>> hearing will come to order. i'm told the ranking republican is on his way so we will begin. we are going to have 40 minutes of opening statements by agreement between the two sides and i will begin. first of want to make a distinction that doesn't always get made. we are not here today talking about the restrictions that paid to recipients of t.a.r.p. money.

we are talking about instances in the federal government. this hearing today is looking for whether or bills enacted that deal with compensation without regard whether or not people have taken t.a.r.p. money going forward. i believe it is now clear, and i am reinforcing that by a number of authorities, paul volcker for example, chairman bernanke, people of the british financial services committee, the problem with compensation is that it has encouraged excessive risk-taking. that is once we leave the area of the recipients of t.a.r.p. money is into any part of my concern as to the dollar amounts given from the governmental standpoint. we are not talking about amounts. we are talking about the

structure of compensation and i believe the structure has been flawed. namely we have had a system of compensation for top decision makers in which they are very well rewarded if they take a risk that pays off but suffered no penalty if they take a risk that costs the company money. now, risk is a very important part of the business and we are not trying to discourage people from taking risks. that is not the government job. but it shouldn't be a system in which risk is artificially encouraged and excessive risk-taking takes place. i said and i should correct myself before someone else does that we were all talking about dollar amounts. we are in one sense. i think there's a problem with overall compensation but it's not one the government can solve in one specific way. what we do instead is to borrow from our english neighbors and competitors because people say you can have a competitive

disadvantage, the system known as ceylon pay and which shareholders are entitled to both. my friends are involved in. no shareholder should be running a share day-to-day. that is why you have directors the the evidence is overwhelming as is the logic. the relationship between boards of directors at ceo as is necessary fairly intimate ongoing one. they've selected each other. they work together. it simply doesn't work to say one or two days a year this group that works closely together will now assume the arm's length position of labor and management and bargained with each other as if there was that independence. therefore, this is an accession to the normal rule where shareholders ought to have a role. board of directors ceos are all going to be able to do that by themselves. say on pay entitles the shareholders and that is where

the questions on the amount would come in but what we should do now is deal with the structure, which should diminish the extent to which people get these incentives. i must say i am somewhat puzzled when the influential highly paid people in the country who present very important institutions come to me and say they need these bonuses to allied interests with those of the company. while the ceo of a major bank or investment firm does not already consider his or her interest aligned with the company is a strange one. they are apparently proving to some character flaw that says on like the rest of us the need to be specially incentivized to treat their employe year's interest fairly. most of us in this society are able to go along without that. that is up to them and their shareholders but it shouldn't be done in a way that incentivizes to much risk and i fink is irascible that is happened in

the past. i do differ with the administration and is the eternal and if we strengthen the compensation committee's we will do better. i agree with what they're trying to achieve and their statement of goals. i have less confidence than they that we will be able to find compensation committees that will have the independence so i would go further. but we do agree on the goals and with the administration on say on pay and i would simply say this is the first in the senate hearings that will lead the committee and i hope to begin marking up in a month a set of financial regulations that we will have to the floor of the house before we adjourn for the summer that will put in place rules that your life from the message we've learned from the most recent crisis and as i said we are here now because of concern over the amount of compensation but fundamentally because we think the incentive structure has contributed to success of risk-taking. the gentleman from alabama is recognized.

>> thank you mr. chairman. thank you for holding today's hearing on executive compensation, which is the first of a series of regulatory reform in the future of the financial system. there is no question there have been questionable decisions made by some of the major corporations regarding executive pay. however i strongly believe it is neither the executive branch or converse role to mandate compensation policies or the role of this congress or executive-branch to determine who sits on a corporate board of directors or interfere with corporate governance in any way. what we need instead is a strategy to get us out of what we have witnessed in the past six months and that is government command and control. we need to get the government out of businesses and we need is

no further intrusion and what should be private economic decisions made by corporations, the directors and shareholders. mr. chairman, the series of regulatory reform hearing schedule will i believe be among the most important the committee we've been holding this year and perhaps most important hearings we will hold in the 111th congress and these hearings we will determine how we will rebuild or financial system and whether we leave the foundation for economic growth and prosperity or whether we repeat the same mistakes that led us to the brink of ruin and those we have made since september. later this afternoon the republican leadership of the financial services committee will unveil a proposal to reform the financial regulatory system. the republican regulatory reform proposal calls for return to market discipline and and of bailouts government intrusions

in the business and the government picking winners and losers. the government planned to address major flaws in the current system exposed by the financial crisis and i look forward to working with my colleagues on both sides of the aisle on this and other proposals for reforming our regulatory system. over the past year we have witnessed unprecedented government interventions in the financial system and in the corporate governance. hundreds of billions of dollars have been spent recapitalizing individual financial institutions some of which were probably on solvent and should have gone into a bankruptcy proceeding instead of being propped up with taxpayer dollars. federal reserve balance sheets has more than doubled. from roughly 870 billion before the crisis to over 2 trillion now according to the remarks made by federal reserve chairman ben bernanke.

in the short run government interventions have stabilized the market but i fear these repeated multibillion-dollar taxpayer bailouts are weakening the financial system and now threaten our economic future combined with a current administration to borrow and spend this policy many have come to believe including myself the vast expansion of the fed's balance sheets is in itself becoming a systemic risk to the national economy far greater than failure of any private financial institution. it all so i think fundamentally affects ability to borrow money and price at which we borrow the money. to restore the economy we should reject a philosophy that has transformed us into a bailout nation. however there are some who want to further enshrine the field government policy of rescuing too big to fail institutions by crafting a resolution authority

or systemic risk regulator which would give the government and government eurocrats' priorities tax payer money to prop up certain financial institutions. we may think that we own a aig, the government, but in fact i think aig and these companies end up owning us. mr. chairman, the appropriate response to this very real problem of handling market failures is we should resolve insolvent non-bank institutions. no matter how large were systemically important due to the bankruptcy system. bankruptcy is transparent and impartial process with seóul rules. and far preferable to a vaguely defined resolution authority that encourages more of hazzard and further entrenches mcginn banks -- mega banks and other institutions of the state.

it's important for regulators to monitor their financial system and i identify risks that could endanger the stability and soundness of the system. but it is unwise for congress to place stewardship of the economy in the hands of a super regulator salles to possess super hero powers to spot bubbles and excess debt risk taking before market's crash. given that we have no way of telling whose forecast will be right and was well be wrong. in conclusion i would remind my colleagues of a comment made by the fed chairman on march 28, 2007. quote, at this juncture the impact on the broad economy and financial markets of the problem and so prime markets seems likely to be contained. my colleagues know i have the highest respect for chatman bernanke but in this case he obviously couldn't have been more wrong. this committee must have the courage to reject calls for a new regulatory regime that depends on the infallibility of the government regulators who

have so far shown themselves unable to anticipate crises not alone prevent them. we must encourage return to market discipline. thank you. >> there is additional one minute and ten seconds i would be willing to add to both sides. >> i appreciate that. >> the gentleman from georgia, two minutes. >> i think this is a very timely and important hearing as we grapple with the issue of how the compensation structure affects systemic risk. i think that i can understand pay for performance but for the life of me i cannot understand pay without performance. i think that gets to the heart of the matter. pay without performance. so much of compensation structure i think is an equitably distributed to the

salaries and in their bonuses. i think it is within the bonus structure we have to look very@n as we and the american people deserve this and are looking at this multimillion-dollar bonuses

on tax payers' money while the american people are just hanging on by their fingernails in an economy where the salary and the wage disparity is continued to widen and widen. so if we look at the history and retrace the unraveling of the economy, there is a very significant role that this out of control compensation packaging of executives would have led to a degree of the cause of the problem. mr. chairman i appreciate the opportunity to explore the issue further. >> the gentleman from delaware is recognized for two minutes. >> thank you mr. chairman. i believe we need to be cautious in the path we are going. the form of capitalism we've had in the country for decades, generations and even sentries at this point has worked well. states have created the

corporate laws and shareholders and injector's set pay. obviously there's been abuses in the area i think we all agree on that and i think the compensation structure should have affect on systemic risk but does that mean the federal government should step in with legislation and try to correct this is giving stockholders and stockholders themselves can the individuals who are not necessarily a person owning ten shares or 100 shares but corporations and others who owned tens of thousands of shares mutual-fund or whatever who may not have the interest of the future of the corporation in mind other than the immediate profit possibilities so as a result that potentially can be dangerous. i think we need to emphasize to the stockholders to have a right to change directors and we need to emphasize to the states the need to have good laws with

respect to the ability to be able to change directors and i think we need to be careful in washington. we've gone through a bailout situation and i don't think anybody looks at washington and thinks she these people know how to run things either the executive branch or congressional branch and one reason the people are not being penalized because of losses is we've been willing to step forward with bailouts and i think we need to be careful about that. i don't think the government intervention is an acceptable and as far as this is concerned so i would encourage us to listen carefully because there's good points to be made to think deeply about what we are doing and make sure we do not upset something which has a history of working pretty well. maybe we can tweak it but we need to be cautious about how far we go and i yield back. >> mr. sherman for two minutes. >> thank you. i agree with the member if we have a risk regulator this should not more than to an agency that could put taxpayer money at risk or in gauging

bailouts. it shouldn't be permanent maffei t.a.r.p.. it stands for executive compensation and i regret the fact the administration seems to apply this only to those entities that have received three scoops of ice cream. i would think if you read law it should apply to any company that receives even one and fusion of t.a.r.p. funds. but people were outraged at exit of compensation that wasn't only understandable, it was valuable and will lead promptly to the return of some $60 billion to the treasury by various banks that they would not have done if it wasn't for this outrage and the government reaction. as to the proposals we are considering today for say on pay i think we ought to look up at being binding largest advisory and we ought to set as many standards here in this room rather than just transfer

authority to the sec. we are talking about shareholder democracy. democracy starts by legislating by elected represented people not just by granting power to an unelected board. there are those that say corporate boards will exercise the authority and if they don't, well, there could be shareholder elections. the process of picking shareholder boards would make hugo chavez ploch. after all corporate funds to be used in on limited quantities to back up one side and fight the other. s to the pernicious incentives i.t. we are against them and would be difficult to design a system where an executive compensation reflects whether that executive actually helped the company in the long term rather than simply made it look good in the short term. this would be easier for those who have company wide decision making since we could give them restricted stock in the entire company those who led it to the success or failure of a single

unit it would be far more difficult and i yield back. >> the gentleman from illinois for two minutes. >> thank you, mr. chairman. i'm disappointed some federal officials are moving in directions of government determined pay not just for senior executives in the united states companies but for their secretaries and the janitor. i think that is a slippery slope or worse. don't get me wrong, financial criminals must be brought to justice. but most important risky behavior in the financial service industry must be addressed and i think we can do that with smart and more effective financial services regulations that rain and reckless behavior, risky leveraging, concentration of capital. in addition to the financial services institutions need to retain the best and brightest. we need to not induce fear in

the future financial service leaders or workers provide them with improved guidelines that foster competition for the benefit of u.s. consumers, businesses, investors and economy. with that, i yield back. >> the gentleman from kansas is recognized one minute. >> i want to commend you for your leadership on executive pay and holding hearings so we can review how compensation affects risk-taking for better or worse as we consider financial regulatory reform. one of the most important lessons id we can learn from a financial meltdown is that excessive risk-taking and over leveraged activity with little or no oversight will lead to instability. as this committee considers financial reform we need to guard against destabilizing activity and identified the proper role of risk in a thoughtful way by improving compensation, risk-management and corporate governance practices and i look forward to hearing the witnesses testimony and again, thinks mr. chairman. >> the gentleman from texas, mr. hensarling for two minutes.

>> thank you, mr. chairman. executive compensation is the wrong remedy for what is probably an onyx system problem. any compensation legislation considered by congress ought to be driven by two key principles. number one, executives of failed companies to come to taxpayers with a tin cup in hand must be subject to compensation limits, period, let there be no doubt. number two, except for the first principle, congress has no business setting artificial and mandatory limits on anyone's pursuit of their american dream. as someone aspires to be the next bill gates, oprah winfrey, warren buffet or charles schwab we should tell them this guy is the limit, go for it. not we are the congress, you will not be allowed to go beyond the tenth floor and by the way, take the stairs. i will be first to admit compensation

and for holding this hearing. this issue promises to be one of the most important regulatory reform legislation. recently there's been a number of characterization's of efforts to reform executive compensation structures on wall street in the wake of the worst economic crisis since the great depression many financial industry leaders have insisted ceo compensation is self correcting. the urge inaction on reform existing shareholder media scrutiny has moderated pay for leaders of poorly performing companies. they claim if we enact stronger reform our financial talent will be driven overseas and economic recovery will be delayed. what is missing from the argument is clarity and reason. for the 175 executives whose companies helped fuel the current economic crisis that required hundreds of billions of dollars in taxpayer assistance i believe a compensation overseer should have the discretion to

determine whether or not these companies compensation packages or reasonable in any other industry when someone takes excessive risks that lead to a monumental failures there are repercussions. wall street seems to expect a separate set of rules. for my constituents the double standard is nothing new. they know 30 years ago ceos to come 30 to 40 times what average workers made and now that number has exploded to 344 times an average worker's pay. they know why all the average ceo pay dropped by $1 million last year many average workers were laid off. they know that the average bonus payment to wall street executives represents more they hope to earn over a lifetime. and they know that once again, mean st is paying for the actions of wall street. my hope is industry leaders understand cause for executive pay reform are not retaliation for the current economic reality but rather attempt to assure a

new era of corporate responsibility. i hope the executives realize performance incentives tied to the long term success and soundness of an institution are essentials if we hope to monitor system at risk and restore confidence in the markets. with that in mind i look forward to working with the administration and the chairman of this committee. thank you, i yield back. >> the gentleman from new jersey is recognized. >> i appreciate the gentleman who just spoke on his comments and i appreciate the witness is here today and the chairman holding this hearing. today we are exploring compensation structure and systemic risk. to me, as i look at it the federal government is the one that poses the single biggest risk and it's not even close. part of the reason the government opposes such a large risk is the misguided federal policies we've seen. yet government officials with long-term track record of success continue to come forward with proposals with 1 degree or

another dictate private firms how they should properly compensate executives and measure performance. there's certainly room for improvement on particular companies putting together compensation practices and the extent this discussion today says the gentleman from the other side just made the comment helps to inform boards as they take a closer look up the compensation policies that could all be a positive development but i have a problem and i believe the american people are growing weary of recent government over reach into the private sector. with the government owning gm and with the way double-fault was disregarded and the chrysler bankruptcy case, dangerous actions are taking place which would create an uneven playing field increasingly inject political decisions with sell any unintended consequences into the economy so individual boards from companies have responsibility for establishing compensation packages that not only take into account the long-term best interest of the company and shareholders will

also allow them to attract the best available talent. this is a fundamental underpinning of the free-market economy and it shouldn't be put in the hands of government bureaucrats. with that, i yield back. >> the gentleman from florida for two minutes. is he here? we will hold off then. let me go to the gentleman from texas, mr. neugebauer. >> we have formed taxpayer support in cities and that is what the american people were in price to be shareholders in companies in many cases they wouldn't have invested on their own but unfortunately that marriage was made, and i would guarantee if you think the marriage isn't working very well we until you see the divorce as we try to unravel but it looks like we are moving in the direction of increasing the consequences of th