time of crisis while some of these firms now have reported record profits and are handing out lavish bonuses some of these firms have not turned around the but to continue to follow reckless compensation practices this is because we currently have an irresponsible corporate culture where american c e o s are awarded large bonuses and generous stock options even when their companies perform poorly there has been an increase in the typical c e o pay in the us during the past twenty five years the total compensation and company heads in great britain canada japan and in much of all developed countries clearly americans are being rewarded over elsewhere even when per capita incomes of the countries do not differ very much while recent headlines on executive compensation have focused on financial firms we cannot ignore other sectors in fact the corporate library recently ranked all outside of finance as the highest paid worst performers are taking home more pay despite the fact that their businesses have done so badly that their stocks and they have laid off many employees american structures are out of control and the existing compensation structure cuts to the ability of our corporate governance system to function as we work to issued new guidelines on executive pay we need to ensure firms begin to better align pay with stockholder value i suggest moving beyond a non binding shareholder vote on executive compensation there's continued frustration with company boards that either fail to act in response to a successful non binding shareholder resolution or water of proposals boards can too easily amend or recent board adopted policies under the umbrella of obligations while i encourage open dialogue between shareholders directors and management i do but i believe in capitalism that means shareholder control at your hold or risk that's why we ought to have say on pay and it ought to be binding after thirty years of congress i'm not a real fan of non binding resolutions there's a special circumstance where companies too big to fail because at that point they have a quasar federal government the best solution is to break them up so that we don't have any one  amendment allows those firms to pay for the past cost of the too big to fail as well as provided before the fact fund to pay for the too big to fail problems of the future it also makes sense as long as there are those to do too big to fail and enjoy this implicit federal guarantee if they are government entities are federally guaranteed they should play by government salary rules which are a lot different from those that wall street is familiar with the best solution is for these firms to voluntarily divide themselves so that they're not too big to fail and we can go back to real capitalism shareholder control shareholder risk add a congress and a federal government that doesn't have to concern itself with salaries and other aspects of internal corporate decision making as young going to consume to believe a minute and twenty seconds regulate the compensation for companies that pay the tarp money back but we approved a multimillion dollar pay package for freddie and fannie who will never pay any of that money back now that's what i call picking winners and losers in this case unfortunately the losers win since the american people now own almost eighty percent of fannie mae we need good management to stop the bleeding and see if we can recoup at least some of the taxpayers money but more importantly we need consistent policy in this country i think it's important to  american people for committing trillions of their hard earned money to bail them out in the first place if my colleagues were so concerned about the taxpayers and not wall street why did they bail out wall street of the american taxpayer what president we need you to focus on jobs not raising taxes growing government and spending money we don't have on where are the jobs you promised the american people instead of more government the american people want more jobs  to increase financial stability should not be part of reforming fannie and freddie should not be either i'm disappointed that some of my friends on the other side forget that when they controlled congress for twelve years they did not and act meaningful reform of fannie and freddie last year the form committee mike oxley said quote we missed a golden opportunity that would have avoided a lot of the problems we're facing now if we hadn't had such a firm a logical position of the white house and the treasurer in the quote i hope we can come together this time republicans and democrats to explore good policy options to deal with fannie and freddie later this year turning back to executive compensation i've always felt that financial firms receiving taxpayer assistance should receive the most scrutiny with respect to their executive compensation practices one should go in and pay levels but to better protect investors and taxpayers in the future the government does have a role looking at a structure more broadly to ensure risk taking is properly aligned with rewards and doesn't pose a systemic risk i look forward to hearing from our witnesses  could be here to answer the question millions of dollars for bonuses to pay people to lose billions of dollars for the taxpayer and unfortunately for whatever reason that request was month he wanted to know the answer you know is a man of great patience i don't and he has a very strong attention span i don't think a month from now he will have forgotten the questions you want to ask you could write them down if you didn't will preserve them but yes we will have this but i also believe we talk about on the part of my republican colleagues because they don't want to do anything about the excessive pay in the private sector nor do they want to appear to not be doing anything about it so they're changing the subject and by the way we do not propose any specific limits on the pay in the private sector we do say that the shareholders should vote radical motion but we also say that there was a public spillover effect namely that the compensation packages often incentiv outlined and i concur with his position with regard to the appropriate request for someone else at this hearing of the head of the acting head of the f a a and i appreciate the chairman's explanation of why he thought we should segregate the panels in this manner but that really doesn't go to the comment that i think the gentleman from texas made that no one up here can remember the last time that a member of the minority requested someone to come to the panel to be able to witness and the majority party refused that appropriate one example one case one line of executive compensation that should be looked at is where taxpayer dollars are being used and that is in the area of fannie and freddie and beyond this point area of executive compensation there's a bigger issue that really we should be looking at and that is the announcement when the administration took action without any congressional input whatsoever of the unilateral left of the four hundred billion dollars cap on fannie freddie bailout and authorize unlimited taxpayer funds to use both terms over the next three years again we have requested a hearing on this expert or the chairman not to allow a witness on this and again he has refused meanwhile however the republican party has come back with our proposals but they have been ignored the republicans on this committee has put forth proposals to reform these institutions because it is indisputable that fannie and freddie with a central role in the mortgage meltdown that we've experienced they've helped ignite the economic crisis that has left on a few points many of these points i will aberrate in my book which was published just a few days ago our financial system failed to perform the key roles that exposed to perform in our society managing risk in allocating capital a good financial system performs functions that low transaction costs our financial system create a risk a mess manage capital all the while generating huge transaction costs as a sector garnered some forty percent of all corporate profits the years before the crisis so deceptive with the systems a preacher counting that the banks had employed that as a crisis evolve they didn't even know their own balance sheet so they knew that they could know that any other bank we ma congratulate ourselves that we have managed to pull back from the brink but we should not forget that it was the financial sector that brought us to the brink of disaster while the failures of the financial system that led to the economy to the brink of ruin are by now obvious the families our financial system are more pervasive small medium sized enterprises found it difficult to get credit even as the financial system was pushing credit on poor people beyond their ability to repay modern technology allows for the creation of an efficient low cost electronic payment mechanism help ordinary americans face the important risk they confronted such as the risk of homeownership or the risk of inflation indeed i am in total agreement with paul volcker it is hard to find evidence of any real growth associated with many of the so called innovations in our financial system though it is easy to see the link between those innovations in disaster that confronted our economy underlying all these failures as a simple point which seems to been forgotten but now to marco markets are a means to an end not end in themselves we should remember too that this is not the first time that our banks have been bailed out bearing the consequences of their bad lending market economies work to produce growth and efficiency but only when private reward and social returns are aligned unfortunately in the financial sector both individual incentives were misaligned which is why this discussion of incentives is so important the consequences of the failures of the financial system were not born just by those in sector but by homeowners retirees workers and taxpayers and not just in this country but also around the world are now it has economists refer to these impacts and others are massive and it is a reason why it is perfectly appropriate that  congress should be concerned the presence of extra nowadays is one of the reasons why the sector needs to be regulated in previous testimony i have explained what kinds of regulations are required to reduce the risk of adverse externalities i've also explained the danger of excessive risk taking how they can be curtailed i have explained the dangers posed by under reagan and riveted markets i regret to say that so far more than a year after the crisis has been done in either account the too big to fail banks create perverse incentives which also have a lot to do with what happened i want to focus my remaining time on the issue of incentives and executive compensation as i said there are also key issues of organizational incentives especially those  that are too big to fail too big to be resolved or too intertwined to fail the one thing that economists agree upon is that incentives matter and even a casual look at the convention center structures with payment focused on short to performance and managers not bearing the downside consequences of their mistakes suggested that they would lead to short sighted behavior and excessive risk taking and so they did let me try to can summarize some of the general remarks that i make in the written testimony that i hope will be entered in the record flooding sent to play an important role as i said before in this and other failures the financial system to perform a central role was not only did they encourage moreover many of the compensation schemes actually provide incentives for deceptive accounting markets only allocate resources well when information is good but the incentive structures and corey distortions the provision of information the design of being center both the symptom and the cause of the instability of the financial services sector and our capital markets i regret to say that the problem continues yesterday told us that a corporation is a person with first amendment rights but compensation the boards of wall street financial institutions implemented pay plans that were a major and direct cause of the financial meltdown of capitalism protected themselves by risk by limiting their downside exposure grandmother would have said a shonda since the only portion of pay the tarp did not restrict was based pay everybody got a raise for example wells fargo's board approved a five hundred and twenty two percent salary increase for the from nine hundred thousand dollars to five million six hundred thousand the extra was paid in stock and we've seen this throughout the financial services center they took the opportunity when the stock market was at its rock bottom to load everybody up with buckets of new and options so i'm predicting now that the next time you have me back we'll be talking about how outrageous it is that they got insane pay packages again but now now is when they're happening and we will see the payout later on these enormous grants of stock issued historic low prices are resulting in enormous payouts based on the infusion from the bailouts and the overall market i completely agree with what the members of this committee have said about taxpayer money this is taxpayer money they are getting paid as though they earned that money the money that the taxpayers put into it they are taking a piece off of the top of the taxpayers money that's absolutely right it's an outrage so the claw backs that were required as a result of this committee's work are also being subverted as professor babcock said they are there's a lot of weasel language being instituted into the claw back saying that bad faith has to be required or some kind of  or feeling or intention has to be required to claw back should apply no matter what the reason for the correction otherwise is to assess or starlix said they create a perverse incentive i ask this committee to lead the way to put an end to too big to fail the term and the concept if a company is too big to fail it is too big to succeed or as the title of us thoughtful new book by robert posen puts it it's too big to save if an enterprise is too big to fail it is utility and it should be regulated like one though that the remedy here is to in fact as i believe this committee will be recommending abolishing fannie mae and freddie macin their current form and coming up with a whole system of housing finance that's the approach rather than the piecemeal one but the fact is that there were two bills are fungible and money that goes out to pay bonuses reduces the capital base of the bank and to the extent that that money that's been paid out in bonuses whatever the form reduces their ability to win and that's obviously a much more significant amount but let me just emphasize one point since we're talking about incentives the president's proposal the overall complex problem of our wages now as a given factor in my congressional district in pennsylvania the average wage is about thirteen dollars an hour and if you multiply two thousand working hours a year that comes to an annual income of about on average twenty six thousand dollars in the last nine months or year i've had several witnesses  before my subcommittee and we've gotten down to the question of our compensation and what we do about it and i for one am not certain that we put enough direct attention to the matter and could get into until after the success of the operation then i'll be damn annoyed whatever the bill but the reality is some of these people and that's not the topic of our discussion today but are in the hedge fund industry and they pressed him because i was offended the fact the only paid a tax rate fifteen percent because of the structure of our voting human capital gains as opposed to regular tax and after about fifteen twenty minutes with great annoyance he finally put his i go back to my congressional district of thirteen dollars an hour away gentlemen that was testifying before his hourly wage one million three hundred thousand dollars that's what he makes every hour of the year when you do the mathematics of that he makes a hundred thousand times the average wage of a average wondering whether or not we're not approaching this from perhaps the correct direction should we be looking at what first of all what do we need to get to a balanced a budget because these people aren't just there i agree with with you that the basic framework for thinking about equity should be through our tax system and that centers are related because the question is would they work a little bit less hard if they paid higher taxes i think the answer is clearly no it would have not would not have a significantly adverse effect the issues that i talked about and some of the others were that the structure of the pay of the executives in the banks had strong effect and the reason we were interested in and those effects affected the tax payer because it led to the economy falling apart that what they do imposes costs on the rest of us and therefore is a legitimate source of concern as opposed to lots of other areas where people get paid but it is not as much a legitimate source of make one remark as we keep talking about pay related to performance very difficult to identify what you mean by performance when a company does well as measured by the stock going up and the reason the stock is going up because the stock market is as pointed out they get a low price because weaver buys it is buying into a company with mis compensated executives and then finally they have the opportunity to invest the proceeds in another company was bad got bad corporate governance and overpaid executives  like this with an observation it's obvious that the establishment in this country is under attack by populism in a way that has not occurred in most of our lifetimes the results in massachusetts were not the victory i think mostly for any one political party but a victory for populism against the establishment and it's not a coincidence the supreme court decided yesterday to overrule one hundred years of precedents something they would ordinary ordinarily find very painful in order to arm the death star so that the empire can strike back and whatever we do whatever we say here today could easily be drowned out by unlimited corporate publicity and propaganda i want to pick up on the comments of the gentleman from pennsylvania i think this committee has done a good job pretty much on executive compensation when compared to the ways and means committee which is continued to our standpoint which we voted for and sent over there it's always the senate in any case but the tax laws of this country not only allow a fifteen percent tax on hedge fund managers  but zero percent tax if they incorporate their hedge fund in the caribbean and you compare that to the probably twenty eight percent rate paid by the gentleman constituents in pennsylvania and you see that we don't exactly have a fair tax system i don't i think that the gentleman who makes a million dollars an hour is going to work less hard if his after tax compensation is reduced to a paltry six hundred thousand dollars an hour when we talk about compensation we ought to be talking about the entire compensation package not just bonuses and we are in this committee we have made life a little difficult for top executives particularly those who got money there is some social utility of that beyond its obvious psychological benefits to those of us in the room and that is we have inspired these companies to pay back the tarp money far more quickly than they would have and now we are focused on those who are too big to fail we are inconveniencing them to the greatest extent we can right now and hopefully that will inspire them to break up so that we will have financial institutions the demise of any one of which will not imperil the system and so here we're talking about their compensation last month we imposed fees on those of over fifty billion dollars in size and i hope that they'll get the message and become medium sized institutions the problem i have is in this effort to try to design compensation systems that do not incentivize excessive risk and that properly ward performance i'm not sure we can do it i hope that there would be none of these companies getting federal subsid implicit federal guarantees in which case i don't think we have to do it but my problem relates to a circumstance where let's say you're trading a portfolio and you have your aim of course might be to have one great year and get an enormous bonus because in this country we tend to tally things up at the end of a calendar year and give you something valuable now it said well we'll give you restricted stock but that still provides a pretty good incentive to take the big risks and to get the big bonus in less you believe the risk you're taking will turn out poorly and will turn out so poorly that they dramatically affect the value of the entire company or that they inspire your other executives to take equally enormous risk so assume that somebody is managing one percent of the company's money they do not believe that their behavior will employees to voluntarily return their bonuses he said he wouldn't executives later agreed to pay back forty five hundred sixty five million dollars of those bonuses but in december of last year we learned that only nineteen million we didn't relate giving them money to their behavior not just with respect to the issue of compensation but also with respect to lending that was the reason we were giving the money and that  point is that the u s taxpayer was not when it gave the money compensated for the risk that they bore in some cases we got repaid but to talk about what an arm's length transaction we ought to look at the transaction that buffett had with goldman sachs and that was an arm's length transaction if we wanted what would have been a fair compensation to the taxpayer it would have reflected those terms and we would have gotten back a lot more missed and better understanding of how the culture of excessive lending abuse of leverage and excessive compensation contributed to the financial crisis this applies across the board for consumers to run over their head with maxed out credit cards on homes they couldn't afford to major financial firms leveraged thirty five to one is there anything that the government can and should do in the future to prevent a similar carefree in a responsible mindset from taking hold and exposing our financial system to another major crisis professor is why the too big to fail bank issue too intertwined is such is so critical but even when we affect incentives will never do it perfectly which is why we need constraints on leverage our behaviors products derivatives and finally in order for our economic system to work there has to be transparency where the discipline of the market the way the system is set up right now it's impossible for capital markets to or your thoughts i'm going to suggest to you that the executive compensation issues on which we all agree the excessive risk the excessive period the short term focus et are more the symptom than the disease and that if we treat this symptom we will be at best ineffective and at worst perhaps counterproductive and that includes bills like the one that the chairman talked about that was  tever it was last year before and that is the root of the problem to get at the root of the problem two things one of which mr already alluded to and one is the a bill is a greater ability for shareholders  to express their displeasure with executives the performs the company or executive compensation through the board by having an alternative mode of directors given appropriate thresholds so that that so that that ability  abused and so that would be one suggestion i would have is to get to the root of the problem rather than trying to micromanage the pay give the shareholders a greater ability to express their displeasure in the way that i think is appropriate through the board rather than through direct control of the pay and second and i know the chairman is going to have a hearing on this subject is the short term focus on pay i would like to suggest is perhaps simply a reflection on the short term focus of the market and that that may be the problem is not so much the pe but the fact that buy and hold is dead and all kinds of other things like that such that we're focused on quarterly earnings quarterly earnings and i to operate inside a public company at one time and i mean you know it was all about this border everything was about this border the whole world revolved around this quarter next quarter next year be damned you know and that is that short term that the short term pay and excessive risk taking and pay is simply a reflection of the short term focus on the markets that perhaps we should be looking at is are there other things we can do to change that short term focus on the markets one of which i've suggested is going to semi annual financial statements rather than quarterly now that's not a panacea but that there may be other things throw those out and love to hear the result of that is that when it comes to institutions like the financial which can put at risk taxpayer money in our whole economic system we have to not only get at the root cause vicious circle clawbacks is one way of addressing that as an issue because if you know that no matter ten years into the future of your numbers are you going to give the money back that keep people focused on the long term but with regard to the issue of a holding period and looking at that in terms of taxes i just remind the committee that the largest collection of investment capital of all six point three trillion dollars is  twitter and instant messages everything else coming faster and trying to slow that down i think the fact is that one way or another investors are going to get information we're very close to a point now where a company financials which are internally available and almost real time basis become available to everybody i'm not sure that that really solves the problem but i agree with you that that is the right question to ask two comments on what you said the first is we were talking about the number forty percent of all corporate profits were in the financial sector we have to remember that a lot of that was phantom profits they weren't real profits and that shows the difficulty of measuring performance in the financial sector they have an enormous discretion to create money as it were and then later on to have losses making all the more important the issue that we've been talking about a long term perspective the second point i couldn't agree more there's something about the sector about the fact that there's imperfect competition that leads to sustainable over above normal profits and particularly true in the big banks point large increase in concentration in the financial industry and when it comes to particular issues like credit cards very american people were on one side and warren buffett with his arm length arms length transaction with on another side a much preferable side and it seems to me we ought to learn from mistakes and so far i you never perfectly overcome but i think some of the things that we've been talking about are ways to mitigate some of the consequences we have to recognize that in some ways things have gotten worse  the gentleman from texas thank you mr chairman mr chairman we're dealing today with irony of ironies because most who oppose raising the minimum wage to seven twenty five an  our supporters and our supporters of maintaining a bonus structure that creates now the public may not understand the make risk and perverse incentives and proprietary trading but the public does understand this that it took us years to raise the minimum wage to seven twenty five an hour and if a person and there is such a person gets a bonus of sixty nine point seven million dollars it will take a minimum wage worker four thousand six hundred twenty two year to make sixty nine in one day than a minimum wage worker makes in a year and there has reason to invade a hedge fund manager who makes more in ten minutes than the average worker makes in a year don't do it based upon perverse incentives that that create risk and that's what this is all about perverse incentives that create the risk that people make as much as they can of this committee and our current chairman was the ranking member and one of the first things we dealt with when i came on this committee was propose and i was talking to a reporter two days ago who said one of the problems in washington is that the truth doesn't matter whether or not you can say the law a lot over and over and over again so that everybody buys wondering if you could if you could do an overlay with what happened with the mortgages the banks the mortgage companies that did not go into the subprime even though they didn't make as much money the particular the wall street so called investment bank will change their compensation structure without congressional legislative  e the financial crisis fall of two thousand and eight and the resulting bailouts and further infusions of cash along the way here we are again  with the public outrage and wall street on handing out this year a record one hundred forty billion dollars in bonuses and you know when we take a look at that kind of money and try to put it in some kind of perspective in context according the washington examiner this is ten percent of the entire u s deficit or three times the amount budgeted for education or four times the amount for homeland security is vastly more money than we have pledged for the reconstruction of haiti and an amount that could prevent millions hundreds of millions of home foreclosures no wonder that  hardworking americans thought as was brought out in questioning that ok we need to bail out wall street we don't want to go over the cliff understood it was their hard earned dollars that were going towards  that nevertheless wanted to see something other than banks buying up banks and handing themselves out bonuses as a result of trading activity rather than making those loans or reading go shooting those mortgages  families understand that they've lost jobs and they've lost homes and bankers still are getting billions of and we still haven't gotten a hold over the all of the issues about the risky behavior that has brought us here to this day you know i serve i listen to the bankers and sometimes they tell me that they're offended that we're even talking about regulating their bonuses and their compensation that we don't understand that they're the best and the brightest or that it has to be now for retention otherwise it would i don't know go do i don't know what i get offended when they tell themselves tell me they have the best and the brightest because i happen to think that there's a lot of people who are very bright and cheery good and in fact the best are involved in teach for america or in our public schools or in our hospitals or a social workers and they seem to work very hard was substantially less so you know when i served on the homeland regret sometimes like some of the people that i hear saying that we can't touch their pay they don't get how angry hardworking americans are and how people in central ohio think somehow relate to your productivity and don't get it that when you ruin an economy you get these kind of bonuses so you know i know you've been around this times already focus of the post and run reform legislation sarbanes oxley and regulation has all been on what i call the supply side of corporate governance managers have to do what accounts have to do we've not really focused on the demand side on what shareholders have to do and the fact that you should have in here the heads of all the mutual funds the assistant secretary responsible for risk these are people who routinely vote in favor of these boards of directors in favor of these pay plans because no one is looking at them no one's paying any attention to them i think we need to remind them what fiduciary obligation is all about and that it's in their economic interest to look at pay as a risk factor about so far here one that those aspects of the structure of the incentive schemes compensation schemes that put it risk the national economy and taxpayer money have to be regulated in a whole variety of ways and the second point is that the tax structure as a whole has to be designed better to address the sense of equity in our system and that the arguments have been made before that more progress taxation or that taxing capital gains would have adverse make additional profits the original the original premise was that that money would be long and it is not now i will say  this flip side of the argument they're using those trading profits to cover some of their lending and some ways that make the bank businesses and i do think the american people do believe that by being able to borrow cheaply from the fed and some of the guarantees that have been extended that that money is finding its way into  lose people are normally rewarded for success and they're punished for failure now we went through an experience where between the middle of two thousand and seven and the end of two thousand and eight that eighteen month period we lost twelve any sign that since these bailouts began that the institutions and the individuals on wall street and in major banks who were responsible for the decisions that led to that loss of twelve trillion dollars actually were held accountable for any sign at all professor the who actually were the people responsible for their losses that led to the government bailout and he wouldn't tell me their names isn't it possible that the people who actually led to the financial disaster not only in america but around the world are still doing the same jobs and every equity is often ten to one or more right professor if it were only ten to one i think we would think that is very conservative it's been up to thirty forty to one and that's an example of excessive risk taking with very little social benefit that you can with that high level of risk taking well let's say it was only ten to one isn't it true that every dollar that's paid on executive compensation means ten dollars less in loan bil and therefore not available as the basis of the leverage that the bank can lend the managers of these institutions on wall street and the big banks around the country have any incentive at all in an economy that's based the base of the company large or the net worth of the company larger it will make larger profits in the long run and therefore in the long run the company is doing better and i'll get an appropriate return but that's