tv [untitled] CSPAN June 29, 2009 2:00pm-2:30pm EDT
executives and shareholders and number five, we should promote transparency and accountability in setting compensation. my underlying question is, who is in the we? first of all, ended the extent to which authority already exists either at the sec or a the fed to do some of this under existing statutes or whether there are specific things that this committee and congress must do to change the law to address these issues? >> thank you. perhaps in the fourth i did not use my words well because i think they are actually different.
i think of the issue of golden parachutes and supplemental retirement packages, we were not coming with a particular legislative or even regulatory proposal. we really were in a sense trying to shine a spotlight on a practice that we think -- can add the we in this case being the treasury? >> we are trying to suggest that based on our review this is a practice that and there are practices on the supplemental retirement accounts, excess of retirement accounts for executives and golden parachutes that shareholders and management should reexamine and there may be times than they are, but this seems to be increasing evidence that they have become more prevalent. >> let me go to the second question -- >> so i say that i perhaps chose my words poorly and that implied that we the treasury department in a specific proposal. on the fifth point which is one you mentioned, there we were
coming to the table with is this another proposal and it was a proposal to essentially give the sec the authority they need to do two things that of the treasury department and the sec both feel are in the interest of a sounder -- >> those two things quickly. >> the legislation which we are giving sec the authority to do and giving the sec clear legal authority to strengthen the independence of compensation committee is in no way that after an ron congress gave the sec authority to strength audit committees. >> well, i thought sec already have this authority. mr. breheny and maybe just not exercising it, you needed more authority or is it just that
this sec that we have had is not exercising the authority they are have? >> no, i don't believe they have the authority to require companies to have a say on paper proposal or strength in the competition committee consultants. the chairman of the sec is on board supporting both the say on the legislation. >> this is -- if the sec doesn't have a to the regulators have it? or are we talking at about all public companies that don't have regulators, what about with banks regulated banks? with the regulators are have the authority to say you've got to have any at more aggressive and compensation committee on your board? with the had the authority already to say you've got to give your shareholders a right to have a say on pay? >> no on say on pay. we would not have the authority to require those kind of disclosures. that is not and safety and
soundness and a strengthening company's we may be able to do some actions but i'm not sure we would be able to say as far as the treasury department would like. >> thank you mr. chairman. >> safety and soundness has been more invoking nondisclosure then disclosure. the gentleman from texas, mr. hensley. >> thank you mr. chairman mr. sperling, i've tried to listen carefully to your testimony and i'm listening and i must admit i find myself in agreement with most if not all of the principles that you lay out. compensation plans should properly measure record performance search of airline with time horizons and risk, should be lined with sound risk-management, and the rest. for most of my life i have assigned the back of a paycheck but there was a time i actually signed the front of a paycheck. now there was a time i served on the compensation committee at a new york stock exchange company
and not unlike the gentleman from california in his opening statement, i thought i worked very hard to try to ensure that these principles were put into place. i remember an unhappy ceo when i was part of a comp committees informing him he would not be getting the pay package compensation structure that he had desired. i guess my question for you it is since i have found this challenging and i was in the private sector for 12 years and been a member of congress for six and half when i came to congress i didn't have any kind of epiphany that now i know what the perfect compensation structure is. i go back to what the gentleman from california said and why can you do better? >> i don't think there's anything we are proposing that suggests we could. i think what we perhaps are suggesting, compensation committees is that when you're in that position if you have the
authority to hire you're own compensation consultant, if there was not an ability for the compensation consultants you have a conflict of interest because they were being paid by the ceo and some other measure that that was strength in your hand. you seem to have been able to in your situation strike that type of independence and i complement to on that, but i can say that many people find on a compensation committee that if the company itself is hiring both the council and the consultant that is very difficult and, in fact, there is a study that shows ceo pay and does end up being higher when you use a compensation consultant that has a conflict of interest. >> i appreciate your approach in that regard and it will be an open question in my own mind whether or not there are ways to strengthen the hand in or the
powers to visit with responsibilities of the comp committees and public companies. i can tell you from my experience on this committee though that there have been many witnesses from private enterprise sitting at that table who have received a strong suggestions from this committee that and this is a way that you might want to do something because if you don't do something we will do it for you so i am somewhat fearful that once we go down this road we may go way beyond merely strengthening the hand of compensation committees. it also, mr. sperling, on page four and your testimony you stated that quote, when workers who are losing their jobs to the top executives at the firm's walking away with huge severance packages it creates and the understandable impression that there is a double standard. and i agree with that impression. let me ask you since the executive compensation issue is in terms of t.a.r.p., i want to
ask a t.a.r.p. related question. the administration put forth a reorganization plan for gm. under that plan at gm bondholders many of whom are middle income americans including blue-collar workers, tradesmen who invested $100, a thousand dollars in gm bonds for their 401k and their retirement, the gm bondholders apparently ended the administration plan get 10 percent of the company for $27 billion in claims, warrants for an additional 27%. the united auto workers get 17.5% of the company for less in claims, 20 billion, and 10 billion in cash, 6.5 billion in preferred stock, 2.5 million i owe you, and warrants for additional two-point represent of the company. would that not create an impression of a double standard? >> i really don't believe so.
i really believe that the bondholders represented themselves very well. i think they were better off and had they allowed for a completely uncontrolled bankruptcy. and in terms of a this, is going to require painful sacrifice from the retirees, retirees who did nothing wrong and were not broken shooting this financial crisis and i really do believe there was very careful shares sacrifice in that arrangement. >> thank you. mr. chairman. >> thank you commenting on the last gentleman, as i am not sure that the bondholders were hurt. rather a huge infusion of taxpayer money helped all of the old stakeholders. i think we were more generous with the workers than we were with the bondholders, but if anybody is not being treated well in this is the taxpayers. i want to recognize kathleen
connell in the audience to was for eight years comptroller of the state of california. i know that's a quite a number have relatives government control pay and i should point out this is companies that have taken and are holding our t.a.r.p. money. i wanted to run the chairman in welcoming republicans when they reject crucially every bush administration economic policy of the last seven months of his administration but i think it is now time for democrats to reject what the same intensity virtually all those policies. we are told that only a few of t.a.r.p. recipients have received extraordinary help, and only those few should face real limits on executive compensation. i would say that t.a.r.p. is an extraordinary departure from free enterprise and that even those who only got one infusion of $25 billion of capital to be viewed as getting extraordinary help. a i have one question for the
record because i like all three to answer in it's way too complicated to do so or early and that is i want you to imagine how we would design and executive compensation system for the derivatives unit of aig or some other derivatives units inside a big company. if you just said we give a restricted stock for a few years they might take extraordinary risk so that the unit looked a veterinary profitable, it did an extraordinary amount of aig a restricted stock. they would have believed that a ig's would have been a solid company the matter what their unit did. i don't think anybody in that unit or in this country realized that that unit could bring down that enormous company. likewise keep in mind at least for this example assume that this unit my show profits for accounting purposes for five for 10 years in a row before in
imploded and now try to figure out what kind of executive compensation system would reward the people in that unit for taking the right kinds of risk, but what actually penalize them for taking the wrong kinds of risks. now for a question for our representatives from the sec, there were elections in venezuela to control the government of venezuela. our state department criticized hugo taught as for using the resources of the government to affect elections before representatives to control the government. so what can you do to propose to congress or you're on board for regulatory changes rules that would prevent corporate management from using the resources of the company to unduly influence the outcome of the election without giving similar resources to the other side? what to do to say this and challenges supposed to get
resources and what has the sec done to make sure that the challengers have equal space in the proxy statement which is the one document you to control? >> thank you, congressman. that exact issue was the point that the commission took up on may 20 and as you may know this is the third attempt the commission has made to give shareholders to have a state law right to nominate directors the ability to have those nominees included within the company's proxy materials. so the issue about disclosure and the ability to provide disclosure about nominees is all included in that rule proposal is up on the commission's website as of last night. >> i would hope to propose legislation that would go far beyond the proxy statement. trust me, it's very boring document and what is needed is equal amounts of some cases millions of dollars to call shareholders and try to get their proxy's in that contest needs to be equal. my time has expired.
>> thank you mr. garrett. >> i think the chair and before i go to my questions to go back to the opening of the meeting with the chairman was talking about history and how history is relevant. indeed, it is. more the pity that revisionist history is not relevant. yes, there were some republicans on this side of the aisle just now repudiating with the past administration did with a lot of the bailout's. unfortunately the chairman and others are not repudiating it when it was going to the house and you remember the chairman adulate some said carried the water for the past administration to make sure that legislation was not only engage in the major that legislation t.a.r.p. legislation passed and also we must remember history tells us that this new administration has basically adopted with line and sinker the past administration's bailout philosophy. so yes there are a number that repudiated in the past and i look to the other side of the aisle and maybe one of their icy and join with us in that fight
against the t.a.r.p. bailout and a string a bailout that followed so let's remember what history was. i also see we have the counselor to the treasury secretary with us today and remember also that secretary geithner at that time was with the new york fed and at that time the new york fed was considered the architect of the bailout of the a i.t. bailout. this administration adopted them -- and adopted him as the treasury secretary's other is the pity this administration is queuing on and in the mold with the bailout and that is why the number of us thought was wrong then and continues to find out against now with legislation and what we rollout later on. so with history now clarified, mr. alvarez, i see in your testimony you say that employees data from exposed to significant risk in importantly you properly designed compensation programs man inside a wide range of employee behavior. you also say we shouldn't just compensation so that employees bear some of the risk associated with activities and employees
less likely to take a prudent risk extend payments reduced or eliminated per activity ends up higher than expected losses. i agree. how does that occur in the fed right now with the activities the employees take that have a risk not only on themselves but the entire economy? >> or they can do anything they want without any risk? >> there is no one that can do without taking risks and we have oversight committees. >> as far as their compensation? >> mel, as far as their actions as well. >> okay. >> other is a performance at the federal reserve a tie between performance and pay. we are all rated on our performance and we all have adjustments to our pay based on our performance. we aren't paid with bonuses in the way that the industry is we're talking about today go.
>> right. for all the panel, looking at the proposal going to this administration, say on pay the chairman talked about, some suggest the proposal would have higher costs for businesses to operate in most would agree. some argue that larger corporations could probably bear that cost. others are arguing that that may be the case but smaller firms with having difficulty dealing with those pretty significant additional expenses. does anyone have a comment on how smaller firms would have to do with this cost to the operation? >> so i would say the smaller firms actually do a better job of aligning risk and reward and the larger firms do. in part because typically in a smaller firm of the ceo, the cfo if there is one knows to the employees, knows the risks coming on to the balance sheet, knows the employees are doing and so is able to adjust the
compensation practices. >> but if we set up additional requirements and what have you as far as outside -- other requirements laid out there doesn't that add to the cost of them doing business and able to absorb fat? >> i will defer to the others on there's but the kind of approach is outlining principles. >> may bill i will turn to mr. sperling. >> the two proposals that secretary geithner put forward speed to any independent compensation committees i do not believe would have a significant cost. it would obviously apply to public companies. it does not mandate that and there is coming it does not put a mandate, it says that if you are. if independent comp committees in iras consultant or council
that that committee needs to have the authority in funding to do their job without conflicts of interest. so i feel the things we have put forward right now would be affecting public companies, but i share your view that one always has to do an analysis of what the differential impact would be -- >> thank you very much. mr. more. >> thank you madame chair. before the end of the $165 million in aig bonuses in march we also learn from new york's comptroller in january that was executives were paid $18.4 billion in bonuses last year. i was troubled by this news especially during a national emergency when the federal government is providing billions of dollars to taxpayer funds to stabilize the financial sector. now under normal circumstances i don't believe and i think most of the american people don't believe that we should congress be involved any way in setting executive compensation or compensations for board of directors and shareholders.
i believe the same. i don't think we should be setting those salaries. but we are not in normal circumstances and that's what i felt a stir 857 to limit for tarpon -- t.a.r.p. recipients would have limited compensation to the same level of compensation the president gets paid for and a thousand dollars. starting with mr. sperling i guess i want to ask, to believe the compensation practices can pose a systemic risk or jeopardize a firm's safety and soundness? how should cover start against risk to them financial system without stifling reasonable compensation practices? >> i think we have learned the hard way that they can contribute and i think it's been part of the discussion that we have had today. and i do want to say that we often do mention or use the examples of the extreme cases were people who are truly bad actors, but i thought of the danger i think comes from
building systems or even good people are not given the right focus. we talked before on the whole practice from the origination of subprime mortgages to their packaging to their sales. you almost have eight teen -- 89 financial transactions were you were paid by fees by the volume of which you did and then you either externalize did to the firm or you kind of move did on to the next person and, of course, what happens is when you're in canada a bubble or an asset bubble situation the people who are being cautionary start looking like they are overly risky verse and people being a bit reckless start look like they're wise and made good money. and it is exactly why you have to believe a company has to believe and risk-management and has to be something they do throughout the system and i have
to empower that person as i said that even when the goings getting good, why wasn't in firms throughout the the financial industry there was a little a practice of risk-management when there were no shortage of people writing the there was a potential housing bubble. perhaps people didn't realize the degree the death of what we would go through but there is a problem, so i do think that companies have to believe a strong risk management and have to empower their risk managers and have independence to stand up even in good times and say yes to this practice has worked the last few years, but when we look at the underlying value of what is happening we think we are creating a risk in the out years for our company and shareholders and the economy as a whole. >> thank you, mr. sperling. mr. alvarez, any comments? >> the only thing i would add is
the industry recognizes there was systemic risk enlisted the help of the firm's through the compensation practices of the past. and if you recall 15 or 20 years ago there was quite an effort to just get paid tied to performance as a beginning spot. and so the message that were used to tie pay to performance have shown in this crisis to have flaws. i think everyone is recognizing that and so is an opportunity, we have an opportunity now to make some strides to improve the health of the system and firms. >> thank you and i think my time is up and i yield back. >> thank you, the gentleman from florida. >> thank you mr. chairman. i am still trying to figure out what would make some of the compensation boards or committees recommended the
incredibly high compensation and that they did when it was clear the ship was on the rocks and it was going down. added the compensation laws that we have now come if they do, how do they affect tiffs between say ceo of a company and members of the compensation board? >> thank you, congressman. at the sec rules have quite a bit of requirements with regard to disclosure about conflicts between members of the compensation committee and other executives. in fact, it is a new york stock exchange-listed company requirement that today compensation committee members have to be independent and those rules are extensive. i think what you're hearing from my colleagues the recommendations made yesterday is to increase the independence of the members of the compensation committees beyond what they are today to restrict
all connections between compensation committee members and the board so i think we're looking at compensation but there is a minute and a requirement today and there is quite a disclosure already required under the sec rules. >> have you ever found that to be violated in history of this sec or the law? >> unfortunately i don't have that information to be able to give it top will answer. i'd be happy to look into that answer the commission takes its authority to force of the rules with regards to violations of disclosure rules are other rules very seriously but i have to get back to that information. >> mr. alvarez and mr. sperling, why do think they would pay out some incredibly high bonuses when they see the ship is on the rocks quacks. >> i think one reason is what we call collective action problem. no one wanted to be the first to
rationalize bonuses for fear that they would lose their best talent. that is actually one of the reasons i think we as supervisors can be helpful here by increasing the priority in of the board of directors and management to pay attention to the incentives and compensation, helping to outline best practices and good principles. we can push the whole industry to act together and in that way there is a little bit of safety. then there is less concern that an institution that does make the proper adjustments does for example of a boy bonuses when performance is for won't be left as the only one doing at. and that will improve the practices of everyone. >> do think it would make any sense just to impute some accountability to stockholders and their losses if you act poor like this?
data opening exposure to liability could be just as effective? >> shareholders are ready to share when there is excessive bonuses paid in two executives that is cost borne by shareholders, when our excessive risks taken aback when was the last time you are aware that was utilize? >> well, the shareholders, it is reflected in decrease of the shareholding in that price. >> i understand in theory but most stockholders that i know and they are small investors, they think that these humongous bonuses are just a necessary evil and nothing they can do about them and just as bad one place as it is another one everybody is misbehaving they're not going to find anything better on bottom line if everyone is being to the same extent and nobody done anything about it. quite frankly i doubt you'll be able to regulate people into doing the right thing like that.
i think that just holding them more accountable individually and personally accountable would make more sense. mr. sperling, i like you're $0.2 worth. >> i actually think the proposals we are talking about would be effective. i agreed with mr. alvarez that there is a bit of and you see this in the hallway that compensation consultants work, it is a plain -- there is less of a this fundamentally sound that, fundamentally good for the shareholder and more how does it compare to the practices of your peers. and so you do get a bit of a collection active problem where they say our competitors do this and that becomes the beginning and end of the discussion i think that empowering compensation committees but also to say on pay bringing this to light does have a powerful deterrent impact on just saying in the u.k. even the study from the harvard business school of
little more skeptical said its positive affect was on deterring pie pans to those who clearly perform poorly. >> we have a vote and will take -- another subcommittee hearing but ms. waters will use that in the subcommittee rules so we will take a break and continue and asked the palace tuesday. we won't be gone that long. mr. mccarthy will have a chance to get in and break for the vote. >> thank you and i appreciate that. many years ago my husband worked on wall street. he started on wall street i think when he was 17 and he worked his way up and he worked for a very large financial service company. he was in compliance and he has old northeast corridor to go to all the little offices to make sure that they are complying with the sec rules but also for the company rolls and he always found it amazing because he never announced when he was going to be there that he would go into an office and