondly, 
I would like to express my appreciation to all our witnesses, 
and in particular to Kenneth Feinberg, for appearing before us 
today, for being open to our views in the course of his work, 
and for his strenuous efforts in so many difficult 
circumstances on behalf of the American public.
    Now, TARP is a program which uses public funds to subsidize 
private businesses and, in the process, extends to those 
private businesses implicit, and in some cases explicit, 
guarantees. Now, while there is extensive debate about 
executive pay in private companies subject to market 
discipline, that debate is of limited relevance to companies 
that have capital at below-market cost or have escaped 
bankruptcy due to the generosity of the American public.
    So, we are here to ask, today, What compensation practices 
at TARP recipient institutions were and are in the public 
interest? I believe there are three dimensions to this 
question. The first is: Compensation practices under TARP 
should have contributed, and should contribute, to a sense 
among the American public that TARP's purpose was public-
spirited and not designed or managed to maintain the incomes or 
assets of the executives of the businesses that caused the 
financial crisis. This issue is critical to the very legitimacy 
of our national government and our capacity, as a Nation, to 
address the ongoing economic crisis and to engage in national 
economic policymaking in the future.
    Now, in this context, I am particularly curious about the 
somewhat peculiar conclusion drawn by the special master, that 
billions of dollars of executive pay was, quote, ``not 
appropriate,'' but was nonetheless in the public interest. I 
look forward to learning how that could be.
    Second, compensation practices under TARP should have led 
to economic and career consequences for executives of failed 
firms. There was and is a profound public interest in 
mitigating the moral hazard created when executives of too-big-
to-fail institutions learn that, in the words of the New York 
attorney general, ``Heads, I win; tails, you lose.'' 
Unfortunately, one of the effects of TARP appears to have been 
to perpetuate the accumulation of wealth by the very people and 
institutions that seem to have been responsible for our 
Nation's economic catastrophe.
    Last week, the Wall Street Journal reported that overall 
compensation at six of the largest TARP recipients, including 
Bank of America and Citigroup that were recipients of 
exceptional aid, was higher in 2009 and in 2010 than it had 
been in 2007, and, during the 4-year period of the continuing 
financial crisis, amounted to over $430 billion; this, during a 
period when the real wages of Americans fell and returns to 
long-term investors in these very firms were catastrophic.
    Now, finally and thirdly, compensation practices under TARP 
should be aligned with the public's interest both as investor 
and as implicit guarantor, both of individual firms and of the 
financial system as a whole. In pursuing this goal, TARP has 
faced a problem of equity prices in a number of TARP recipients 
that were so low as to be, effectively, options. Executives 
with equity-based compensation thus faced little real downside 
exposure and every reason to not restructure bank balance 
sheets, as my fellow panelists have alluded to. This situation 
would seem to encourage reckless risktaking, like, say, 
pursuing foreclosures without having the proper documents by 
means of faked affidavits.
    So, I hope, today, that we can learn how TARP measures up 
against these objectives and what approaches to executive pay 
make the most sense, in light of them.
    Thank you.
    The Chairman. Mr.--Dr. Troske.



    
 STATEMENT OF KENNETH TROSKE, WILLIAM B. STURGILL PROFESSOR OF 
               ECONOMICS, UNIVERSITY OF KENTUCKY

    Dr. Troske. Thank you, Senator Kaufman.
    I would like--also like to start by thanking all of the 
witnesses for appearing before our panel today. I recognize 
that all of you are very busy people with a number of other 
responsibilities, so I appreciate you taking your time to 
travel here and to help us with our oversight responsibilities.
    As we are all aware, the issue before us today--examining 
the government's efforts to regulate how firms compensate 
executives, particularly firms who have received bailout 
money--remains one of the more controversial issues to arise 
out of the recent financial crisis. Taxpayers remain incensed 
about the large bonuses received by executives at firms that 
received enormous government bailouts.
    Much of the recent discussion of executive compensation on 
these issues has focused on several issues about executives: 
Should executives of bailed-out financial firms receive 
bonuses? Do bonuses cause managers to focus on short-term gains 
as opposed to the long-term growth of a company? And have 
boards of directors of large financial firms been captured by 
management so that they simply rubberstamp managerial decisions 
instead of engaging in the appropriate amount of oversight?
    While I recognize that there can be instances in which the 
way firms compensate executives is not always perfectly in line 
with the interests of shareholders, I believe that, in a free 
market, these problems can and will be corrected. However, in 
my opinion, the fact that for the past 40 years the Federal 
Government has made it clear that it would use taxpayer money 
to insure large financial firms against failure creates a 
distortion that actually exacerbates the problems mentioned 
above--mentioned previously. In other words, the financial 
sector is not a free market, and if we could simply return it 
to a free market--that is, if we could simply get rid of all of 
the government guarantee that has created too-big-to-fail 
firms--then many, if not most, of these problems would largely 
disappear or would no longer be of concern to taxpayers. It 
also means that by focusing on these ancillary problems, we 
fail to fix the true problem that is producing so much anger.
    In regard to the specific issue of executive compensation, 
recent research from the Federal Reserve Bank of Minneapolis 
shows that, in almost every setting, shareholders of firms will 
choose to pay workers in an efficient manner. The one exception 
to this rule is when the government provides an implicit or 
explicit guarantee of the firm's debt and does not charge the 
firm for this guarantee. In this case, shareholders will choose 
to incentivize workers in ways that encourage them to take an 
excessive amount of risk. After all, if the risky investment 
pays off, shareholders reap all the rewards, but if the 
investment bankrupts the company, then it is the taxpayers who 
are left holding the bag.
    One obvious solution to this problem is to simply let firms 
fail, in the too-big-to-fail phenomena, or at least charge 
firms for the insurance that they're being provided by the 
taxpayers.
    Regardless of what one thinks is the optimal solution, I 
think we can all agree that these issues remain important, and 
I am interested in hearing what the witnesses have to tell us 
about the challenges involved in having the government regulate 
how firms pay their employees.
    So, once again, I would like to thank all of the witnesses 
for agreeing to appear before our panel today.
    Finally, I would like to extend a special welcome to our 
new chair, Senator Kaufman. For me, having Senator Kaufman join 
us is especially exciting, since I am no longer the newest 
member of the Congressional Oversight Panel. And, Senator, I 
want to assure you that I empathize with what you have been 
going through during the past few weeks, trying to catch up on 
all of the fine work that the Panel has completed. However, 
burdensome as your work has been, I want you to know that 
you're getting off easier than me, since the first hearing I 
participated in was the Panel's marathon hearing on AIG which 
lasted for 6 hours.
    The Chairman. Oh, God.
    Dr. Troske. I am fairly confident that our hearing today 
will be much shorter.
    The Chairman. Thank you.
    Superintendent Neiman.



    
STATEMENT OF RICHARD NEIMAN, SUPERINTENDENT OF BANKS, NEW YORK 
                    STATE BANKING DEPARTMENT

    Mr. Neiman. Thank you.
    I, also, want to start by welcoming Senator Kaufman. I'm 
thrilled that you have been able to join us, and I want to 
congratulate Majority Leader Reid for such an exceptional 
appointment.
    When I first started as a bank regulator, almost 4 years 
ago in New York, one of the first things that became clear was 
that the misaligned compensation incentives in the mortgage 
origination process, particularly of those around mortgage 
brokers, was harming consumers and poisoning the mortgage 
market. As my colleagues on the Panel and our witnesses know, 
too many new homeowners were steered into inappropriate 
subprime products because of the higher profits those products 
provided to loan originators. Worse, such misaligned 
compensation incentives permeated throughout the entire 
securitization process as the default risk of these products 
was consistently offloaded onto others.
    The entire financial system is rife with potential for 
similar conflicts between short-term profits and long-term 
sustainability. I hope to focus, this morning, on the best ways 
we have, collectively, learned to align risk with compensation 
so that we do not again need another TARP, or possibly yet 
another special master position, for Mr. Feinberg. [Laughter.]
    The guidance issued by the Federal regulators, in June, 
takes a principle-based approach to assuring that insured 
institutions and their holding companies appropriately balance 
risks and rewards and do not encourage imprudent risk taking.
    I hope to draw on Mr. Feinberg's experience with TARP, and 
the other witnesses' experience, to explore the pros and cons 
of a rules-based versus principle-based approach to 
compensation. It seems to me that it is clearly difficult to 
draw effective rules for all situations before the fact, but, 
at the same time, the enforcement of principles requires 
vigilance and discretion.
    An additional area worth considering is if compensation and 
misaligned pay incentives are not just a concern for those 
generating revenue within institutions. The independence and 
incentives of those whose job it is to manage risk and assure 
legal compliance is arguably just as important. The mindset 
that considers risk managers as merely a cost of doing business 
is one we can no longer afford.
    I am pleased that the Panel is exploring this topic of 
executive compensation. And I do very much appreciate Mr. 
Feinberg's attendance with us today, as well as the other 
experts. Compensation issues are an unfinished business in 
building a more resilient financial sector, and this is an 
important hearing for our Panel.
    Thank you.
    The Chairman. Thank you.
    I'm pleased to welcome our first witness, Kenneth Feinberg, 
who served as special master for TARP Executive Compensation 
from June 2009 to December 2010 and who has demonstrated his 
support for tough assignments and for--as a great public 
servant. And Ken and I go way back when we both were--he was 
involved with Senator Kennedy and I was involved with Senator 
Biden, primarily on the Judiciary Committee. So, I want to 
thank you for your service and I want to thank you for joining 
us.
    We ask that you keep your oral testimony to 3 minutes so 
there will be adequate time for questioning, but, as you well 
know, your written statement will be printed in the official 
record for the hearing. Please proceed.




   STATEMENT OF KENNETH R. FEINBERG, SPECIAL MASTER FOR TARP 
    EXECUTIVE COMPENSATION, JUNE 2009 THROUGH SEPTEMBER 2010

    Mr. Feinberg. Thank you. It is an honor to be here, Mr. 
Chairman. It's been about 30 years since we first met, and it's 
great to be back here again, with you on that side and I'm the 
witness this time.
    I want to emphasize I'm the ``former'' special master. The 
acting special master, Patricia Geoghegan, is right here, along 
with deputy special master Kirk Slawson. He is still on the 
front lines doing this. I also note the presence of Professor 
Murphy, who was of great assistance to us as a consultant 
during our work.
    I just want to emphasize a couple of points. This whole 
issue of causation was sort of preempted by Congress, when it 
came to my role. Congress delegated, to the Secretary of the 
Treasury, who delegated to me, the legal responsibility for 
linking executive compensation to regulation. Professor Murphy 
and others can talk about whether it's a good idea for 
government to get involved in this.
    I've emphasized, repeatedly, that my role was very limited 
to just seven top recipients. That's all the statute conveyed 
to me. Even as to those seven, my role in actually regulating 
pay was limited to the top 25 officials, as a mandatory matter. 
I had other voluntary discretionary regulatory authority, 
limited somewhat by the statute and by the regulations. So, in 
effect, to some extent--to some extent--my role is a sideshow, 
as the New York Times pointed out, because if you really want 
to get answers to questions of causation, linkage, executive 
pay, what is appropriate regulation, look to the Federal 
Reserve, the SEC, the FDIC, the G20, the new Dodd-Frank 
legislation that's now the law of the land. My role was rather 
limited.
    Now, within that context, we did find some prescriptions 
that we invoked and implemented tying pay to performance. Very 
limited guaranteed compensation. Cash. Very limited guaranteed 
cash compensation. Tie the rest of an executive's compensation 
to stock in the company for which she or he works. Do not allow 
that stock to be easily transferred too early. Compel the 
executive to keep that compensation in the form of equity. 
Nontransferable, except over a period as long as 4 years, a 
third after 2 years, a third transferable after 3, a third 
transferable after 4.
    The law required the statute immediate vesting of that 
compensation, but we decided, in a move that I think was 
important, that the long-term compensation of any individual 
top official in these seven companies should be deferred, as 
much as possible, so that the long-term success or failure of 
that company will be tied to the long-term compensation of the 
executive. I think it's sort of elementary. I'm not sure 
everybody agrees with me on this, but this is what we 
concluded.
    We wanted to try and minimize risk. We wanted to maximize 
taxpayer return. We wanted to make sure that there was an 
appropriate allocation between cash and equity. We wanted 
compensation tied to performance. We wanted to look to the 
compensation of these seven companies and see how competitive 
our pay packages would be, relative to other companies that are 
in the marketplace that we had no authority to regulate. And, 
finally, we wanted to make sure that, as I say, the top 
officials were paid based on what they contributed to the 
overall performance of the company and its shareholders.
    Finally----
    The Chairman. Can you wrap up?
    Mr. Feinberg [continuing]. Finally, two quick points. We 
heard, over and over again, that if we didn't provide 
competitive pay packages, those top officials would leave and 
go elsewhere. And we were told by these companies, they would 
go elsewhere, they might even go to China. Everybody was going 
to go to China to work if these companies lost these officials. 
They're still there. Eighty-five percent of the specific 
individuals whose pay, by statute, we regulated are still 
there.
    The second final point is in response to panelist Silvers. 
Why did the special master conclude, at the end of his tenure, 
that--as to officials at 17 top recipients--not just the 7, but 
as to 17 top recipients--why did I conclude, at the end of my 
tenure, that, although certain compensation practices led to 
compensation that was inappropriate and not justified--why 
didn't I demand--even though I had no enforcement authority--
why didn't I demand that that money be returned to the 
taxpayer?
    Answer?
    The Chairman. No, let's hold the answer, when Mr. Silvers 
asks the question, because you're----
    Mr. Feinberg. I'm done.
    The Chairman [continuing]. Out of time.
    Mr. Feinberg. Thank you, Mr. Chairman. You wield a tough 
gavel.
    The Chairman. Oh, yeah, right. [Laughter.]
    [The prepared statement of Mr. Feinberg follows:]



    
    The Chairman. How did you--overall, how did you evaluate 
your success? I know it was kind of inside, and it was 
internal, but how did you judge your success as special master?
    Mr. Feinberg. I think, I would view, if I must say so--Ms. 
Geoghegan might have a different view, but I don't think so--I 
think we did exactly what the statute, Congress, and the 
Treasury regulations asked us to do. We were confined by those 
legal regulations in the statute. And I think, overall, in a 
very limited way--seven companies we did exactly what we were 
trying to do. And frankly, Mr. Chairman, we now see other 
Federal agencies adopting many of the prescriptions I've 
mentioned in their own effort to rein in executive pay.
    The Chairman. Well, you stated that 85 percent of the 
people are still there. Are there other numbers you use? In 
other words, at the end of the thing, you looked at it, and you 
said, ``There are some numbers here, some metrics that I feel 
good about or I feel bad about''?
    Mr. Feinberg. Well, that's the most important. I also look 
at the metrics that demonstrate that we did--if you look at the 
statistics, we substantially reduced what we thought was 
inappropriate largesse on the part of these top 25 officials. I 
think the executive pay that we set, mostly consensual with the 
companies, demonstrates a drop in that overall executive pay, 
something that I think was important to do.
    The Chairman. Well, how much of it, do you think, though, 
people stay because they thought, when you were gone, it was 
going to go back to what it was before?
    Mr. Feinberg. Oh, I think there's something to that. Now, 
whether or not that will happen, I don't know.
    The Chairman. Oh.
    Mr. Feinberg. I draw two conclusions from that question. 
One, it's a bit premature to say whether companies will go back 
to business as usual. I've only left a couple of months ago. 
The 2010 prescriptions and pay prescriptions, we'll watch, I 
think, and this panel and the Congress will watch and see. 
Second thing I would say is, don't paint with too broad a 
brush. I think what I've learned is, you've got to look at each 
individual company and see how that company reacts to 
criticism, when it comes to pay. I don't think you can just 
assume all companies adopt these prescriptions, all companies 
don't adopt these prescriptions. You got to go case by case by 
case.
    The Chairman. But you do have some views about whether, in 
fact, that worked. You do have views about specifically what 
happened, and--in terms of the metrics, in terms of the math--
of what happened, case by case. And the other thing that you 
were looking for, you were looking for long-term effect.
    Mr. Feinberg. That's right.
    The Chairman. So, it isn't just--looking at the seven 
companies really will not tell us what happened with that, 
right?
    Mr. Feinberg. That's right.
    The Chairman. We're looking for something broader than 
that, right?
    Mr. Feinberg. That's right. And the two ways you'll find 
out about a broader impact is, one, what the agencies are doing 
with a much broader cohort of companies than what I would--
dealt with; and, secondly, it'll be interesting, in the next 
few years, to see whether companies that weren't under my 
jurisdiction voluntarily, on their own, adopted the 
prescriptions. Many did, right now. We'll see, over the next 
few years, whether they adhere to those prescriptions.
    The Chairman. Right. And you used--you kept track of what 
the pay was before you got involved, and when you got involved. 
Do you have that? Can we have a chance to view----
    Mr. Feinberg. Final report.
    The Chairman. Final report.
    Mr. Feinberg. If you look at our final report and the 
accompanying materials that are submitted that are part of the 
public record, you will see: what the companies submitted; how 
we responded; how we engaged that data and companies, 
anecdotally and empirically; and how we disagreed with those 
companies.
    The Chairman. Okay.
    Mr. McWatters.
    Mr. McWatters. Thank you.
    Mr. Feinberg, you were charged with the interpretation and 
implementation of certain statutory and regulatory provisions 
regarding executive compensation. What's your assessment of 
those statutory and regulatory provisions?
    Mr. Feinberg. I think that it--they worked. It was a very 
limited role. I doubt that Congress or the Treasury want any 
expansion of that role. I think, in the limited area that I was 
asked to regulate, we did it, we did it pursuant to law, we did 
it effectively. I do not hear, anywhere, in Congress or in this 
administration, suggesting that the degree of micro management 
that I was obligated to be engaged in should be replicated or 
expanded.
    Mr. McWatters. Okay. If you were presented with the 
opportunity--asked to draw these provisions again, de novo, how 
would they differ?
    Mr. Feinberg. Well, clearly we would want to change some of 
the language of the statute that prevented--that required that 
compensation, in an annual year, vest immediately--the so-
called Dodd Amendment. I think that the problem we ran into is 
that, for the top 25 officials, vesting was required 
immediately, cash bonuses were severely curtailed--cash 
compensation was severely curtailed. I think that we would want 
to tinker with the--some of those incentives--or, some of those 
requirements. But, I think, overall, those were the major areas 
of tinkering.
    Mr. McWatters. Okay. I'll ask the same question I asked in 
my opening statement. And, again, in answering the question, 
don't be constrained by the current rules, okay? This is just, 
again, de novo question. And that is: How does an employer 
structure a compensation program so as to identify risk, but 
also minimize any unnecessary and excessive risk, but still 
permitting the executive to take sufficient risk so the company 
prospers? How do you balance that?
    Mr. Feinberg. Very, very difficult. My first answer is a 
hedge by saying: every company has a culture and a environment 
that is different. I'm not sure you can answer that very 
legitimate question by saying that GM and automobile companies 
should invoke the same prescriptions as AIG or Bank of America. 
I think they're very different.
    But, I would say that the fundamental conclusion we drew is 
that you want to set up a compensation package that provides 
competitive cash to that employee, but in a limited amount--a 
competitive amount--we said, under $500,000 annually--and that 
the appropriate balance should be struck by giving the 
remaining compensation in a given year in stock in that 
company, but over a relatively lengthy period of time so that 
you are undercutting any incentive for quick turnaround, quick 
flip, making the stock, in effect, cash. And, instead, you've 
got to hold a--as nontransferable, a good share of that stock, 
over as long as 4 years.
    Mr. McWatters. Okay, thank you. My time's up.
    The Chairman. Mr. Silvers.
    Mr. Silvers. Mr. Feinberg, before I let you continue in 
what you were about to say before, let me express my view that 
I think that your work has undoubtedly significantly improved 
compensation practices in the financial sector and in the 
specific companies that you were--that you had authority over.
    Mr. Feinberg. You're setting me up, Mr. Silvers. 
[Laughter.]
    Mr. Silvers. I am, indeed, but I'm trying to be nice first. 
And I want to express the absolute sincerity of my--of what 
I've just said, before I get to the tougher part of it.
    Now, I'd like you to tell me why you found, in your final 
report, that a significant amount of the compensation paid to 
the 17 firms you referred to who were TARP recipients that were 
paying, I believe, over half a million dollars to their 
executives--why you found a significant amount of that 
compensation during the period after the enactment of TARP, 
during a 4-month period after the enactment of TARP, to be 
inappropriate. Why was that?
    Mr. Feinberg. It was inappropriate because they were taking 
taxpayer money and feathering their own nest.
    Mr. Silvers. Well, that's an extraordinarily helpful lead-
in to where you left off, because what I want to know is, not 
the question of how much or should you have clawed it back--all 
right?--but, How do you reconcile that finding with your 
statutory obligation around the notion of the public interest?
    Mr. Feinberg. Well, it's a very close question, I admit. I 
debated this for many, many weeks. And I concluded, for the 
following couple of reasons, that it would be inappropriate to 
claw back the--or seek to claw back the money.
    First, 90 percent of that money that was inappropriately 
paid to those executives on those 17-90 percent of it was paid 
to companies, like Citigroup, that had already repaid the 
taxpayer every dime of TARP. We----
    Mr. Silvers. Now----
    Mr. Feinberg. We found----
    Mr. Silvers. Mr. Feinberg, Citigroup has not repaid every 
dime of TARP----
    Mr. Feinberg. Under my jurisdiction--they were out from 
under my jurisdiction--they had repaid----
    Mr. Silvers. But, they have not repaid every dime of TARP, 
as we sit here today.
    Mr. Feinberg. That is correct. But, under my statutory----
    Mr. Silvers. I----
    Mr. Feinberg [continuing]. Jurisdiction over Citigroup----
    Mr. Silvers. I--yes. No, I understand that. But, the 
public-interest mandate was not confined to special aid.
    Mr. Feinberg. I understand. I----
    Mr. Silvers. It seems--Mr. Feinberg, it seems to me that 
what you were really--what you really did--and I would like you 
to deny--if it's not true, if I have--misunderstand what you 
were doing, then tell me--but, what you really did was, you 
concluded that--I--it can't be true that feathering your own 
nest, when you're a--when you're holding the public's money, is 
in the public's interest. That can't be true. It seems to me, 
what you just said is the key thing, that you felt that it was 
not in the public's interest to have an accurate finding here, 
because it would trigger a process of recapture that you felt 
was not in the public interest to trigger.
    Mr. Feinberg. You----
    Mr. Silvers. Is that----
    Mr. Feinberg. You say it well. You say it well. But, let me 
go on and remind me you, as you well know, better than anybody, 
I also recognized I had no authority to force that money back. 
All I could do under the statute was seek, beseech, request, 
urge. I couldn't guarantee that that money would be repaid, in 
any event.
    Mr. Silvers. Right.
    Mr. Feinberg. And, my final point, at the time that that 
money was inappropriately paid to those executives, as you well 
know, they violated no law at the time, they hadn't violated 
any regulation at the time. I thought it was overkill.
    Mr. Silvers. But, that wasn't your standard. Your standard 
was not, ``Did they break the law?'' Your standard was ``the 
public interest.'' And I understand that you made a judgment 
about what was in the public interest, in terms of the 
consequences; but, that was also not your mandate. Your mandate 
was--and I think you've determined it--I think the irony here 
is that, in your own way, you have determined that that 
compensation violated the public interest. And, it was 
Congress's determination that, if it did, it should be--every 
effort should be made, within the fact that you didn't have the 
power, to claw it back.
    Mr. Feinberg. Don't----
    Mr. Silvers. My time is expired.
    Mr. Feinberg. Don't pooh-pooh that fact, that I didn't have 
the power to claw it back.
    The Chairman. Dr. Troske.
    Dr. Troske. Thank you.
    Mr. Feinberg, I thought you made a very good point about 
the limited role that you had--Congress--and it's something 
that we should all keep in mind. Having said that, you've got a 
lot--gained a lot of experience in this issue, so, you know, we 
would like to draw on some of your broader experience.
    One question I have is, in some such--you--as you correctly 
said, you're supposed to look at what would be competitive and, 
you know, what are comparable firms and what you'd expect these 
executives to get paid. Of course, many of these executives 
that you were dealing with were executives that--at firms that, 
in the absence of a government bailout, would have been 
bankrupt. And I don't think CEOs of bankrupt firms get paid a 
lot. So, I mean, did you take that into account? Is that 
something that you considered when--you thought, What would 
these people have been paid, had they been out looking for a 
job, having been just the CEO of a firm that they drove into 
bankruptcy?
    Mr. Feinberg. Yes, we looked at any and all of these 
variables to try and come up with a pay package that we thought 
was appropriate, in light of competitive pressures.
    Dr. Troske: Okay. You mentioned that 85 percent of 
executives were still there. What would we have expected? I 
mean, what was the--I guess, in some sense, I'm trying to get a 
sense of what a competitive pay package would have been. And 
you would expect a normal amount of turnover at these firms. 
Did you investigate what turnover was like before they 
implemented TARP and sort of--in some sense, maybe you paid 
them too much; maybe the turnover--you know, saying that 85 
percent of them are still there, I--that seems like a high 
number to me. So, can you--do you have a sense of what that is? 
Did you do any looking at that?
    Mr. Feinberg. Yes, we looked at that. I must say, I always 
viewed this whole issue of pay as only one variable as to why 
people stay where they are. This argument that was presented to 
us, that pay, and pay alone, is ``the'' variable that will 
determine whether we're competitive or not, I found it dubious 
at the time, and I still find it dubious, and I think that the 
statistics bear me out on this. People stay at jobs for a lot 
of reasons, only one of which--important, but one of many 
reasons--is their pay.
    Dr. Troske. As a college professor who probably--you get 
paid more, as a consultant--I'm certainly going to agree with 
you, because I--and you're right that that is a common finding, 
is that pay is not the sole determinant of whether people are 
happy and stay at their job.
    Talk a little bit about AIG. I guess it's--it was reported, 
or at least I've read reports in the New York Times, that AIG 
received some sort of special consideration, in terms of the 
value, you know, that they were not--their compensation--the 
executives--they were not based on the value of their--the 
stock--AIG stock--but of some derivative of that stock. Is that 
the case? And, if so, why?
    Mr. Feinberg. I don't believe that is the case. That was 
the case--that was proposed.
    Dr. Troske. Okay.
    Mr. Feinberg. And we tried to work something out, in 
conjunction with AIG's suggestion that the stock--the common 
stock wasn't worth enough to appropriately compensate top 
officials. But, we worked out a compromise with the Federal 
Reserve, with AIG, with the Office of Financial Stability. It 
turned out, at the end of the day--I believe--that, at the end 
of the day, AIG did agree that its common stock, under our 
formula, would be appropriately used as a compensation device.
    Dr. Troske. Your 500--again, your $500,000, you know, 
seemingly, line in the sand of--that's what they should get as 
cash--I--you said that you tried to come up with a competitive 
amount. How did you come up--where did the $500,000 come from?
    Mr. Feinberg. First, it wasn't a line in the sand. We 
allowed variations from the 500,000. And, in some cases, there 
were quite a few variations from the 500,000. We concluded, 
based on the packages that were submitted to us, based on 
evidence that we took on our own, anecdotally--empirical 
evidence that we got on our own--and also based on our sense of 
what Congress and Treasury intended in their statute and 
regulations--at the end of the day, we exercised our discretion 
and came up with that number, based on these variables.
    Dr. Troske. Thank you.
    The Chairman. Superintendent Neiman.
    Mr. Neiman. Yes, thank you.
    Just, really, following up on that, because, you know, it's 
clear there's--a fundamental question and debate on executive 
comp is: What is the proper role of government insuring that 
incentive comp arrangements don't encourage excessive 
risktaking? And, as I mentioned in my opening statement and you 
referenced in yours, there's a lot of work already being done 
by Federal bank regulators. The guidance put out by the bank 
regulators, as you know, in June, took a principle-based 
approach. I'd be interested in your experience. And, you 
certainly set out, in your opening, that--the six principles 
that guided you. Do you see the proper role for government in a 
principle-based or in a rule-setting framework, or a 
combination of the two?
    Mr. Feinberg. Combination of the two. The one thing I had 
to do, that nobody else had to do, of course, was actually put 
pencil to paper and come up with the dollars. And coming up 
with the dollars, I would have thought, at the outset of this 
assignment, it wouldn't have been--there wouldn't have been 
much interest. Only 175 people I'm dealing with, here. Turns 
out that principles plus rulemaking--that's fine; but asking 
government to then translate that into, ``You will make 1 
million or 800,000 or 5 million,'' that is government 
intervention, which I think should be very, very limited and 
should not be expanded upon.
    Mr. Neiman. So, what are the specific pay issues that are 
more susceptible to principle-based versus rules? I mean, you 
said one clear rule, with respect to the 500,000, and now we're 
hearing it's--it clearly wasn't a line in the sand. Are there 
other specific pay issues that you think a rule-based is 
appropriate?
    Mr. Feinberg. Very important that compensation be spread 
and not be guaranteed and be tied to the overall performance of 
the company where the official works. We made sure--I think 
perhaps our most important prescription--and Professor Murphy 
and others can comment on this--is, we concluded that 
compensation should be in the form of stock, but stock which 
cannot be transferred. It may vest, by law, but it should not 
be transferable, except over a lengthy period of time, so that 
long-term performance of the company will determine the total 
pay package of the corporate official.
    Mr. Neiman. So, that, let me understand, is a principle as 
opposed to----
    Mr. Feinberg. A rule.
    Mr. Neiman [continuing]. A rule of mandating a----
    Mr. Feinberg. Right.
    Mr. Neiman [continuing]. Specific vesting period.
    Mr. Feinberg. A rule might be: you should transfer, over a 
lengthy period of time. The principle is: a third, a third, a 
third--2 years, 3 years, 4 years.
    Mr. Neiman. So, now, what--we hear one of the--some--many 
of the commentators to the Fed's guidance said, principle-based 
are--give rise to vagueness, ambiguity with respect to 
compliance. And I think it's also clearly tied to enforcement. 
What is the enforcement regime on a principle-based?
    Mr. Feinberg. I'm--I'd want to debate the Federal Reserve 
more on that. It seems to me that what we found is that the 
rule delegated to the special master the ability to provide 
more detailed principles that would be used to effectuate the 
rule. The danger, I think, with pay is that you'll come up with 
vanilla rules: Pay should be performance-based. Well, I mean, 
who will disagree with that? But, what's the underlying detail 
behind that rule that is a principle that will be adopted? And 
I think--I'd debate--maybe it's semantic, but I think it's an 
important difference.
    Mr. Neiman. Before my time runs out, I would like your view 
on the guidance put out by the Federal bank regulators as 
getting at the issue of misaligned incentives.
    Mr. Feinberg. Again, it remains to be seen. I want to--to 
me, the only test here, with these rules put out by the 
agencies, What impact do they have in practice? And I think 
it's too early to comment, other than to say that vigorous 
enforcement--your point, Mr. Neiman--vigorous enforcement, I 
think, will determine the effectiveness of these rules or 
principles.
    Mr. Neiman. Thank you.
    The Chairman. Useful--when you talk about a ``useful 
model'' and ``for reasonable pay,'' do you think your work has 
led to more--an idea of what ``reasonable pay'' is?
    Mr. Feinberg. Yes, I do.
    The Chairman. And what were the main elements of it?
    Mr. Feinberg. The main elements, as I said--and I think the 
agencies are adopting some of what we prescribed the main 
elements of pay should be, without mentioning numbers: Low 
guaranteed base-cash salary; the remaining compensation in X 
stock, in that company, which cannot be transferred, except 
over a lengthy period of time; and, I should point out, more 
effective corporate--corporate regulation of golden parachutes, 
perks, end-of-career severance payments and pension plans. I 
think our final report pretty much lays out the blueprint that 
we think is a pretty good model.
    The Chairman. Can you comment on--and this goes beyond 
your--you know, specifically this thing, but I think it has 
real impact, especially when you're talking about a reasonable 
model. My experience has been, over the years, that using stock 
as an incentive--and the price of stock has--you know, 
sometimes it works, sometimes it doesn't. I mean, you're 
executive, you got a good market going, Dow Jones goes up 3,000 
points, you're king, and you're making a fortune, and you had 
nothing at all to do with that; you just happened to be there 
when the wind was blowing. And then, conversely, what we see, 
time and time again, when the market turns down, the 
compensation committees say, ``Well, wait a minute, we didn't 
cause the downturn. We shouldn't be taking the hit on that. Our 
company's doing just what it was doing the last 3 years.''
    And therefore, they don't get the reduction in 
compensation. Can you comment on that?
    Mr. Feinberg. Well, that's the argument. My response will 
be a couple of things. Two points.
    One, there's got to be some diversity in compensation. I 
agree with that.
    The Chairman. Right.
    Mr. Feinberg. It can't be all stock. It can't be all cash. 
We went back and forth on this discussion. Frankly, we 
concluded that if the market improves and corporate officials 
get a windfall because the stock soared: win-win. I mean, if 
the corporate--if the corporation benefits to that extent, so 
its shareholders benefit, hopefully the country benefits, 
that's the free market. That's all right.
    The Chairman. Except that, in order to do that, then when 
it goes down, they should take the hit for that.
    Mr. Feinberg. They should take the hit.
    The Chairman. And you do agree that, in most cases, they 
don't. And then, for this--in many, many cases----
    Mr. Feinberg. I----
    The Chairman [continuing]. The compensation committee 
meets, and they say, ``Well, you know, it wasn't our fault, 
let's--we're not going to reduce that. We'll give more stock or 
we'll change the stock options, or whatever.''
    Mr. Feinberg. That's right. Now, that's a corporate 
governance issue, too.
    The Chairman. No, no, I got it. I understand it. But, I'm 
saying--but, I'm just to get--again, I understand it's a 
corporate governance issue, but when you're dealing with the 
issue of, you know, what is reasonable pay, then that's clear--
you know, a clear concern.
    Mr. Feinberg. Mr. Chairman, I agree completely that, in a 
vacuum, what I'm suggesting as principles might work just fine. 
But, if you're not going to have enforcement, and you're not 
going to have the type of corporate--internal corporate 
regulation to make the principles meaningful----
    The Chairman. Right.
    Mr. Feinberg [continuing]. It's all about enforcement in 
the corporate culture.
    The Chairman. But, it would be fair to say that, in a 
reasonable model--a reasonable pay model, it would be 
incentives--stock can be one of those incentives, but it should 
be taken into account that stock is not the only determinant of 
whether an executive does a good job.
    Mr. Feinberg. Absolutely.
    The Chairman. Good. And I know you said that the school's 
not out yet on how Wall Street's going to pay, but I think--
again, it's always risky to refer to newspapers, but the Wall 
Street Journal says, ``Wall Street pay is on a pace to reach a 
record high in 2010.'' William Cohan, writing in the New York 
Times, October 7, 2010, said, ``The incentives on Wall Street 
have not been changed one iota.'' Now, if that, in fact, is the 
case, how do you feel about your tenure and the ability to 
actually change cultures?
    Mr. Feinberg. Hey, if that's the fact, and it's broad brush 
across Wall Street and includes not only Bank of America and 
Citigroup, companies that were under my jurisdiction, but also 
includes Goldman, who professed to follow the prescriptions 
last year that we had imposed, voluntarily, then I think that 
our work has not been successful and it's not being followed 
and it is a problem.
    The Chairman. Thank you.
    Mr. Feinberg. But, I think that, if that's the case, there 
are other agencies that profess to rein in executive pay, like 
the SEC and the Federal Reserve--I think that the mandate falls 
to them to pick up the slack.
    The Chairman. Although, I really do think everyone agrees 
that it would be better if we didn't turn to that. It would be 
better if we could come up a reasonable pay package, if we did 
have incentives, if we did have a model, if people did go ahead 
and control it. And it's very disturbing, if, in fact, given 
the opportunity to do this, that--an opportunity that, as bad 
as this financial crisis is, people don't take advantage of it, 
you've got to wonder about where the answer is.
    Mr. Feinberg. Right. I think that's right.
    The Chairman. Mr. McWatters.
    Mr. McWatters. Thank you, Senator.
    Mr. Feinberg, if a company pays a portion of the 
compensation in the form of stock--okay?--at a point when the 
stock prices are at historic lows, will executives have an 
incentive to engage in risky behavior, due to the potential for 
large upside gains and the limited downside loss?
    Mr. Feinberg. Well, that--we had to debate that. That's the 
argument. Now, we concluded that the way to minimize that 
likelihood--two ways: One, diverse pay packages that include 
cash, to a certain extent. And, secondly, have that stock 
transferable only over a relatively lengthy period, so that 
whatever short-term gain that corporate official might try and 
be incentivized to do--over the long-term life of that company, 
we thought it less likely that that type of risky behavior 
would be maximized, because over the long-term, especially with 
corporate governance in place, we thought that that would make 
it more likely that the long-term interest of the company would 
be aligned with the corporate official.
    Mr. McWatters. Sure. I mean, if you talk to employees of 
Merrill, Lehman, Bear--Citi, I think, is trading around $4 a 
share--B of A, and a number of others, who had incentive 
stock--a lot of incentive stock, coming into the fall of 2008, 
and--I can't say they were all wiped out, but they lost a lot. 
But, nonetheless, they created this mess with those 
compensation programs in place. So, if we now have these new 
and improved compensation programs that are dependent upon 
long-term incentive comp, aren't we, in effect, copying what 
was in existence in '05, with the exception, perhaps, of a 
meaningful clawback?
    Mr. Feinberg. I'm not sure about that. I tend not to agree 
with that. I tend to look at Lehman and the debacle of the last 
few years--and I'm not an expert on this, I have a statute to 
enforce--but, to what extent would those executive pay 
packages, the cause of that debacle, as opposed to 
capitalization requirements and other institutional flaws in 
these companies--I think that, by requiring that compensation 
in the form of stock be transferable only over a number of 
years, you minimize, somewhat, the likelihood of that type of 
risktaking. May be wrong about that, but that's the conclusion 
we reached.
    Mr. McWatters. No, I understand. As I said in my opening 
statements, I'm not necessarily wedded to the idea of 
compensation packages causing the problem. In other words, the 
``show me the money'' theory, as I called it, I'm not confident 
that works. But, a lot of people are. And so, they're proposing 
deferred comp, incentive comp as a way to solve the problem. 
But, my fear is--I mean, we may be solving the wrong problem, 
or at least not solving the correct problem.
    Mr. Feinberg. Yeah. What is the alternative? We concluded 
that, if you really want to promote risky behavior, tell a 
corporate official that he or she is guaranteed 5 million in 
cash--win, lose, or draw, in terms of the future performance of 
the company. And we concluded that that, as a relative matter, 
would be more risky, in terms of the company's long-term growth 
and success, than the method that we adopted.
    Mr. McWatters. See, I would think to the contrary. I would 
think, ``If someone's going to pay me $5 million cash a year, I 
want to keep this gig going.'' That's a good one. It's hard to 
come by, unless you can play first base for the Yankees or 
something like that, which I can't. So, I'm just not sure.
    Okay, my time's up.
    The Chairman. Mr. Silvers.
    Mr. Silvers. Yeah.
    Mr. Feinberg, I'm--in a way, I want to continue Mr. 
McWatters's line of questioning, but in a somewhat--maybe from 
a somewhat--a little different angle. Although, let me just 
take one case study, in what Mr. McWatters is talking about, 
that haunts me, which is: Angelo Mozilo. All right? $400 
million-plus in comp taken out of Countrywide during, 
essentially, one leg of the business cycle. The up leg. All 
right? Securities fraud settlement, giant headlines. So, he 
paid--he had to pay back, I think, 67 million of the 400. 
What's the externalities of that little adventure? Seven 
million foreclosed families, a destroyed--apparently, a deeply 
damaged property-loss system that's been a foundation of our 
economy for 300 years. The--all of them--all of the work of 
this panel and the TARP and all that sort of thing--seems to 
have been substantially--Countrywide seems to have been a 
substantial contributor to it. And the net of that circumstance 
is--well, let's say he had to pay his lawyers $30 million. The 
net of that circumstance is a pretax income of $300 million to 
Mr. Mozilo. That would appear to speak very strongly to 
executive pay as a contributing factor, would it not?
    Mr. Feinberg. Oh, I think so. I mean, it gets to the 
point--you're using a summa cum laude example. Don't forget 
that, as to the 175 officials that we dealt with----
    Mr. Silvers. Right.
    Mr. Feinberg [continuing]. We did--by statute, legally 
obligated--we did cap everybody's packages. All of the 
compensation. I don't think that we approved--I could be wrong; 
Patricia would know--but, I don't think we approved anybody's 
pay package--maybe one or two people--that were $10 million.
    Mr. Silvers. The Mozilo example, though, goes to the time 
horizons issue. Right? If you--you've got pay set up so you can 
take out $400 million--right?--in one leg of the business 
cycle. The incentives are obvious.
    I want to come, then, to the--to, sort of, the big question 
here. We, as a--we--this panel has found, repeatedly, that TARP 
functions as an implicit guarantee of the major financial 
institutions. And it's my opinion that there's kind of a 
linger--it's kind of always been an implicit guarantee of the 
very largest financial institutions. And the certainty of that 
guarantee has grown with the--with their size. Why does it make 
sense, if the--if that's the truth of the matter, to have 
incentive pay be equity-based, for those institutions?
    Mr. Feinberg. What's the alternative?
    Mr. Silvers. I mean----
    Mr. Feinberg. I mean, in--you talk about what's implicit. 
What is the alternative? I mean, I guess one alternative is: 
don't bail out these companies. If--let the free market really 
control----
    Mr. Silvers. Well, I mean, I know that my fellow panelist, 
Professor Troske, would like to have that happen. I think 
history suggests that, with these very large financial 
institutions, despite all of our desires, it doesn't, that 
there is an implicit guarantee operating, and as long as we 
have institutions of that size, it will operate. And so, the 
question is--I mean, this is not a--I'm not being critical of 
your work in--in a respect, because you applied, I think, 
very--you know, in a very thoughtful way, the prevalent 
thinking around long-term equity-based compensation. But, if 
these institutions have a government guarantee behind them, 
doesn't that suggest that we ought to be looking at measures of 
performance that are: (a) more risk-based; and (b) maybe tied 
more to debtholders, as I think we're going to hear from 
witnesses, following you.
    Mr. Feinberg. You may be right. I think, really, your 
question is better directed to the Chairman and the Congress, 
in terms of an overview as to what the appropriate role of 
government is. Congress had already spoken and delegated to me, 
through the Treasury, certain limited function and----
    Mr. Silvers. But, Mr. Feinberg, they didn't delegate to 
you, specifically, equity-based pay.
    Mr. Feinberg. I understand that. But, I don't really 
think--when you talk about the type of meltdown you're 
discussing, Mr. Silvers, I'm not sure what the pay package 
would be that would minimize the likelihood of that type of 
meltdown. You're talking about a meltdown that maybe should 
have resulted in these seven companies not being protected by 
the government.
    Mr. Silvers. Well, a larger question. My time's expired.
    The Chairman. Since I've been asked, I have spoken: I think 
``too-big-to-fail'' should not be too big to fail. And I've 
worked mightily to do it. I didn't succeed in all the things I 
wanted to, but I'm very interested to hear Dr. Troske's 
questions.
    Dr. Troske. Thank you. And I do--you know, as Mr. Silvers 
has indicated, I do have somewhat of a preference for that, but 
I do recognize the problems of allowing large financial firms 
to fail in the midst of a financial crisis. But--and it does 
bring up the issue, I think--and maybe you can talk a little 
bit about that--is--I mean, is--when you have these guarantees, 
you really don't--there aren't a lot of people around, involved 
with the company. In some sense, it allows them to ignore 
really bad risk, right? Large level--what's known as black 
swans, now. The--just--you don't have to worry about it. If--
once it gets so bad, after a certain point, well, the 
government's going to step in. And so, given that, it's hard 
for me to imagine an incentive-based compensation structure 
that is going to be created that gives an executive a lot of 
incentive to worry about that.
    Mr. Feinberg. Well, you may say that. I must say, one thing 
I learned in this job is the desire of these companies to get 
out from under any government regulation. I mean, Citigroup and 
Bank of America, as I understand it, borrowed money to get out 
from under TARP and my restrictions.
    Again, I go back, I guess, to the question that--my role 
was so limited, all I could do, under the statute and regs--and 
Mr. Silvers thinks maybe I could have done more--but, all I 
could do was try and tinker with ways that might be a model to 
deal with these seven companies. And I think, within that 
limited framework, we did what we were supposed to do.
    Dr. Troske. So, let me ask you a little bit about that, 
because I think, while you are right--your description is, 
obviously, correct, that your--you were limited in what you 
could do. You clearly scared these people. And it is the case--
I mean, I think, you have described it as--that in order to get 
out from under you, they paid back TARP funds quickly. Do you 
think that's a good thing?
    Mr. Feinberg. Congress certainly did. Congress felt that 
the single most important thing I could do is get those seven 
companies to repay the taxpayer. That was the number--Secretary 
Geithner made that clear, Congress made that clear, the 
administration made that clear; and we succeeded, with three of 
those companies already repaying.
    Dr. Troske. And so, let me ask--build on that again a 
little. And I want to be clear, I--you know, the companies that 
went bankrupt, I think, deserve almost anything they got, and 
then took the money. I'm not a big sympathy--I'm not very 
sympathetic. But, there were companies that were requested to 
take TARP funds, that were not in the same financial situation, 
and yet they came under your purview. And it also does seem to 
be the case that the rules of the game changed over--I mean, I 
think, the final rules regarding what you were allowed to do, 
many of them were adopted after the original TARP legislation, 
in October of 2008.
    Do you think that they were aware--many of the executives 
were aware, when they took the original TARP money, what they 
were agreeing to? And----
    Mr. Feinberg. No.
    Dr. Troske. And do you think it's, in some sense, fair to 
them to change the rules of the game in the midst of it? And I 
know I'm asking you to expand on what--that's not part of 
your----
    Mr. Feinberg. It really isn't part of my mandate.
    Dr. Troske. Yeah.
    Mr. Feinberg. I--you'd have to ask each company, and each 
corporate official who made these decisions, what they knew and 
when they knew it. But, I do agree with the argument that, once 
Congress provided substantial taxpayer assistance to these 
companies, I was, in effect, a surrogate creditor for the 
taxpayer. And I'm hard-pressed to accept the argument that it 
was inappropriate for us to change the rules or to modify the 
rules. The taxpayers were creditors, the government had a 
right, I think, especially under the congressional legislation, 
to influence pay practices, at least to a limited extent, with 
those companies. And I think we did that--exactly what Congress 
wanted us to do.
    Dr. Troske. Okay. I would agree with you. I think they 
learned a valuable lesson about what comes with taking money 
from the public trough.
    The Chairman. Superintendent Neiman.
    Mr. Neiman. Thanks.
    Well, we talked about what should be the regulatory 
governmental regime principle, versus rules, regarding 
incentive comp. But, another key question is the scope of the 
institutions that should be subject to these standards. My 
question is: Where should we draw the line? Your line was 
pretty clearly drawn, with respect to TARP recipients, the 
seven you referenced. But, I'd be interested in your views as 
to--in expanding that out. Should it be--should it cover only 
insured banks? What about other financial institutions, like 
security firms and insurance companies? Should we only be 
focusing on those systemically significant institutions; you 
know, beyond the explicit guarantees of insured banks, but to 
those with implicit guarantees?
    Mr. Feinberg. I'm not the expert, there. I mean, I must 
say, you're asking a very legitimate question to somebody who 
had just seven institutions to worry about, and we worried, at 
3 a.m., what to do with those seven. Whether or not the Federal 
Reserve and the FDIC should expand their authority to encompass 
prescriptions on pay for others and other agencies, you're 
asking the wrong witness, on that.
    Mr. Neiman. Well, you know, maybe I'll take it--you know, 
I'll come at it a different way, because I think your 
experience and learnings are helpful. What should be the 
principles that we should be guided by in determining the 
scope? Is it simply protecting the taxpayers, whether through 
explicit--as a result of explicit guarantees or implicit 
guarantees? Is it financial stability?
    Mr. Feinberg. Well, financial stability protects the 
taxpayers. I think that--in my situation, I had--you're right, 
I had a rather explicit mandate tied to the fact that the 
taxpayer cut a check to each of these seven companies, and that 
made us a creditor. I'm not suggesting that that's the way to 
do it next time, but I do think that, in terms of 
prescriptions, there ought to be some rule tied to taxpayer 
protection and financial stability in the marketplace. So, how 
that translates, you'll have to ask others.
    Mr. Neiman. Okay. And--also, in your experience--you know, 
we're talking about--to the extent it even should extend to the 
shadow banking system, to the extent that controls that we put 
in place in regulated entities may shift some of these riskier 
activities and compensation programs into less regulated 
entities.
    Mr. Feinberg. I think that's right. I also think--be 
careful about--in my experience, be careful about looking only 
at the issue of scope, because I think what we learned, in the 
special master's office, is: every bit as important, if not 
more important, than scope is enforcement. And, at the end of 
the day, who are in the front line enforcing these regulations 
and the scope of regulatory effort is every bit as critical as 
what, on paper, looks to be a fairly sensible regulatory 
regime.
    Mr. Neiman. Yeah. And, I--you know, where we left off, in 
principle versus rules--I think the first time a regulator 
takes a significant enforcement action under a principle-based 
regime, the industry will first say, ``Give me the rules. We 
can't live with this ambiguity. Give us the rules and we will 
comply.'' So, it--there really is the balance.
    I'm also interested in your views on culture, because 
you've seen very different institutions and--with the large 
investment banks converting to bank holding companies, with 
trading mentalities. I'd be interested in your views as to how 
much culture really plays in----
    Mr. Feinberg. Oh.
    Mr. Neiman [continuing]. These kinds of organizations.
    Mr. Feinberg. We found cultures critical. Goldman, Morgan--
they're different. One fascinating aspect of what I learned in 
this is the relative lack of interest in the public when it 
came to GM and Chrysler. I mean, almost all of the media and 
public attention was addressed to Bank of America, Citigroup, 
and AIG. There was, relatively speaking, much, much less 
interest in General Motors and in Chrysler, in GMAC and 
Chrysler Financial. Part of that, I think, was driven that--if 
you look at the pay packages of these Wall Street firms, 
relative to GM and Chrysler, it was like Earth and Mars. I 
mean, I think, if I remember correctly, the top three people of 
the 25 at Citigroup got more compensation before we arrived 
than all 25 people at GM, which was, to me, a little bit 
astounding.
    Mr. Neiman. Thank you.
    The Chairman. I think, I can answer that question. I think 
that people in America believe that they were the people that 
brought this thing down, they're the people that caused the 
unemployment, they're the people that caused foreclosure, 
they're the people that did all that, number one.
    Number two is, they came through this thing and started 
making money faster than any other economic entity in the 
country, and got back to where they were, when all the others 
were floundering. So, I think--it's very obvious to me that 
that was the cause-effect.
    I want to thank you for your testimony. Illuminating, as 
usual. And thank you for your public service.
    Mr. Feinberg. I just want to thank the Panel for--this is 
the third opportunity I've had to meet, formally or informally, 
with the panel, although not with the distinguished Chairman. 
And I want the panel to be--rest assured that the acting 
special master, Patricia Geoghegan, who's right here, will 
continue the fine work of the special master's office. So, 
thank you very much.
    The Chairman. Great. Thank you.
    And can the second panel come forward? [Pause.]
    Very good.
    I'm pleased to welcome our second panel, a truly 
distinguished group of academics and industry experts who will 
help us evaluate the TARP's executive compensation restrictions 
and the work of the special master, Feinberg.
    We are joined by Professor Kevin Murphy, from University 
South Carolina's Marshall School of Business; Professor 
Frederick Tung, from Boston University School of Law; Rose 
Marie Orens, a senior partner at Compensation Advisory 
Partners; and Ted White, strategic advisor from Knight Vinke 
Asset Management and the cochair of the International Corporate 
Governance Network, Executives Remuneration Committee.
    We'll believe with--we'll begin with Professor Murphy. 
Please keep your oral testimony to 3 minutes, as we know, and 
we'll put the whole record--everything you--your total 
testimony in the record.
    Thank you.

STATEMENT OF KEVIN MURPHY, KENNETH L. TREFFTZ CHAIR IN FINANCE, 
 UNIVERSITY OF SOUTHERN CALIFORNIA, MARSHALL SCHOOL OF BUSINESS

    Mr. Murphy. Good afternoon, Chairman Kaufman and Panel 
members.
    I have been asked to address a set of 11 very provocative 
questions, and I want to begin by commending the Panel for 
asking exactly the right questions, even though they are very 
hard questions.
    I have 3 minutes to summarize my responses, so my challenge 
is to figure out what to do with my remaining time. [Laughter.]
    Seriously, I've offered a 25-page report detailing my 
responses to these questions and could spend the full semester 
talking about these issues; and, in fact, intend to, when I get 
back to Southern California. I'll refer you, in part, to my 
report and wait for the Q-and-A for specific responses to 
specific questions, but I would like to summarize several 
general themes and conclusions emerging from my responses.
    First, when the pay restrictions were enacted in February 
2009, Congress was angry at Wall Street and its bonus culture, 
and suspicious that this culture was the root cause of the 
financial crisis. By limiting compensation to uncapped base 
salaries, coupled with modest amounts of restricted stock, 
Congress completely upended the traditional Wall Street model 
characterized by low base salaries coupled with high bonuses 
paid in a combination of cash, stock, and stock options. One 
interpretation of Congress's intentions was to punish the 
executives at firms alleged to be responsible for the crisis. 
More charitably, Congress may have decided that banking 
compensation was sufficiently out of control that the only way 
to save Wall Street was to destroy its bonus culture. Whatever 
the intent, it is my opinion that the restrictions were 
misguided and not in the interest of protecting taxpayers.
    Second, while ostensibly designed to implement the pay 
restrictions, Treasury's interim final rule circumvented 
Congress by blending the enacted restrictions with the, 
frankly, more sensible restrictions proposed earlier by the 
Obama administration but dismissed by Congress. In particular, 
Treasury circumvented the intentions of Congress by allowing 
salaries to be paid in the form of nontransferable stock and by 
imposing more severe pay restrictions on firms requiring 
exceptional government assistance. In my opinion, these changes 
benefited taxpayers, relative to the strict adherence of TARP.
    Third, the special master, guided by a well-intentioned but 
ill-defined public-interest standard, was forced to navigate 
between the conflicting demands of politicians, who insisted on 
punishments, and taxpayers and shareholders, who were 
legitimately concerned about attracting, retaining, and 
motivating executives and employees. Too often, the politicians 
won.
    Overall, the pay restrictions for TARP recipients were 
value-
destroying. Ultimately, the most productive aspect of the 
restrictions was the pressure they put on TARP recipients to 
escape the restrictions by repaying the government sooner than 
most anticipated. In retrospect, the TARP experience is a case 
study in why the government should not get involved in 
regulating executive compensation within the financial sector 
or more broadly.
    Thank you.
    [The prepared statement of Mr. Murphy follows:]



    
    The Chairman. Professor Tung.

 STATEMENT OF FRED TUNG, HOWARD ZHANG FACULTY RESEARCH SCHOLAR 
     AND PROFESSOR OF LAW, BOSTON UNIVERSITY SCHOOL OF LAW

    Mr. Tung. Good day, Senator Kaufman, Panel members. Thank 
you for the opportunity to allow me to testify.
    My name's Fred Tung. I'm a law professor at Boston 
University. I teach and research in the areas of corporate and 
bankruptcy law. Among my research interests, I have been doing 
work on corporate executive compensation and am currently 
investigating the incentive structure of banks, executive 
compensation preceding the financial crisis, and its potential 
role in the crisis.
    For today's hearing, I've been asked, among other things, 
to draw on my recent academic work to suggest executive pay 
structure reforms that might help curb executives' incentives 
toward excessive risktaking. I have a few suggestions, all of 
which come under the general themes of: number one, one size 
won't fit all; and, number two, a light regulatory touch may be 
best. So, I'm taking something--more of a prospective approach 
to these issues than maybe some of the other panelists.
    So, number one, I think it would be useful to focus more on 
portfolio incentives and less on annual pay. The current 
discussion of financial executives' compensation structures has 
missed what I believe to be a very critical issue, the issue of 
portfolio incentives. There's been an almost singular focus on 
annual compensation structures, to the virtual exclusion of any 
consideration of executives' existing portfolio incentives. 
Most executives at large financial institutions hold large 
portfolios of their own firms' securities, primarily stock and 
options and other claims on the firm. Because these portfolios 
typically dwarf the value of executives' annual pay packages, 
their existing portfolios exert much stronger influence on 
their risktaking tendencies than does annual pay.
    So, for example, at the end of 2006, just before the 
financial crisis, the average large-bank CEO held an equity-
based portfolio worth over $92 million. By contrast, the 
average annual compensation then was a mere 5 million. So, the 
composition of the portfolio--the stock, the options, and 
potentially other claims against the firm--has a far greater 
influence on CEO decisionmaking than the composition of the pay 
portfolio--the annual pay. We should be thinking about using 
the structure of annual pay to tailor portfolio incentives, as 
opposed to looking just at annual pay, thinking that's the only 
incentive that matters.
    The other important idea I want to raise is, we should 
think about paying financial firm executives with something 
other than just their equity interest in the firm. One 
suggestion is the use of inside debt. Recent theoretical and 
empirical work outside the banking context suggests that when 
executives hold debt claims against their own firms, what 
academics call, ``inside debt,'' their appetite for risk 
declines.
    I see I'm running out of time. Let me just say that I also 
believe that, when we think about reform of executive pay, we 
need to think of it as part of an integrated piece of a 
multifaceted financial regulatory system. It's not a 
substitute, but a complement to existing financial regulation.
    And thank you for the opportunity to testify.
    The Chairman. Thank you, Professor.
    Mr. White.

 STATEMENT OF TED WHITE, STRATEGIC ADVISOR, KNIGHT VINKE ASSET 
    MANAGEMENT; COCHAIR, EXECUTIVE REMUNERATION COMMITTEE, 
           INTERNATIONAL CORPORATE GOVERNANCE NETWORK

    Mr. White. Good afternoon, Chairman Kaufman, panel members. 
I would also like to express my gratitude for the opportunity 
to be here with you today.
    My background is that as of an active manager. I have a 
tremendous amount of experience with the institutional 
community; in particular, in engaging companies on matters of 
corporate governance and executive compensation.
    What I would like to do is get right to the point it--with 
some of the very significant aspects of executive comp, 
particularly with the financial sector, which we have 
identified through some of our work with companies--and some of 
those in the TARP, in fact--where I think that the most 
significant differences of opinion on alignment of interests 
come from.
    In many ways, the matter of executive comp is actually 
quite simple. The implementation of it, I find to be extremely 
complex. And I have a fair amount of sympathy for the special 
master in the task that he had before him; in general, give him 
good marks for taking on--you know, for climbing that mountain, 
but I think there's very significant aspects of comp that were, 
frankly, unaddressed in this.
    Let me get right to some very significant aspects of comp 
where I think you should pay particular attention.
    First is in disclosure. Disclosure is obviously important 
to investors, in that we--that's how we understand plans. But, 
I think that it also has a very significant role in making 
companies go through an extremely rigorous process in 
justifying the--not only the design of comp plans, but also 
their implementation. All right.
    There is a certain amount of rigor that goes into a plan 
when you know that you have to justify it.
    Term structure, which I think would be consistent with the 
issue that the previous panelist just got to, is another area 
where I think there's very significant disconnect. By ``term 
structure,'' I mean a number of elements of a plan that lead to 
an alignment of interests along a horizon, so not only annual 
pay versus long-term pay, but also the mechanics of long-term 
pay, the types of metrics that are encompassed in that. There's 
an all-encompassing equation that you look at to try to 
determine whether or not a plan is well aligned with your 
interests as a long-term investor. And I think, in the cases of 
financial institutions, in particular, there's a big disconnect 
between the cycle of that industry and where the alignment of 
interest is driven, from the comp plans. They are way too 
short-term.
    The metrics and mechanics. There are several metrics that I 
would point to. One, in particular, the use of ROE, which is 
prevalent in the industry. That metric is not risk-adjusted 
and, I think, probably had a role in emphasizing a certain 
risky behavior, and it missed an opportunity for comp plans to 
mitigate risk taking behavior.
    Realizing that I'm out of time, I'm going to--I'm just 
going to list the other areas where--I'll talk about later, 
under questions--is: the mechanics of the plan; the role of the 
committees--in particular, whether or not they use the 
subjective or a formulaic-type process; risk, as a category; 
and, in employment contracts, severance change of control.
    [The prepared statement of Mr. White follows:]



    
    The Chairman. Thank you very much.
    Ms. Orens.

  STATEMENT OF ROSE MARIE ORENS, SENIOR PARTNER, COMPENSATION 
                     ADVISORY PARTNERS, LLC

    Ms. Orens. Good afternoon, and thank you, Mr. Chairman and 
Panel, for inviting me.
    My background is a bit different. I'm actually executive 
compensation consultant to boards of directors, primarily 
compensation committees, of course, and have been for over 25 
years. In the last 15, I have spent most of my time with 
financial institution companies. So, I'm pretty well--pretty 
knowledgeable about TARP and their--those issues, as well as 
those who have not been involved in TARP.
    So, I thought that would--might be a helpful perspective.
    I have spent the last several years being heavily involved 
in the issue and the question that has come up among many 
committees: To what degree has incentive compensation brought 
on the financial crisis? My view is that is has not helped, but 
it was certainly not the primary cause. And I think we've 
started to talk about that today. It was a plethora of things. 
Incentive compensation will not be the solution to the problem, 
but it is something that we need to fix.
    The debate and the--what I'll call ``the intervention,'' by 
the government in the United States and Europe, that is going 
on is probably positive, in terms of getting us thinking about 
this. But, we really have to now move on to where we--it is 
that we want to go. And that's, I think, the objective.
    When we look back in 2008 and '09 at TARP, aside from the 
special master, there were a number of aspects of TARP that 
have actually been very positive. We don't spend that much time 
talking about them. It was TARP that brought up risk assessment 
for the first time. And if I say one thing that's come out of 
TARP, in terms of compensation and for companies overall, the 
word ``risk'' is heard on everyone's--in everyone's mouth, in 
every program, in every committee that I go to--every comp 
committee. This is a real and very sincere effort that is 
taking place today, that did not exist prior to 19---to 2008. 
Didn't exist. Nowhere near where we are today.
    Also, the other issues that TARP brought out and required 
as part of the other TARP participants was a mandatory ``say on 
pay,'' which is--as you know, is now being required by the SEC 
for everyone; an end to ``golden parachutes,'' as we knew them, 
and ``gross-ups.'' These were all practices that we had tried 
to get away with for a long time, to get companies used to 
giving them up; and TARP put us in a position to be able to do 
that. And they've been broadly accepted now by all other 
companies, and they're now part of the Dodd-Frank bill in the 
SEC. And so, besides pay, there were a lot of practices and 
mentality that has changed tremendously in compensation over 
the last few years that probably doesn't get as much press.
    As we go forward, I think the one thing we really should 
take away from today, and continue to, is that risk is not a 
fact in companies. All right? It was not front and center, as 
it ought to have been. It certainly was not front and center in 
compensation, mostly because companies didn't know how to 
manage it or what it--how to determine it. They are all 
wrestling with that. They've done that because of regulation. 
They will continue to get better at it. There is an integrated 
process that exists today, between risk management, HR, and 
finance, in the development of compensation programs, that was 
never there before. It's very positive. It will continue. 
Compensation committees are committed to it and required to by 
the Treasury and the other regulations.
    I think, in terms of where we've been, I do not really call 
the special master's program a pay-for-performance structure. I 
think it was pay-for-stock. And I think ``pay in stock only'' 
is a really frightening concept. As you know, people had 
millions of dollars of stock; it didn't change anything. I 
think it's an easy way to think you're paying for performance, 
but you're not. It's much more complex.
    The Chairman. Could you begin to wrap this up?
    Ms. Orens. Yup. Only one thing.
    The Chairman. Thank you.
    Ms. Orens. I would leave you with one last thought, which 
is, there is no size-fits-all. An investment bank and a 
regional bank have very little in common, in their pay 
programs, risk, or their culture. All right? So, we focus so 
much on Wall Street, and, as a result, all these other banks--
regionals and communities--have to live with the outcomes. And 
I would ask you to think about--there was a huge difference 
there in how we do things and how compensation is administered.
    [The prepared statement of Ms. Orens follows:]



    
    The Chairman. Great. Thank you.
    Mr. White, would you comment? In your experience now, 
recently, has risk become more and more important, in terms of 
executive compensation? Have you noticed a difference?
    Mr. White. I completely agree with that. I think one of 
the--probably the most significant lasting impact from TARP and 
the special master's work is in the area of risk and the 
recognition of the interaction of risk and executive comp. I 
would say, though, that I think the work is somewhat in its 
infancy, and there's greater emphasis right now on what I would 
call ``micro risks'' within the company, and less emphasis on 
``macro risks.''
    The Chairman. Thank you.
    Can I--I'd like each of the panel--we'll start at the other 
end, Ms. Orens, with you, and--how do you think the special 
master did? Did he do a good job, an appropriate approach of 
balancing fairness and competitiveness?
    Ms. Orens. I think that the special master had a thankless 
job. [Laughter.]
    It's extremely difficult. I can only imagine what it--how 
difficult it was, when you looked at the variety of companies 
and the situation. I think that he did implement the program, 
as it was put in place----
    The Chairman. Okay.
    Ms. Orens [continuing]. With little choice. But, I don't 
think it's a model for the future.
    The Chairman. Mr. White.
    Mr. White. I have a tremendous amount of sympathy for the 
role; I think, incredibly difficult, under the circumstances. 
There's a number of areas where I would give the work of the 
special master positive marks. I do think there's some nuances 
to particularly what I'd reference as ``term structure'' within 
the industry, which, frankly, was, to my knowledge, not 
addressed, as well as some of the underlying drivers in 
performance metrics, where I think there was probably an 
opportunity to bring those things out, debate those with the 
companies, and maybe set some structures that were more 
appropriate for long-term performance.
    The Chairman. Professor Tung.
    Mr. Tung. I have a tremendous amount of respect for Ken 
Feinberg and the work that he's done with TARP and some of his 
other activities. I think that the salary-stock approach was a 
useful way to generate a longer-term perspective than what came 
before. I think there are other approaches that could do that 
as well. I think it's a hard task.
    We don't know, really, very well how to limit risk through 
executive comp. As Kevin Murphy's memo points out, for 20 years 
we've been trying to get executives to take more risk, because 
we thought that--remember, back in the '90s, companies were 
big, they were run like bureaucracies; we wanted to incentivize 
them to be leaner and meaner, and came up with this, you know, 
performance-based pay. And now we're essentially trying to do 
the opposite, trying to figure out how to sort of cabin the 
beast. And I think it's a tricky task.
    The Chairman. Professor Murphy.
    Mr. Murphy. Yeah. Now, as Mr. Feinberg himself recognized, 
he had a very limited set of tools available to him. And so, 
what he was doing, at most, was constrained by--he had base 
salaries to work with, he had restricted--some amounts of 
restricted stock to work with, and then this new construct of 
salarized stock to work with. What--within those concepts, I 
was disappointed that he didn't take more of a taxpayer 
perspective. In other words, how do we maximize taxpayer 
return, how do we protect taxpayers, or maximize shareholder 
return while protecting taxpayers? I don't think that 
protecting taxpayers meant punishing executives by lowering the 
competitive compensation. I would have liked--I'd like to see 
large potentials for upside gain, large potentials for downside 
losses, and relatively small base compensation. And I don't 
really quarrel with Mr. Feinberg in the structure of pay that 
he established.
    The Chairman. Good.
    Mr. McWatters.
    Mr. McWatters. Thank you.
    I'd like for each of you to respond to a question that I 
asked in my opening statement. And I'll go ahead and read the 
question again: How does a TARP recipient--a too-big-to-fail 
TARP recipient, let's specify that--such as Citi, Bank of 
America, Goldman, or AIG--structure a compensation program so 
as to identify and minimize unnecessary and excessive 
risktaking while encouraging managers to assume sufficient risk 
so as to ensure the long-term profitability of the enterprise?
    We'll start with Professor Murphy.
    Mr. Murphy. Unnecessary and excessive risks are always 
something that's easy to detect in hindsight, but something 
that is very hard to identify ex ante. And I share your concern 
that the implicit too-big-to-fail guarantee is certainly the 
cause of a lot of concern, much more concern than direct 
investment--government investments into companies where we 
actually can measure what the return are--is on those 
investments. The--then I believe that the best way--the best 
way to encourage executives to not take unnecessary and 
excessive risks is to make sure that their longrun wealth is 
tied to the longrun prospects at the firm, which is not only 
the shareholder wealth, but also penalizes them highly if they 
rely on the government for assistance.
    Mr. McWatters. But, wasn't that true with respect to 
Merrill, Lehman, and Bear a few years ago? Didn't they have 
long-term compensation packages?
    Mr. Murphy. I----
    Mr. McWatters. And they were wiped out. So, I mean, there 
was a--there was an implicit clawback there. They gave the 
money back.
    Mr. Murphy. They--we can look, in retrospect, and--when we 
uncover all the causes of the financial crisis, I suspect that 
we'll find that compensation played some role, but a fairly 
minor role compared to housing policy, monetary policy. And 
clearly, these executives were punished by--for their actions.
    Mr. McWatters. Okay. And so, it sounds like it's just 
difficult to do this, difficult to look into a crystal ball and 
figure out what the--what is excessive and unnecessary 
risktaking today.
    Mr. Murphy. Absolutely. It's easy after the fact, when 
something happens and we can say, ``Hey, that looks like an 
unnecessary risk.'' I think, if you go back 3 years ago, no one 
thought Mr. Mozilo, at Countrywide, was taking unnecessary 
risks; we were celebrating the fact that he was getting--
helping to get so many people into housing that could have not 
afforded it before.
    Mr. McWatters. Absolutely.
    Professor Tung.
    Mr. Tung. I--sir, let me go back to my earlier suggestions. 
I think, number one, we have to look at portfolio incentives. 
Number two, to the extent that we can pay executives, at least 
in part, with, for example, debt securities issued by their own 
firms--debt securities are more sensitive to risk than equity--
that may be a way to make executives at too-big-to-fail firms a 
little more concerned about risk--gives them a little bit more 
skin in the game, because the bond--the market pricing of the 
bonds would, to some extent, reflect risktaking by the company.
    Now, having thrown out those two ideas, I do think the 
devil's in the details. We don't know how much debt is the 
right amount. We don't know what the right proportion is. The 
research on inside-debt incentives is relatively new. 
Conceptually it seems to make sense. But, I think, whatever we 
do, it's going to involve a lot of tinkering, and we should be 
cognizant of the fact that we're really going down a road of 
experimentation, to some extent.
    Mr.  McWatters. Okay, well, taking some debt as 
compensation, does that make the executive overly conservative? 
And is that in the best interest of the equityholders, who may 
want the executive to take more entrepreneurial risk?
    Mr. Tung. That's exactly the problem. Sir, the question, 
``Will the executive be too risk-averse?'' really depends on 
the proportion of debt-to-equity compensation. Certainly, 
shareholders would be less excited about executives taking 
debt, because their interest is in the stock price. To the 
extent that we have government subsidy of the risks that 
financial institutions are taking, it seems to me that it's not 
just the stockholders' return we're concerned about. We're 
concerned about preserving the deposit insurance fund. We're 
concerned about the costs of too-big-to-fail and other sorts of 
implicit government subsidies.
    Mr. McWatters. Okay, thank you.
    My time's up. We'll continue next time.
    The Chairman. Mr. Silvers.
    Mr. Silvers. Professor Tung, I--in a way, Mr. McWatters 
took my question, and your answer, away from me, but I want to 
push you a little further on it. Do you think that, in 
relationship to your ideas, that there is a difference between, 
say, the stress-test institutions, which we should use as 
perhaps a proxy for too-big-to-fail, and, say, the typical bank 
that's subject to FDIC insurance?
    Mr. Tung. Do I think there's a difference in what----
    Mr. Silvers. In terms of the suitability or the need for 
your type of compensation.
    Mr. Tung. Okay. So, right--by the way, I have to say to Mr. 
Silvers, I was gratified that you knew what was in my paper. 
And we don't get many--we don't get high subscription volume 
for the academic papers we write, so I'm grateful.
    Mr. Silvers. Thank the staff. [Laughter.]
    Mr. Tung. Thank you.
    So, I do think one important facet of sub-debt 
compensation, you have to worry about the depth of the market 
in the securities that you're using as compensation, because if 
the market is in a deep one, where you don't have a lot of 
analysts following a lot of institutions involved with it, you 
can't be as confident that the market price is going to reflect 
risktaking, because there's not enough folks paying attention 
to that particular institution. The smaller the banks get, the 
less volume you have in their debt trading, the more that's 
going to be a problem.
    Mr. Silvers. Now, you heard, I assume, my exchange with Mr. 
Feinberg about the sort unique circumstances of a implicit--or, 
in certain respects, explicit--guarantees, and the position of 
the government as both holder of preferred stock and guarantor 
of the balance sheet. What are your reflections on that 
circumstance, which is really, in a sense, what we're about 
here?
    Mr. Tung. You mean, how do we fix that?
    Mr. Silvers. No. I'm not going to task you with that. I'm 
interested in the--so, the government is in that position, as 
we continue to be at AIG, at Citigroup, perhaps at all of 
them--perhaps at all of the stress-test institutions, we 
continue to be in that position. What's the appropriate public 
policy, in relation to pay, at institutions that--where the 
government has that combination of interests?
    Mr. Tung. Well, I guess, one of the things--I mean, it 
seems to me that, because of the large taxpayer investment in 
those institutions, we want to worry about getting the 
taxpayers' money out. At the same time, we're worried about the 
safety and the soundness of those----
    Mr. Silvers. Yes, we do--there's been a lot of talk about 
how much we want that money back. Do we want the money back at 
the expense of destabilizing those institutions?
    Mr. Tung. Absolutely not. No.
    Mr. Silvers. All right.
    Mr. Tung. We don't want them to lever up to buy off the 
taxpayer. I mean, it's----
    Mr. Silvers. Right.
    Mr. Tung. And I think the point's been made that, to the 
extent we make the compensation constraints too onerous, that 
provides incentive for those companies to try to get out from 
under--they don't want the government being an investor if the 
government is----
    Mr. Silvers. Although, that's only true if we let them----
    Mr. Tung. Right.
    Mr. Silvers [continuing]. Right? Isn't--that's only true if 
Treasury or the regulators allow them to lever up recklessly. 
Professor Tung, if you don't mind, my--I want to stop you 
there.
    Mr. White, you talked about, essentially, I think, an issue 
you had about the construction of time horizons in the work of 
Mr. Feinberg. Can you expound on that?
    Mr. White. Yeah, sure. The point that I would make is that 
one of the things that we examine very closely when looking at 
executive comp across any industry, and certainly applies here, 
is whether or not the incentives that are inherent in the 
compensation plan are consistent with the cycle that the 
industry finds itself in, with its opportunities, its 
challenges. It is very circumstantial, and I agree with all the 
comments from the panelists, including earlier, that it is a 
case by case scenario.
    In the situation with the financials, I think the 
disconnect is probably larger than most other industries, in 
that I believe that the cycle that they operate in is 
multiyear--right?--and it--and they're, effectively, leverage 
plays on the economy. But, their comp programs are heavily 
weighted towards annual performance. I think there is a very 
significant macro risk, encompassed in that disconnect, that 
simply wasn't addressed. Right? The--some of the micro risk 
with whether or not, you know, they understand a VAR model or--
there are some things that are very programmatic, I think are--
they're coming up the scale very fast. But, at the same time, I 
think we're missing what is an elephant in the room.
    And the potential implications, in my mind, are this, that 
an industry that is so short-term-oriented may overcompensate 
for risk, wherever it happens to be on that slope. If my vision 
is only a year long and we're on a downward slope, I'm going to 
manage with that in mind; same on the upward slope. And I think 
that probably has the potential to make them overemphasize 
behaviors in each one of those aspects of the term.
    Did I cover it--does that----
    Mr. Silvers. Yes. And, my time is expired. You've covered 
it admirably.
    The Chairman. Dr. Troske.
    Dr. Troske. Thank you.
    I thought the point that Professor Tung made is an 
important one to remember. I do recall being in graduate school 
and hearing and seeing papers by Professor Michael Jensen and 
George Baker, and then a very young Professor Murphy at the 
time, telling us about the fact that executive pay was not 
closely enough tied to the risk of the company. And I think 
it's had a major influence.
    Professor Murphy, first I'd like say I agree with your 
claim in your report that one of the primary effects of the 
special pay master was to push firms to pay back their TARP 
funds very quickly. I guess I consider that a pretty big 
success of the program. I think he indicated he did, as well. 
Do you agree? Do you--couldn't we view the work of, sort of, 
the special pay master as a way to sort of push firms, to 
punish them, in some sense, for taking this money, and maybe 
that was a good outcome?
    Mr. Murphy. I believe it's a good outcome, although I share 
the potential concern, by Mr. Tung and Mr. Silvers, that, to 
the extent the companies borrowed money from the private sector 
in order to escape those regulations, they haven't really 
escaped the problem, but they've certainly gotten off the 
taxpayers' dime. I think that was very beneficial.
    But, when we're talking more broadly about regulating pay, 
this was a case where regulating only a couple firms and--who 
could escape the regulations by taking particular actions. If 
we regulate more broadly, we won't have that opportunity.
    Dr. Troske. So, let me ask you--I'm sort of--I'm going to 
put you on the spot a little. There's a proposal--I think 
it's--as my opening statement indicated, I think one of the 
problems that--inherent in all of this is just the fact that 
firms are insured against failure; they're too big to fail. 
There's been a proposal floated by the Narayana Kocherlakota, 
the president of the Minneapolis Federal--the Federal Reserve 
Bank of Minneapolis, to essentially float bonds against these 
companies. So, there's a Goldman Sachs bond that pays off if 
the government has to--had to step in and bail out the firm. 
And then, simply, the price of that bond will be what we charge 
Goldman Sachs for the insurance that we're providing them. 
Presumably, the price will reflect the riskiness that the 
executives and the firm are engaging in, both investment 
decisions and executive--and their compensation. And once firms 
are forced to pay for this insurance, then they make the 
appropriate decisions.
    I know I'm putting you on the spot a little. I don't know 
whether you've seen Narayana's--or----
    Mr. Murphy. I think it's----
    Dr. Troske [continuing]. His plan.
    Mr. Murphy. I think it's an intriguing idea. I think that 
then AIG will create some synthetic CDOs that are associated 
with these bonds, then we'll see what--we'll see how that works 
out. The--there--it has always--it's just going to be a fact of 
life that we can reward executives on the upside all day long, 
but we're never going to be able to penalize executives 
efficiently for huge downside occurrences, whether they're 
buying insurance or not. We're--we can't--we're never going to 
be able to punish them sufficiently for huge downside 
occurrences to eliminate this problem.
    Dr. Troske. Professor Tung, I'd like your thoughts on that, 
because it seems like Dr. Kocherlakota's plan seems, certainly, 
related to yours; it's an alternative way of getting to the 
same outcome. You want to provide these executives--force them 
to hold debt. Dr. Kocherlakota wants them to just sort of pay 
for the insurance. Either way, they have to--that cost becomes 
part of something they have to take into account. What are your 
thoughts?
    Mr. Tung. I mean, it sounds plausible. You know, I'd want 
to read the paper. I guess you'd have to find some private 
institution or group of institutions to take the--essentially, 
the failure risk of Goldman Sachs or whatever entity you're 
trying to insure. And then, of course, you're essentially 
putting--shifting the credit risk to those institutions that 
are selling the insurance, which is--basically, we're back to 
CDS and CDOs. Right? So, it's just sort of more bets--more side 
bets on the solvency of a particular institution.
    Dr. Troske. Okay, thank you.
    My time's up.
    The Chairman. Mr. Neiman.
    Mr. Neiman. Thank you.
    You know, we're talking about using bonuses and long-term 
awards to reward performance and discourage excessive 
risktaking. I'm intrigued by Professor Tung's use of sub-debt. 
Mr. White was--I think, also referenced that a return on equity 
is not a risk-adjusted measure and misses an opportunity. But, 
both of those are corporatewide and--or are at least bankwide 
measurements, and may not necessarily reflect the risk taken by 
an individual business unit or executive. So, two executives, 
both generating $1 million in revenue, or even earnings, may 
have very different risk profiles. And, in a bonus award 
program, issuing the same bonus to both really misses the boat.
    I'd be interested in some of your reaction as to what are 
the appropriate metrics to use to distinguish and change 
behavior under those regimes.
    Ms. Oren's just nodding, so it seems like----
    Ms. Orens. Well, I do this for a living, so I can certainly 
opine on it. What is going on in a--on a broad scale in most 
financial institutions, both the large ones and the regionals, 
is an assessment of where their risk is, where is their 
greatest level of risk within their organization. And you can 
start with the credit risk, but they also look beyond that. 
There is credit, market, operational--there's, obviously, the 
whole area--there's a variety of risks that we wouldn't relate 
to the kind of problems we've had, but are still certainly 
within that risk umbrella and need to be considered. And if you 
start with the theory that you're--you can begin to allocate 
capital to businesses, which they are trying to do, and can now 
look at each of those--major business units and ultimately the 
lower--the smaller ones, and assess where the greatest risk is, 
then you can begin to really charge the costs of capital, you 
can calculate the risk-weighted assets----
    Mr. Neiman. Right.
    Ms. Orens [continuing]. And you can assess that as part--
that has become, in a sense, a metric.
    So, two businesses that may each bring in $20 million, on 
the bottom line, one that takes a lot of capital and is risky 
beside--taking capital alone, is not a negative, it--you'll get 
charged for it, but if, on top of it, this is viewed to be a 
particularly risky but appropriate business for the company--
that's already been decided--then you're charged even more--
versus the other business.
    And then, secondarily, to, I think, this gentleman's point 
is where you say, ``What's the time horizon, then? If this is 
such a risky type of business to us, how do we pay this?'' And 
we don't have to pay it the same as we do another business 
unit.
    Mr. Neiman. And then, is this where, whether you're using 
clawbacks or longer-term vesting periods comes into effect to 
change----
    Ms. Orens. Absolutely. The clawback is actually being put 
in, across the board, because you don't know where that issue 
is going to arise. And you want to--you don't want people to 
feel, ``Well, in this business unit, I'd have to have a 
clawback; in another one, I wouldn't.'' So, they're really 
being very broadly put into programs.
    But, absolutely, the time horizon, the balance of cash and 
other forms of compensation, even though it might be cash, but 
it's longer-term in nature, is being determined, if you will, 
business by business.
    Mr. Neiman. I'd like to----
    Thank you.
    I'd like to give any other witnesses a chance to comment on 
that, as well.
    Mr. Murphy. I agree that there's going to be two ways to 
charge executives for the risk, and one is up front, with how 
we measure their performance, whether we adjust that 
performance for risk. And I have--certainly endorse what Ms. 
Orens says. More generally, though, we need to hold--to the 
extent possible, we need to hold executives and employees 
accountable for the downside, as well as the upside.
    Ms. Orens. Uh-huh.
    Mr. Neiman. Great. Thank you very much.
    The Chairman. I'd like to go through each panel member, 
starting Ms. Orens, and--one of the objectives of the special 
master was to have some impact on executive compensation down 
the road. Do you think there's been a long-term effect of what 
the special master's done?
    Ms. Orens. I think there is an effect from what TARP and 
all the government intervention and the public outcry has been. 
I think that's been actually enormous. I think that's been a 
huge impact on compensation committees, on management 
understanding the level of scrutiny, and in the fact that the 
Treasury, clearly, and now the regulators, as they've gone 
around to the horizontal reviews, how serious and, you know, 
different the environment is than it used to be.
    So, if you say that, ``Yes, there was lots of press and 
people understand all that,'' and whatever, I think the aspect 
that has really gotten more important is the issue of, really, 
governance. You know, there's just a whole lot more attention 
to, and there's a whole different way of looking at 
compensation than I think there was prior to the crisis. And 
that's----
    The Chairman. So, you----
    Ms. Orens. A positive.
    The Chairman [continuing]. Do you think it's actually 
affected executive compensation?
    Ms. Orens. I'm sorry?
    The Chairman. Do you think it's actually affected executive 
compensation?
    Ms. Orens. I think it has, today. I have the same concern 
that Mr. Feinberg offered, which is: Can we stay the course. 
I--let's not just start this process, let's keep at it. I'd 
like to believe we will, because of--back to the question of 
enforcement. We need the regulations. We need them interpreted 
and implemented appropriately. You know--there's a lot of 
education that needs to occur on that side, if you will. I 
can't take an examiner seriously who doesn't know anything 
about compensation and tells me the same three things they've 
told every bank. So, it's going to take a while, but I think 
there's an enormous willingness today to say, ``Look, you know, 
we get it. We want to do the right thing. We understand what 
happened.'' You know, we've all been extremely hurt by it----
    The Chairman. Right.
    Ms. Orens [continuing]. Both, you know, the public as well 
as the employees. And right now, it resonates; it resonates 
broadly.
    The Chairman. Great, thank you.
    Mr. White.
    Mr. White. I think the area with the most long-lasting 
impact is likely to be in the sensitivity to risk. And I think 
that's a very positive thing. I think the second most 
significant implications will be in areas around the periphery 
of contractual arrangements, severance change in control, some 
of those. I suspect those will be longer-lasting. I'm 
anticipating some companies will unwind some of the 
restrictions that have been placed there.
    And then, I think the work will also be somewhat 
foundational for how the Fed, in particular, picks up its 
oversight role; hopefully, with nuances toward the things that 
we're bringing out today, which are actual drivers of 
performance, in terms of structures and things like that. I 
would agree with Dr. Murphy, that just outright restrictions on 
incentive are ultimately not going to be that--you know, from 
an equityholder's perspective that's a tool that we need.
    The Chairman. Got it.
    Professor Tung.
    Mr. Tung. I agree with the comments of the other two 
panelists. Certainly, the process of crafting TARP, the process 
of crafting ESA and then ARRA and then the Fed guidelines, have 
all focused public, congressional, executive regulatory 
attention toward the role of executive compensation in 
financial institutions. And that, I suspect, would be long-
lasting. How it plays out, in terms of actual behavior of 
corporate boards and executives, I think there's going to be 
a--you know, an interaction between regulators and the 
regulated that will be interesting as it unfolds.
    The Chairman. Great.
    Professor Murphy.
    Mr. Murphy. I think we can connect the dots directly from 
TARP to the Dodd-Frank Wall Street Reform Act. And that Act 
included in it the most sweeping reforms of executive 
compensation applicable to all firms, not just financial 
institutions, in U.S. history. That is going to have 
implications for executive compensation for decades to come.
    The Chairman. Thank you.
    Mr. McWatters.
    Mr. McWatters. Thank you.
    Ms. Orens, I read your opening statement. And I want to 
read a sentence to you and see what your response is.
    You say, on page 2, that, ``While delivering compensation 
in stock reinforces long-term focus''--okay?--``it does not 
guarantee the existence of pay-for-performance programs or a 
culture that properly evaluates individual risktaking.''
    Ms. Orens. Uh-huh.
    Mr. McWatters. Well, this just sort of blows a lot of stuff 
out of the water. So, what do you mean?
    Ms. Orens. Be happy to answer that. I think this goes back 
to some of the comments that were made by Mr. Feinberg. Stock 
is an important vehicle in executive compensation. It's a very 
important vehicle. But, when we think about stock that's just 
given to you as restricted stock--all right?--which has been 
the TARP type of stock or the deferred stock--we call it all-
you-have-to-do-is-breathe stock. All right? I stay employed, I 
get this. I thought we didn't want guarantees. It's a 
guarantee. The risk is, the stock might go up and stock might 
go down, but I still have a great chance of getting something.
    On the other hand, we dislike options intensely, because, 
we say, ``Oh, they create risk. They create people who want to 
just, you know, blow through and get all these huge numbers.'' 
Well, at least they don't pay unless there's some performance 
above a certain level. So, that's a contrast there, between 
performance and not performance, to me.
    If you go back to the point of--to me, the company develops 
the culture of risk, or it doesn't. From everything I've seen, 
there are companies who, at their heart, were willing to take 
enormous risk. How much they were taking, they didn't even 
know. Go back from 2005. All right? It's----
    Mr. McWatters. Okay.
    Ms. Orens. They----
    Mr. McWatters. Okay. That's helpful.
    Ms. Orens. Yeah.
    Mr. McWatters. What if an employee, one employee, runs a 
division, and that division does very well, that employee makes 
a ton of money for the company, but the company, overall, does 
poorly. What happens to that employee?
    Ms. Orens. Mr. McWatters, that's actually a philosophic 
question that, as a designer of programs, you start with the 
committee--compensation committee--and you say, ``What kind of 
program do you want to have?'' In true pay-for-performance--
I'll take away the risk of this individual and all that, for 
the moment--but, if I even had a salesperson who was 
extraordinary sales performance in this year, and the rest of 
us are not getting bonuses, do you want to pay, or don't you? 
That's part of your philosophy and design. People might very 
readily say, ``No, you're a part of the team. We will not 
structure compensation that way. That's the way it is. 
Salesperson, join the company, don't join the company. You know 
the facts.''
    Mr. McWatters. Okay. Okay. But, if that made the media, the 
employee that walked away with the big bonus even though the 
company is doing poorly might not be well received.
    Ms. Orens. But, I would say to them, ``Are you willing''--
--
    Mr. McWatters. Sure. I----
    Ms. Orens [continuing]. ``To have that published?''
    Mr. McWatters. Absolutely.
    Ms. Orens. That's how you have to answer it.
    Mr. McWatters. Professor Murphy, also reading from your 
opening statement, on page 2, you say, ``It is my opinion that 
the TARP pay restrictions were ultimately destructive and 
designed to meet political objectives rather than their 
legitimate purpose of protecting U.S. taxpayers.'' That's very 
interesting to me. What do you have to say?
    Mr. Murphy. Now, remember, when I'm talking about the TARP 
restrictions there, I'm talking about the TARP restrictions 
actually in the February 2009 bill----
    Mr. McWatters. Yes.
    Mr. Murphy [continuing]. Which, of course, were changed in 
the----
    Mr. McWatters. Yes.
    Mr. Murphy [continuing]. Treasury restrictions. The 
elimination, the exclusion, of any kind of bonuses, stock 
options, signing bonuses, severance bonuses, any kind of 
incentive pay, except for modest amounts of restricted stock, 
coupled with no restrictions on the level of base salaries, 
would run counter to virtually any concept of best practices in 
compensation design.
    Mr. McWatters. And it sounds like we've moved away from 
that.
    Mr. Murphy. Excuse me?
    Mr. McWatters. Sounds like we have moved away from that.
    Mr. Murphy. That if--well, we heard the special master talk 
about his own vision for pay. It was the opposite. It--his 
vision of pay was low base salaries coupled with high longrun 
pay for performance.
    Mr. McWatters. Okay. Thank you.
    The Chairman. Mr. Silvers.
    Mr. Silvers. Okay. Professor Murphy, you say that--and you 
just said that--you said you thought that pay ought to be more 
aligned with common equity through--and should have been in the 
amendment to the TARP statute. Did I hear you right?
    Mr. Murphy. I believe the pay should be aligned with the 
longrun value of the firm, which is not equivalent to the 
common equity.
    Mr. Silvers. Well, you just talked about options as 
something that you thought should've--there should've been an 
ability there to award more stock options.
    Mr. Murphy. I included, in the arsenal of tools, the 
compensation practitioners use, includes stock options, 
restricted stocks, salarized stock----
    Mr. Silvers. Okay, stop.
    Mr. Murphy [continuing]. Performance bonus plans----
    Mr. Silvers. Stop. What instrument did the Federal 
Government hold in the firms at issue at the time that that 
statute was passed?
    Mr. Murphy. The Federal Government held preferred stock and 
warrants.
    Mr. Silvers. All right. And, the preferred stock was the 
dominant instrument, was it not?
    Mr. Murphy. The----
    Mr. Silvers. Economically dominant. I mean, I refer to our 
February 2009 report, where, in general, the warrants were a 
small fraction of the value of the preferred, were they not?
    Mr. Murphy. That's correct.
    Mr. Silvers. All right. And was the government not, 
effectively, the guarantor of these firms?
    Mr. Murphy. That is--well, that's correct.
    Mr. Silvers. All right. So, in what sense was the 
government's interest the same interest as the same common 
stockholder's?
    Mr. Murphy. I was not insinuating what they were.
    Mr. Silvers. Okay. Now----
    Mr. Murphy. If you read my report----
    Mr. Silvers. Now that----
    Mr. Murphy [continuing]. I----
    Mr. Silvers. No, but--stop.
    Mr. Murphy. Okay.
    Mr. Silvers. What was the public interest in this 
circumstance? Was it to maximize the financial payout, risk--on 
a risk-adjusted basis--to the public of its investment in these 
firms? Is that an adequate description of the public interest?
    Mr. Murphy. Yes.
    Mr. Silvers. Yes, it is.
    Mr. Murphy. In general terms, yes.
    Mr. Silvers. All right. So then, are you aware of this 
committee's February 2009 report finding that we underpaid, by 
30 percent, roughly, for the securities we purchased, in the 
capital purchase program, from the nine major banks and AIG?
    Mr. Murphy. Not the details, but, yes, the finding.
    Mr. Silvers. All right. So, would you agree that we started 
off on the wrong foot by doing that, that we should have taken 
100 percent?
    Mr. Murphy. It's beyond the scope of my testimony.
    Mr. Silvers. Well, doesn't it flow logically, from your 
proposition, that it's all about that narrow interest? How can 
it be that we should be structuring executive pay to achieve 
this narrow financial interest? And we start off, essentially, 
throwing that financial interest to the wind and acting in a 
manner precisely contrary to the way that any financial actor 
would act in this circumstance. Why does one not flow 
completely from the other?
    Mr. Murphy. Taxpayers had a legitimate interest in the 
compensation policies to protect their interest and to maximize 
the return on their interest.
    Mr. Silvers. So--but, not in the interest to get full value 
for their money when they made the investment?
    Mr. Murphy. They should have received full value for the 
money when they made the investment.
    Mr. Silvers Okay, good.
    Now, here's my second question. You said, earlier in your 
testimony, that you thought folks had been punished--what was 
my quote? You said, you thought that the executives involved in 
these firms have been adequately punished or severe--I forget 
the quote exactly. I'm trying to find my notes. ``Clearly, they 
were punished for their actions,'' that's a quote from your 
earlier testimony.
    Mr. Murphy. The----
    Mr. Silvers. Am I quoting you correctly?
    Mr. Murphy. Yes, that was in----
    Mr. Silvers. Okay.
    Mr. Murphy [continuing]. Regard to the people----
    Mr. Silvers. Do you know----
    Mr. Murphy [continuing]. At Bear----
    Mr. Silvers. Do you know--well, you--you made a broad 
statement. Let's take Bear Stearns. To your knowledge, is any 
executive of Bear Stearns homeless today as we sit here?
    Mr. Murphy. Not to my knowledge.
    Mr. Silvers. Is any executive of Bear Stearns drawing 
unemployment?
    Mr. Murphy. Not to my knowledge.
    Mr. Silvers. Is any executive of--has any executive of Bear 
Stearns had to take their children out of college----
    Mr. Murphy. Not to my----
    Mr. Silvers [continuing]. And put them to work----
    Mr. Murphy [continuing]. Knowledge.
    Mr. Silvers [continuing]. To support their family?
    Mr. Murphy. Not to my knowledge.
    Mr. Silvers. Has any executive of Bear Stearns lost their 
healthcare and had to go to an emergency room to get it?
    Mr. Murphy. Not to my knowledge.
    Mr. Silvers. All right. Has any executive of Bear Stearns 
had to--has any executive of Bear Stearns suffered in any 
respect, comparably, to that of the millions of Americans whose 
lives they destroyed?
    [Pause.]
    My time is expired.
    The Chairman. Dr. Troske.
    Dr. Troske. Thank you.
    Ms. Orens, I guess I'll ask you a similar question that I 
asked Mr. Feinberg. You've worked with these TARP companies. Do 
you think they, in essence, scrambled to get out from under his 
purview by--because they were concerned about the impact that 
he was going to have on their pay?
    Ms. Orens. I think it's more--a little bit more complex, 
Dr. Troske. From the moment that anyone became a TARP 
participant--and I think this was part of that unknown aspect 
of TARP and--you know, it was one thing in October, and it 
changed a bit later--you became a tainted company. Companies 
felt that they were just being looked at as if they were, you 
know, severely at a disadvantage and in terrible shape, when 
some of them thought that they'd actually taken the money and 
been patriotic. So, you had a number of companies who really 
felt like, you know, they were tainted. It wasn't even the--the 
compensation just exacerbated it, but they felt--TARP became 
just very negative. Their--you know, their share price, 
everything was affected. And so, I think they acted, those that 
went, about July--a number of them paid back, in the first big 
group. They did it for both reasons. But, I will tell you, they 
did it more for the taint than they did it for the comp, 
initially.
    Dr. Troske. Thank you.
    I want to ask a question. So, recent article in the New 
Yorker magazine claims that capital had become accustomed to 
saying yes to talent, even in cases where talent does not end 
up being all that talented. I guess the implication seems to be 
that executives are overpaid and they're not worth what 
they're--the value that they bring is less than the 
compensation that they've received. Is that your opinion? Do 
you think that there's any evidence----
    Ms. Orens. I think they're----
    Dr. Troske [continuing]. That suggests that?
    Ms. Orens [continuing]. Just like athletes and actors and 
actresses, some points people are definitely not worth the 
money that they've been paid, but they've convinced someone or 
have been good enough for a long enough period of time. I 
think, unfortunately, companies don't do a good enough job of 
determining that people are really worth their contribution, 
not just on a market basis, but that if I'm going to pay 
somebody several million dollars, they're really--they really 
are very good. I don't think they do a good job.
    Dr. Troske. Mr. White, I like to--your response to that.
    Mr. White. It's an excellent question. I agree there's--
that it is a complicated issue in determining the value in--
from an investor standpoint, I think the problem is, is that 
companies don't view that with a return-on-investment type of 
perspective. And it comes up in a number of facets of our 
discussion with them; for example, when they ask the market for 
equity. When they come for approval for equity, their question 
is always raised in, ``What's your limit?'' In other words, 
``How much can we get? What's--how much dilution will you 
allow?'' instead of, ``This is the amount of investment we need 
to make in the management team, and this is the return we 
expect on it, and this is how we're going to measure it over 
time, and adjust, if our approach to this is incorrect.'' So, I 
think that the philosophy of how they pay doesn't lend itself 
well to making that evaluation.
    Dr. Troske. Okay. Let me ask you another question. We 
talked a little bit about ``say on pay.'' Mr. White, from 
investors--is that something meaningful? I mean, a nonbinding 
vote--is that--do you think that that's--has any impact?
    Mr. White. I think it has tremendous potential to bring 
equityowners--long-term equityowners more into the discussion 
and more into a role of oversight. If there's anything that, 
you know, I would have to say is--been missing in the issue of 
executive compensation, is a greater scrutiny from long-term 
owners. Right? We care about the issue, but we simply haven't 
done enough. And I think that is one vehicle that will 
facilitate that.
    Dr. Troske. Thank you.
    The Chairman. Superintendent Neiman.
    Mr. Neiman. Thank you.
    Most of the focus and discussion so far has been on the 
compensation of sales and revenue generators within our large 
firms. But, what about the risk-and-control functions? And, 
while I've seen instances of senior risk and credit folks being 
attracted away with big comp packages, overall I think the 
surveys will show that they are compensated at significantly 
less levels. There's a recent IIF, Institute International 
Finance, study out on compensation in wholesale institutions. 
So, I'm interested in--on your views on both the level of 
compensation and the incentives--and really, it does relate to 
the independence, as well--with respect to risk and control and 
compliance folks.
    Who'd like to start?
    Ms. Orens. I'll be happy to start.
    Mr. Neiman. Go ahead. Ms. Orens.
    Ms. Orens. It's an excellent point, Mr. Neiman, another 
area we would look to what went wrong, historically. It's--
particularly within the Wall-Street-type firms, I think, as you 
well know, risk management was not a particularly attractive 
function, and you tended to report within the business unit, 
which meant that you really weren't going to criticize, to a 
large degree, what was going on. And maybe you had a dotted-
line relationship to the head of risk on a corporate basis. And 
now that's all changed.
    Mr. Neiman. And are there incentive programs out there for 
risk?
    Ms. Orens. Yes. You--it's part of, obviously, the Treasury 
regulations, as well, to determine how best to do that. But, 
they are no longer compensated within their line of business, 
nor--typically would those leaders--have final say about how 
they've done their role. The determination will be done by the 
head of risk. It will normally be a more corporate-style 
payout--you know, less short-term, more long-terms; actually, 
an attractive salary, because it's a very professional-type 
position. It's being compensated, as it should be, to the type 
of perspective that person needs to have.
    Mr. Neiman. I want to shift onto some international global 
competitiveness issues. You know, there are a number of areas 
where the U.S. has been a first mover on many issues in 
regulatory reform. But, I'm interested in the impact. And you 
hear the feedback. If we are the first mover in areas of 
compensation, what impact will that have on where individuals--
will they shift to jurisdictions with less constrictive 
compensation schedules? You know, we heard Mr. Feinberg say 
that, despite the rules he put into place, 85 percent were 
still there after that--a year after. Any thoughts on these 
issues--the international issues? Should there be anything 
restraining the U.S. from proceeding with a stringent regime?
    Mr. Murphy. I'll start, if I may.
    Mr. Neiman. Mr. Murphy.
    Mr. Murphy. This is--the United States is still the place 
you want to be if you're an executive, even given the current 
restrictions. If we look at what's going on in Europe in the 
financial institutions, they have adopted more of a rule-based 
system and not a principles-based approach. They're--I think, 
will be much more restrictive, in years to come, than anything 
I anticipate out of the United States.
    Ms. Orens. Yeah. I think we're having pressure, obviously, 
from Europe to adopt similar-type programs. And, the U.K. is 
currently, kind of, in between, also. They don't totally want 
to go the full route of the European Parliament.
    Mr. Neiman. Then my--I think--my recollection, after London 
bank tax, is that what they feared was a big shift. There--it--
I don't think there was a--any major impact on movement of 
employees outside of----
    Ms. Orens. It was a 1-year event. You have to watch it 
about 1-year events. If there's sustained view that the U.K. 
doesn't want to have people there, U.S. companies will--you 
know, their employees will say, ``I don't want to go to the 
U.K. if I'm going to be subject to those types of 
restrictions.'' So, I think coordination is important. And I--
but, I do think that the U.S. should keep to a more 
principled--even if there's some clear--you know, clearly some 
guidelines, but principles rather than fiats. And the Europeans 
now are just saying, ``They'll pay X in cash, X in stock, some 
of it will be contingent, et cetera.'' And, again, it's a one-
size-fits-all approach, assuming everybody in the world is 
exactly the same kind of company, and they're not.
    Mr. Neiman. Thank you.
    Ms. Orens. And I think it makes us uncompetitive, which is 
a problem right now. I don't think we want to lose those jobs.
    Mr. Neiman. Thank you.
    The Chairman. I want to thank the panelists for doing a 
great job. I want to thank you for coming. I want to thank you 
for what you had to say.
    And, with that, the hearing is adjourned.
    [Whereupon, at 1:10 p.m., the hearing was adjourned.]
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