thank you, mr. feinberg, for testifying before us today. i know that you have the limited per view of these seven companies, but j.p. morgan chase and others have had substantial loans. they are no longer under executive pay restrictions. however, with their profits recovering, all three firms are set to make large payments to their executives this year and, in fact, according to the attorney-general cumo, -- cu omo, goldman sachs paid out $4.8 billion in bonuses. what would it take to stop this reckless behavior? . legitimate question, what

authori authority. historically the authority has been the self-regulating marketplace. now, to the extent that that supplemented by the federal reserve, by the regulators like the s.e.c., the fdic, that is a subject that congress may want to revisit. i want to emphasize my reluctance to attempt in any way to broaden my jurisdiction beyond these seven companies where i'm trying to collect money representing the taxpayers as a creditor. i'm not saying it's not a legitimate concern. i'm just saying that it's a subject that goes well beyond my jurisdiction, it seems to me. >> well, there is one company, gmac, which is under your jurisdicti jurisdiction, and it has already received $12.5 billion of t.a.r.p. money. however, they are asking for a third bailout. and how do you plan to ensure

that the additional $5.6 billion that they're requesting doesn't go towards these unscrupulous compensation practices? >> we're very vigilant in making sure that the compensation practices that we have articulated in this report are fair, are reasonable and will be paid by gmac to its employees as part of this program. i'm not sure we are that extra requested funding will go, but we want to make sure under the law that there's sufficient funds at gmac to pay these officials, and we'll make sure of that. >> and for them to control their compensation practices? >> they control their compensation practices subject to our rules and regulations in which we have mandatory jurisdiction, congresswoman, to make sure that we're monitoring those compensation practices.

>> well, let's talk about aig. i know that you made some major exceptions to pay cuts for three senior aig executives who had signed contracts for multimillion-dollar bonuses prior to your appointment. you stated that you're reluctant to invalidate contracts prior to the enactment of this current law. but do you have the authority to override these contractual rights? what can be done about this situation? you have aig employees who -- well, let's see. four employees made over $4 million. one employee made $10.5 million. >> we have authority under the law to attempt to work with the company in renegotiating those contracts. we have been successful in almost every case, although that's the exception that you have referenced. three individuals at aig. what we did with those three individuals at aig, they had a

contract. they insisted on honoring that contract. they had every right to insist on honoring that contract. and therefore under the law, i took those contracts into account in reducing their 2009 compensation. beyond that, i have no authority to act. and i think that that's what i did under those circumstances. >> while there are alarming findings that executive compensation is actually increasing even though there is this outrage by americans, now that you've had the experience with these seven companies, what would be your recommendation on a going-forward basis? >> i think going forward we'll continue. first to implement the recommendations in our report that call for a reduction in cash compensation of around 90%, a reduction in overall

compensation of around 50%, cash plus stock. in addition, i am hoping -- and we've also reined in perks. we've also tied compensation to long-term performance. and i'm hoping that our recommendations will be followed not only by these seven companies which are required to follow them, but i'm hoping that some of our recommendations will voluntarily be adopted by other companies seeking to improve their compensation practices. we shall see. >> thank you. i yield back. >> his time has expired. mr. cummings is recognized for five minutes to be followed by mr. connelley. >> mr. feinberg, i wanted to thank you for your testimony. and i've listened to you very, very carefully. and i do believe that you have done what you've been instructed to do. and i think you've done an outstanding job. >> thank you. >> let me just try to get down

to where the rubber meets the road. you know, i think part of the reason why this is going on, why you're doing what you're doing, why the congress has asked you to do what you're doing, is so that -- and you've implied this in your testimony. part of the reason is to try to get other companies to do this beyond the seven. and i have had an opportunity -- i know you've gotten maximum cooperation, i think you said, with aig. and i've had an opportunity to meet with the former head of aig, mr. liddy. and to listen quite a bit to what he had to say. and i read the papers just like you do. i have absolutely no confidence, none, that the things that you're able to do -- and it has nothing to do with you -- there is a culture on wall street that

will cause them to reduce salaries -- i mean, consistent with what you just said a minute ago. and, i mean, in you're very bright and straightforward person. i mean, what do you see -- i mean, what would cause them to even do it? because my dealings with them is, like, we're on two different planets. they have -- i think that when they talk about multimillion-dollar bonuses, it's like shoe-shine money to them. and i'm serious. and so -- and when you talk to -- i talked to mr. liddy about my constituents who were being thrown out of their houses because of foreclosure, losing their savings, everything, and they still -- they still wanted to give money to the financial products division. and to seem to not even have a

clue or not give a hoot about these folks, and at the same time, handing out millions. i mean, i just can't see how, with all your fine work, that is going to be turned around. i just don't. i've been around a long time. and number two, i was wondering what advice -- do you have conversations with the president? because let me tell you, i believe that the american people, in order for -- in order for all of the things that the president's trying to do to right this economic ship, if the american people aren't there and if they feel like they're getting screwed every which way and certainly it goes beyond these seven companies. you know, so the question

becomes, are we -- i mean, what do we see -- what do you see -- and, i mean, i know what you're hoping. but mr. barofsky said something the other day that really impressed me when he was giving us a little talk about his report. he said that secretary geithner and others, whenever he's -- he comes before us, they listen. so here you are before us. you're the man, work for the seven company. i'm trying to what it will take, if anything. this may be a culture that's impossible to turn around. to make these folks move in another direction. >> congressman, you're asking a political science question about the difference -- the gap -- the gap between wall street and main street thinking on this subject.

"a," i can play whatever role i can play hopefully in impressing upon wall street generally the value of what's in this report. whether or not wall street will pick up on any of this, i do not know. >> and give me your best argument. that's what i want to hear. you're talking to wall street. you say wall street, we've got a great report here. this is why you should do this. your best argument. >> my best argument would be to wall street that this is why you should do this because if you don't do this, there may be a time when congress or others will rein in -- will rein in pay and will limit your discretion and will limit your unilateral ability to determine what to pay people. i mean, to the extent that these modest proposals, modest in the sense that they only apply to seven companies, to the extent that they are ignored in the private marketplace, ignored, well, i mean, the question is, will congress, in its wisdom,

sit by and allow compensation to go forward under the old regime and the old way of doing things? i don't know. i've got enough problems, as you've witnessed this morning, dealing with these seven companies and suggesting that my role should definitely not go beyond these seven companies to express their view on what global decision should be made by congress to try and rein in wall street. that is a subject of beyond my jurisdiction and one that i wisely don't want to get near because i don't want to undercut my credibility and my effectiveness in terms of dealing with these seven companies. >> thank you very much, senator. >> we might need another companies. >> congressman connelly. >> thank you, mr. chairman and mr. feinberg, thank you for your willingness to serve. in listing some of the rhetoric

about the subject, on the other side of the aisle, one would think, if one knew nothing that congress and the federal government just has this irrational compulsion to interfere in the private sector and arbitrarily set compensation limits. what's your understanding of why your job was created, mr. feinberg? >> it's clear. my job was created by congress and the treasury to establish compensation determinations designed with one primary objective in mind -- to get the taxpayers' money back. and that is the primary objective. now, how we do that -- >> mr. feinberg, i understand that, and thank you. but why? did something go wrong? why did we decide on these seven companies? >> these are the seven companies that were -- that were allowed, i guess, to survive on the back of the taxpayers' willingness to contribute these funds.

>> ah, so the private sector, the free market, in fact, had failed. is that correct? >> correct. >> let's take one of the seven companies you oversee. aig. the largest corporate quarterly loss in the american history was in the last quarter of last calendar year, and it was none other than aig. is that correct? >> correct. >> and aig has been the biggest recipient of bailout funds, is that correct? >> i think that -- yes, that's correct. >> so it had the largest loss and the largest single taxpayer bailout in american history is that correct? >> correct. >> does the public have any interest at all? in wanting to see some kind of rational compensation limits in a company that's bailed out, the biggest in its history? >> insofar as the public's view is reflected in the statute that i'm working under, yes. >> does that seem a rational

concern? >> no. >> it's not rational? >> it's a rational response to the crisis yes. >> in the public's interest? >> yes. >> thank you. let me ask you, the statute that created a special master was to review prior payments. when your office reviewed prior paymen payments two senior executives in aig, what did you find? because presumably you found something wrong in the fact that you've chosen to roll back some of that compensation. there was nothing nefarious or illegal about it. prior to the enactment of the statute creating my office. what we did find going forward under my tenure, we did find

that there were pending payments that were obligated to be made under prior contracts and we were able through negotiation with the companies in almost every respect except the ones cited earlier to get those contracts voluntarily invalidated. instead, we rolled the amounts that were involved in those contracts into perspective performance. >> performance based. when you look at compensation prior and in your report you are submitting the day looking forward, i assume that there is some rational basis for your coming up with the recommendation you came up with. for example, we heard rhetoric today that suggests that the sky is a limit. we have no business even talking about limiting executive compensation, even in companies we have held up. and you agree with them some reason, any limit is arbitrary.

>> i think that that is right. >> but would you not agree, if i said, the ceo's compensation in company x ought to be to 1% of the entire profit for the year, that would be an irrational compensation. compensation, would it snot. >> i think it probably would. >> so it's not entirely arbitrary. >> oh, no. our decisions weren't arbitrary. our decisions absolutely were based, i think, were based on reasonable evaluation of the data and the an neck total information we received from the seven companies. i would defend my report as being not at all arbitrary, but very, very principled, very rational and very reasonable. now, people may disagree, but i think it is clearly a reasonable and defensible report that was submitted to the secretary.

>> and you use the words performance-based. could you just elaborate on that? that's where we get into the rational or arbitrary here. it's tied to some kind of rational expectation of financial performance on the part of the company. is that correct? >> that is absolutely correct. we rejected out of hand the notion that regardless of company performance there should be guaranteed salaries, guaranteed bonuses. guaranteed commissions. guaranteed perks, guaranteed, guaranteed, guaranteed. and what we said in our report, and what i recommended is that the era of the compensation guarantee is over. and instead, other than small cash-based salaries, the remainder of the compensation package should be tied to

performance. and not only tied to company performance, but tied to company performance over a peer yo of time so that you can not simply short the stock, sell it after a year, roll it over. you've got to hold it for up to four years. and then we're hoping the long-term benefit of holding that stock will tie the officials' compensation to the overall value of the company as reflected in the stock. in addition, one other point, we also offered up the notion of longer term incentive-based stock, in addition to salary. but that stock cannot be redeemed. it d not be sold, until and unless the taxpayers get their money back. that's the formula we tried to use to correct what we thought

in our report were the problems with executive compensation practices in these seven companies. >> i thank you. and my time sup, mr. chairman. thank you. >> i just want to make one point from my friend and colleague from virginia. they taurked about the private sector failing. i think it's important to understand. the private sector didn't fail. we had some institutions that had major problems. but to argue the private sector failed is just in my judgment fundamentally wrong. institutions fail in the private sector every single day in this country and across the planet. that's part of capitalism. that's part of -- what the problem is, once we start down the reed, that's when we get into all these questions and all these problems. >> yeah. thank you very much. let me say this before i yield to the gentleman from new york, that, you know, there's a lot of concern about these folks who have failed going to another company. you know, i'm not sure that

anybody would be too excited about hiring people that fail. i mean, i don't think you have to worry about that too much. they run one company into the ground and you expect to get big money to go to another one and do the same thing? i don't know that that's a real conce concern. >> well, we hear the argument all the time. you expressed one view, and ranking minority members express another view. there are a lot of vacancies. whoever was going to leave would have left, i don't know. we're trying to implement the statute of keeping in mind both of those positions. it's a balancing act. >> i think about moefbs congress. when we leigh, someone takes our seat. they do real well. i yield five minutes to the gentlewoman from new york. >> thank you. first i would like to welcome mr. feinberg and mention his truly outstanding work as a special master for 9/11 during a

very difficult period in our country. it's a very difficult topic. you did a fine job. i would like to ask how we are faring internationally in terms of our compensation compared to foreign countries. we are in a global market now. we are kpaet competing with firms across the world. and how does u.s. executive pay compare to, say, pay in japan and european countries? 6. >> i'm not -- i can get you that data congresswoman. i can tell you there has been a great deal of recent g-20 and other cooperation between treasury and the secretary and other companies in other countries in trying to come up with a common set of international standards governing compensation. i can certainly get you that data.

>> i would like to know. i've also read the united kingdom adopted say and pay rules or shareholder vote on executive pay. and are you aware of that and has that made any difference in the pay scale or have you followed what's happened in the united kingdom? >> i think that's of recent vintage. ly try to secure some impact of that in the united kingdom pop event united kingdom's five largest banks have reportedly agreed to abide by the g-20 executive compensation rules and have u.s. banks likewise agreed to accept these condition which include an independent compensation committee and claw backs for poor performance? >> not on my watch. i don't know. i'm limited to these seven companies. and again, at the risk of

disappointing you,ly get you answers to these question, congressman. >> are you trying to issue pay according to performance? >> what congress is considering, as ien s, both the house and the senate, concerning both corporate governance reforms in federal legislation and corporate regulatory reform, and both of those subjects certainly are part of the overall concern about total compensation, even though those two subjects aren't directly part of my jurisdiction. >> okay, the law gives firms the right to appeal within 0 days of the compensation determination. and do you anticipate appeals? and if so, how will they be conducted?

>> i haven't received any appeals as yet. i'm hopeful there won't be any appeals. if there are under the law, we will certainly give due consideration to those appeals, but as of yet, as of today. >> are companies offering grarnt guarantees to employees and does that violate treasury regulations? >> it all depends whether those employees getting those grants allegedly in the new york times fall within my jurisdiction one 1 to 25 or 26 to 100. citigroup and other companies under my jurisdiction, at least legally have the authority to act independently if they're not part of my mandatory jurisdiction. i could issue some advisory

opinion, if i knew more about such bonuses. and we will look into that. >> do you have the authority to override contractual rights? >> no. if the contractual rights are found by my office to be valid, legal and binding, then we give due deference to the constituti constitution. the fact that the sanctity of contracts should be upheld. but as i said earlier, we do have under the law two ways to deal with these old contracts that might be found to be valid. one, we can seek to renegotiate those contracts with the company. we've been very successful in doing that. we'll yield those contracts and turn it over to performance-based stocks. second, if a company refuses to

voluntarily modify the contract, we can take those contracts into account in establishing perspective compensation. so we do have some weapons at our disposal. >> thank you. my time has expired. we've been calmed to i will always be in your bed for that. >> and we thank you for your testimony. we want to let you know that we appreciate that and the work that you have done. we really, really want to stay in touch with you as we move forward. as i indicated earlier, the american people are angry. and you are helping to calm them down. thank them -- thank you so much. >> give me a call now will be up

here as soon as possible. >> and now our second panel. >> i think your audience is going to disappear now. >> with your staff leaving, you leave plenty of open seats. >> please stand as i swear you win. -- as is where you win. let the record reflect that the witnesses have answered in the affirmative.

william k. black is an associate professor of economics at the university of missouri parent -- missouri-kansas city. and author of the book, the best way to rob a bank is to own one." we welcome you to the committee. russell roberts is a professor of economics at george mason university and a research scholar it stanford university hoover institute. welcome. your entire statement is to be placed into the record. we would like for you did to your statements and 5 minutes. we might have to stop you because we will have votes on the floor. thank you very much. why don't we start with you, mr.

roberts. you can began. >> you may want to pull it closer. >> distinguished members of the committee, americans are angry about executive compensation, rightfully so. the executives at general motors and chrysler denied deserve to make a lot of money. they made bad products that people did not want to buy. the executives on wall street or reckless and all road huge sums to make bets that did not pay off and they wasted trillions of dollars in excess capital. everyday people are out of work through no fault of their round, and they want to know why people who made bad decisions not only have a job but a big salary to

go with it. no wonder they are angry at wall street. but if we keep getting angry at wall street, we will miss the real source of the problem right here in washington. we are what we did, not what we wish to be or what we say we are, but what we did. and what we do in washington is rescue large companies and financial institutions and rich people from the consequences of their mistakes. when the mistakes do not cost anything, you do more of them. when your teenager drives drug and crash suspect car, and repairing the car and giving the keys back to him will not keep them from getting drunk. the story always ends with a crash. capitalism is a profit and loss system. the profits encourage risk- taking, the losses encourage prudence. is it a surprise that when the government takes the losses instead of investors that

investing gets lead spurgeon? if you always bail out lenders, is it surprising that they can borrow huge amounts of money and live on the edge of insolvency? i am mad at wall street but i am more mad at the people who gave them the keys to drive the economy off of a clip. who gave them hundreds of billions of taxpayer dollar, to some of the richest people in human history? i am." -- i am mad at president bush, president obama, the treasury secretaries, and i am mad at congress. you helped risktakers continue to expect that the rules that apply to the rest of us do not apply to the people with the right connections. you have saved the system but it is not a system worth saving. it is not capitalism, it is crony capitalism. using a special master for compensation to get our money back is too little, too late.

in a constitutional democracy like ours, is not the government that have rights, we the people have right. a constitution exists to restrain government, not in power it. the question is whether it is a good idea for the government to have the power to set compensation, and despite our anger, the answer is no. this demonstrates the man how readily available know about what they imagine they can design. the special master imagines he can design compensation packages while retaining key talent, but it is impossible to anticipate the consequences of such a decision. he has no scan in the game. a single individual had been given no a norma's arbitrary power with insufficient accountability or transparency. this is not good for the rule of law, democracy, or capitalism.

by focusing on those who owed the money tarp money, this distracts us from other firms that benefit from the album -- from rescue like goldman sachs and jpmorgan chase. it distracts us from the postulancy -- paul -- the policies that created the problem in the first place. it is a share raid to make crony capitalism look respectable. i want my country back. let's get the government out of the auto business, at of the banking business, out of the compensation design business. we need explicit timetables to disengage from government ownership, including a plan for how the federal reserve will drawdown its balance sheet. i want my country back. i want a country where responsibilities home -- still mean something, where rich and poor, main street and wall

street, lives by the same roles. we do not need a special master to level the playing field. we need to take the crony at of crony capitalism so we can get back to the real thing. >> thank you very much. mr. black. >> i joined us in thanking you for having us. i agree that what we have this chronic capitalism. but it is not crony capitalism that occurs simply because of bailouts, and that is critical to understand. this same process occurred when creditors were wiped out, when subordinate debt holders were wiped out, when shareholders were wiped out. it happened when there were absolutely no ballots in enron and worldcom, an executive

compensation drove those frauds. that is what is producing the crony capitalism. you can stop the bailouts, and i think that we should, but you're still going to have this problem unless you deal with pay. you have to deal with not simply executive compensation but compensation more broadly. let's look what happened. the savings and loan crisis -- there was an exhaustive investigation of what happened. the national commission found in the typical large failure, fraud was invariably present. the means of the fraud was accounting fraud, and that the way you convert the firm's assets to the benefit of the ceo is through modern compensation mechanisms. he saw that an abundance with enron and worldcom. in other words, we have known

for at least 35 years how do incentives. and it came not from government but from a very conservative libertarian, michael jensen, who said we are doing it all wrong and we needed change compensation. we need to go to much more aggressive form -- performance- based pay. he set out to do it. what did feinberg just report? 35 years later even after these disastrous failures, they could not get it right. they design systems which obviously further misaligned the interest of shareholders from those of the managers. we need to stop that system. that is the system that has caused this crisis. why did loan brokers bring in bad loans? consistently, because they were

put on incentive systems based solely on volume and not on quality. why did appraisers get inflated? it is because compensation created an aggressive dynamic in which bad ethics drove good ethics at of the marketplace. we have good quantitative numbers on that. >> we have to run and bowed. we will be back 10 minutes after the last vote, ok? we will do our recess. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2009]

>> we apologize. we have the vote around here in if you do not, your constituents will talk about you. that is the same kind of anger we get about this compensation, if we did not budge. if you would continue, please. turn the microphone. >> all right. to resume, the critical thing to understand about accounting fraud in connection with executive compensation is that it is a sure thing. it is a very simple formula for how you optimize. you grow really rapidly, he made very bad loans, you had extreme leverage, and you put minimal loss reserves. if you do those four things, you

will produce not just profits but record profits. and then you can use seemingly normal corporate mechanisms of compensation to convert from assets to your benefit as the ceo. it is the perfect crime. if you do it without giving orders to engage in the accounting fraud, and you can give that order through modern executive compensation. i cannot send a memo at fannie mae that says to 10,000 employees, we want to commit accounting fraud. but i can do the same thing with my compensation system. all i have to do is extend it, not just to the top 100 -- these modern, insistent -- these modern compensation systems go much farther down in the organization. you will get as a relatively

junior officer and incredible increase in your income, and as senior officers, even more. all you have to do is touch the numbers. and all i have to do is the ceo is not care. and i pay you a maximum bonus. and the degree of this pledging is extraordinary. -- this fudging is extraordinarily per the office of thrift supervision report's overall called a loans are causing losses for 55% -- report's overall alt-a loans are causing losses for 55% of loans. it would be irresponsible to discuss the current crisis without discussing the role of fraud in it.

so, no, compensation is not what directly causes the largest losses. compensation incents you to make deliverly bad loan to grow rapidly to produce financial bubble. that produces catastrophic losses. that is the system that we have right now. i don't know where i am in terms of time. i think i have probably done five minutes. i will stop. the day is not young. >> thank you, both of you, for your testimony. and again i apologize for the brake and the interruption that we had. but let me begin with you, professor black. please explain the relationship between what you term accounting

control fraud and it szeged -- an excessive executive compensation. >> this exist at both the criminality literature and the economic literature. we've worked together on a very the most famous piece is by no apprise -- the nobel prize winners, and they have an article in 1993 entitled "looting -- bankruptcy for profit." this is at work. -- this is how it works. i gave you the optimization condition. you grow rapidly, he made deliberately babylon, you have executive -- excessive leverage, and if you do those things it must be the case that you will report record earnings per that was true in the savings and loan crisis were linking savings -- where the two worst

reported that they were the most profitable savings and loans and america at different times. by the way, as the foot night, this messes up any kind of metric analysis. it produces perverse results. now we have record and come. -- in come. directly under modern executive compensation, which is oriented toward short-term accounting gains, this produces maximum bonuses. frank rains in the context of fannie mae, when he was running it, was asked by business week, why do we have all these frauds? he said it was because of modern executive compensation. when you put enough money in front of people, and good people will do bad things.

i think that last line is word for word. >> thank you very much, professor black. prof. roberts, i understand your aversion to the bailout, but given the existing relationship between the government and the seven largest bailout firms, how would you address executive compensation issues until such time as the government has been repaid in been able to get out of these companies? dollars special master feinberg, i thought, did a masterful job defending what he is doing to those seven firms. he is held by a to economists that i have a lot of respect for. but unfortunately there is no way that they can successfully figure out the consequences of their decisions, the mix of short-term and long-term pay.

the special master talked about it like it was a science. it is really a wild guess. the real danger of this enterprise, but side of violation of the rule of law, the arbitrariness, the lack of accountability, the biggest problem is that it distracts the american people and makes them feel good. we are taking care of the seven firms. the real cause of the crisis in the real reason that they were overcompensated was the government bailout. we ought to focus on the incentives that those bailouts created for egregious executive pay, and if we did that, we can prevent it from happening again in the future. if we stick with this system and not get down in a post hoc way, we will miss the real lesson. >> do you think the folks on wall street will get the message? >> i do not think that they will get the message at all. i think that we have seven firms

being told that they have to be paid. the rest of the firms are getting away with it. goldman sachs and jpmorgan chase, as some of the other members mentioned, they are making record profits with my money as a taxpayer because of the incentives that we created for them. the expectation that they would be bailed out, that came true and they acted properly utley and irresponsibly. profit lead -- profigately and irresponsibly. that created the expectation and the karr problem and it will create the next problem but we do not fix it. >> what else do you think we need to do? >> politically, with a lot of anger on main street, i would go after folks that you have direct legislative control over. it is a good time to get rid of

some corporate welfare and get rid of payments to millionaire agribusiness folks. it's a good time to get rid of the sugar quota. it takes jobs at of america to canada where they do not have the quotas. it's a great time to do things that are hard to do and i would love to see congress do that. in terms of the financial crisis, we have to have a recognition of the government's role in the house and roll to change. i hope we learned about the challenges and dangers of trying to create homeownership for every american. that is not the american dream. it is the dream of the national association of home builders and the national association of realtors. fannie and freddie will cost a sleaze -- at least $100 billion. i am worried it is going to be more than that 3 the federal reserve holds $1 trillion or more of their loans which will turn out to be bad. i am worried about what that is going.

i hope that congress will put pressure on us to get out of the mortgage business and have the federal government get out of the mortgage business, and we have to get at of the banking business most importantly. i don't want it run implicitly or explicitly by washington. it will create problems like the one we are in the middle of no. >> we have to get our money back. >> i am worried about that, too. it is politically important to get your money back but i hate to say this -- it might be a mistake to get the money back. it could be that by propping up these organizations in desperation, we are going to cause other distortions and other things that we do not see because we want our money back. the special master is worried about losing key talent. maybe he needs to lose them. we are still fronting capital

and scarce resources into them. we talked about gmac wanting another bailout. maybe we should say, enough. it is a mistake. i am not going to throw good money at a bad. that is the risk that we're playing with right now, that we continue to throw money at these folks. that is what we're doing with fannie and freddie and aig, maybe we should cut our losses and get out. i understand the political pressure on you to get our money back, but maybe that is a risk. the special master is task with getting the money bag. economically and for the citizenry as a whole, it may be a mistake. >> i yield to the gentleman for california. >> thank you, mr. chairman. i'll start with prof. roberts. ironically the 1992 act felt that executives were not linked to enough rest. in other words, their pay was

not at risk in those days and it was going up. people's compensation was less linked to performance. the law specifically was designed to minimize the growth in the base pay and maximize the growth in risk. can you comment on in fact what we should do differently if we want to see a change in that? >> earlier i quoted the nobel laureate who talked about the purpose of economics, to tell people that what they imagine they can design, they can i really designed for it there is an inevitable tendency on the part of congress and everyone to create the perfect system, as if it is the engine of a car. we will tweak the carburetor and add some more oxygen in gasoline.

it is a bit of a fantasy to think that the wisest people on the world could tinker the mix of current and future compensation to get the right level of risk taking, especially in the background if you have the feeling in the expectation and it turns out to be true that if you mess up, someone will risk the un bail you out. particularly the bailing out of lenders to those folks is a great danger. that has been done over and over again. >> thank you for describing the the fed. that is what they did. we can tinker with the economy and there will be no recession or inflation. everything will be perfect until it is not. you talked about franklin raines. we have a special regard for franklin raines year to date. -- here today. what part of the catastrophe that the world felt did you put

on friday and fannie taking on, knowingly, willingly, and demanding to take on trillions of dollars of loans which had no underlying net value? they had no skin in the game by the individuals, and does the skin in the game for the banks once they got them under freddie and fanny or countrywide. we're talking executive compensation and you are complaining about it. but wasn't a great deal of this growth in financial community profit at the expense of the taxpayers from day one? we were taking their risky investments deliberately want to the federal balance book? >> no, it is actually more complicated. >> i appreciated the more complicated, but no deserves an explanation. no, they did not take this on to their books?

>> fannie and freddie took less of it on to their books than did private -- purely private entities. the bullet let's go through that. freddie and fannie took trillions on the books, right? >> no. >> $1.90 trillion. >> of subprime? no. >> what figured to you have? >> relatively little they had little subprime 3 they had much more of alt-a. >> you're talking about wires loans? >> you may be under the impression that i am here to defend fannie and freddie. i'm in a very different position. >> let's go through it. they were providing aaa rating for subprime, and fannie and freddie was taking on subprime and alt-a, which is the other

name for that basket of loans that did not have ordinary income ratios and equity. the fact is that the banks that took that and flipped it did very well. their executives deserved all of that great day because they managed to make money with no risk if they got off the books. is that not right? >> in general, no. these things were sold with recourse. >> you product credit the fault and then you enter the failure. >> perhaps you did. we do not know about the credit default swaps market, you have to wonder standard that market is still almost completely opaque. >> professor roberts, perhaps you have more transparency in this area. >> what about fannie and freddie's involvement? >> franklin raines wasn't compensated incredibly well. >> $90 million over a six-year

period. -- was compensated incredibly well. >> that is the facts. subprime is an elusive definition as you point out. the way it should be defined is troubled loans, which could be for many reasons. the most interesting statistic that i know of fannie and freddie is that in 2007, at the height -- at the beginning of the collapse, when everyone started to realize this was going to be trouble, 23% of their loan purchases, used to buy a house, 23% had less than 5% down. one in every five loans were four loans that they were buying had very little scan in the game. they are now on the books of the the fed -- the fed. >> chairman kucinich was holding

a hearing during that time that the loans were still being put down, showing the destruction that was happening in cleveland at the time and the foreclosure rate that was climbing. >> thank you very much. i yield five minutes to the gentleman from missouri. >> i want to thank the witnesses for participating today. to prof. black, you have stated that government regulation and prosecution are the only solutions that can prevent an issue like this from occurring again. we now see corporations going so far as to sell derivatives on life insurance policies, greatly increasing their risk. i wonder if we can see the slippery slope here. corporations will risk more, assuming that taxpayer dollars will be used to save them once again. you have referred to the need

for effective regulators. in your view, what jurisdiction of powers would these regulators have? >> we should be regulating the financial lenders of america. not regulating the loan brokers, the mortgage bankers, was a disastrous policy. my counterpart talked about how you can screw up regulation. that is quite true. that is why we do not do it that way. we tell you what we did and why was so effective in dealing with the subprime crisis, the non- subprime crisis of 2001 and 2002. i am sorry -- of 1991 and 1992. we did not try to adopt perfect roles. we looked at the industry for their best practices. we did not go all the way to the best practices. we said, what did the prudent

lenders do, and we said roles that you had to act with the prudent members of the industry. that worked phenomenally well. stop what it would have been the subprime crisis in those years. but we deregulated and stop supervising after that point and thought it was illegitimate, impossible to regulate. it is not, but you do not do it by creating every doctor. -- every dot. >> professor roberts, anything to add? >> there is always the hope that this time it will be different. you start to think that maybe there is some fundamental mistake that we are making. i think there is a strong desire to see an improved regulatory system. we're going to get a different regulatory system, but the question is, is it going to be improved? the challenge is that, annie and

freddie had their own regulator. they explicitly -- they were not distracted by anything. why did they stand by and watch fannie and freddie mac were slums than they did before, increasing the risky loans, loans without documentation, zero down payment loans, loans with 3% value of the house, and catch the accounting fraud way to light -- way too late? and the question is -- and the answer is politics. the people in the regulation got leaned on by congress and partly by fannie and freddie as is well known. there were caught in a vise. congress wants any and ready to be get -- to be more active in getting out loans. can i disagree with it. everybody likes it. fannie and freddie was to make more money. everyone is happy until the taxpayer foots the bill. why