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COMPENSATION IN THE FINANCIAL INDUSTRY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

JANUARY 22, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–98 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

January 22, 2010 .............................................................................................. 1 

Appendix: 

January 22, 2010 .............................................................................................. 41 

WITNESSES 

FRIDAY, JANUARY 22, 2010 

Bebchuk, Lucian A., William J. Friedman and Alicia Townsend Friedman 

Professor of Law, Economics, and Finance, and Director of the Corporate 

Governance Program, Harvard Law School ....................................................... 9 

Minow, Nell, Editor, The Corporate Library ......................................................... 12 

Stiglitz, Joseph E., University Professor, Columbia Business School ................. 10 

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 42 

Bebchuk, Lucian A. .......................................................................................... 45 

Minow, Nell ....................................................................................................... 52 

Stiglitz, Joseph E. ............................................................................................. 68 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hensarling, Hon. Jeb: 

Written statement of the Center On Executive Compensation .................... 76 

‘‘Bank CEO Incentives and the Credit Crisis’’ ............................................... 82 

(1) 

COMPENSATION IN THE 

FINANCIAL INDUSTRY 

Friday, January 22, 2010 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Sherman, 

Moore of Kansas, Miller of North Carolina, Green, Cleaver, Bean, 

Perlmutter, Donnelly, Foster, Carson, Kilroy, Grayson; Bachus, 

Hensarling, Garrett, Neugebauer, Campbell, Lee, and Lance. 

The CHAIRMAN. The hearing will come to order. And we have 10 

minutes on each side. Since there are not many members here, we 

can get right into the questioning and have some significant—everybody will be able to ask questions. I will say that I want to announce that on February 5th, we are going to have a joint hearing 

with the Committee on Small Business on the question of why 

more money isn’t being lent. And we are picking February 5th because we agreed to have a joint hearing which means that 100 

Members of the House will be the operative body. So this will be 

one day where, if Members come to us and say I can’t make it, we 

will not be totally unhappy; but we did feel that this is something 

that the Small Business Committee has a very real interest in this 

as well. 

We have the chairman and the ranking member of the Small 

Business Committee on this committee so we will do that one together. 

And this hearing will now begin. We have 10 minutes on each 

side for opening statements, and I begin by recognizing for 2 minutes the gentleman from Indiana, Mr. Carson. 

Mr. CARSON. Thank you, Mr. Chairman. As we all know, the 

American taxpayers are angry that their tax dollars lifted many financial firms in the time of crisis while some of these same firms 

now have reported record profits and are handing out lavish bonuses. Some of these firms have not turned around but continue to 

follow reckless compensation practices. This is because we currently have an irresponsible corporate culture where American 

CEOs are awarded large bonuses and generous stock options even 

when their companies perform poorly. 

There has been an increase in the typical CEO pay in the United 

States during the past 25 years. The total real compensation of 

CEOs in large publicly traded companies grew sixfold during this 

2 

period. The case against the pay of American CEOs looks even 

more powerful by recognizing that the typical American company 

head receives greater total compensation than company heads in 

Great Britain, Canada, Japan, Spain, and in much of all developed 

countries. Clearly, American CEOs are being rewarded over CEOs 

elsewhere, even when per capita income of the countries do not differ by very much. 

While recent headlines on executive compensation are focused on 

financial firms, we cannot ignore other sectors. In fact, the corporate library recently ranked five CEOs, all outside of finance, the 

highest paid, worst performers. These CEOs are taking home more 

pay, despite the fact that their businesses have done so badly, that 

their stocks have tanked, and they have laid off many employees. 

American compensation structures are out of control and the existing compensation structure cuts to the ability of our corporate 

governance system to function. As we work to issue new guidelines 

on executive pay, we need to ensure firms begin to better align pay 

with stockholder value. 

I suggest moving beyond a nonbinding shareholder vote on executive compensation. There is continued frustration with company 

boards that either failed to act in response to a successful nonbinding shareholder resolution or a watered-down implementation 

of proposals. Boards can too easily amend or rescind board-adopted 

policies under the umbrella of fiduciary duty obligations. 

While I encourage open dialogue between shareholders, directors, 

and management, I do feel shareholders have the incentive to act 

responsibly in determining fair and equitable pay for executives of 

firms. 

Thank you, and I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Alabama—I believe the gentleman used 21⁄2 minutes, so we will have 71⁄2 left. The gentleman 

from Alabama for 21⁄2 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman. Mr. Chairman, since 

you have been chairman, I think you have been very fair to committee Republicans. You have invited witnesses that we have requested and often invited more than just one of our choices at certain hearings. Of course, it is traditional that the Republicans get 

to call one witness at a hearing. I have always appreciated your 

consideration and I know my colleagues have too. Because you 

have always been accommodating of our requests, the decision to 

deny Republicans our witness choice for this hearing is both disappointing and puzzling. I am not sure what makes this hearing 

any different from any other one. 

So I would ask why we were denied our choice of witness. That 

witness was Ed DeMarco. He is the acting director of the Federal 

Housing Financial Agency, which oversees Fannie Mae and Freddie 

Mac. He is the person who, along with the Treasury Department, 

approved a $42 million payday for 12 executives of the failed GSEs, 

including $6 million to the chief executives. 

During this hearing on compensation in the financial industry, 

we assumed we would be permitted to examine a real-life case of 

excessive unreasonable executive pay at the two companies which 

have received more extraordinary taxpayer assistance over—$110 

billion and counting—than any others. But we were wrong. 

3 

Mr. Chairman, $6 million is 15 times more than what the President earns and 30 times more than what a Cabinet Secretary 

earns. The Christmas Eve announcement of these bonuses was 

greeted by one commentator by saying the taxpayers got scrooged. 

Because the regulators failed to use their authority to block these 

colossal paydays of government employees—you have referred to 

them as public utilities—Congress should step in. 

I and several of my Republican colleagues have introduced legislation to protect taxpayers from having to foot the bill for any more 

multibillion-dollar tax packages. 

Mr. Chairman, I think the taxpayers are right. Whether it is any 

financial company, if the government is heavily subsidizing that 

company, they have a right to ask— 

The CHAIRMAN. If you wish to continue— 

Mr. BACHUS. Another 30 seconds. They have a right to ask: Are 

my tax dollars subsidizing these large salaries? And they certainly 

have the right to hear Mr. DeMarco and find out why, on Christmas Eve, they learned that they would be paying some tremendous 

bonuses. 

The legislation also expresses a sense of Congress that each executive should return the executive pay they received in 2009 so we 

can reduce the Federal budget. 

Mr. Chairman, I do appreciate your pledge to invite Mr. DeMarco 

to testify at a hearing in late February, but I am disappointed that 

the American taxpayers will have to wait another 5 weeks for an 

explanation from the Obama Administration about this Christmas 

Eve raid on the Treasury to pay these executives. 

I yield back the balance of my time. 

The CHAIRMAN. The gentleman consumed 3 minutes. There will 

be 7 minutes on his side and 71⁄2 on this side. I recognize the gentleman from California. 

Mr. SHERMAN. Thank you. 

The CHAIRMAN. For 21⁄2 minutes. 

Mr. SHERMAN. Yes. I believe in capitalism, that means shareholder control, shareholder risk. That is why we should have a say 

on pay and it ought to be binding. After 13 years in Congress, I 

am not a real fan of nonbinding resolutions. There is a special circumstance where a company is too-big-to-fail because at that point, 

they have a quasi-Federal Government guarantee. The best solution is to break them up so that we don’t have anyone who is toobig-to-fail. 

I commend the gentleman from Pennsylvania whose amendment 

would at least allow the Administration to do just that. Until then, 

those that are too-big-to-fail should face fees to recoup for the taxpayer the benefits that the organizations get from their implicit 

Federal guarantee. 

The bill we passed in this committee, in this House, does that, 

and, with Peter’s amendment, allows those firms to pay for the 

past cost of the too-big-to-fail as well as provide it a before-the-fact 

fund to pay for the too-big-to-fail problems of the future. It also 

makes sense as long as there are those that are too-big-to-fail and 

enjoy the implicit Federal guarantee, if they are quasi-government 

entities or quasi-federally guaranteed, they should play by governVerDate Nov 24 2008 15:05 May 28, 2010 Jkt 056241 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\56241.TXT TERRIE
4 

ment salary rules, which are a lot different from those that Wall 

Street is familiar with. 

The best solution is for these firms to voluntarily divide themselves so they are not too-big-to-fail. And we can go back to real 

capitalism—shareholder control, shareholder risk—and a Congress 

and a Federal Government that doesn’t have to concern itself with 

salaries and other aspects of internal corporate decisionmaking 

I yield back. 

The CHAIRMAN. The gentleman has consumed, I believe, 1 

minute and 20 seconds. So that will leave us on this side about 61⁄2

minutes. And the gentleman from Texas is recognized for 21⁄4 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Let me see if I can 

get this straight. We are going to regulate the compensation for 

companies that paid the TARP money back, but we approved a 

multimillion-dollar pay package for Freddie and Fannie who will 

never pay any of that money back. Now, that is what I call picking 

winners and losers. And in this case, unfortunately, the losers win. 

Since the American people now own almost 80 percent of Fannie 

Mae, we need good management to stop the bleeding and see if we 

can recoup at least some of the taxpayers’ money. But more importantly, we need consistent policy in this country. 

I think it is important to kind of reflect on what is going on 

today. We are going to regulate compensation, tell companies what 

they can and cannot do, break them up if some bureaucrat thinks 

they are too big, tax their products. By the way, I am not taking 

about Venezuela, I am talking about what is going on in the United 

States. The American people are getting tired of the government 

telling them what to do. 

So today, we are going to talk about more big-government intervention into America’s companies. We are going to try to look tough 

on the financial institutions so we can appease the anger of the 

American people for committing trillions of their hard-earned 

money to bail these entities out in the first place. 

If any colleagues were so concerned about the taxpayers and not 

Wall Street, why did they bail out Wall Street at the expense of 

the American taxpayers? 

What the American people really want us to focus on is how can 

we raise their wages and create jobs for those who have lost theirs, 

instead of focusing on issues that don’t create jobs and, in fact, are 

going to cause the American people to lose their jobs. 

Mr. President, we need you to focus on jobs, not raising taxes, 

growing government, and spending money we don’t have on flawed 

stimulus packages. Where are the jobs you promised the American 

people? Instead of more government, the American people want 

more jobs. They sent you a wake-up call on Tuesday in Massachusetts, Mr. President. I hope you were listening. 

With that, I yield back. 

The CHAIRMAN. The gentleman from Kansas is recognized for 2 

minutes. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. Just like reasonable executive compensation rules to increase financial stability 

should not be bipartisan, reforming Fannie and Freddie should not 

be either. I am disappointed that some of my friends on the other 

5 

side forget that when they controlled Congress for 12 years, they 

did not enact meaningful reform of Fannie and Freddie. 

Last year, the former chair of this committee, Mike Oxley, said, 

‘‘We missed a golden opportunity that would have avoided a lot of 

problems we are facing now if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed.’’ 

I hope we can come together this time, Republicans and Democrats, to explore good policy options to deal with Fannie and 

Freddie later this year. 

Turning back to executive compensation, I have always felt that 

financial firms receiving taxpayer assistance should receive the 

most scrutiny with respect to their executive compensation practices. One example involves reports of large salaries for Fannie and 

Freddie executives. I wrote them about this last March when we 

first learned about it, and after receiving an unsatisfactory response from FHFA, I joined Chairman Frank and others to vote for 

H.R. 1664 to stop those unfair pay practices of TARP recipients. 

Protecting taxpayers should not be a partisan issue. So I was disappointed that some of my friends on the other side didn’t join us 

to support that commonsense measure. 

Finally, for firms who have repaid TARP, I don’t think the government should go in and set specific pay levels, but to better protect investors and taxpayers in the future, the government does 

have a role in looking at how pay is structured more broadly to ensure risk-taking is properly aligned with rewards and doesn’t pose 

a systemic risk. 

I look forward to hearing from our witnesses and exploring issues 

in further detail, d I yield back the balance of my time, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling, for 

21⁄2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. After upset defeats 

in the States of New Jersey and Virginia, and a stunning upset defeat in the Commonwealth of Massachusetts, I would have hoped 

that this Administration and this Congress would have gotten 

down to job number one, and that is to help create jobs for the 

American people. Instead, it really appears that the Administration 

is set upon an adventure in scapegoatism: Let’s see if we can find 

an entity that perhaps is more unpopular than our Administration 

in the United States Congress. Thus we have this launching of the 

assault upon the investment community. 

Now, are there outrageous compensation systems out there? Yes. 

I am outraged by late-night comedians who make tens of millions 

of dollars to be mean to each other. I am outraged by professional 

athletes who make tens of millions of dollars and abuse their 

spouses and girlfriends. And, yes, I am outraged by compensation 

packages on Wall Street as well. But none, none, are more outrageous than those who use taxpayer funds to reward the execs at 

Fannie and Freddie. 

And so on Christmas Eve, this Administration decided to take 

out all the goodies from the stockings of the American taxpayer 

and hand it over to the executives of Fannie and Freddie, which 

are functionally owned by the United States Government, and 

hand them out, the two CEOs, $6 million pay packages, $42 million 

6 

for the rest of their execs. And so we are paying these people bonuses to lose tens of billions of dollars for the United States taxpayer. Now, what people do with their money is their business; 

what they do with the taxpayer money is our business. 

And so I echo the comments of our ranking member. I have said 

privately and publicly that this is a committee that has a reputation for fairness under Chairman Frank. 

Now, I am unaware under his leadership, or his Republican predecessor in the 7 years that I have been here, that the Minority has 

ever been denied their request to have a witness. So we requested 

a witness, Ed DeMarco, the acting head of FHFA to ask a simple 

question— 

The CHAIRMAN. The gentleman’s time has expired. If you want 

to take more time, it will come out of the 10 minutes. 

Mr. HENSARLING. I yield back the balance of my time. 

The CHAIRMAN. Well, unanimous consent for an additional 15 

seconds to finish that thought, that wouldn’t come out of 

everybody’s time, if the gentleman would like. 

Mr. HENSARLING. I was hoping that Mr. DeMarco could be here 

to answer the question why he has spent millions for bonuses to 

pay people to lose billions of dollars for the taxpayer, and unfortunately again for whatever reason, that request was denied. Thank 

you, Mr. Chairman. 

The CHAIRMAN. I yield myself my remaining time which I think 

is 31⁄2 minutes; is that correct? 

I want to thank both the gentlemen from Texas and the gentleman from Alabama for their comments about the fairness of the 

committee. I am very proud that I think this committee holds the 

record for the number of amendments that we are debating on the 

Floor at markup time. 

We do have one difference here. The members of the Republican 

side have made the distinction between private sector and public 

sector entities when it comes to compensation. That is why I wanted to defer Mr. DeMarco to a hearing we will have with Mr. 

DeMarco, and I hope Mr. Lockhart—a Bush appointee who had 

that position before and it was was a holdover—and Mr. Feinberg, 

and probably Sheila Bair and Dan Tarullo. That is, I think it 

makes sense to separate the issues of what we do about private 

sector compensation where our role is a more limited one, as we 

all agree, and public sector compensation. 

The question for Mr. DeMarco is what do we do about public sector compensation? 

Now, I also want to say I am not usually the one who welcomes 

converts. That has generally not been my side of the street. But I 

do want to welcome my Republican colleagues to conversion to the 

notion that we should regulate the pay of Fannie Mae and Freddie 

Mac. 

Last year, this committee twice reported bills to the Floor which 

explicitly proposed restrictions on the pay of Fannie Mae and 

Freddie Mac, and the Republicans opposed it in committee and opposed it on the Floor. Indeed, in the case of one of the bills that 

wasn’t on the private sector, because it wasn’t clear what the status was at the time. The gentleman from Texas, Mr. Hensarling, 

offered an amendment to make sure that they were explicitly covVerDate Nov 24 2008 15:05 May 28, 2010 Jkt 056241 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\56241.TXT TERRIE
7 

ered. We adopted the amendment. But that did not persuade the 

gentleman from Texas to vote for the bill on the Floor. 

So we have had two bills which passed the House which explicitly authorized regulation in the pay of Fannie Mae and Freddie 

Mac, and all the Republicans on this dais here voted against it 

both times. One Republican, Mr. Jones, voted for it one time. So 

I am a little skeptical as to why we have all of this coming up now. 

By the way, when we passed the bill that specifically would have 

done it for public-funded companies, we got a letter on March 

20th—which I will put into the record—from James Lockhart, the 

Bush appointee who was running the Housing Finance Agency, 

held over, strenuously objecting to it. So it was the Bush Administration that first raised the objections of the Bush Administration 

holdover. 

I think the pay that was given to Fannie Mae and Freddie Mac 

was too high, and I think this: We will have a hearing with Mr. 

DeMarco, and others who administer pay schemes for public employees in a month. My colleague from Texas said he wanted to 

know the answer. I know he is a man of great patience and he has 

a very strong attention span. I don’t think a month from now he 

will have forgotten the questions he wanted to ask. He could write 

them down and we will preserve them. But, yes, we will have this. 

I also believe what we have here is an embarrassment on the 

part of my Republican colleagues because they don’t want to do 

anything about the excessive pay in the private sector, nor do they 

want to appear to not be doing anything about it, so they are 

changing the subject. 

By the way, we do not propose any specific limits on the pay in 

the private sector. We do say that the shareholders should vote— 

radical motion—but we also say that there is a public spillover effect; namely, that the structure of those compensation packages 

often incentivize excessively risky behavior. And we have mandated 

that the regulators end this ‘‘heads they win,’’ ‘‘tails they break 

even at worst.’’ So that is what we are talking about, private and 

public sector. We are dealing with the private sector today, to the 

discomfort of my Republican colleagues. We will get to the public 

sector in a month. 

The gentleman from—the gentleman’s side has 21⁄2 minutes left. 

Does the gentleman wish to use it? 

Mr. BACHUS. I would ask— 

The CHAIRMAN. We have 10 minutes for debate. 

Mr. BACHUS. I would like to claim 15 seconds. 

The CHAIRMAN. The gentleman is recognized for 15 seconds. 

Mr. BACHUS. The executive compensation the chairman refers to 

covered all companies, both private and public. It covered community banks and it covered all employees, not just top executives. It 

was a political response to AIG, but it was poorly written— 

The CHAIRMAN. Does the gentleman yield? 

Mr. BACHUS. The Senate has never taken up that bill, and the 

last time I looked, the Democrats controlled the Senate. They realized it was a bad bill. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Does the gentleman yield? 

Mr. BACHUS. No, my time has expired. 

8 

The CHAIRMAN. The gentleman from New Jersey is now recognized for 2 minutes and 15 seconds. 

Mr. GARRETT. I thank the chairman, and I thank the ranking 

member. And as the ranking member has already outlined, and I 

concur with his position with regard to the appropriate request for 

someone else at this hearing, the acting head of FHFA, and I appreciate the chairman’s explanation of why he thought we should 

segregate the panels in this manner. But that really doesn’t go to 

the comment that I think the gentleman from Texas made that no 

one up here can remember the last time that a member of the Minority requested someone to come to the panel, be a witness, and 

a Majority party refused that appropriate request. As of this point, 

the chairman has yet to fully explain why they refused that request. 

As the gentleman from Texas also points out, Fannie and 

Freddie are different from these; they are under government control. The chairman of this committee, as a matter of fact, has recently stated they are basically, ‘‘public policy instruments of the 

government.’’ Fannie and Freddie are. 

So while I may think the Majority’s initiatives in the area of executive compensation in that April legislation are examples of government overreach into the private sector, if there is one example, 

one case, one line of executive compensation that should be looked 

at, it is where taxpayer dollars are being used, and that is in the 

area of Fannie and Freddie. 

And beyond this point, the area of executive compensation, there 

is a bigger issue that really we should be looking at. That is the 

Christmas Eve announcement, when the Administration took action, without any congressional input whatsoever, of the unilateral 

lift of the $400 cap on Fannie and Freddie’s bailout and authorized 

unlimited taxpayer funds to use, both firms, over the next 3 years. 

Again, we have requested a hearing on this, or the chairman to 

allow a witness on this, and again he has refused. 

Meanwhile, however, the Republican Party has come back with 

our proposals, but they have been ignored. The Republicans in this 

committee have put forth proposals to reform these institutions, because it is indisputable that Fannie and Freddie were the central 

role in the mortgage meltdown that we have experienced. They 

helped ignite the economic crisis that has left millions of Americans 

unemployed. So passing stronger GSE reform legislation should be 

at the very top of this committee’s agenda. 

Thank you. 

The CHAIRMAN. The gentleman’s time has expired. 

We will now proceed to hear from the witnesses, repeat witnesses 

in every case, who are always welcome in this committee because 

they are people who make very significant contributions not just in 

this testimony but even more importantly, obviously, in the debate 

over important public issues in the country and the world. 

We begin with Professor Lucian Bebchuk, who is a professor of 

law, economics and finance, and director of the corporate governance program at Harvard Law School. 

9 

STATEMENT OF LUCIAN A. BEBCHUK, WILLIAM J. FRIEDMAN 

AND ALICIA TOWNSEND FRIEDMAN PROFESSOR OF LAW, ECONOMICS, AND FINANCE, AND DIRECTOR OF THE CORPORATE GOVERNANCE PROGRAM, HARVARD LAW SCHOOL 

Mr. BEBCHUK. Chairman Frank, Ranking Member Bachus, and 

distinguished members of the committee, thank you very much for 

inviting me to testify here today. 

I would like to devote my introductory comments to making four 

points. 

First, there is a growing acceptance, including among business 

leaders, that compensation structures have provided perverse incentives. They have encouraged financial executives to seek to improve short-term results even at the expense of an elevated risk of 

an implosion later on. Let me illustrate this problem with the example of Bear Stearns and Lehman Brothers, the two investment 

banks that melted down in 2008. 

Many commentators have assumed that the executives of these 

firms sold their own compensation, their own wealth wiped out together with the firms’, and then inferred from this assumed fact 

that the firms’ risk-taking could not have been motivated by perverse incentives created by pay arrangements. 

In a recent paper, my coauthors and I did a case study of compensation at those two firms between 2000 and 2008, and we find 

that this assumed effect is incorrect. We estimate that the top five 

executive teams of Bear Stearns and Lehman Brothers derived 

cash flows of about $1.4 billion and $1 billion, respectively, from 

cash bonuses and equity sales during 2000 to 2008, and these cash 

flows substantially exceeded the value of the executives’ initial 

holdings in the beginning of the period. As a result, unlike what 

happened with the long-term shareholders, the executive net payouts for 2000 to 2008 were decidedly positive. 

The second point I would like to make is that we cannot rely 

solely on existing governance arrangements to produce the necessary reforms. To be sure, some firms have announced reforms of 

the compensation structures. For example, they indicated that bonuses would be subject to clawbacks. But firms have generally not 

provided information that would enable outsiders to determine 

whether the clawbacks would be meaningful and affect behavior or 

would be merely cosmetic. 

This is an area where the devil is in the details. Because the 

changes that firms adopt appear to be at least partly motivated by 

desire to appear responsive to outside criticism, there is a basis for 

concern that arrangements with details that are not disclosed 

might not be sufficiently effective. 

What else should be done? The point I would like to stress is to 

improve arrangements, pay arrangements in particular, in governance more generally. We have to strengthen shareholder rights. 

In addition to introducing say on pay votes, which H.R. 3269 

would do, there are other things that need to be done to bring 

shareholder rights to the same level as the shareholders in the 

U.K. and other English-speaking countries enjoy. In particular, the 

following aspects of their existing state first deserves the Commission’s attention. Many publicly traded firms still do not have majority voting. Shareholders still like the power to place director canVerDate Nov 24 2008 15:05 May 28, 2010 Jkt 056241 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\56241.TXT TERRIE
10 

didates under corporate bylaws. Many privately traded funds still 

have staggered boards, and many such firms have supermajority 

requirements that make it difficult for shareholders to change governance arrangements. 

Finally, in addition to strengthening shareholder rights, it remains important to have regulatory supervision of pay structures 

in financial firms, as the provisions of H.R. 3269 would require. 

Opponents of regulatory intervention argue that such regulatory 

supervision would drive a talent away. However, the regulation 

under consideration focuses on structure, not on pay levels, and 

firms would still be able to offer packages that are sufficiently attractive in terms of pay levels. One of the established insights in 

economics is that it is never efficient to compensate agents using 

perverse incentives; in the financial sector, an especially important 

context to apply this established insight. Thank you. 

[The prepared statement of Professor Bebchuk can be found on 

page 45 of the appendix.] 

The CHAIRMAN. Next, we have Professor Joseph Stiglitz, university professor at the Columbia Business School. 

STATEMENT OF JOSEPH E. STIGLITZ, UNIVERSITY 

PROFESSOR, COLUMBIA BUSINESS SCHOOL 

Mr. STIGLITZ. It is both a source of pleasure and sadness to testify before you today. I welcome this opportunity to testify on this 

important subject, but I am sorry that things have turned out so 

badly thus far. 

In this brief testimony I can only touch on a few key points, and 

many of these points I elaborate in my book, ‘‘FreeFall,’’ which was 

published just a few days ago. 

Our financial system failed to perform the key roles that it is 

supposed to perform in our society: managing risk; and allocating 

capital. A good financial system performs these functions at low 

transaction costs. Our financial system created risk and mismanaged capital, all the while generating huge transaction costs, 

as the sector garnered some 40 percent of all corporate profits in 

the years before the crisis. 

So deceptive were the systems of creative accounting the banks 

employed that, as the crisis evolved, they didn’t even know their 

own balance sheet, so they knew that they couldn’t know that of 

any other bank. We may congratulate ourselves that we have managed to pull back from the brink, but we should not forget that it 

was the financial sector that brought us to the brink of disaster. 

While the failures of the financial system that led the economy 

to the brink of ruin are by now obvious, the failings of our financial 

system were more pervasive. Small- and medium-sized enterprises 

found it difficult to get credit, even as the financial system was 

pushing credit on poor people beyond their ability to repay. 

Modern technology allows for the creation of an efficient low-cost 

electronic payment mechanism, but businesses pay 1 to 2 percent 

or more for fees for a transaction that should cost pennies or less. 

Our financial system not only mismanaged risk and created products that increased the risk faced by others, but they also failed to 

create financial products that could help ordinary Americans face 

11 

the important risk they confronted, such as the risk of homeownership or the risk of inflation. 

Indeed, I am in total agreement with Paul Volcker. It is hard to 

find evidence of any real growth associated with many of the socalled innovations in our financial system, though it is easy to see 

the link between those innovations and the disaster that confronted our economy. 

Underlying all the failures a simple point seems to have been forgotten: Financial markets are a means to an end, not an end in 

themselves. We should remember, too, that this is not the first 

time our banks have been bailed out, saved from bearing the full 

consequences of their bad lending. Market economies work to 

produce growth and efficiency, but only when private rewards and 

social returns are aligned. Unfortunately, in the financial sector, 

both individual and institutional incentives were misaligned, which 

is why this discussion of incentives is so important. 

The consequences of the failures of the financial system are not 

borne by just those in the sector, but also by homeowners, retirees, 

workers, and taxpayers, and not just in this country but also 

around the world. 

The externalities, as economists refer to these impacts and others, are massive; and they are the reason why it is perfectly appropriate that Congress should be concerned. The presence of 

externalities is one of the reasons why the sector needs to be regulated. 

In previous testimony I have explained what kinds of regulations 

are required to reduce the risk of adverse externalities. I have also 

explained the danger of excessive risk-taking and how that can be 

curtailed. I have explained the dangers posed by underregulated 

derivative markets. I regret to say that so far, more than a year 

after the crisis peaked, too little has been done on either account. 

But too-big-to-fail banks create perverse incentives which also have 

a lot to do with what happened. 

I want to focus my remaining time on the issue of incentives and 

executive compensation. As I said, there are also key issues of organizational incentives, especially those that arise from institutions 

that are too-big-to-fail, too-big-to-be-resolved, or too-intertwined-tofail. 

The one thing that economists agree upon is that incentives matter. Even a casual look at the conventional incentive structures, 

with payments focused on short-run performance and managers not 

bearing the full downside consequences of their mistakes, suggested that they would lead to shortsighted behavior and excessive 

risk-taking. And so they did. 

Let me try to summarize some of the general remarks that I 

make in my written testimony that I hope will be entered into the 

record. Flawed incentives played an important role, as I said before, in this and other failures of the financial system to perform 

its central roles. Not only do they encourage excessive risk-taking 

and shortsighted behavior, but they also encourage predatory behavior. 

Poorly designed incentive systems can lead to a deterioration of 

product quality, and this happened in the financial sector. This is 

not surprising, given the ample opportunities provided by creative 

12 

accounting. Moreover, many of the compensation schemes actually 

provide incentives for deceptive accounting. Markets only allocate 

resources well when information is good. But the incentive structures encouraged the provision of distorted and misleading information. 

The design of the incentives system demonstrates a failure to understand risk and incentives and/or a deliberate attempt to deceive 

investors, exploiting deficiencies in our systems of corporate governance. 

I want to agree very much with Professor Bebchuk’s view of the 

need for reforms in corporate governance. There are alternative 

compensation schemes that would provide better incentives, but 

few firms choose to implement such schemes. It is also the case 

that these perverse incentives failed to address adequately providing incentives for innovations that would have allowed for a better functioning of our economic system. 

[The prepared statement of Professor Stiglitz can be found on 

page 68 of the appendix.] 

The CHAIRMAN. Nell Minow, who is the founder and editor of The 

Corporate Library. 

STATEMENT OF NELL MINOW, EDITOR, THE CORPORATE 

LIBRARY 

Ms. MINOW. Thank you very much, Mr. Chairman, and members 

of the committee. It is a real honor to be back here again, and, like 

Professor Stiglitz said, I wish I had better news for you. In previous appearances, I have called executive compensation both the 

symptom and the cause of the instability of the financial services 

sector and our capital markets. I regret to say that the problem 

continues. 

Yesterday, the Supreme Court told us that a corporation is a person with First Amendment rights, but as Baron Lord Thurlow told 

us hundreds of years ago, a corporation has no soul to be damned, 

no body to be kicked, and that is why corporations essentially get 

away with murder in matters like compensation. 

The boards of Wall Street financial institutions implemented pay 

plans that were a major and direct cause of the financial meltdown. 

These purported bastions of capitalism protected themselves from 

risk by limiting their downside exposure and taking their pay off 

the top. Second, rinse repeat. They took bailout money and kept 

paying themselves as though they earned it. What they did before 

the bailout was counterproductive and misguided. What they have 

done since the bailout is an outrage, or, as my grandmother would 

have said, a ‘‘shanda.’’ 

Since the only portion of pay that TARP did not restrict was base 

pay, everybody got a raise. For example, Wells Fargo’s board approved a 522 percent salary increase for the CEO from $900,000 to 

$5,600,000. The extra was paid in stock, and we have seen this 

throughout the center. They took the opportunity, when the stock 

market was at its rock bottom, to load everybody up with buckets 

of new stock and options. So I am predicting now that the next 

time you have me back here to speak, we will be talking about how 

outrageous it is that they got insane pay packages again; but now 

is when they are happening. And we will see the payout later on. 

13 

These enormous grants of stock issued at historic low prices are 

resulting in enormous payouts based on the infusion from the bailouts in the overall market. I completely agree with what the members of this committee have said about taxpayer money. This is taxpayer money. They are getting paid as though they earned that 

money, the money that the taxpayers put into it. They are taking 

a piece off of the top of the taxpayers’ money. That is absolutely 

right. That is an outrage. 

So the clawbacks that were required as a result of this committee’s work are also being subverted. As Professor Bebchuk said, 

there is a lot of weasel language being instituted into the 

clawbacks, saying that bad faith has to be required, or some kind 

of emotion or feeling or intention has to be required. Clawbacks 

should apply no matter what the reason for the correction; otherwise, as Professor Siglitz said, they create a perverse incentive. 

I ask this committee to lead the way to put an end to too-bigto-fail, the term and the concept. If a company is too-big-to-fail, it 

is too-big-to-succeed, or, as the title of a thoughtful new book by 

Robert Pozen puts it, it is ‘‘too-big-to-save.’’ If an enterprise is toobig-to-fail, it is a utility and it should be regulated like one and executives should be paid like public servants. 

Wall Street boards and executives have abused shareholders by 

creating perverse incentives for themselves, through their pay 

plans. 

The IMF has a very important new study linking lobbying expenditures and high-risk lending. In other words, it is another example of externalizing the risks onto everybody else and keeping 

the pay plans. They are now doing their best to perpetuate this 

system by pouring over $70 million so far into fighting any meaningful reform. This is just another example of diversion of assets 

to perpetuate the externalization of risk onto the shareholders and 

the taxpayers. 

I hope that Congress will address this attempt to subvert the efficient oversight of the market and restore the crediblity of our financial sector by removing obstacles to effective shareholder oversight of pay. 

[The prepared statement of Ms. Minow can be found on page 52 

of the appendix.] 

The CHAIRMAN. Thank you. Let me begin the question and—I 

want to give my Republican colleagues credit. They fundamentally 

want to take the attention away from the subject of excessive compensation, which is a legitimate public sector issue, probably because, as Ms. Minow just noted, they are paying money which they 

are able to have in part because of a significant public intervention; 

also because there are effects on the economy as a whole as to the 

way in which it is structured. And also, of course, because the notion that we are interfering in a private sector sphere when we set 

the laws for corporate governance is nonsense. 

Corporations are a creation of the law, even though the Supreme 

Court thinks God made them, and this can be regulated by us in 

many ways. They simply don’t want to do anything that would 

interfere with that, but they have raised the Fannie/Freddie thing. 

I want to respond to one point that the gentleman from Alabama 

raised when I pointed out that the Republicans twice voted in comVerDate Nov 24 2008 15:05 May 28, 2010 Jkt 056241 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\56241.TXT TERRIE
14 

mittee and on the Floor against legislation to give regulators the 

power over Fannie Mae and Freddie Mac salaries, which they now 

say they want. He said, well, that was in the bill that covered all 

the private sector. But there were two bills. The gentleman from 

Alabama forgot to mention one. The first bill that came forward 

was H.R. 1664, which specifically covered only those financial institutions that were receiving financial assistance—TARP money and 

Fannie and Freddie. It had nothing to do with the rest of the private sector. 

Page 2 of that bill: No financial institution has received or receives a direct capital investment under the TARP program or with 

respect to the Federal National Mortgage Association, the Federal 

Home Loan Mortgage Corporation or Federal Home Loan Bank, 

etc. 

So we had a bill that dealt only with TARP recipients, Fannie 

and Freddie, and put tough restrictions on them to be administered 

and they voted against it. So it is not my fault that there wasn’t 

the power to do that more. 

Yes, I think they got too much money over the Christmas Eve 

period. I believe, though, that the remedy here is to in fact—as I 

believe this committee will be recommending—abolish Fannie Mae 

and Freddie Mac in their current form and come up with a whole 

new system of housing finance. That is the approach, rather than 

the piecemeal one. 

But the fact is, there were two bills, and Republicans voted 

against both of them. One covered all private sector and public sector, but one bill they voted against specifically was limited to TARP 

recipients in Fannie Mae and Freddie Mac, and it passed the 

House and it failed. The gentleman is right; the Senate didn’t take 

it up. If they want to blame the Senate, that is okay, I guess, for 

them to say it, but I don’t know why the fact that the Senate might 

not be taking something up is a justification for a Member of the 

House to vote ‘‘no.’’ 

So it is very clear, we put forward a bill that would have toughened restrictions on compensation at the TARP recipients and at 

Fannie Mae and Freddie Mac in April. They voted against it. Now, 

to divert attention from this subject which makes them uncomfortable because they don’t want to do anything about it, they bring 

it up. 

Let me ask one question to Professor Stiglitz and the others. One 

of the arguments we have gotten against the President’s proposal 

to tax large financial institutions to recoup the money that was 

paid out through the TARP and elsewhere that was of great assistance to the financial sector, this will diminish the amount of money 

they have available for loans and it will force them, over their 

great reluctance no doubt, to raise credit card and other fees. 

Does the size of the bonus pool and the amount of compensation 

have any relevance to that argument? Professor Stiglitz? 

Mr. STIGLITZ. Yes, obviously funds are fungible, and money going 

out to bonuses reduces the capital base of the banks, and to an extent the money that has been paid out in bonuses, whatever the 

form, reduces their ability to lend. That is obviously a much more 

significant amount. 

15 

Let me just emphasize one point, since we are talking about incentives. The intent of the President’s proposal here is changing 

the current incentives of the banks to have excessive risk-taking, 

and excessive risk-taking led to the economy being brought to the 

brink. 

The CHAIRMAN. Tax structure— 

Mr. STIGLITZ. That is right, these incentives partly arose from 

the fact that the tax structure was based on the amount of liabilities that they had. It was directed at— 

The CHAIRMAN. Tier 1 capital money. 

Mr. STIGLITZ. Exactly. 

The CHAIRMAN. What is the relationship between the board of directors and the CEO currently? 

Ms. MINOW. I know it is difficult for people who know what real 

elections are to understand that, but we use the term ‘‘election’’ 

when we talk about boards of directors, even though essentially the 

CEO controls who is on the board. These arrangements are often 

very cozy. 

It was not that long ago that CEOs of Cummins Engine and Inland Steel served as chairs of each others’ compensation committees. At another company, the CEO is the chairman of the local 

university’s board of directors. The provost is on his compensation 

committee, etc. So therefore it is a very close circle. And until 

shareholders can replace directors who get it wrong, we are not 

going to see any change. So many of the directors, almost all of the 

directors of the bailout companies continue to serve. 

The CHAIRMAN. Thank you. The gentleman from Alabama. 

Mr. BACHUS. Thank you. Ms. Minow, you have heard the chairman talking about his executive compensation bill that was introduced last year that the Republicans voted against along with 

many Democrats. You published an article on The Corporate Library Web site entitled, ‘‘Right Question, Wrong Answer’’ that was 

critical of the executive compensation legislation, and that was the 

legislation that Chairman Frank incorporated into the bill. He 

talks about criticizing us for not voting for it. 

In the article you say, ‘‘I have the utmost respect for politicians 

and bureaucrats but I also recognize their limits. The government 

should not micromanage pay.’’ 

I happen to agree with that position. Could you elaborate to committee members on your specific concerns about entrusting political 

figures and government bureaucrats with the responsibility for designing incentive-based compensation structure? 

Ms. MINOW. Certainly, as I said repeatedly before this committee, I do not believe that the government should set pay. I do 

believe in removing obstacles to allowing shareholders to provide 

that kind of feedback, as I just said to the chairman, by removing 

directors who do a bad job through say on pay. I think the bill was 

perhaps necessary but not sufficient, and I do share the concern of 

the members of the committee that some of the terminology in the 

bill was not—did not give enough guidance. 

Mr. BACHUS. Thank you, I appreciate that. Obviously, the bill 

gave the Treasury Secretary really carte blanche authority to define unreasonable excessive compensation, and it wasn’t just for top 

16 

executives, it was for all employees. And I would vote against that 

bill today if it were up before me. 

Professor—is it ‘‘Bibcock?’’ 

Mr. BEBCHUK. ‘‘Bebchuk.’’ 

Mr. BACHUS. Okay. In the past, you have criticized GSE executive compensation packages as being decoupled from performance. 

Under the terms of the GSE executive compensation package that 

was announced Christmas Eve, two-thirds, or $4 million of the $6 

million cash compensation for each of the two CEOs, is completely 

unrelated to firm performance or any performance manager. 

Would you agree that the latest GSE executive compensation 

awards still failed to adequately link pay and performance? 

Mr. BEBCHUK. The study you mention was one that was probably 

several years ago, and it was a careful analysis of compensation arrangements at the time, mainly with respect to the chairman at 

the time, Raines. And those were the conclusions then. I have not 

studied the most recent decisions and therefore I am not in a position to evaluate them. 

Mr. BACHUS. If I say $4 million of that was not linked to performance and does not link pay and performance, you would still 

think that—you would still have your same objections to those compensation packages? 

Mr. BEBCHUK. I don’t think I can really offer a view about a 

package that I haven’t really studied. 

Mr. BACHUS. All right. 

Ms. Minow, in your written testimony you decry compensation 

arrangements that widen the gulf between pay and performance 

and between integrity and outrageousness. In your view, do the 

pay packages of Fannie Mae and Freddie Mac executives, most particularly the $6 million awarded to each of the CEOs, adequately 

link pay and performance? 

Ms. MINOW. I have been a consistent critic of the pay packages 

at Fannie and Freddie, going back before the financial meltdown. 

And, again, they have a corporate governance nightmare. You can’t 

be both a public and a private enterprise at the same time. 

Mr. BACHUS. Do they meet your definition of outrageous? 

Ms. MINOW. They are not as outrageous as the previous pay 

plans at Fannie and Freddie, but I think they are wrong. 

Mr. BACHUS. They are wrong, but how about outrageous? Do 

they meet your definition of outrageous? 

Ms. MINOW. No, no. If I am calibrating the word ‘‘outrageous,’’ 

they are nowhere near the category of outrageous— 

Mr. BACHUS. It might be like a class 4 instead of a class 5 outrageous? 

Ms. MINOW. They are troubling; how is that? They are troubling 

but not outrageous. 

Mr. BACHUS. Thank you. I appreciate that very much. I yield 

back the balance of my time. 

The CHAIRMAN. The gentleman from Pennsylvania, and I want to 

take 15 seconds, if he will yield to me. 

My friend from Alabama continues to ignore the fact that there 

were two bills, one on executive compensation involving the private 

sector, another that only dealt with TARP and Fannie Mae and 

Freddie Mac, and he voted against it. So what he talked about beVerDate Nov 24 2008 15:05 May 28, 2010 Jkt 056241 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\56241.TXT TERRIE
17 

fore, what he quoted Ms. Minow about, was the one about general 

compensation. 

But there was a separate bill for Fannie Mae, Freddie Mac and 

the TARP that came after this question, and that is the one he 

voted against. There is one bill. 

It is not my time. The gentleman from Pennsylvania. 

Mr. KANJORSKI. Thank you, Mr. Chairman. I will just open up 

first with some remarks to the panel, and I appreciate your opinions when I get to conclude. Very often, I have had the occasion 

over the last 6 to 9 months to make a speech in my district because 

I am trying to reach constituents to understand the overall complex 

problem of salaries and wages. 

Now, as a given factor in my congressional district in Pennsyl- vania, the average wage is about $13 an hour. And if you multiply 

that times 2,000 working hours a year, that comes to an annual income of, on average, $26,000. 

In the last 9 months or a year, I have had several witnesses who 

have appeared before my subcommittee, and we have gotten to this 

question of salary and compensation, and what we do about it. I, 

for one, am not certain that we put enough direct attention to the 

matter, and could get into difficulty if we start deciding that we are 

the final arbiter of what a fair salary is, because quite frankly, I 

will confess, I don’t know. 

If hiring a brain surgeon, I guess, and I need brain surgery, 

there is no amount too excessive until after the success of the operation. Then I will be annoyed, whatever the bill. 

The reality is—that is not the topic of our discussion today—but 

in the hedge fund industry, they report—I remember one witness 

who was a little annoyed involving a cross examination: What did 

he make and what is his relationship? He earned about $2.5 billion 

a year, and I pressed him because I was offended that he only paid 

a tax rate of 15 percent because of the structure of his salary, putting him in capital gains as opposed to regular tax. After 15 or 20 

minutes, with great annoyance, he finally put his hand in his pocket, leaned back and said, ‘‘Congressman why are you picking on 

me? What did I do to you?’’ I said, ‘‘You did nothing; you happen 

to be a witness and I am trying to extract some information.’’ He 

said, ‘‘Well, I want you to know I am only the 51st highest-income 

person in this country.’’ This astounded me. I thought we had located the highest-income person. I found out he actually was not 

and is not, and there are some who make a great deal more. 

I guess the first question that I would ask is, what is too much? 

What is too high? Is it $5 billion, or $50 billion? And now I pose 

that question, because we always use numbers, and I go back to 

my congressional district of $13 an hour wage. The gentleman who 

was testifying before me, his hourly wage is $1,300,000. That is 

what he makes every hour of the year. 

Now, when you do the mathematics of that, he makes 100,000 

times the average wage of an average worker in my district. How 

do we get a sense? Regardless of what compensation we pass here 

or do on Fannie Mae, they are chickens; what do they get paid, $6 

million a year? That is peanuts. 

I am wondering if we are approaching this from perhaps the incorrect direction. Should we be looking at, first of all, what do we 

18 

need to get to a balanced budget? Because these people aren’t just 

earning and taking corporate money or profits. These people are 

not picking up their burden in society in proportion to their income. 

And as a result now this year, we are ending up with a shortfall 

that we could make up if we didn’t have these extraordinary ways 

of avoiding income. 

I am just wondering, should we approach this from changing the 

tax structure and perhaps get to a level field that way, as opposed 

to identifying particular people where we may be able to exercise 

power and those so that we cannot. And I am just curious. Let me 

throw that out there very quickly. 

The CHAIRMAN. Maybe 30 seconds for an answer. 

Mr. STIGLITZ. I agree with you that the basic framework for 

thinking about equity should be through our tax system. Incentives 

are related, because the question is, would they work a little bit 

less hard if they paid higher taxes? I think the answer is clearly 

no, it would not have a significantly adverse affect. 

The issue that I talked about in my testimony is that the structure of the pay of the executives in these banks has strong effects. 

The reason we are interested in them is because those effects affected the taxpayers because it led to the economy falling apart. 

These pay structures imposed huge costs on the rest of us, and 

therefore they are a legitimate source of concern, as opposed to lots 

of other areas where people get high pay but are not as much a 

legitimate source of concern. The way we deal with that is through 

the tax system. 

The CHAIRMAN. The gentleman from Texas. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I think we have 

heard from the panel on where they think that there have been 

abuses in the pay structure, the corporate pay structure. I think 

one of the things that I would like to hear from the panel is who 

is doing it right? Where is the model that other companies should 

follow? Mr. Bebchuk? 

Mr. BEBCHUK. Yes. I think that there is evidence that firms with 

shareholder rights are stronger, where you have less arrangement 

that would make it difficult to pay directors. Compensation in 

those firms is more sensitive to performance and also CEO turnover is more sensitive to performance. So we have evidence that relates, empirical evidence that relates the level of shareholder 

rights, both with firm value in general but also with the qualityof-pay structures. 

Ms. MINOW. If you would like to have a specific example, I can 

tell you that Home Depot went from the very bottom of the list to 

near the top of the list by going from a CEO where 90 percent of 

his pay was not related to performance to a CEO where 90 percent 

of his pay is related to performance. 

Mr. STIGLITZ. I want to make one remark because we keep talking about pay related to performance. It is very difficult to identify 

what you mean by performance. When a company does well as 

measured by the stock going up, but the reason the stock is going 

up is because the stock market is going up, then it wasn’t what an 

employee did that led to the company’s stock going up. One of the 

points I make in my written testimony was that, in fact, if you look 

19 

at the design of many of the so-called ‘‘pay for performance,’’ they 

are not pay for performance. They merely have that in their name. 

Ms. MINOW. I cover that in my written testimony as well. 

Mr. NEUGEBAUER. One of the things that concerns me is when 

you start down the road of government designing these compensation plans—and now really what we are doing is we are saying, 

there are a few companies out there, and I think everybody is trying to point to the financial institution—but the question is, what 

about all the other companies that are actually doing it right? How 

do we justify whether we are going to pick the ones we don’t think 

are doing it right and we are going to let the others fall? 

Mr. BEBCHUK. Nobody is talking about the government really 

prescribing what the pay arrangements would be but, rather, giving shareholder rights and improving corporate governance arrangements. And if that happens, then the firms that are doing it 

right will continue to do it right, but those firms that didn’t do it 

right because those were not sufficiently focused on shorter interest 

would hopefully improve their pay arrangements. 

Mr. NEUGEBAUER. But the shareholder has the ultimate right, 

don’t they? That is whether to own a share of stock or not. And if 

I I think that company CEO is making too much money and the 

boys are dividing the pie and the shareholders aren’t getting much 

return, I just sell my share of stock and I move on. 

Mr. BEBCHUK. Your ability to sell the share provides you with no 

protection. It providers insiders with no incentives to behave well. 

Why? Because let’s suppose the price right now is $100, and you 

believe that if managed well, the company would be worth $120. 

If you sell, you would be getting—you would be passing this imperfectly managed share to somebody else who would pay $100. But 

your concern is that you should be getting to $120, and the ability 

to sell the share on the market for $100 in no way provides you 

access nor makes it likely that you will be able to capture the $120. 

Ms. MINOW. I just want to say that is also kind of an outdated 

approach since up to 70 percent of the stock in most major companies are held by institutional investors that don’t have the luxury 

of selling out every time; because of transaction costs and other 

issues, they are pretty much stuck. And so the question is, is it 

more beneficial for them economically to pursue better pay than to 

just abandon it and leave and invest in some other company that 

overpays their executives? 

Mr. NEUGEBAUER. I don’t think I can agree that people are stuck 

in any position. If you own a share of publicly traded company 

stock, you can send a message to the management. In fact, some 

of those larger investors can actually send a very strong message. 

If a large investor in a company moves a very large block of stock, 

sells that stock, that sends a signal to the rest of the market: Why 

did he or she do that? So to say I think people are stuck in a position is a little— 

Ms. MINOW. The data actually goes the other way on that. And 

as far as large investors making a difference, you are right; they 

can call up the board of directors and ask for better. All we are 

asking is to make it more possible. 

Mr. STIGLITZ. Can I make a general point, which is that corporations are a creation of the State. We write the laws that define a 

20 

corporation. What I think Mr. Bebchuk and Ms. Minow have been 

emphasizing is that we want to think about how we write those 

laws to make sure that our whole corporate sector works more efficiently, which has to do with the systems of corporate governance. 

But what are those systems? 

I think that is really the debate here. There is going to be one 

system or another, so the question is, can we create a system that 

is better than the current system? 

The CHAIRMAN. The gentleman from California. 

Mr. SHERMAN. Thank you. Responding to the gentleman who was 

just speaking, I would say selling the stock is an imperfect way for 

shareholders to control things. First, they pay a big capital gains 

tax when they sell. Then they have transaction costs. As the witness pointed out, they get a low price for the stock because whomever buys it is buying into a company with miscompensated executives. And then finally, they have the opportunity to invest the proceeds into another company which has bad corporate governance 

and overpaid executives. 

I would like to start with an observation. It is obvious that the 

establishment in this country is under attack by populism in a way 

that has not occurred in most of our lifetimes. The results in Massachusetts were not the victory I think mostly for any one political 

party, but a victory for populism against the establishment. And it 

is not a coincidence the Supreme Court decided yesterday to overrule 100 years of precedents, something they would ordinarily find 

very painful, in order to arm the death star so that the empire 

could strike back; and whatever we do, whatever we say here 

today, could easily be drowned out by unlimited corporate publicity 

and propaganda. 

I want to pick up on the comments of the gentleman from Pennsylvania. I think this committee has done a good job on executive 

compensation when compared to the Ways and Means Committee 

which has continued to allow hedge fund managers to pay taxes at 

only 15 percent unless—I yield to the gentleman. 

The CHAIRMAN. If the gentleman would yield. The House in fact 

voted for the bill the gentleman is talking about. It is in the Senate. In fairness to our colleagues, they did bring up the right bill 

from our standpoint, which we voted for and sent over there. 

Mr. SHERMAN. It is always the Senate. In any case, the tax laws 

of this country not only allow a 15 percent tax on hedge fund managers, but a zero percent tax if they incorporate their hedge fund 

in the Caribbean. And you compare that to the probably 28 percent 

rate paid by the gentleman’s constituents in Pennsylvania, and you 

see that we don’t exactly have a fair tax system. I don’t think that the gentleman who makes $1 million an hour 

is going to work less hard if his after-tax compensation is reduced 

to a paltry $600,000 an hour. 

When we talk about compensation, we ought to be talking about 

the entire compensation package, not just bonuses. And in this 

committee, we have made life a little difficult for top executives, 

particularly those who got TARP money. There is some social utility of that, beyond its obvious psychological benefits to those of us 

in the room. And that is, we have inspired these companies to pay 

back the TARP money far more quickly than they would have, and 

21 

now we are focused on those who are too-big-to-fail. We are inconveniencing them to the greatest extent we can right now, and hopefully that will inspire them to break up so that we will have financial institutions, the demise of any one of which will not imperil the 

system. 

And so here we are, talking about their compensation. Last month, we imposed fees on those of over $50 billion in size. And 

I hope that they will get the message and become medium-sized institutions. 

The problem I have is in this effort to try to design compensation 

systems that do not incentivize excessive risk and that properly reward performance; I am not sure we can do it. I would hope that 

there would be none of these companies getting Federal subsidies 

or implicit Federal guarantee, in which case I don’t think we have 

to do it. But my problem relates to a circumstance where, let’s say, 

you are trading a portfolio. And your aim, of course, might be to 

have one great year and get an enormous bonus, because in this 

country, we tend to tally things up at the end of the calendar year 

and give you something valuable. Now it said, well, we will give 

you restricted stock. But that still provides a pretty good incentive 

to take the big risk and to get the big bonus unless you believe the 

risks you are taking: (A) will turn out poorly; and (B) will turn out 

so poorly that they dramatically affect the value of the entire company or that they inspire your other executives to take equally 

enormous risks. 

So assume that somebody is managing 1 percent of the company’s money. They do not believe that their behavior will affect 

their colleagues, and they choose to take enormous risks. They pan 

out as of the end of the year, they get a gajillion shares of restricted stock. How are they disincentived by getting restricted 

stock? I don’t know if there is time for the answer. 

The CHAIRMAN. Let’s take 30 seconds for an answer. We don’t 

have an overburdened day. 

Mr. BEBCHUK. The Congressman is exactly right. For executives 

who manage a limited part of the company, like 1 percent, paying 

them with restricted stock does not give them incentives to avoid 

taking risks that might implode later on. The only way to do it 

would be to subject them to a clawback or to put their bonus in 

the bank that would be adjusted downward, not if the company 

does not do well on the whole, but when their own unit doesn’t do 

well in the subsequent year. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. Before I make my 

comments, I would ask unanimous consent to enter two studies 

into the record relative to the subject: one is entitled, ‘‘Compensation in the Financial Industry’’ by the Center on Executive Compensation; and the other is entitled, ‘‘Bank CEO Incentives and the 

Credit Crisis’’ from the Fisher College of Business from Ohio State 

University. 

The CHAIRMAN. Without objection, they will both be entered into 

the record. 

The gentleman is recognized. 

Mr. HENSARLING. Thank you, Mr. Chairman. Again, the American people were presented with a great outrage on Christmas Eve 

22 

when this Administration decided, after tens of billions of dollars 

in losses, $110 billion now, now to announce unlimited taxpayer exposure to the Government-Sponsored Enterprises, those that are at 

the epicenter of the financial crisis, and to simultaneously—for all 

these losses that are costing the taxpayers all this money—to announce bonus structures of $6 million to each of the CEOs, $42 million in total for the executives. 

So again, as I said in my opening statement, I had hoped that 

we would have an opportunity to ask questions of the acting head 

of FHFA, Mr. Ed DeMarco, about this. 

And now I know the chairman in his comments said that we 

would have that opportunity next month. And he said that I am 

a patient man. Well, perhaps I am patient, but I am not sure, after 

the election results in the Commonwealth of Massachusetts, that 

the American people are patient. They don’t want answers a month 

from now, they want answers yesterday. 

And so I am disappointed, again, that for whatever reason, the 

American people are going to have to wait a month to find out 

about the bonuses at the Government-Sponsored Enterprises, 

Fannie and Freddie. 

The questions, again, I had were for Mr. DeMarco, I was going 

to ask, in light of the fact that the companies have averaged $11 

billion in taxpayer subsidized losses over the last 5 quarters, how 

were the executives chosen to receive the bonuses? Since Mr. 

DeMarco isn’t here, I doubt this panel can answer that question. 

But if somebody knows Mr. DeMarco, has spoken to him, maybe he 

has insight. 

If not, the second question I had for Mr. DeMarco is, why were 

the bonuses to be paid in cash? This is an Administration that 

says, no, we have to make sure that payments are made in stock. 

We have to have longer-term vesting dates for everybody else, apparently, except the Government-Sponsored Enterprises. So why 

cash for them and stock for everybody else? I was going to ask Mr. 

DeMarco that question. Again, I assume you haven’t spoken to 

him. Is anybody qualified to answer that question on Mr. 

DeMarco’s behalf? I assume not. 

I don’t have to be convinced that there are pay structures that 

can be poorly designed that can cause companies to fail. I know 

that. I used to serve on a compensation committee of a publicly 

traded company, traded on the New York Stock Exchange. I at 

least have some experience with these matters. I have studied 

some of these issues. So I know that poorly designed compensation 

packages can cause companies to fail. You don’t have to convince 

me of that. But you do have to convince me that any one company 

in America is too-big-to-fail. 

And guess what? If you don’t bail them out with billions of dollars of taxpayer money, then you don’t have to use the heavy hand 

of government to impose pay structures. 

I know the chairman has brought up, on a couple of occasions 

now, H.R. 1664. I have a couple of observations. Number one, if 

this Democratic Administration, this Democratic Senate, this 

Democratic House, were serious about doing something about 

Fannie and Freddie pay, I assume they could have done it by now. 

23 

Second of all, as I think the chairman knows, this just didn’t deal 

with the execs. This was a bill that would have regulated the pay 

of the janitor at Goldman Sachs and provided a role for the Congressional Oversight Panel in policy matters. And as a former 

member of that panel, I assure you they are singularly unqualified 

for the task. 

So again I don’t see why—the basic proposition is this, again. In 

America, the principle ought to be what you do with your money 

is your business; what you do with taxpayer money is our business. 

And if your compensation structure causes you to fail, don’t take 

money away from the farmers, school teachers, and the firemen to 

bail them out. The purpose of government is not to bail out. The 

purpose of government is not to place artificial limits on the American Dream. It is to preserve freedom. I yield back. 

The CHAIRMAN. The gentleman from Kansas. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. I believe financial firms receiving taxpayer assistance should receive the most 

scrutiny with respect to their executive compensation practices. 

The most obvious and troubling case was AIG that provided $165 

million in bonuses last year after taxpayers invested billions of dollars to keep the company solvent. I and others asked Ed Liddy, the 

CEO of AIG at the time, if he would encourage his employees to 

voluntarily return their bonuses. He said he would, and executives 

later agreed to pay back $45 million of $165 million of those bonuses. But in December of last year, we learned that only $19 million has been repaid. 

I have joined Representative Mike Capuano and others to write 

Secretary Geithner about this, especially in light of another round 

of bonuses to be issued to AIG in March of this year. 

If as much in taxpayer dollars were immediately recovered today 

and AIG were allowed to go through bankruptcy, I doubt those bonuses would be paid. So I hope we can get some answers soon. 

Taking a look at these AIG bonuses, Professor Bebchuk, it is obviously frustrating to taxpayers, because if it were not for them, 

AIG wouldn’t be around to pay out those bonuses in 2009 and 

2010. Are there specific things we should learn from the government’s intervention with AIG as it relates to executive compensation, sir? 

Mr. BEBCHUK. I think I would share your general sentiments 

that taxpayers have not charged financial firms sufficiently to 

make up for the substantial level of support that has been extended over the last year. And, more generally, I think that we can 

think about the pie that is being produced by the financial sector 

as being a result of contributions by taxpayers, by shareholders 

who provide capital, and by financial executives. And until now, 

the taxpayers have not been charging enough and shareholder interests have not been sufficiently protected. And the ultimate result of that is that financial executives—and AIG would be just one 

example, but more generally the sector—the financial executives 

might be getting an excessive fraction of this pie. 

Mr. MOORE OF KANSAS. Ms. Minow, do you have any thoughts? 

Ms. MINOW. Yes, I do. In the future, I hope we never have to do 

another bailout, but if we do, I hope we impose some conditions before we turn over the money. And condition number one should be 

24 

that you take a discount on any incentive compensation for the 

amount that was subsidized. 

Mr. MOORE OF KANSAS. Thank you. Mr. Stiglitz? 

Mr. STIGLITZ. I would like to emphasize two things that we did 

not do when we turned over money to these banks. First, we didn’t 

relate giving them money to their behavior, not just with respect 

to the issue of compensation schemes, but also with respect to lending, which was the reason we were giving them money. That relates to the issue of jobs that has come up here a number of times. 

The fact that compensation went out meant there was less money 

inside the banks and therefore less ability or willingness to lend. 

The second point is that the U.S. taxpayer was not, when it gave 

the banks money, compensated for the risk that they bore. In some 

cases, we got repaid. But we ought to look at the transaction that 

Warren Buffet had with Goldman Sachs, which was an arm’slength transaction. If we wanted what would have been a fair compensation to the taxpayer, the bailouts would have reflected the 

same terms, and we would have gotten back a lot more. 

Mr. MOORE OF KANSAS. Thank you, sir. I am interested in better 

understanding how the culture of excessive lending, abusive leverage, and excessive compensation contributed to the financial crisis. 

This applies across-the-board for consumers who are in over their 

head with maxed-out credit cards and homes they couldn’t afford, 

to major financial firms leveraged 35 to 1. 

Is there anything the government can and should do in the future to prevent a similar carefree and irresponsible mindset from 

taking hold and exposing our financial system to another financial 

crisis? Professor Bebchuk? 

Mr. BEBCHUK. Two things. One is, I think in retrospect it is clear 

that leverage ratios were allowed to be too high and we need to 

regulate those to be at the lower level. And stopping short of that, 

the approach that the Administration is proposing of imposing levies on liabilities is a useful approach, and that approach could be 

useful going forward, regardless of the issue of making up for a 

past contribution of the taxpayers just in terms of charging financial firms for the risk that larger liabilities are posing to the system and to taxpayer. 

Mr. MOORE OF KANSAS. Thank you. Ms. Minow, do you have any 

comments? 

Ms. MINOW. I agree with Professor Bebchuk. 

Mr. MOORE OF KANSAS. Mr. Stiglitz? 

Mr. STIGLITZ. Yes. Three things very briefly. It is very important 

to change the incentives, which is the subject of this hearing. If you 

have incentives for excessive risk-taking, you will do it. These incentives are both at the individual level and the organizational 

level, which is why the too-big-to-fail bank issue is so critical. Even 

when we realign incentives, we will never do it perfectly, which is 

why we need constraints on leverage, on behaviors, and on products like derivatives. 

Finally, in order for our economic system to work, there has to 

be transparency. The way the system is set up right now, it is impossible for capital markets to exercise the discipline that is needed 

to make our system function well. 

25 

Mr. MOORE OF KANSAS. Thank you, sir. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from California. 

Mr. CAMPBELL. Thank you, Mr. Chairman. I am going to throw 

out a few thoughts here on which I would like the panel’s observations, or your thoughts. I am going to suggest to you that the executive compensation issues on which we all agree, the excessive 

risk, the excessive period, the short-term focus, etc., are more the 

symptom than the disease, and that if we treat the symptom we 

will be, at best, ineffective and, at worst, perhaps counterproductive. And that includes bills like the one the chairman talked 

about that was passed, whenever it was last year, the year before, 

and that the root of the problem—to get at the root of the problem, 

two things, one of which Ms. Minow already alluded to; and one is 

the greater ability for shareholders to express their displeasure 

with executives, the performance of the company, or executive compensation through the board by having an alternative vote of directors, given appropriate thresholds, so that ability is not abused. 

And so that would be one suggestion I would have as to get to 

the root of the problem. Rather than trying to micromanage the 

pay, give the shareholders a greater ability to express their displeasure, and the way that I think is appropriate is through the 

board rather than through direct control of the pay. 

And the second—and I know the chairman is going to have a 

hearing on this subject—is the short-term focus on pay, I would 

like to suggest, is perhaps simply a reflection on the short-term 

focus of the markets, and that maybe the problem is not so much 

the pay but the fact that ‘‘buy and hold’’ is dead and all kinds of 

other things like that, such that we are focused on quarterly earnings, quarterly earnings, and I too operated inside a public company at one time and it was all about this quarter. Everything was 

about this quarter. The whole world revolved around this quarter, 

next quarter, next year be damned. And that short term, that the 

short-term pay and excessive risk-taking in pay is simply a reflection of the short-term focus on the markets; that perhaps we 

should be looking at are there other things we can do to change 

that short-term focus on the markets? One of which I suggested is 

going to semi-annual financial statements rather than quarterly. 

Now, that is not a panacea, but there may be other things. So I 

will throw those out and love to hear the panel’s thoughts on those 

thoughts. 

Mr. BEBCHUK. The first issue, I completely agree with you, it is 

actually the main thesis of the book, ‘‘Pay Without Performance,’’ 

that Jesse Fried and I published 5 years ago, is that executive compensation is a symptom. It is a manifestation of underlying corporate governance problems, and all the panels have been discussing about changing governance arrangements in the ways you 

mentioned so as to produce better compensation outcomes, rather 

than micromanaging and dictating them. 

Mr. STIGLITZ. Let me add two points. One of them is that I agree 

with your second point that the deeper problem of trying to make 

our markets less short-sighted has itself been a long-term problem, 

but it has gotten much worse. One of the things that can fix this 

is tax policy. A capital gains tax structure that encouraged longerVerDate Nov 24 2008 15:05 May 28, 2010 Jkt 056241 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\56241.TXT TERRIE
26 

term holding and discouraged shorter-term holding is one of the 

few things we can do to move in that direction. 

Mr. CAMPBELL. What would you define as ‘‘long term?’’ 

I am curious. It used to be 1 year. 

Mr. STIGLITZ. I would define it as longer than 1 year; 2 to 5 years 

is longer term. 

The second point is that, while the reforms in corporate governance are the root of the problem that we have to deal with, we are 

always going to be imperfect on that. The result is that when it 

comes to institutions, like the financial institutions, which can put 

taxpayer money and our whole economic system at risk, we have 

to not only get at the root causes and reform corporate governance, 

but we actually also have to control, try to effect the actual behaviors. 

Mr. CAMPBELL. Only basically for those systemically significant? 

Mr. STIGLITZ. Exactly, for those that represent a risk to our systemic system. But that may be broader than just the big banks. 

The CHAIRMAN. Before we get to the gentleman, particularly with 

her concern with investors, this is a very important question. I am 

just going to allow Ms. Minow to go beyond. Please don’t be concerned by the red light. I think your input on this issue, the quarterly, semi-annual, is something we very much want. 

Ms. MINOW. Thank you, Mr. Chairman. I think that is a crucial 

question, and I think that one drives the other. I think the shortterm focus on pay drives the short-term focus on numbers. It is 

really important to remember that the financial institutions themselves are very, very large shareholders, and so they look at their 

own quarterly performance in terms of the money that they invest, 

you know, so it creates a vicious circle. Clawbacks is one way of 

addressing that as an issue, because if you know that no matter, 

10 years into the future if your numbers are revised, you are going 

to have to give the money back. That keeps people focused on the 

long term. 

But with regard to the issue of a holding period and looking at 

that in terms of taxes, I just want to remind the committee that 

the largest collection of investment capital of all, $6.3 trillion, is 

under ERISA, which is indifferent to tax consequences, so they are 

not going to be affected. 

The CHAIRMAN. Would you address the—because you represent 

investors, and I am attracted by the notion of not requiring quarterly reports, going to semi-annual. The counter argument is that 

the investors would feel maybe deprived of information. 

If the gentleman wouldn’t mind, I would interested. We will 

probably get back to you. But I want to know your view on that, 

if that is all right with you. 

Mr. CAMPBELL. Sure. That is fine. 

Ms. MINOW. There is something sort of charming and poignant 

about making that suggestion in a world of Twitter and instant 

messages, everything else is becoming faster, and trying to slow 

that down. I think the fact is that one way or another, investors 

are going to get day-to-day information. 

We are very close to a point now where company financials, 

which are internally available on an almost real-time basis may 

someday become available to everybody. So I am not sure that realVerDate Nov 24 2008 15:05 May 28, 2010 Jkt 056241 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\56241.TXT TERRIE
27 

ly solves the problem, but I agree with you that is the right question to ask. 

Mr. CAMPBELL. On clawback— 

The CHAIRMAN. Take 10 seconds. 

Mr. CAMPBELL. We will discuss that another day when we have 

another hearing. I just wanted one thing on a clawback that I 

wanted to ask real quick was, you said that if someone—if it is restated. I don’t know how that changes the short-term focus. If I am 

paid entirely on what happens in the next 30 days, that would 

change the focus on accounting for it, perhaps, but if the consequences of that decision are very bad for a long term, you are not 

going to claw me back, so that doesn’t change my behavior, does 

it? 

Mr. BEBCHUK. Clawbacks cannot be based—to be effective they 

cannot be based only on accounting restatements. Even if the accounting was correct, but it turns out that the performance was illusory, the money should be adjusted. 

The CHAIRMAN. With the acquiescence of the charming and 

poignant gentleman from California, we will move on. But that is 

a question we will be dealing with, and I thank him for raising it. 

The gentleman from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

Not only do I find myself agreeing with much of what Mr. Campbell had to say, but also with what David Stockman, the Director 

of OMB under the Reagan Administration, had to say the other 

day. I am pretty sure the Book of Revelation said that when I 

agree with both Mr. Campbell and Mr. Stockman, it is one of the 

signs of the Apocalypse. 

Mr. Stockman wrote the day before yesterday in the New York 

Times in op-ed, ‘‘The economy desperately needs less of our bloated, 

unproductive and increasingly parasitic banking system.’’ 

Make no mistake, the banking system has become an agent of 

destruction for the gross domestic product and of impoverishment 

for the middle class. Mr. Neugebauer asked earlier, why didn’t we 

have a hearing about jobs? This is a hearing about jobs. How do 

we stop the excess, the vulgar excess that is not rewarding productive conduct, but is rewarding what economists call ‘‘risk seeking,’’ 

what Dr. Stockman called ‘‘parasitic,’’ that is taking money from 

the middle class and taking money from the real economy. And it 

is certainly undermining all that we need to be doing to build a 

sustainable economy that works for the middle class, works for ordinary Americans. 

I have a couple of questions. Is the focus on executive compensation part of a bigger problem? I don’t really want to regulate compensation. I would much rather the market regulate compensation. 

But the way the market is supposed to work, where there are competitive forces in place, is that competition squeezes profits and 

squeezes costs, including compensation; and, instead, in the financial industry we have seen, despite the fact that there are 8,000 

banks, or more than 8,000 banks—and God only knows how many 

other kinds of entities that were doing bank-like things, and four, 

five, six big banks, profits in that sector ballooned to, a couple 

years ago, or metastasized a couple of years ago, to more than 40 

percent of all corporate profits and compensation was almost twice 

28 

what ordinary Americans were making, when historically it had 

been about what ordinary Americans made. 

Are competitive forces working? And why not? 

And second, where were the boards of directors? Of all the institutions that failed in the financial crisis, the board of directors has 

to be near the top. Gretchen Morgenson wrote an article, a column, 

3 or 4 weeks ago that looked at what had happened to the board 

members from all the companies that had failed, and found out 

they had gone out to serve on other boards with no apparent diminution in their reputation. They were not tarnished in any way. 

There was an article in the New Republic that I read last night 

that was very critical of General Tommy Franks for not having 

captured or killed Osama bin Laden in Tora Bora in December of 

2003. And without necessarily agreeing with everything that he 

had to say, there was a snide reference he had now retired and 

joined the board of directors at Bank of America and Chuck E. 

Cheese, which gave me the impression that boards of directors 

were really more a part of celebrity culture than they were corporate governance, that a board of directors meeting was a celebrity appearance. 

What can we do to make boards of directors a full-time job, a real 

job, and we don’t have people on there who just treat it as a celebrity appearance? 

Mr. BEBCHUK. I think, actually, making directors full-time employees is not a good idea because that would make them like insiders, would make them more dependent on the firm. 

What we need to do is obviously have them spend enough time, 

but the most important thing is to make them dependent on the 

shareholders in a way that would give them the right incentives 

and the kind of governance arrangements we were discussing. Arrangements that enabled shareholders to replace directors more 

easily would produce such an outcome. And this would be not replacing market outcomes, it would just enable the market to work 

better. 

Mr. STIGLITZ. I want to make two comments on what you said. 

The first is when you were talking about that 40 percent of all corporate profits were in the financial sector, we have to remember 

that a lot of that was phantom profits; that is to say, they weren’t 

real profits. That shows the difficulty of measuring performance in 

the financial sector. They have enormous discretion to create 

money, as it were, to create profits, and then later on to have 

losses, making all the more important the issue that we have been 

talking about of a long-term perspective. 

On the second point, I couldn’t agree more. The fact that there 

is imperfect competition leads to sustainable above-normal profits, 

and that is particularly true in the big banks. The point is, there 

has been a large increase in concentration in the financial industry, 

and when it comes to particular issues like credit cards, it is very 

clear that they are engaged in anticompetitive practices that allow 

them to garner those profits and then, obviously distribute those 

profits to the officials. 

Ms. MINOW. May I address the issue of the boards of directors? 

I feel very strongly about it. My company rates boards of directors 

like bonds, A through F. And we have really encouraged our cliVerDate Nov 24 2008 15:05 May 28, 2010 Jkt 056241 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\56241.TXT TERRIE
29 

ents, to include director and officer liability insurers, to raise the 

rates, sometimes to raise them to make it prohibitive for repeat offenders to continue to serve. And I will continue to try to do that. 

But when I first came into this business, O.J. Simpson was on 

five boards. He was on an audit committee. So we have made a little bit of progress. I think Tommy Franks probably was a better 

director than O.J. 

The CHAIRMAN. The gentleman from New Jersey. 

Mr. LANCE. Thank you, Mr. Chairman. Good morning to you all. 

Regarding your point, Professor Stiglitz, that Warren Buffet had 

an arm’s-length transaction with Goldman Sachs, why don’t you 

think the American people have that same arm’s-length transaction? Was it just missteps by those in the Executive Branch? 

Mr. STIGLITZ. You might say ‘‘missteps.’’ They were very much 

taken into the view that at that point, they had to give money to 

the banks; because they thought it was imperative so that the 

banks could return to the usual role that they had had. But the 

government officials were captured in an intellectual sense by the 

banking system. It was a very big mistake. 

Mr. LANCE. And do you see improvement with Federal officials 

at the moment in this area? 

Mr. STIGLITZ. If I look at the proposals that are being discussed 

recently, I see a very marked change. But if you looked at the bailouts that occurred in January, February, and the beginning of this 

year, they were as bad as those that occurred earlier. 

Mr. LANCE. That is my point. And I began my questioning with 

what occurred at a prior time. But from what I have seen so far 

this year, there doesn’t seem to me to be much of a change, and 

certainly in both last year, a year-and-a-half ago and in 2009, we 

the people, you and I together, the American people, were on one 

side and Warren Buffet with his arm’s-length transaction was on 

another side, a much preferable side. And it seems to me we ought 

to learn from mistakes. And so far, I haven’t seen any great learning curve in this regard. 

Ms. Minow, your comments perhaps in this area? 

Ms. MINOW. I have seen a learning curve. I think that the initial 

transaction, the initial bailout transaction was made in a moment 

of sheer panic, and it reflects that. But I think that the subsequent 

negotiations, and particularly the Administration’s proposal of this 

week, do show that some lessons have been learned. 

Mr. LANCE. Regarding Fannie Mae and Freddie Mac, how could 

these bonuses possibly have been given, in your opinion, as a matter of the court of public opinion, and what should we do? 

Ms. MINOW. Mr. Lance, if these people could be embarrassed, we 

wouldn’t be here talking about them. They seem to be 

unembarrassable. So the court of public opinion doesn’t seem to 

matter to them. 

Mr. LANCE. So what should we do to make sure this doesn’t happen again? 

Ms. MINOW. With regard to Fannie and Freddie? 

Mr. LANCE. Yes. 

Ms. MINOW. I support the chairman’s notion of essentially rebooting the entire concept. 

Mr. LANCE. Professor Stiglitz, your views? 

30 

Mr. STIGLITZ. I agree. I think that we really have to reexamine 

the whole structure of the GSEs: the concept of an institution that 

was in the private sector, which is what they were, and yet seemed 

to have by some people’s account this kind of public role, which is 

a very peculiar mixture. We have been talking about corporate governance, and it was a system of governance that was almost bound 

to fail. 

Mr. LANCE. Thank you. Is my time expired? 

The CHAIRMAN. No. 

Mr. LANCE. Following up on Congressman Campbell, the shortterm focus versus the long-term focus, isn’t this true throughout 

the whole society? People don’t let me finish a sentence. 

The CHAIRMAN. Would the gentleman hurry up, please? 

Mr. LANCE. I can never be as witty as the chairman. 

Isn’t this the nature of society? And how are we going to overcome this? Ms. Minow, your point of view? 

Ms. MINOW. It is the nature of humanity, I am afraid, but I do 

think that we have some structural perversities in the system that 

can be regularized to calm things down. 

Mr. STIGLITZ. We will never perfectly overcome it. But I think 

some of the things that we have been talking about are ways to 

mitigate some of the consequences, and we have to recognize that 

in some ways things have gotten worse; and that shows that whatever it was, you know, is not inevitable. Changes in the rules, the 

tax structures, and so forth do affect the extent to which there is 

that shortsightedness. 

Mr. LANCE. Thank you. I yield back the balance of my time, Mr. 

Chairman. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GREEN. Thank you Mr. Chairman. Mr. Chairman, we are 

dealing today with the irony of ironies, because most who opposed 

raising the minimum wage to $7.25 an hour were supporters and 

are supporters of maintaining a bonus structure that creates systemic risk. 

Now, the public may not understand systemic risk and perverse 

incentives and proprietary trading, but the public does understand 

this: that it took us 10 years to raise the minimum wage to $7.25 

an hour. And if a person—and there is such a person—who gets a 

bonus of $69.7 million, it will take a minimum wage worker 4,622 

years to make $69.7 million. Some things bear repeating, 4,622 

years. 

The public understands that when you explain that the CEO or 

the CEOs of the biggest companies make more in 1 day than a 

minimum wage worker makes in a year, and this CEO has reason 

to envy the hedge fund manager who makes more in 10 minutes 

than the average worker makes in a year, and only pays 28 percent—pardon me, 15 percent, capital gains, not ordinary income. 

I am one who supports allowing people to make bonuses as large 

as they can make, as long as they don’t do it based upon perverse 

incentives that create systemic risk. And that is what this is all 

about—perverse incentives that create systemic risk. 

Let people make as much they can. But let’s not allow them to 

create perverse incentives that will bring down this economy. 

Enough already with this notion that we should just let the econVerDate Nov 24 2008 15:05 May 28, 2010 Jkt 056241 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\56241.TXT TERRIE
31 

omy collapse. If we had not bailed out AIG—and I did not want to 

do it, I had to hold my nose and close my eyes to cast a vote—but 

if we had not bailed out AIG, Bear Stearns, the auto industry, 

would the world be a better place today, Ms. Minow? 

Ms. MINOW. I think we could have done a better job of bailing 

them out, but I think we should have bailed them out. 

Mr. GREEN. Would the world have been a better place? 

Ms. MINOW. No. 

Mr. GREEN. Sir, Mr. Stiglitz? 

Mr. STIGLITZ. I agree that the way we bailed them out leaves a 

lot to be desired. 

Mr. GREEN. Leaves a lot to be desired. Would the world have 

been a better place if we had not? 

Mr. STIGLITZ. I think that at the time, the perspective was that 

we thought we had to. 

Mr. GREEN. I want speculation. If I may intercede, my time is 

limited. 

Would the world be a better place today? Give me your speculation. 

Mr. STIGLITZ. My speculation is the world would be a better place 

if we had let AIG fail. 

Mr. GREEN. The auto industry, Bear Stearns, and AIG? 

Mr. STIGLITZ. I think we were forced to have some kind of a bailout for some of these. 

Mr. GREEN. Mr. Bebchuk? 

Mr. BEBCHUK. I feel the world would have been better had we 

done a ‘‘partial bailout,’’ for example. Having some of AIG’s 

counterparties— 

Mr. GREEN. If we had taken a laissez-faire, hands-off attitude 

and let things go, would the world be a better place today? 

Mr. BEBCHUK. Compete laissez-faire, no. It would not have been 

a better place if we just took our attention completely away from 

those firms. The answer is no. 

Mr. GREEN. Just laissez-faire, let the world go wherever it is 

going. 

Mr. BEBCHUK. That would have been a worse outcome. 

Mr. GREEN. Do you understand that we have Members of Congress who are advocating we should have just let the world go, just 

left it alone? Can you imagine where we would be if we had done 

nothing? Is it irresponsible to do just nothing at a time of crisis like 

this? Ma’am? 

Ms. MINOW. Yes. 

Mr. GREEN. Sir? 

Mr. STIGLITZ. I agree it would be irresponsible. 

Mr. GREEN. Is it irresponsible to do nothing? 

Mr. BEBCHUK. It is not the right thing to do. 

Mr. GREEN. It is not the right thing to do. All right. I will help 

you. It is irresponsible. 

Friends, we at some point have to become adults about what we 

are dealing with. We are talking about perverse incentives that create systemic failure. Give me an example, please, ma’am, of a perverse incentive that creates systemic failure, please. 

Ms. MINOW. Certainly. In the subprime industry, the individuals 

were paid on the number of transactions rather than the quality 

32 

of transactions. So they had a perverse incentive to create as many 

transactions as possible. 

Mr. GREEN. Mr. Chairman, may I, with unanimous consent, ask 

that each other witness just give one example of perverse incentive? 

Mr. STIGLITZ. The fact that the incentives in the financial sector 

were based on pay as measured by performance, whether it was 

through excessive risk-taking, increasing beta, or whether it was 

the result of greater efficiency, increasing alpha. 

Mr. BEBCHUK. The fact that the top executives at Bear Stearns 

and Lehman Brothers were able to get in 2006 very large bonuses 

based on earnings which then they were able to keep and they 

were not clawed back, even though all those earnings, and more, 

were evaporated in the subsequent period. 

Mr. GREEN. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. Thank you, Mr. Chairman. I have a number of 

questions so I am going to try to ask them quickly. But before I 

ask the questions, I was appointed to this committee in 2005 with 

Mr. Green—I had to just recheck—and my recollection is that at 

the time, Mike Oxley was the chairman of this committee and our 

current chairman was the ranking member. And one of the first 

things we dealt with when I came on this committee was some proposed reform, assuming by Mr. Oxley, maybe both Mr. Oxley and 

Mr. Frank, dealing with Fannie and Freddie. 

I was talking to a reporter 2 days ago who said one of the problems in Washington is that the truth doesn’t matter; it is whether 

or not you can say a lie over and over and over again so that everybody buys it. So my concern is that history has been a little distorted, because Mr. Oxley proposed trying to deal with the issue of 

Fannie and Freddie compensation, and as I recall, they didn’t get 

any support from the White House. If I have misspoken, I would 

like to be corrected. 

The CHAIRMAN. If the gentleman would yield, Mr. Oxley’s quote 

in the Financial Times was that what he received from the White 

House was the ‘‘the finger salute.’’ 

Mr. CLEAVER. I take that to mean I am correct. 

Mr. BACHUS. Would the gentleman further yield? 

Mr. CLEAVER. Certainly. 

Mr. BACHUS. Chairman Frank opposed that legislation. 

The CHAIRMAN. Would the gentleman further yield? 

Mr. CLEAVER. Yes. 

The CHAIRMAN. The gentleman from New Jersey and the gentleman from Texas derided it as very ineffective and weak, and it 

failed in the Senate. I voted for the bill in the House and in the 

committee. When it got to the House Floor and the Republican 

leadership put in an amendment restricting affordable housing, unrelated to the structural organization of Fannie and Freddie, I then 

voted against that. But I voted for the bill until they put that 

amendment in. 

I thank the gentleman and he will get an additional minute for 

yielding. 

Mr. CLEAVER. The point I was trying to make, as somebody had 

said earlier, had transferred the conversation to Fannie and 

33 

Freddie, and that we had not tried to deal with compensation with 

Fannie and Freddie. I wanted to try to clear it up as this reporter 

told me. It doesn’t matter; people are going to continue to say it, 

just like we will hear over and over again that I guess President 

Obama started the bailouts. 

But where I want to go now is that the too-big-to-fail is a problem because I think they understand clearly that they have what 

it takes to take what we have. And if that is the attitude they 

have, which I think it is, we are going to lose. 

My questions are though—and I don’t know the answer to this, 

and in this committee you probably should know the answer before 

you ask the question—but did the firms with better compensation 

perform better? Those with the better compensation structure, did 

they end up performing better? Did they get into trouble? Do any 

of you know that answer? 

Mr. BEBCHUK. This is a subject that still needs to be investigated. What makes it not a straightforward question to answer is 

the question is, what does it mean to be compensated better? So 

if you believe that better compensation is one that provides less incentives to focus on short term, then you have to measure those dimensions and then to find how they have correlated with performance, and that is not something that has yet been kind of fully 

done. 

Mr. CLEAVER. Don’t you think that would be a worthy project 

to— 

Mr. BEBCHUK. Definitely. 

Mr. STIGLITZ. Part of the problem is that almost all of the big 

banks, those that are too-big-to-fail, had similar compensation 

schemes, so that you probably won’t be able to get clear results. 

The differences were not big enough to overwhelm the perverse incentives that really dominated the whole industry. 

Mr. CLEAVER. I was wondering if you could do an overlay with 

what happened with the mortgages—the banks, mortgage companies, that did not go into the subprime scam even though they 

didn’t make as much money. Now, if you look at their books, they 

did better. And so the question that I raise was based on what I 

have seen with the subprime industry. 

And do you think that the—particularly the Wall Street so-called 

investment banks will change their compensation structure without 

congressional legislative encouragement? 

Ms. Minow? 

Ms. MINOW. As I discussed in my testimony, the fact that following the bailout just over the last year, they have essentially 

poured gasoline on the fire of excessive compensation suggests to 

me that they need a much stronger message from Congress. 

Mr. STIGLITZ. I agree. There will be some cosmetic changes, but 

the question is, will the depth of those changes be anywhere near 

sufficient to address the kinds of concerns that have been discussed 

this morning? 

Mr. CLEAVER. My final question. In talking with an investment 

banker in my district in Kansas City, Missouri, I found out that 

what the investment bankers like to do is—not the people out trying to make the deals, but the execs—give bonuses that stretch 

over a number of years. And my assumption is that they invest, 

34 

you know, they give a bonus over the next 4 or 5 years, and then 

they invest what they gave, they keep and invest what they gave. 

And so I am wondering whether or not that kind of system should 

be outlawed. The executives don’t want to give compensation, all 

compensation in cash up front. They want to stretch it out over the 

years. Do you understand when I am saying? 

Mr. STIGLITZ. Let me make one comment, which is they are very 

creative in trying to subvert the intention—that we have been concerned with—of getting better incentive systems. One of the concerns is that, if you look in more detail across corporations, much 

of what is called ‘‘incentive pay’’ is not incentive pay. It is a charade. If you look at overall performance and overall compensation, 

they are much less closely linked than the name would suggest. 

That was evidenced in the AIG case where, when they began to 

have problems, they just changed the name from ‘‘performance 

pay’’ to ‘‘retention pay.’’ They are very clever in undermining what 

we are really concerned about. 

Mr. CLEAVER. I know you weren’t trying to suggest this, but it 

almost sounds like you were saying they are trying to trick Congress and the public. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from Ohio. 

Ms. KILROY. Thank you, Mr. Chairman, and thank you to all of 

the witnesses for your thoughtful testimony. And I thank my colleagues for their questions and discussion that we have had since 

then. It has been very useful and thought-provoking, and still the 

whole issue is still difficult to get your arms around here. 

Despite the financial crisis in the fall of 2008, and the resulting 

bailouts and further infusions of cash along the way, here we are 

again with the public outraged and Wall Street handing out this 

year a record $140 billion in bonuses. 

When we take a look at that kind of money and try to put it in 

some kind of perspective, in context, according to the Washington 

Examiner, this is 10 percent of the entire U.S. deficit, or 3 times 

the amount budgeted for education, or 4 times the amount for 

Homeland Security. It is vastly more money than we have pledged 

for the reconstruction of Haiti and an amount that could prevent 

millions, hundreds of millions of home foreclosures. 

So it is no wonder that hardworking Americans who thought, as 

was brought out in questioning, that okay, we need to bail out Wall 

Street, we don’t want to go over the cliff, and understood it was 

their hard-earned dollars that were going towards that, nevertheless wanted to see something other than banks buying up banks 

and handing themselves out bonuses as a result of trading activity, 

rather than making those loans or renegotiating those mortgages. 

So families understand that they have lost jobs and they have 

lost homes, and bankers still are getting billions of dollars, and we 

still haven’t gotten a hold over all of the issues about the risky behavior that has brought us here to this date. 

Now, I listen to the bankers, and sometimes they tell me that 

they are offended that we are even talking about regulating their 

bonuses and their compensation, that we don’t understand that 

they are the best and the brightest, or that it has to be now for 

retention; otherwise they would, I don’t know, go do I don’t know 

what. I get offended when they tell me they are the best and the 

35 

brightest, because I happen to think that there are a lot of people 

who are very bright and very good. In fact, the best are involved 

and teach for AmeriCorps, in our public schools, or in our hospitals, 

or social workers, and they seem to work very hard with substantially less pay. 

So, you know, I serve on the Homeland Security Committee, and 

we had the Salahis in last week and they were all primped and 

dressed up and made up and these gate crashers struck me as incredibly self-centered and without regret, and sometimes, like some 

of the people that I hear saying that we can’t touch their pay, they 

don’t get how angry hard-working Americans are and how people 

in central Ohio think pay should somehow relate to your productivity. And they don’t get it that when you ruin an economy, you 

get these kind of bonuses. 

So, you know, I know we have been around this a few times already, but what advice do you have for us so that we can fairly 

compensate people and try to define performance? And if the issue 

is, Ms. Minow, as you suggested, the central issue, board governance, if boards have this attitude that we all deserve that in the 

financial sector, that kind of compensation, how do we really get 

into, you know, changing the practices, both in order to protect us 

from further damage down the road, and to have a better handle 

on corporations and their governance? 

Ms. MINOW. The focus on the post-Enron reform legislation, Sarbanes-Oxley, and the regulations has all been on what I call the 

supply side of corporate governance, what managers have to do, 

what accountants have to do. We have not really focused on the demand side, on what shareholders have to do. And the fact is that 

you should have in here the heads of all the mutual funds, the Assistant Secretary responsible for ERISA, these are people who routinely vote in favor of these boards of directors, in favor of these 

pay plans because no one is looking at them, no one is paying attention to them. I think we need to remind them what fiduciary obligation is all about and that it is in their economic interest to look 

at pay as a risk factor, and I think that would make a big difference. 

Mr. STIGLITZ. I think the reforms in corporate governance that 

we have been talking about, both on the demand and supply side, 

are essential, but in the end I think they won’t go far enough, for 

two reasons. One, those aspects of the structure of the compensation schemes that put at risk the national economy and the taxpayers’ money have to be regulated in a whole variety of ways. 

The second point is that the tax structure as a whole has to be 

designed better to address the sense of equity in our system. The 

arguments that have been made before, that more progressive taxation or that taxing capital gains would have adverse incentive effects, are just wrong. We can have a fair tax system that actually 

would encourage greater efficiency. 

Mr. BEBCHUK. I would put the $140 billion figure that you mentioned in context, not just by comparing it to the Homeland Security budget, but I would compare it, that would be the most relevant comparison, to what shareholders have received during this 

period and what taxpayers have received during this period. So 

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36 

tion of the financial sector to the performance of the economy over 

the last decade. If you look at the numbers, you see that shareholders in the financial sector over the last 10 years still see somewhat negative returns over this long period. And we know about 

taxpayers. 

So what we need is to reallocate the pie, so to speak, in a more 

efficient way between shareholders, taxpayers, and financial executives, and the way to do it would be for shareholders to have 

stronger rights so that they can claim their share of the pie, and 

for taxpayers to begin going forward charging banks adequately for 

the support the taxpayers are providing. 

The CHAIRMAN. The time of the gentleman has expired. I just 

want to makes an announcement to others. And this again, the 

gentleman from California, Mr. Campbell, the gentleman from 

Michigan, Mr. Peterson, there has been a lot of interest in corporate governance. We tried to minimize the involvement of it with 

the financial regulatory programs. We want to deal with that. We 

are going to get into the corporate governance issue, and that includes, by the way, I would just say to Ms. Minow, jurisdiction 

being what it is, I don’t think I can summon the Assistant Secretary of Labor before this committee who was the ERISA guy or 

woman. But we are going to continue with one of the things that 

the SEC did, which is to require that all these institutions publish 

how they vote. As you know, there was a lot of resistance to that. 

And the fact that it was kind of partisan is true, so it was imposed 

on the mutual funds, and we believe it should be imposed on any 

fiduciary. If you are the owner of the shares in your own right, you 

have a privacy right. But if you own shares as a fiduciary, we, I 

hope, will pass legislation that will require that you have to make 

public how you voted on all the proxies. We can’t force them to do 

more, but I think that would be useful. 

Ms. MINOW. No question about it. I would be delighted and I 

hope you will allow me to come back and testify in support of that. 

The CHAIRMAN. And we will be inviting people to that hearing. 

Before we get to the last questioner, the gentleman from Florida, 

one other question, I talked to the gentleman from Alabama, if I 

have just like 2 minutes, unanimous consent to say, one of the 

things we are told is well, we are given two arguments on compensation. One, we will all go to some other country. Well, the rest 

of the world is getting tighter than us. So now the argument is 

okay, we will go do something else. We will go into some other profession and won’t you be sorry, all billion of us will no longer be 

trading CDSs with each other. 

My response is in part, well, I am not sure where you are going 

to go for that kind of money. But two, what if they did, if, in fact, 

fewer of the very brilliant people that the gentleman from Ohio 

was referring to decided that there was no longer enough money 

to be made in bond trading and went into other lines of work, 

would that be a social loss? Not that we would drive them away, 

but is that a by-product that we have to try to avoid? 

Ms. MINOW. I was supportive of the remarks you made on this 

subject earlier this week, Mr. Chairman, when you talked about 

scheduling this hearing. And in my written testimony, I said I 

37 

would love to see the demand curve on that one if all of the Wall 

Street guys rush out into the market. I think the pay package— 

The CHAIRMAN. Well, I think it is twofold. One, what is the demand curve and, two, even if there is a demand what is the social 

loss? 

Professor Stiglitz? 

Mr. STIGLITZ. I addressed that in my written testimony. I said 

that not only is there a misallocation of financial capital, but there 

is also a misallocation of human capital that is costing our society 

even more. It would be a good thing for our society to reallocate 

this human capital. 

The CHAIRMAN. Professor Bebchuk? 

Mr. BEBCHUK. There is a very interesting study by Claudia 

Goldin and Larry Katz from Harvard, and they track what happened to Harvard college graduates over a long period of time, and 

they report that a huge increase in the fraction of the class, the 

best and the brightest, they go into finance relative to what happened 30 years ago when larger numbers were going into science, 

engineering, medicine, and so forth. And this partly reflected response to market incentives, and now that we are reconsidering the 

contribution of financial to the wellbeing of the economy, we might 

conclude that having a smaller fraction going into finance might 

not be a bad thing. 

The CHAIRMAN. Thank you. Does the gentleman from Alabama 

want to take 2 minutes? 

Mr. BACHUS. Yes, I do want to say this. I think we are dealing 

with executive compensation, and I think one thing that does trouble most Americans and Members on both sides of the aisle is that 

some of the very large banks do borrow very cheaply from the Fed, 

and that is taxpayer subsidized in one way or the other. Whether 

they invest them in Treasury bonds or carry trade, or whether they 

use them to trade and make additional profits, the original premise 

was that money would be loaned, and it is not. 

Now, I will say this: The flip side of the argument is that they 

are using those trading profits to cover some of their lending losses, 

and in some ways that makes the banks stronger and it may avoid 

the government having to come up and pick up liability. You know, 

that is one of their answers. 

Another one that they say is that there are no borrowers; they 

can’t find borrowers who are qualified. Now, I talk to many people 

back in Alabama, and they say when they deal with the large 

banks, they say they are not interested in loaning someone 

$200,000. They are interested in $100 million deals. So I think that 

is a real problem. Particularly as banks get bigger and bigger, they 

are not lending on Main Street. They are lending to large corporations, but smaller businesses can’t get loans. 

And I do think the American people do believe that by being able 

to borrow cheaply from the Fed and some of the guarantees that 

have been extended, that money is finding its way into compensation, which gives the appearance of being excessive. And so I think 

these are valid concerns. 

And also, the last concern, and I will close with this, and I think 

it is a concern we all have, as they do this trading they tend to be 

going back and doing what got them in trouble in the first place, 

38 

and that is speculating, leveraging, and what happens, do we get 

right back into the problem we had? And if they are going to get 

in trouble, they say, you know, you don’t want us to make bad 

loans. That is true. We also don’t want them to make trades that 

are risky. And if anything, the trades benefit themselves, proprietary trading, whereas the lending at least gets the economy going. 

The CHAIRMAN. If the gentleman would yield, if they can make 

enough money doing everything but lending that may be a contributing factor to not lending. We will have an all-day hearing on Friday, February 5th, with borrowers and regulators and lenders, and 

we want to get into this question about why more loans aren’t 

being made. It is a bipartisan concern. And I do think it is legitimate to inquire to the extent to which other opportunities to make 

a lot of money displace lending, either directly or indirectly. Let me 

just now— 

Mr. BACHUS. And I do think one answer is to look at whether 

they are lending, and if they are not lending, the government, if 

they are going to make money available it ought to be to those institutions that are lending and lending on Main Street, and put 

some competition out there . 

The CHAIRMAN. Yes. And that will be our February 5th hearing. 

The last questions will be from the gentleman from Florida, Mr. 

Grayson. 

Mr. GRAYSON. Thank you, Mr. Chairman. In capitalism, winners 

have to win and losers have to lose. People are normally rewarded 

for success and they are punished for failure. Now, we went 

through an experience where, between the middle of 2007 and the 

end of 2008, that 18-month period, we lost $12 trillion in our country’s net worth. According to the Federal Reserve figures, the net 

worth of America dropped from $62 trillion to $50 trillion, by 20 

percent in the last 18 months of the Bush Administration. 

Is there any sign since these bailouts began that the institutions 

and the individuals on Wall Street and in major banks who were 

responsible for the decisions that led to that loss of $12 trillion actually were held accountable for it? Any sign at all? 

Professor Stiglitz? 

Mr. STIGLITZ. No. 

Mr. GRAYSON. Ms. Minow? 

Ms. MINOW. No. 

Mr. GRAYSON. Professor Bebchuk? 

Mr. BEBCHUK. I think some of them lost their positions. Some of 

them lost money, but by and large they have not been held sufficiently accountable. And the most important thing is we don’t yet 

have incentives going forward that would make people do the right 

thing in terms of risk-taking. 

Mr. GRAYSON. Well, you raise an interesting point. I actually 

asked the head of AIG, who actually were the people responsible 

for their losses that led to the government bailout and he wouldn’t 

even tell me their names. Isn’t it possible that the people who actually led to this financial disaster, not only in America, but around 

the world, are still doing the same jobs, very often down the block 

from where they were before? 

Mr. BEBCHUK. I think some of the key people did lose their positions. So some of the top people at AIG are no longer there. But 

39 

I think that I agree with your sentiment that probably they have 

not been held sufficiently accountable. And most importantly, many 

of them have been able to pocket and still keep large amounts of 

money that were based on results that they had in 2006 and 2007, 

which were disastrously reversed in 2008. 

Mr. GRAYSON. What does it mean for a capitalist country like the 

United States if over a long period of time, failure is rewarded and 

capital destruction is rewarded? What does that mean in the long 

run? 

Ms. Minow? 

Ms. MINOW. Bankruptcy. 

Mr. GRAYSON. For the country? 

Ms. MINOW. For the country. 

Mr. GRAYSON. Professor Stiglitz? 

Mr. STIGLITZ. It obviously has a very adverse effect on the efficiency of our economy. I have called it an ersatz capitalism, where 

you socialize the losses and you privatize the gains. That leads to 

distorted behavior, which is why a lot of what we are talking about 

is about going forward, not just dealing with the past. Unless we 

correct these incentive problems at the organizational and individual level, we are likely to have exactly the same kind of problem 

again. 

Mr. GRAYSON. And Mr. Bebchuk? 

Mr. BEBCHUK. I really agree. The difference between what Professor Stiglitz called ersatz capitalism and real capitalism is very 

substantial and costly for the country’s well-being. 

Mr. GRAYSON. Now, on Wall Street the gearing, the ratio between assets and equity is often 10 to one or more, right? Professor 

Stiglitz. 

Mr. STIGLITZ. If it were only 10 to one, we would think of that 

as very conservative. It has been up to 30 or 40 to one. That is an 

example of excessive risk-taking with very little social benefit that 

you can associate with that high level of risk-taking. 

Mr. GRAYSON. Well, let’s say it was only 10 to one. Isn’t it true 

that every dollar that is paid on executive compensation means $10 

less in loan ability for these institutions, the ability to lend out 

money to the rest of America? Professor? 

Mr. STIGLITZ. Yes. We were talking about that at the beginning 

of the hearing, that money that goes out in bonuses is money that 

is not available in, you might say, the net worth of the bank and 

therefore not available as the basis of the leverage that the bank 

can lend out. 

Mr. GRAYSON. Now, do the managers of these institutions on 

Wall Street and the big banks around the country have any incentive all in an economy that is based on incentives like America’s, 

any incentive at all to economize on their own compensation? 

Ms. Minow? 

Ms. MINOW. No, I think it is the sky’s the limit. 

Mr. GRAYSON. Professor Stiglitz? 

Mr. STIGLITZ. The incentives are distorted. We have been talking 

about what would happen if they had long run incentives. If they 

had more effective long run incentives, then of course they would 

say if they keep the net worth of the company larger, it will make 

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40 

pany is doing better, and they will get an appropriate return. But 

that is not the way the current incentive structures are designed. 

Mr. GRAYSON. Mr. Bebchuk? 

Mr. BEBCHUK. They don’t have the right incentives. Privately 

they would be better off paying, having larger compensation even 

at some cost to the shareholders. We have seen this in firms that 

were making decisions whether to return TARP funding, and it 

seems that some executives were eager to return TARP funding, 

even when that was costly to their shareholders, as evidenced by 

market reactions, in order to get out of the restrictions the TARP 

funding had on the compensation. 

Mr. GRAYSON. Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the witnesses. We will take further testimony, particularly on the question of how you deal with shorttermers and some of these things that are ongoing and also on 

what I think I will title the ‘‘so what’’ part of this, which is, oh, 

if you don’t let us make all this money, we will go off and do other 

things. We know they are not going to England. In fact, one of our 

major bank CEOs—we don’t need to mention him here—complained to the Chancellor of the Exchequer that they were driving 

away his potential investment in Canary Wharf because of their 

compensation restrictions. So they really are trying to play us off 

against each other. I will be in Davos next week, and one of the 

things I will most focus on is reinforcing this agreement, both with 

compensation and regulation, that we are not going to be played 

off, and I think in fact America will wind up being a little bit more 

lax than many of the others. So then the question is, okay, we will 

go off and engage in other lines of work, and maybe if we got some 

more family physicians and less people doing mathematical models, 

it wouldn’t be such a bad thing. 

Thank you all. 

[Whereupon, at 12:19 p.m., the hearing was adjourned.] 

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A P P E N D I X 

January 22, 2010 

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