archbishop of washington at the ordinary of this diocese here. [cheers and applause]

crp programs. this is live on c-span. but the same firms have recorded a record profits and are handing out lavish bonuses. some continue to follow reckless compensation practices. this is because we have been irresponsible corporate coacher where american ceos are awarded large bonuses and a generous stock options even when their companies performed poorly. this has been typical in the past 25 years.

the total real compensation of ceos grew sixfold in this time. the case against the pay of american ceos looks even more powerful by recognizing that the typical american company receives -- american company had received more total compensation that the company head of most developed countries. clearly, american ceos are being rewarded over ceos elsewhere, even when per-capita income of the countries do not differ much. recent headlines have focused on financial firms, we cannot ignore other sectors. in fact, the five ceos all outside of finance or recently named the highest paid worst performers. the ceos are taking one more pay despite the fact of their businesses have done so badly that their stocks have tainted and they have laid off many employees. -- their stocks have tanked and

they are laying off many employees. as we work to issue new guidelines on executive pay, we need to ensure firms begin to better align with stockholder value. i suggest moving beyond a nonbinding shareholder vote on executive compensation. there is continued frustration with company boards editor fail to act in a response to a successful non-binding cheryl the resolution or watered down implementation of proposals. boards can continue to rescind board adopted policies under the fiduciary duty of obligations. i encourage open dialogue between church elders and management, but i do believe that shareholders -- between shareholders and management, but i do believe shareholders need to control management in their firms.

>> the senator from alabama is recognized for -- the representative from alabama is recognized for two and half minutes. >> mr. chairman, i think you have been very fair two committee republicans. you have invited witnesses that we have requested and often invited more than just one of our courses at certain hearings. of course, it is traditional that republicans get to call one witness at hearings. i have always appreciate your consideration, and i know my colleagues have, to. because you have always been accommodating of our request, the decision to deny republicans are witness choice for this hearing is both disappointing and puzzling. i am not sure what makes this hearing any different from any other one. 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 and freddie. and he is the person who, along with the treasury department, approved a $42 million payday for 12 executives of the failed gse's including $6 million to the failed executives. in this hearing, we assumed we would be permitted to examine a real-life case of excessive and unreasonable executive pay at the two companies that have received more extraordinary taxpayer assistance, over $110 billion and counting, than any others. but we were wrong. $6 million is at 15 times more than what the president turns and 30 times more than the cabinet secretary. on christmas eve when it was announced, these bonuses, one commentator said the taxpayer

got scrooge. congress should step in. i and several of my republican colleagues on the committee 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. >> do you wish to continue? >> 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 they would be paying some tremendous bonuses. the legislation also expresses a sense in congress that each

executive should return the executive pay 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'm disappointed that the american taxpayers will have to wait another five weeks for an explanation from the obama administration about this christmas eve raid on the treasury to pay these executives. i yield back the bonds of my time. >> the gentleman consumed 3 minutes. there will be seven on this side and seven on that side. i recognize the gentleman from california for two and a half minutes. >> i believe in capitalism, that means shareholder control and shareholder risk. that is why we ought to have pay on -- as we ought to have a say on pay and it ought to be binding. there is a special circumstance

where company -- a company is too big to fail. at that point, they have quite the federal government guarantees. -- quasi federal government guarantees. at this point, they should be broken up. the gentleman from virginia is willing to allow the administration to do just that. until then, those that are too big to fail should reduce fees to recruit for the taxpayer of the benefit those organizations get from this implicit federal guarantee. the bill we passed in this committee and in this house does that. and with peters amendment, allows those firms to pay for the past cost of the too big to fail as well as provided for the too big to fail problems of the future. it also makes sense as long as those that are too big to fail

enjoy the implicit federal guarantee if they are qazquasi federal government entities or differed from those that wall street is familiar with. the best solution is for firms to voluntarily divide themselves so that they are not too big to fail. and we can go back to real capitalism, shareholder control, shareholder risk, and a congress @@÷@@r

up if the some bureaucrat thinks they are too big. i am not talking about venezuela. i'm talking about what is going on in the usa. at the american people are getting tired of the government telling them what to do. we're going to try to look tough on the financial institutions so we can appease the in your of the american people for committing trillions of their hard-earned money -- to appease

the anger of the american people for committing twins of their hard-earned money. -- trillions of their hard- earned money. and 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 do not create jobs, and in fact, we're going to cause more americans to lose their jobs. we need to focus on raising taxes, growing government and while the stimulus plans. where the jobs you promised the american people? the american people send you a wake-up call on tuesday in massachusetts, mr. president. i hope you were listening. with that, i yield back. >> the gentleman from kansas is recognized for two minutes. >> just like reasonable executive compensation rules to increase financial -- just like reasonable executive compensation, goals to increase financial stability should not

be partisan. the fannie and freddie should not be there. i'm disappointed in my friends on the other side of the aisle when they were in control of the congress they did not do more to regulate fannie and freddie. we missed a golden opportunity that would have avoided a lot of the problems we are facing now if we had not had such a firm of ideological position at the white house and the treasury and the fed. i hope we can come together, republicans and democrats, to explore good policies this year. i've always felt the financial firms receiving taxpayer assistance should receive the most scrutiny with respect to their executive compensation practices. one example involves a large celery for a lot -- a large salaries for fannie and freddie executives. i joined chairman frank and others to vote to stop the unfair tarp pay practices unfair recipients. -- unfair pay practices of tarp

recipients. finally, for firms to have repaid tarp, i do not think the government should go in and set levels. the government does have a role in looking at the structure more broadly to enter risk-taking is properly aligned with rewards and does not pose a systemic risk. i look forward to hearing from our witnesses and i yield back our time -- my time. >> after of said the fees in the state of new jersey, 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 drop #1, and that is, create jobs. help create jobs for the american people. instead, it really appears that the administration is set upon a venture in a scapegoat-ism.

let's see if we can find an entity that is perhaps more unpopular than our administration in the united states of congress. thus, we have this launching of the assault on the investment community. or they're outrageous compensation systems out there? yes, i am not reached by late- night comedians who make tens of millions of dollars to be mean to each other. i am outraged by professional out -- athletes who make tens of millions of dollars and have -- and abuse their spouses and girlfriends. and i am outraged by compensation packages on wall street as well, but none are more outrageous than those who use taxpayer funds to reward the executives at fannie and freddie. on christmas eve, this administration decided to take out all the goodies from the

american taxpayer and hand them over to the executives of fannie and freddie, which are functionally owned by the u.s. government and hand them out to the two ceos, $6 million pay packages, 42 in dollars for the rest of their executives. we were paying -- $42 million for the rest of their executives. we were paying them tens of billions of dollars from the u.s. taxpayers. what they do with the taxpayer money is our business. but what people do with their money is their business. i have said privately and publicly that this is a committee is a reputation for fairness under chairman frank. i am aware of his leadership or his republican predecessor in the seven years that i have been in here that the minority has ever been denied a request for a witness. we requested a witness, at the

marker, the acting head of fha to ask a simple question. >> the gentleman's time has expired. do you want to take more time? >> i yield back the balance of my time. >> let me give you a consent for an additional 15 seconds. >> i was hoping that mr. markham could be your to answer the question why he has spent millions -- mr. demarco could be here to answer the question why he has spent millions of dollars in bonuses to pay people who have lost billions of dollars for the taxpayer. and unfortunately, for whatever reason, that request was denied. >> i read -- i yield myself my remaining time. i think it is 3 1/2 minutes, is that right? >> [inaudible] >> i want to thank both the gentleman from texas about the comments of the fairness of the committee. i think this committee holds the record for the number of amendments that we are debating on the floor and the mark of time. but 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 want to refer -- differ mr. demarco to a hearing we will have with mr. demarco. and i hope to have mr. feinberg and probably sheila their and others. i think it makes sense to separate out the issues -- sheila dara and others. i think it makes sense to separate out the issues between private-sector and public- sector. the question for mr. demarco is what we do about public sector compensation? i do want to welcome my republican colleagues to converge into the notion that we should regulate the pay of fannie mae and freddie mac. this committee has twice referred 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. even in the case of one of the bills, the one on private- sector, because it was not clear what the status was at the time in texas, mr. antar and offered an amendment to make sure everything was covered -- mr. hensley and offered an amendment to make sure everything was covered. we adopted the amendment. we have had two bills that have passed the house which explicitly authorized regulating pay of fannie mae and freddie mac, and all of the republicans on this diet is here voted against it, both times. 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 is a decree would have done it for republican funded -- for publicly funded companies, the bush appointee was strenuously objecting to it.

it was the bush administration the first raised the objections of the bush administration holdover. i think this, we will have a hearing with mr. demarco and others over pay schemes for public employes in the next month. i know he is a man of great patience. and we as a very strong attention span. i do not think a month from now people of forgotten the questions that you wanted to ask. i also believe -- we have an embarrassment on the part of my republican colleagues because they do not 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 impose the specific limits on the pay in the private sector. we do say that the shareholder ought to limit radical pay.

but the structure of those can't -- compensation packages often incentivize excessively risky behavior. and we have mandated that the regulators -- had they break even, tales they do worse. we will get to the public sector in a month. the denman has two and half minutes left. does the jump in which to use it? >> mr. chairman i would ask -- >> we have 10 minutes for debate. >> i would like to claim 15 seconds. >> the gem is recognized for 15 seconds. >> the executive compensation bill that the term refers to cover olives entities, private and public and it covered all employees, not just top executives. it was a political response to aig, but was poorly written. and the senate has never taken up the bill and the last time i

looked, the democrats controlled the senate. they realized it was a bad bill. >> as the gentleman yield? >> my time has expired. >> the german from new jersey is recognized for two minutes and 15 seconds. >> i thank the ranking member and chairman with regard to this approach request -- i appreciate the chairman's explanation as to why he thought we should segregate the panels in this matter, but that does not go to the, that i think the gentleman from texas made, that not one up here can remember the last time that they're a minority requested someone to come to the panel to be a witness and the majority refused that appropriate request. as of now, the chairman has yet to fully explain why they refuse the request. as the gentleman from texas point out, they differ from

these. they are under government control. the chairman of this committee has recently stated that they are "basically public policy instruments of the government." if there is one example, one case, one line of executive compensation that should be looked at, is where taxpayer dollars are being used and that is in the area of fannie and freddie. beyond this point, the area of executive compensation, there is a bigger issue to look at, and that is the christmas eve announcement when the administration took action without any congressional input whatsoever of the lift of the $400 billion cap on fannie and freddie is bailout and authorized a limited taxpayer funds to be used for both firms over the next three years. again, we have requested a hearing on this, or the chair and to allow a witness on this and he has refused. meanwhile, however, the

republican party has come back with their proposals. but they have been ignored. the republicans on this committee have put forward proposals to reform these institutions because it is in this be -- indisputable that fannie and freddie work the central and the mortgage meltdown that we have experience. they have helped ignite the economic and -- economic crisis that has left millions of americans unemployed. passing this legislation should be at the top of the committee's agenda as opposed to some other place up and to this point. >> the gentleman's time has expired. we will now proceed to the witnesses. repeat witnesses in every case, and were always welcome in this committee because they make very significant contribution is not just in testimony, but more importantly, in the debate over public issues in the country and, indeed, the world. we will begin with professor lucian bebchuk, professor of law at harvard law school. >> chairman frank, ranking

member and distinguished members of the committee, thank you for inviting me to testify today. first, -- i would like to make four points. 4d%) @ kraa$)rr@ @

$1 billion respectively during 2000 to 2008. and these cash flows substantially exceeded the executive's initial -- initial holdings in the beginning of the time frame. as a result, unlike what happened with long-term shareholders, the executives net payoffs for 2000 to 2008 was positive.

the second point i would like to make is that we cannot rely solely on existing government arrangements to produce the necessary reforms. to be sure, some firms have announced a fault in the compensation structures. an example, an indication that bonuses would be subject [unintelligible] but firms have not provided information that would enable outsiders to determine whether the cognex would be meaningful or 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 a desire to appear responsive to outside criticism, there is a basis for concern that arrangements whose details are not disclose might not be sufficiently effective. what else should be done?

but the third point i would like to stress is that improved pay arrangements -- improved arrangements, pay arrangements in particular, and governor -- governing in general, we ought to strengthen its your rights. in addition to h.r. 3732, there are other things that need to be done in particular, the following aspects of a -- an existing state that deserves the commission's attention, many publicly traded firms still do not have majority voting, shareholders still lack the power to place the regular candidates on the corporate balance, many publicly traded firms still have staggered boards and many such firms have

supermajority requirements that make it difficult for shareholders to change governments arrangements. -- governance arrangements. finally, in addition to strengthening shareholder rights, it remains important to have supervision over pay structures and financial firms as the provisions of h.r. 3269 would require. it would require that the subsequent supervision would drive talent away. however, the regulation focuses on structure, not on pay levels, and firms would still be able to offer pay packages that are sufficiently attractive in terms of delivery. one of these it is the best insight in economics is that it is never sufficient to compensate executives using

financial incentives. it is important to apply this established inside. -- incitsight. >> next, we have the professor from columbia business school. >> it is but a source of pleasure and sadness to testify before you today. i welcome this opportunity to testify in this important subjects. i am sorry things have turned out so badly so far. in this brief testimony, i can only touch on a few key points and many i elaborate on in my book "freefall" which was published just a few days ago. our financial system fail to perform the key roles it was supposed to perform in managing society. a good financial system performs these functions of low transaction costs.

we generated huge transaction costs as the section -- the sector garnered some 40% profits in years before the crisis. so deceptive were the systems of accounting of the banks had employed as the crisis evolves, they did not even know their own balance sheet, so they knew they could not know that of any other bank. we may congratulate ourselves that we manage to pull back from the brink, but we should not forget that it was the financial structure -- a financial sector that brought us to the brink of disaster. the systems up lead the economy to the brink of ruin are obvious. small and medium-size enterprises found it difficult to get credit even as the financial system was pushing credit on poor people beyond their ability to pay. businesses pay 1% to 2% or more in fees for transactions that should cost pennies or less. our financial systems have not only mismanaged risks and

greater problems -- products that this message to others, but they also failed to help ordinary americans face the risk of a of home ownership or the risk of inflation. indeed, i am in agreement with paul volcker. it is hard to find evidence associated with growth in many of the innovations and our financial system. underlying all of these failures is a simple point, which seems to be done. financial markets are in means to an end, not an end in themselves. we should remember, too, that this is not the first time that our banks have been bailed out, safe from consequences of their bad lending. market economies of work to do -- produce growth and efficiency. unfortunately, the financial sector was misaligned and that is why the discussion of this incentive is so important. the consequences of the failures of the financial system were not

born just by those in sector, but by homeowners, retirees, workers and taxpayers, and not just in this country but around the world. the impacts are massive and there's a reason why it is 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 expressed the dangers of risk-taking that can be curtailed. i regret to say that so far, more than a year after the crisis peaked, too little has been done on either count. the two big to fail banks create perverse incentives, which also have a lot to do with what happened. i would like to focus my remaining time on executive compensation. as i said, there are key

organizational incentives that arise from institutions that are too big to fail, too big to be resolved, were too intertwined to fail. one thing economists agree upon, incentives matter. even a casual look at conventional structures with payment focus on short-term performance and managers not bearing the full downside consequences of their mistakes suggested that they will lead to shortsighted behavior and excessive risk-taking, and so they did. let me try to summarize some of the general remarks i make in my written testimony that i hope will be written in -- entered into the record. floridian dentist played an important role. -- incentives play an important role. not only did they encourage a short-sighted beater, but predatory behavior. proven -- short-sighted behavior, but predatory behavior.

this is not surprising given the ample opportunities provided by creative accounting. multiple schemes provide the opportunity for deceptive accounting. the incentive structures encouraged distortion of information. the design of the incentives system demonstrates a failure to understand risk and incentives and/or a deliberate intent to deceive investors. i want to agree with professor bebchuk's view of the need for corporate governance. there are alternative compensation schemes that would provide better incentives, but few firms chose to implement such schemes. it is also the case that these perverse incentives failed to address adequately providing incentives for renovations that would allow for a better function of our economic system.

>> the founder and editor of corporate laundry. >> it is a real honor to be back here again. like professor stiglitz, i wish i had better news for you. in previous appearances, have called executive compensation both the sinton and the cause of the instability in our financial sector and capital markets. i regret to say the problem continues. yesterday, the supreme court told us that a corporation is a person with first amendment rights, but as was told us hundreds of years ago, a corporation has no soul to be damned, nobody 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 in major and direct cause of a financial meltdown. these purported bastions of capitalism protected themselves

by eliminating their downside exposure and taking their pay off the top. a second, rinse and repeat, they took a bailout money and campaign 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 shonda. since the only restriction was base pay, everybody got a raise. wells fargo approved a 522% salary increase for the ceo from $900,000 to 5,600,000. -- $5,600,000. and they took the opportunity when the stock market was at its rock-bottom to load everybody up with buckets of new stock and options. i'm predicting that the next time you have me back here to speak, we will be talking about how outrageous it is that they got in same pay packages again. but now was when they are

happening and we will see the payout later on. the historic low prices on stock are resulting in enormous payouts in the overall market. i completely agree with what the members of this committee have said about tax payer money. this is taxpayer money. they're getting paid as though they aren't that many, the money that the taxpayers put into it. they're taking a piece of the top of the taxpayers' money. that is absolutely right. it is an outrage. the clawback that were required as a result of this committee's work are also being subverted, as professor bebchuk said. there is a lot of weaseling been instituted in the clawback saying that faith has to be required or some kind of emotion or feeling or intention has to be required. clawback should apply a matter what the reason for the correction. otherwise, as professor stiglitz said, they create a perverse incentive. i ask this committee to lead the

way into putting the end to the too big to fail concept. if a company is too big to fail, it is too big to succeed. or as the title of a new book by robert posen is -- puts it, too big to save. an executive should be paid by public servants. wall street board's and executives have abused shareholders through their pay plans. the imf has an important 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 not -- now doing the best to perpetuate this system by pouring $7 million into reforms. this is another example of prejean in this response to shareholders and taxpayers. i hope that congress will work

to subvert this effort on the overall market and remove obstacles to effective shareholder oversight of pay. >> thank@@rr

there were two bills. he forgot to mention one. the first bill that came forward was a jar 64, which -- was h.r. 64, which covered only fannie and freddie. it had nothing to do with the rest of the private sector. page two of the bill, no financial institution has received capital investment under the tarp c-span.org -- under the tarp or with respect to the home loan program.

we have a bill that dealt only with tarp recipients, fannie and freddie and it put tough restrictions on them to be administered and they voted against it. it is not my fault. i think they got too much money over the christmas eve timeframe. i believe the remedy here is to, in fact, as i believe the committee will be recommending, abolished this current reform and come up with a whole new system of finance. that was a piece meal one. there were two bills and the republicans voted against both of them. one cover public and private sector. but one that they voted against was a debate was limited to tarp and fannie mae and freddie mac and they voted against it. if they want to bring the senate, that is o.k. i guess for them to say it, but i do not know why the senate might not be taking something up as a justification for the house to vote no.

now to divert attention from the center of that makes them uncomfortable because they did not do anything about it, they bring it up. let me ask one question to professor stiglitz and the others, one of the arguments that we have against the present proposal to tax our institutions to recoup the money that was paid out through chart and elsewhere, this will -- throughout tarp and elsewhere, this will diminish the amount of loans and force them, over their great reluctance no doubt, to raise fees. does the size of the bonus pool and the amount of compensation have any relevance to that argument, professor stiglitz? >> obviously, funds are fungible and money that goes out to pay bonuses, it reduces the

capital banks and to the extent that the money has been paid out in bonuses, whatever the form, reduces their ability to lend. how that is obviously much more significant amount. but let me just emphasize one point since we are talking about incentives. the intent of the president's proposal here is to change incentives, change the incentives of the banks to have excessive risk-taking. excessive risk-taking let the economy to being brought to the brink. >> [inaudible] >> that is right, the fact that the tax structure was based on the amount of liabilities that they had. it was a design directed at -- >> [inaudible] >> exactly. >> [inaudible] what is the relationship between the board of directors and the ceo?

currently. >> 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 board of directors even though essentially the co controls who was on the board. these arrangements are often very cozy. it was not that long ago that the ceos of some businesses served as shares of each other's compensation committee. and the ceo is the chairman of the local university's board of directors and the provost is on his compensation committee, etc. it is a very closed circle. until shareholders can't replace directors who get it wrong, we will not -- can replace directors who get it wrong, we will not see a change. >> thank you. the gentleman from alabama. >> ms. minow, you have heard the executive -- the german talking about executive compensation

that republicans voted against along with many democrats. and you published an article in the corp. -- corporate library website 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 that he talks about criticizing us for not voting for. in the article you said, "i have the utmost respect for politicians and bureaucrats, but i also recognize their limits. the government should not want micromanaged pay. -- micromanaged pay." i happen to agree with that. could you elaborate about entrusting politicians and government bureaucrats with the responsibility for designing compensation structure? " certainly, as i have said repeatedly before this committee, i do not believe -- >> certainly, as i have said

repeatedly before this committee, i do not believe the government should set pay. i do believe in removing obstacles to promote shareholders to provide that kind of feedback. as i just said to the chairman, my removing directors to do a bad job, a of -- who do a bad job, i think the bill was necessary, but not sufficient. i do share a concern with members of the committee that some of the terminology in the bill was not -- did not give enough guidance. >> thank you, i appreciate that. obviously, the bill gave the treasury secretary really, cart blanche authority to define and reasonable and excessive compensation, and it was not just for top executives. it was for all employees. i would vote against that bill today if it were before me. professor, -- if it caught?

-- is it bebchuk? in the past, you have criticized executive compensation packages as being double their performance. in the baggage that was announced christmas eve, -- the package that was announced christmas eve, two-thirds of the $6 million cash compensation for each of the two ceos is completely unrelated to firm performance or any performance measure. would you agree that the latest gmc executive compensation -- gse executive compensation awards still fail to link to performance? >> the city you mentioned was published eight the number of years ago and was a careful analysis of payment arrangements. at the time, it was about the chairman of the time, raised. i have not started the most recent decisions, and therefore,

i have not been a position to answer. >> if $4 million of that was not linked to performance, you would still think that -- you would still have your same objections to the compensation packages? >> i do not think i can really offer a view about something i have not release added. -- really studied. >> miss minow, in your testimony, you decry compensation arrangements that widen the gulf between pay and performance and 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? >> i have been a consistent critic of the pay packages that fannie and freddie, going back before the financial meltdown. again, they have a corporate

governance nightmare. you cannot be both a public and private enter side -- enterprise at the same time. >> does that need your definition of outrageous? >> they are not as outrageous as the previous pay plans at fannie and freddie, but i think they are wrong. >> ok, ron, but how about outrageous? -- ok, they are wrong, but how about outrageous? [laughter] >> if i'm calibrating the word outrageous, they are nowhere near the category of outrageous -- >> may be a class for instead of a class by the outrageous? >> exactly, they are troubling. how was that? they are troubling, but not outrageous. >> i appreciate it. >> i would like to take 15 seconds to say that my friend from alabama continues to ignore the fact that there were two

bills, one on the private sector and the other zero having to do with tarp and fannie mae and freddie mac and heat he refd to do anything with it. there was a second bill, fannie mae and freddie mac and tarp and that is the one he voted against. but it is not my time. i yield to the gentleman from pennsylvania. >> i appreciate your opinions. very often, have had the occasion over the last six to nine months to make a speech in my district because i'm trying to reach constituents to understand the overall complex problem of salaries and wages. as a given factor in my congressional district of pennsylvania, the average wage is about $13 an hour.

i say -- and if you will supply 2000 working hours a year, that comes to and have -- annual income on average of $26,000. we have had several witnesses that appeared before my subcommittee and we have gotten down to the question of compensation and what we do about it. we 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 do not know. if i were a brain surgeon and i need brain surgery, there is no amount that is to excessive until after the success of the operation. but the reality is, some of these people have come.

i was a little annoyed and at what can across with compensation. hear about $2.5 billion per year. and i pressed him because i was offended he only paid a tax rate of 15% because of the structure of his salary, putting them into capital gains as opposed to regular tax. and after about 15 minutes with great annoyance, he finally put his hand in his pocket and said, congressman, why are you picking on me? what did i do to you? i said, nothing, you happen to be a witness and i'm trying to extract information. and he said, i happen -- what i will have you know i am only the 51st person in this country in income. there are some who make a great deal more.

what is too much? what is too high? is $5 billion? is $50 billion? i pose the question because we always use numbers. and i go back to my congressional district of $13 pratt our wage. -- $13 per hour wage. and this gentleman is wage is $1,300,000, that is what he makes every hour of the year. 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 what we do on fannie mae -- they are chickens. what do they get, $6 million per year? that is peanuts when you compare

this. should we be looking at -- first of all, what do we need to get to a balanced budget? because these people are not just earning and taking corporate money or profits.

some of the others, were the structure of the pay of the executives in these banks have strong effects. the reason we are interested in them is because those affects affected the taxpayer because it led to the economy falling apart. what they do impose costs on the rest of us, and therefore, is a legitimate source of concern, as opposed to lots of other areas where people get high pay but it is not as much of a legitimate source of concern and the way we

deal with it in the tax system. >> i think we have heard from the panel on where they think there have been abuses in the corporate pay structure. i would like to hear from the panel who is doing it right. where is the model? mr. bebchuk? >> i think there is evidence that firms who showed it right are stronger, where you have less arrangements to make it difficult to replace directors. compensation in those firms is more sensitive to performance. and also, ceo turnover is more sensitive to performance.

we have evidence that relates, empirical evidence that relates the level of both in general and also with the quality of pay structures. . . >> they are not paid for

performance. they only have that in their name. >> i cover that in my written testimony. >> i think one of the things that concern me is when you start down the road of the government designing these compensation plans, what we are really doing is saying that there are a few companies out there, but the question is what about all the other companies that are doing it right? how do we justify the ones we pack? >> we are talking about the government -- we are not talking about the government prescribing what the guidelines should be, but giving guidance. that -- if that happens, the firms that are doing it right will continue to do it right. those that are not, would hopefully improve their pay

arrangements. >> the shareholder has the ultimate right, do they not? if that company was making too much money and the shareholders are not getting too much return, i would just sell my share of stock and move on. >> they provide you with no protection and insiders with no incentive. let's suppose the price is 100. you believe that if managed well, the company would be worth 120. if you sell, you would be selling at this to someone else. you're concerned would be that you should be getting 120. that ability in no way provide you access nor makes it likely that you would be able to capture the 120.

>> that is an out-dated approach. up to 70% of the stock is held by those that do not have that luxury of selling out every time because of transaction costs. everyone is stock. the question is, is it more beneficial to them, economically, and to pursue better pay than abandon it and leave? >> i do not think i can agree that people are stuck. if you own a share, you can send a message to the management. in fact, some of the larger investors can send a very strong message. if a large investor moves a large block of stock, that sends a risk. why did he or she do that? to say that people are stuck is

a little -- >> the data goes the other way on that. as far as large investors, you are right. they can ask for better. all we are asking is to make that more possible. >> can i make a general point? corporations are a creation of the state. we write the laws. what 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. that has to do with the systems of corporate governance. what are those systems? that is what is that debate. there is going to be one system or another. we can, i believe, create a system that is better than the current system. >> the gentleman from

california. >> thank you. responding to the gentleman that was just speaking, selling the stock is an imperfect way to control things. first have capital gains tax, then transaction costs, and as the witness points out, they are getting a low price on the stock. finally, they have the opportunity to defend the proceeds into another company that has bad corporate governance and overpaid executives. i would like to start with an observation. it is obvious that with the establishment under attack, by populism that has not occurred in our lifetimes -- the results of massachusetts were not the dick three of one party, but a victory for populism. -- where not a victory for one party, but a victory for populism. in order to arm the death star

said that the empire can strike back -- so that the empire can strike back. whatever we say here today can easily -- can easily be drowned out by 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. that committee has allowed. >> the house, in fact voted for the bill. >> ah. >> they voted for the bill. >> it is always the same. >> in any case, the tax laws allow for a 50% tax on hedge fund managers and eight -- a 15%

tax and hedge fund managers and you can compare that to the 20% rate paid by the gentleman's constituents in pennsylvania. you can see we do not have a fair tax system. i do not think the gentleman that makes $1 million an hour is going to work less hard if his after-tax compensation is reduced to $600,000 an hour. when we talk about compensation, we ought to talk about the entire package, not just bonuses. in this committee, we have made life a little difficult for top executives, particularly those who got tarp money. there is some social utility to that decide the psychological benefits -- beside the psychological benefits. we have inspired these companies to pay back the money far more quickly than they would have. we are focused on those that are

too big to fail, inconveniencing them to the greatest extent that we can. hopefully, that will inspire them to break up, so that we will have financial institutions, the demise of any one of which would divide the whole system. hear, we are talking about their compensation. last month, we impose fees on those of over $150 billion in size. i hope they will get the message and become medium-sized institutions. the problem i have is that in this effort to design compensation systems that do not incentivized excessive risk and properly reward performance -- i am not sure we can do it. i hope that there would be none of these companies getting federal subsidies or federal guarantees, in which case, i do not think we have to do it.

my problem relates to a circumstance to where you are trading " a portfolio. york a might be to have won a great year and get an enormous bonus because in this country we tend to tally things up at the end of the kelly -- at the end of a calendar year. then you get something valuable. that provides a good incentive unless you believe the risks you are taking will turn out poorly and will turn out so poorly that they dramatically affect the value of the entire company. that will inspire other executives to take equally enormous risks. assume that someone is managing 1% of the company could no money. they do not believe their behavior will affect their colleagues. they choose to take enormous risks.

the pan out. at the end of the year, they get shares of restricted stock. how are they losing incentive by giving restricted stock? i did not know if there is time for the answer. >> it is provided for corporate managers, providing them with restricted stock does not give them the incentive to take risks. the only way to do it would be to subject them to a call -- a call back or to put their bonus in a bank. they would suffer when their own unit does not do that -- does not do good. >> before i make my comments i would ask permission to enter

two studies, one on executive compensation, and the other on the credit crisis from ohio state university. >> they will both be entered into the record. the gentleman is recognized. >> thank you, mr. chairman. the american people were presented with a great outrage on christmas eve. this administration decided after billions of dollars of losses to announce on limited taxpayer exposure to government- sponsored enterprises and 2, simultaneously, for all of these laws that are causing the taxpayers all this money, to announce a bonus structure for the the executives. as i said in my opening

statement, i had hoped we would have an opportunity to ask questions of the acting head of fhfa, mr. ed demarco@@@@@@rrrrrr

doubt this panel can answer that question. if someone knows mr. demarco and has insight, if not, the second question i had his wife were the bonuses to be paid in cash? -- why were the bonuses to be paid in cash? we have to make sure that the bonuses are paid in stocks. we have to have longer term besting stakes for everyone else except the government- sponsored enterprises. why cash for them, and stock for everyone else? i was calling to ask mr. demarco that question. i assume you have not spoken to anyone that is qualified to answer that question on mr. demarco's behalf.

i do not have to be convinced that there are pay structures that can be poorly devised that can cause companies to fail. i know that. i used to serve on it publicly traded company. i have some experience with these matters. i have studied some of these issues. i know that formally designed competition packages can fill. he did not have to convince me of that. you do have to convince me that any one company is too big to fail. if he did not bail them out with billions of dollars of taxpayer money, then you do not have to use the heavy hand of government to impose pay structures. i know the chairman has brought up on a couple of occasions, a bill. i have a couple of observations.

if this house was serious about doing something about fannie and freddie, they could have done it. second of all, this did not just deal with the executives, this is a bill that would have regulated the pay of the janitor at goldman sachs and provided a role to the congressional oversight panel in policy managers. as a former member, they were not qualified for the task. the basic proposition is this. in america, the principle ought to be what you do with your money is your but -- is your business, tax payer money is our business. if the compensation structure causes you to fail, did not take money away from others to bail them out. the purpose of government is not to bail out. it is not to place artificial limits on the american dream.

it is to preserve freedom. >> the gentleman from kansas. >> thank you, mr. chairman. >> i think financial firms receiving taxpayer assistance should receive the most scrutiny with regards to compensation practices. the most troubling case was an edgy -- was aig, which provided bonuses after taxpayers invested billions of dollars to keep the company solvent. i ask the ceo of the company at the tide if he would encourage employees to voluntarily return their bonuses. he said he would, and executives paid back some of it. in december of last year, we learned it was only $19 million. i wrote secretary dieter about this. -- i wrote secretary timothy geithner about this.

if aig were allowed to go through bankruptcy today, i doubt those bonuses could have been paid. it is obviously frustrating for taxpayers. if it were not for them, aig would not be around to pay out those bonuses in 2009 and 2010. other specific things we should learn from the intervention with aig from the government? >> i think i would share your sentiment that taxpayers have not charged financial firms sufficiently to make up for the level of support that has been extended over the last year. more generally, i think we can think about the tide that is being produced. it is being produced by

taxpayers and financial executives. until now, taxpayers have not been charged. the ultimate result of that would be the financial executives. more generally, the financial executives might be getting an excess of fraction. >> do you have any thoughts, ms. minow? >> i do. in the future i hope we do not have to do a bailout, but if we do, i hope to impose some conditions. the first condition should be that you take a discount on any set of compensation for the amount that was subsidized. >> i want to emphasize the fact that when we turned over money to these banks, we did not do two things.

we did not give them money to their behavior, not just with respect to the issue of compensation schemes, but also with respect to lending. that is the reason we were giving the money. it relates to jobs, which has come up here on number of times. in fact, compensation that went out meant there was less money inside the banks and therefore less willingness to lend. the second point is that the u.s. taxpayer was not compensated for the risk. in some cases, we got repaid. we ought to look at the transaction that warren buffett had with goldman sachs. that was an arm's length transaction. that would have been fair for the tax player to reflect those terms. we would have gotten back a lot

more. >> all i want to understand how the success of lending contributed to the financial crisis. if this relies -- this relates to consumers that maxed out credit cards. is there anything that the government can and should do in the future to prevent a mind set from taking hold and exposing our financial system from another crisis? professor bebchuk? >> we need to regulate those to a lower level. something short of that is imposing levies. that is a useful approach. it could be useful going forward regardless of the issue of making up for the past

actions of the taxpayers in terms of charging financial firms for the risk of larger liabilities. >> thank you. ms. minow? >> i agree. >> mr. stiglitz? >> it is important to affect the incentives. if you have the incentive for excessive risk-taking, you will do it. those are also at the organizational level. that is why it is so critical. even when we affect incentives, we will never do it perfectly. sweet constraints on leverage, behavior's, products, derivatives, and finally, for our system to work there has to be transparency. the way the system is set up, it is impossible for capital markets to exercise the

discipline that is needed to make our system function well. >> thank you. >> the gentleman from california. >> thank you. i would like to throw out a few thoughts. i am going to suggest to you that the executive compensation issues on which we all agree, the excessive risks, the short- term focus, are more the symptom than the disease. if we treat the symptom, we will be at best ineffective and at worst counter-productive. that includes bills that were talked about from last year and a year before. to get at the root of the problem, there are two things. one is the ability, the greater ability for shareholders to

express their displeasure with executives through the board by having an alternative a board of directors given an appropriate threshold so that ability is not abused. that would be one suggestion, get to the root of the problem rather than micro-manage the pay. it is the shareholders a greater ability to express displeasure, in a way that i think is more appropriate. secondly, and i know the chairman is going to have a hearing on the subject, the short-term focus on pay is perhaps a reflection of the short-term focus of the market. maybe the problem is not the pay, but buy and hold is dead. we focus on quarterly earnings. i, too, focused -- worked on a

publicly traded company. everything was about this quarter. the whole world revolves around this quarter. next quarter, next year, be damned. the short term pay and excessive risk-taking is simply a reflection of the short-term focus on the market. perhaps, we should be looking at other things we can do to change that short-term focus. one thing i suggest is going to semi-annual financial statements rather than quarterly. there may be other things. i would love to hear the panel's thoughts. >> on the first issue, a completely agree with you. it is the main issue of the book published five years ago. it is a symptom, and manifestation of underlying corporate governance problems.

all the problems that you have discussed is changing government's arrangements so as to produce better compensation out comes rather than micro- managing and dictating them. >> i agree with your second point. that, has been a long-term problem, but it has gotten much worse. one way to do that is a tax policy. i think we had a capital gains tax structure that encouraged longer term holding and discouraged short-term holdings. that is one of the few things we can do to move in that direction. >> what we define as long-term? >> i would define longer than one year, two-five years. i would recognize that while the

reforms are a part of the route that we have to deal with, we are always going to be in perfect on that. -- we are always calling to be not perfect of that. when it comes to institutions, which can put at risk tax payer money and our whole economic system, we have to not only get at the root causes, but we have to actually try to effect the actual behaviors'. that is for those that affect a risk. that might be more broad than just the banks. >> this is a very important question. i am going to allow miss noll to go beyond -- ms. minow to go beyond. did not the concern with the light.

>> thank you, mr. chavis. i think -- mr. chairman. i think one relates to the other. it is important to remember that the financial institutions are very large shareholders themselves. theykaá@@@ $"rrrr'$@ @ @ @ @ @ r

and poignant about making that suggestion in the world of twitter and instant messages. everything else is becoming faster and trying to slow that down. i think that one way or another, investors will get day-to-day information. we are close to a point where a company financials which are available on a real-time basis, will be available to everyone. i am not sure that solves the problem, but i agree that it is the right question to ask. >> we will discuss that another day.

i just want to ask, you said that someone, if it is restated, i do not 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, perhaps. if the consequences of that decision are very bad for the long term, you are not going to colodny back. that does not change my behavior. >> it is not based only on accounting statements. if it turns out that the performance loses, it could be adjusted. >> that is a question that we will be dealing with the gentleman from north carolina.

>> thank you i find myself agreeing with what mr. campbell had to say. i am pretty sure that the book of revelations sent that this is one of the signs of the apocalypse. in the "new york times", there was an op-ed that said it has become the bridge of the banking system has become an agent for destruction. this is a hearing about jobs. how do we stop the access, -- the access that is not per boarded -- that is not rewarding conduct, but is rewarding actions that are taking money from the middle-class and the real economy.

it is certainly undermine all we need to be doing to build a sustainable economy that works for the middle-class. i have a couple of questions. is this focus part of a bigger problem? i do not want to regulate compensation. i would much rather the markets regulate compensation. the way the market is supposed to work, there are competitive forces in place. competition squeezes' problems and costs, including compensation. despite the fact that there are 8000 banks, and who knows how many other entities were doing bank-like things, profits in that sector ballooned to more than 40% of all corporate profits.

compensation was more than twice what ordinary americans were making. our competitive forces working, and why not? second, of all of the institutions that failed in the financial crisis, the board of directors needs to be near the top. there was an article that looked at what has happened to the board members from all the companies that have failed, and found out they have gone on to serve for other boards. they were not tarnished in any way. there was an article in the "in new republic" that was critical of tommy francs for not having captured or killed osama bin laden. without agreeing with everything, there was a reference that he had now

retired and joined the board of directors at bank of america. that gives you the impression that boards of directors or more a part of celebrity culture. what can we do to make it a full-time job and not have people that treated as a celebrity appearance? >> i think making directors full-time employees is not a good idea. that would make them insiders. that would make them more dependent on the firm. what we need to do, the most important thing, is to make them independent shareholders in a way that would give them the right incentives in the kinds of government arrangements we were discussing.

that would produce such an outcome. this would not replace market outcomes, it would just enabled the market work better. >> i want to make two comments on what you just said. 40% of all profits in the financial sector -- you have to remember that all of that were not real profits. that shows that the difficulty of measuring performance in the financial sector. they have an enormous discretion. that loss is making more and ported the issue of the long- term perspective. there is something about the sector in which there is imperfect competition that leads

to above normal profits. there has been a large increase in concentration in the financial industry when it comes to particular issues like credit cards, it is clear that they are engaged in non-competitive practices that allow them to garner those profits and then, obviously, to use those and distribute them to the officials. >> i feel very strongly about it. my company rates board of directors. we have encouraged our company to raise the rates. i will continue to try to do that. when i first came into this business, o.j. simpson was on an audit committee. we have made a little bit of progress. >> the gentleman from new jersey.

>> thank you, mr. chairman. good morning to you all. regarding your point, professor stiglitz, that warren buffett had an arm's-length transaction with goldman sachs, why you think the american people did not have the same transaction? >> they were very much taken in to the view that they wanted at that point -- to give money to the banks. they thought it was imperative that the banks be given money so that they could return to the usual role that they had had. they were captured by the banking system. it was a very big mistake. >> do you see improvement with federal officials at the moment in this area? >> if i look at the legislation

and the proposals that are being discussed, i see a marked change. if you look at the bailout's that occurred in january, february and the beginning of this year, they were as bad as those that occurred earlier. >> that is my point. i begin my question with what occurred at a prior time. what i have seen so far this year, there does not seem to be a need for change. we the people, were on one side, and warren buffet with his arm's-length transaction was on the other side, a much more preferable side. it seems to me that we ought to learn from mistakes. so far, i have not seen a

learning curve in this regard. ms. minow, your comments? >> i have seen a learning curve. i think the initial transaction was made at a moment of pure panic. it reflects that. i think that the subsequent negotiations, particularly the administration's proposal shows that some lessons have been learned. >> regarding freddie mac and fannie mae, how could bonuses have been given in your opinion as a matter of public opinion? >> if these people could be embarrassed, we would not talk about them. the court of public opinion and does not seem to matter to them. >> what should we do to make sure this does not happen again?

>> i support the chairman's notion of read-starting the entire concept. >> professor stiglitz? >> i think we need to re- examining the whole structure of fannie and freddie -- the concept of something that was in the private sector, which is what they were, and yet seem to have this public role. it is a peculiar mixture. it was a system of governance that was almost bound to fail. >> has my time expired? following up on congressman campbell, is it not true throughout the whole society?

people cannot let me finish a sentence. >> will the gentleman hurry up? >> i cannot be as witty as the chairman. how're we going to overcome this? ms. minow? >> it is the nature of humanity, i am afraid. we do have some structural perversities that can be regularized to calm things down. >> we will never perfectly overcome it, but i think some of the things we have been talking about are ways to mitigate some of the consequences. we have to recognize that in some ways, things have gotten worse. that shows that what ever it was was not inevitable. there are changes that do affect the extent to which there is that shortsightedness.

>> the gentleman from texas. >> what we are seeing today is the irony of ironies. most who oppose raising the minimum wage to $7.25 an hour were supporters and are supporters of maintaining a bonus structure that creates systemic risk. the public may not understand systemic risk and proprietary trading, but the public does understand this -- it took us 10 years to raise the minimum wage to $7.25 an hour. if a person, and there is such a person, gets a bonus of $69.7 million, it will take a minimum- wage worker 4622 years to make

$69.7 million. 4622 years. $rrrragrr not allow them

to create perverse incentives that will bring down this economy. enough already with the notion that we should let the economy collapsed. if we had not built up aig, and i did not want to do it, i had to hold my nose and close my eyes, but if we had not build them up along with the auto industry and bear stearns, which the world be a better place today, ms. minow? >> i think we could have done a better job of building them out, but i think we should have. >> with the world have been a better place? >> no. >> i agree that the way we bailed them out -- >> left a lot to be desired?

>> i think at the time the perspective was -- >> would the world be a better place today? >> my speculation is that the world would be a better place if we would like aig fell, -- sale, but we needed to have some kind of bailout for some of these. >> mr. bebchuk? >> i think it would have been better had we done a partial bailout. >> if we had taken a laissez- faire attitude and let things go, with the will be a better place? >> it would not have been a better place if we just took our attention away from the firms.

>> let the world go wherever it is going? >> there would have been a worse outcome. >> did you understand that there are members of congress that are saying that we should have let things go? can you understand where we would be if we had done nothing? is it responsible to do nothing at a time of crisis like this? >> i agree that it is irresponsible. >> is it irresponsible? >> it is not the right thing to do. >> i will help you. it is irresponsible. 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 of a perverse incentive that creates

static filly. >> certainly. in the sub-prime industry, individuals were paid on the number of transactions rather than the quality of transactions. they had a perverse incentive to create as many transactions as possible. >> i would ask that each member give one example of perverse incentives. >> the fact that people in the financial sector's were -- of the financial sector were measured risk-taking or as a result of greater efficiency. >> the fact that the top executives of bear stearns and lehman brothers were able to get large bonuses based on earnings, which they were able to keep even though all of those earnings were evaporated. >> thank you, mr. chairman.

>> the gentleman from missouri. >> i have a number of questions, i will try to ask them quickly. before i ask the questions, i was a part of this committee in 2005. my recollection is that mike was the chair of this committee and our current chairman was the ranking member. one of the first things that we dealt with when i came on this committee was some proposed reform -- maybe both the former chairman and the current chairman, dealing with fannie and freddie was proposed. i was talking to reporters two

days ago that says that one of the problems in washington is that the truth does not matter, it is whether or not you can say a lie over and over again so that everyone buys it. my concern is that history has been distorted because the former chairman proposed trying to deal with the issue of fannie and freddie's compensation, and as i recall, they did not get any support from the white house. if i have misspoken, i would like to be corrected. >> the " in the -- de remarke was that he received the one

hand salute from the white house. >> the gentleman from new jersey and the gentleman from texas deride it. i voted for the bill in the house committee. when it got to the house floor, the republicans added something and i voted against that. >> the point i was trying to make, as someone said earlier, transferring the conversation to fannie and freddie, that we have not tried to deal with fannie and freddie. i want to try to clear it up. as a supporter told me, it does not matter. people hear over and over again that president obama started the bailouts. where i want to go now is that

too big to fail is a problem. they understand that they have what it takes to take what we have. if that is the attitude that they have, we are going to lose. my questions are, and i do not bill -- and i do not know the answer, did the firms with better compensation performed better? those with better compensation structures, did they end up performing better? do any of you know that answer? >> this is a subject that needs to be investigated. it is not a straightforward question to answer. what does it mean to be

compensated better? if you believe that better compensation is one that provides less incentive to focus on short-term, then, you have to measure those dimensions and define how they have looked at the performance. that has not been fully done. >> did you not think that would be a worthy project? >> definitely. >> part of the problem is that all of the big banks, those that are too big to fail, had similar compensation structures. you would not be able to get clear results. the differences were not big enough to overwhelm the perverse incentives that really dominated the whole industry. >> i was wondering if you could do an overlay with what happened with the mortgages -- with the mortgage companies that did not go into the sub-prime

scam. now if you look at their books, they did better. the question that i raised is based on what i have seen with that industry. do you think that in particular, the wall street investment banks will change their compensation structure without congressional legislative the encouragement? ms. minow? >> as i discussed in my testimony, the fact that following the bailout over the last year, they have essentially poured gasoline on the fire of excessive compensation. it's just to meet a need a much stronger message from congress. >> 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 addressed this morning. >> my final question, in talking with and investment bankers in my district in kansas city, missouri, i found out that with investment bankers like to do -- not the people that are trying to make the deals, but the executives, is give bonuses that stretched over a number of years. my assumption is they give a bonus, and then they invest what they gave. i am wondering whether or not that kind of system should be outlawed.

they do not want to give all compensation and cash up front. they want to stretch it out. do you understand what i'm saying? >> they are very creative in trying to subvert the intention that we have been concerned with -- getting better incentive systems. one of the concerns is that if you look at more details across corporations, much of what is called incentive pay is not incentive pay. it is a sure way. if you look at overall performance and overall compensation, they are much less closely linked than the name. that suggests that the evidence in the aig case, they changed the name from performance pay. they are very clever. they are undermining what we are

concerned about. >> i'm not try to suggest that they are trying to trick. thank you, mr. chairman. >> thank you, mr. chairman and to all of the witnesses. i think my colleagues for their questions and the discussion we have had since then. it has been very useful, but thought-provoking. this whole issue is difficult to get your arms around. if you know, despite the financial crisis and the resulting bailout and further diffusion of cash along the way, here we are again with public outrage and wall street handing out a record $140 billion in

bonuses. when we take a look at that kind of money, and try to put it in perspective, according to the " washington it examiner" it is vastly more money than we have pledged. -- that we have pledged to haiti. it is no wonder that hard- working americans, those who thought that we need to bail out wall street, and understood that it was their money that went towards that, nevertheless wanted to say something other than banks buying up banks and handed themselves bonuses as a

result of trading activity rather than making those loans or renegotiatirrrrr" in fact the best, are involved in public schools, or our

hospitals, or social workers, and they seem to work for very hard with substantially less pay. i serve on the homeland security committee. we had michaele and tareq salahi in last week. they were all well dressed and made up. they struck me as incredibly self-centered and without regret. , that -- just let the people that say we should not touch their pay. they do not get how angry americans are. people in ohio believe that pay should reflect your productivity and they do not get that when you ruin an economy, you should get these kinds of bonuses. i know we have been few times at advice do you have for us so we can compensate people and tried

to define performance and if the issue it is -- the central issue is board government. if the boards have this attitude that we all deserve that in the financial sector, that kind of compensation, how do we really get into 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 governments? >> the focus on the post-enron reform legislation, sarbanes and oxley, has been on the supply side of corporate governance. we have not really focused on the demand side, what shareholders have to do. the fact is, you should have in here the heads of all of the

mutual funds, the assistant secretary responsible, these are people who routinely vote in favor of the boards of directors and pay plans because no one is looking at them and paying attention. i think we need to remind them what fiduciary obligation is about and it is in their economic interest to look as pay as a risk factor. >> i think reforms in corporate governance we have been talking about is essentials. but in the end, i think they will go far enough. what we talked about so far here, two sides. one, that those aspects of the structure of the incentive schemes, compensation schemes, that put at risk the national economy and taxpayers' money have to be regulated in a whole variety of ways. and the second point is that the

tax structure as a whole has to be designed better to address the sense of equity in our system. arguments have been raised or more progressive taxation or that taxing capital gains would have adverse -- adverse incentive effects are just wrong. we could get a fair tax system that actually would encourage greater efficiency. >> i would put the 140 billion figure that you mention in context, not just comparing it to homeland security budget, but i would compare it, would be the most relevant comparison, to what shareholders have received in the period and what taxpayers received. what is disproportionate is the $140 billion relative to the contribution of the financial sector to the performance of the

economy over the last decade. if you look at the numbers, d.c. shareholders in the international sector over the last 10 years, somewhat negative returns over this long period. we know about taxpayers. what we need is to reallocate the pie, so to speak, in a more efficient way between shareholders and taxpayers and the executives, and the way to do it is for shareholders -- so they can claim their share of the pie, and for taxpayers to begin going forward charging banks adequately for the support taxpayers are providing. >> the gentleman from california, mr. campbell, and the gentleman from michigan -- corporate governance. we tried to minimize -- we are

going to get into the corporate governance issue, and it includes, by the way -- one with jurisdiction blade is, i do not think i can summer the assistance secretary of labor. but we will continue with one of the things the sec did, which is to require all of these institutions publish how they vote. it was imposed on the mutual funds and we think it should be imposed on an eight fiduciary. if you are the owner in your own right, you have a privacy right. but if you own shares as a fiduciary i hope we will pass legislation that would require to make it public how you vote. i think that would be useful. >> no question. i would be delighted and i hope you will allow me to testify in support of that. >> we will be inviting people. before the last question, one

other question -- talking to the gentleman of alabama for like two minutes. there have been two arguments on compensation. the rest of the world is getting tighter than us. now the argument is, we will do something else. we will go into some other profession and what you be sorry, all of us people will no longer be trading cds's with each other. my response is, i am not sure where you will go. two, what if they did? if an effective fewer of the very brilliant people that the gentleman from ohio were referring to decided 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 or it is there any byproduct? >> i was very supportive of the remarks he made on the subject earlier this week when you talk about scheduling this hearing. in my written testimony i said,

i would love to see the demand curve on that one if all of the wall street guys a russian to the market. >> if there is a demand, what is the social laws? >> i addressed it in my written testimony. not only is there a misallocation of financial capital, but misallocation of human capital that is costing our society even more than that. i think it would be a good thing for our society to reallocate this human capital. >> a very interesting study from harvard and a track what happened to harvard graduates over a long period of time and a report that a huge increase in the fraction of the class, best and brightest, they go into finance -- 30 years ago, larger numbers were going into science, engineering, medicine, and so forth. this partly reflects the

response to market incentives. now that we are reconsidering the contribution of finance, we might conclude that having a smaller fraction going to finance might not be a bad thing. >> 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 barrault with very cheaply from the fed, and that is taxpayer subsidized in one way or the other. whether they invest them and kick treasury bonds or carry trade, or whether they use them to trade and make additional profits, the zero regional

premise was that that money would be loaned. and it is not. i will say this -- the flip side of the argument is they are using those trading profits to cover some of their lending losses. in some ways, that makes the banks stronger and it may avoid the government have to come up and pick up liability. that is one of their answers. the other -- they are not lawyers, they can't find bars that are qualified. i talk to people back in alabama and they say when they deal with large banks and they say they are not interested in learning some 1 $200,000. they are interested in $100 million bills. 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 so smaller businesses cannot get loans. i do think the american people do believe that being able to borrow cheaply from the fed, and some of the guarantees that been extended, that that money is finding its way into a compensation, which gives the appearance of being excessive. so, i think these are valid concerns. and i also -- i will close with this, and i think it is a concern we all have. when they do this trading, they tend to be going back and doing what got them in trouble in the first place, and that is speculating, leveraging,, and what happens -- do we get right back to the problem we had? and if we are going to get in

trouble, they say, you know, you don't want us to make bad loans. that's true. we also don't want them to make trades that are risky. if anything, the trades benefit themselves -- proprietary trades -- where as lending at least it's in the economy going. >> if they can make enough money doing everything but lending that may be a contributing factor. we will have an all day hearing on friday, february 5, with bar wars and regulators and lenders and we want to get into the question. it is a bipartisan concern and i think it is legitimate to enquire to the extent to which other opportunities to make a lot of money displays lending either directly or indirectly. am i do think one answer is to look at whether they are lending -- >> i think one answer is to look whether they aren't lending and if they are not lending, the government, if they are going to make money available at all to be those institutions' lending, and landing on main<  street ad put some competition out.

>> that will be on february 5 hearing. last question from the german from florida, mr. grayson. >> in capitalism, winners have to win and losers have to lose. people are normally rewarded for success and are punished for failure. 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 figures. the net worth of america dropped from $62 trillion down to $50 trillion, by 20% in the last 18 months of"n the bush administration. is there any sign that since these bailouts began that the institutions and individuals on wall street and in major banks who are responsible for the decisions that led to that loss of $12 trillion were actually held accountable? any sign at all? professor stiglitz?

>> no. >> minow? >> no. >> professor bebchuk? >> some of them lost their positions, some lost money but not held sufficiently accountable. the most and pour in thing is we don't yet have incentives going forward that will make people do the right thing in terms of risk taking. >> you raise an interesting point. i have the head of aig who actually was the people's pockets -- responsible for the losses and he would not tell me their names. is it possible the people who actually led to the financial disaster, not only in america, but around the world are still doing the same jobs and are down the block where they were before? >> some of the key people did lose their positions. some of the top people at aig are no longer there. but i think i agree with your sentiment that probably they have not been held sufficiently

accountable and most importantly, many of them have been able to still keep large amount of money based on results that they had in 2006 and to thousands 7, which worked -- 2007, which were disastrously reversed in 2008. >> in decapolis country over the united states, what happens if over a long. of time failure is rewarded and capital destruction is rewarded? what does it mean for the long run, mrs. minow? >> bankruptcy. >> for the country? >> for the country. >> professor stiglitz? >> it obviously has a very adverse affect what efficiency of the economy that is why i call the erzatz capitalism -- you socialize the losses and reprivatize the gains and that lead to distorted behavior and that is why a lot of what i've talked about going forward. it is not just dealing with the past, but going forward, that

unless we correct the incentive problems at the organizational and individual level we are likely to have the same kind of problem again. >> mr. bebchuk? >> i agree, the difference between erzatz capitalism and real capitalism is very substantial to the country's well-being. >> on wall street, the ratio between assets and equity is often tend to 1 or more? professor stiglitz? >> if it were only 10 to 1 but think of it as a conservative -- it is up to 30, 40, to 1. risk-taking that very little social benefit you can associate with that high level of risk taking. >> lettuce say it is only 10 to 1, is it true every dollar in executive compensation means $10 less of loan capability -- let us say it is only 10to 1.

>> yes, we talking about that, the money that goes out in bonuses is money that is not available and then -- let us say, a net worth of the bank, and therefore not available as a basis of the leverage that the bank can lend out. >> did the managers of these institutions at wall street and big banks of ram country have any incentive at all, in an economy based on incentives, and the incentive to economize on their own compensation? >> ms. minow? >> i think this guy is the limit. >> professor stiglitz? >> that incentives are distorted. talking about, what would happen if they had long run incentives, if they had a really effective long run incentives and they really don't have these are really effective incentives. then of course, they would say if i keep the base of the company larger, the network of the company larger, it would

make larger profits in the long run and therefore in the long run the company is doing better and i will get an appropriate return. that is not the way our current incentive structures are designed. >> mr. bebchuk? >> they don't have the right incentives -- privately they would be better off had a larger compensation even at some cost to the shareholders. we have seen this in firms that were making decisions rapid -- whether to return top funding. seeing that some executives were eager to return even when it was closely to their shareholders as evident by market reaction to -- costly to the shareholders, even if to get out of the restriction. >> i think the witnesses. we will take further testimony -- particularly, on a question

of how you deal with -- also on what i think i will title the so what part of this, if you don't let us make all of this money, we will go off and do other things. we know they are not going to england. in fact, one of our major banks ceo's complained to the chancellor to the exchequer that they were driving away his potential investment in canary ore because of the compensation restrictions, so they are trying to play us off against each other. i will be in davos next week and one thing i will most focus on is reinforcing this agreement, both compensation and regulation -- and i think, in fact, america will wind up being a little more lax. then the question is, ok, we will go off and engage in other lines of work and maybe if we got some more family physicians

and less