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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TARP AND EXECUTIVE COMPENSATION RESTRICTIONS 


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64–160 2010

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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(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

THE HONORABLE TED KAUFMAN, Chair 

KENNETH TROSKE

J. MARK MCWATTERS

RICHARD H. NEIMAN

DAMON SILVERS


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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 


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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, factbased, and consensus-driven. I hope to help carry our work forward 

in exactly that spirit. 

We are here today to examine the executive compensation re- strictions 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. 


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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. 


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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. 


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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. 


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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 


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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. 


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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-tofail 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 

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lenges 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. 


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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 rulesbased 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 


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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. 


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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 

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place 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:] 


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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 


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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 


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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—— 


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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 


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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 


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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. 


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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 


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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? 


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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 longterm, 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 Mer- rill, 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 


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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. 


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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, 


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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 

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gress 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 


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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 


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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 Qand-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 


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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 valuedestroying. 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:] 


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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 


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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 

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lent 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:] 


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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 


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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:] 


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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. 


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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. 


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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. 


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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 whethVerDate Mar 15 2010 02:23 Mar 11, 2011 Jkt 064160 PO 00000 Frm 00097 Fmt 6633 Sfmt 6602 E:\HR\OC\A160.XXX A160

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er 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 


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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. 


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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. 

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erally, 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 


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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-isbreathe 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 


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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 


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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? 


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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. 


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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 


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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 


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normally be a more corporate-style payout—you know, less shortterm, 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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