Liveblog of House Financial Services committee meeting on executive compensation, which is turning into a showdown on Fannie and Freddie (on CSPAN 1 now, also available online here).  Members’ campaign contributions from FIRE interests in 2009 (Finance, Insurance and Real Estate), the percentage it represents of money they raised &  rank if they rank in Top 10 is included in bold.

Witness List & Prepared Testimony:

  • Mr. Lucian Bebchuk, Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, Harvard Law School
  • Ms. Nell Minow, Editor and Founder, The Corporate Library
  • Mr. Joseph Stiglitz, University Professor, Columbia Business School

BARNEY FRANK (D-MA, Chair):  Ed DeMarco, head of FHFA (regulator of Fannie/Freddie), not going to be here today.  He’ll be here within the month.  Today’s hearing is on private company executive compensation, next month is on companies 80% owned by the gov’t.

STIGLITZ:  Reiterates points he made in his new book Freefall (he was here chatting about it on FDL on Sunday)

It was the financial sector that brought us to the brink of disaster.  Credit was not available to businesses who needed it even as it was being pushed on poor people who did not have the ability to repay.  He agrees with Paul Volker: hard to see any real growth from this.

Short-term compensation incentives encourage excessive risk-taking, predatory behavior and deceptive accounting.

MINOW:  Yesterday Supreme Court told us corporations are like persons, with full rights.  The pay plans were major causes of the meltdown.  They took TARP money and paid themselves mortgages.  Since the only thing TARP didn’t restrict as base pay, that’s what they did.

"For example, Wells Fargo’s board approved a 522 percent salary increase for the CEO, from $900,000 to $5,600,000. The extra was paid in stock, just over 180,000 shares at August’s rock-bottom prices.  Thanks largely to the government bailout, two months later this was worth over $5.7 million."

IMF has new study linking lobbying expenditures and high-risk behavior.  Executive compensation plans continue externalization of risk.

BARNEY FRANK:  This is an issue because these executives are taking money that is available to them because of government intervention, and so saying that compensation shouldn’t be regulated because it’s interference with private companies is ridiculous.  And since Republicans voted against bills to limit compensation of Fannie/Freddie and TARP recipients (H.R. 1664) they don’t have a lot of cause to be throwing stones.

STIGLITZ:  President’s plan is designed to curb these problems.

BAUCUS (Ranking member, R-AL):  Does Minow have a problem with members of Congress designing compensation structures? ($161,200, 71% of donations, #1)

MINOW:  Doesn’t believe in Congress setting pay restrictions.  Believes in removing barriers to shareholders doing that.  Has problems in terminology in the bill Barney cites that gave the power to the Treasury.

BACHUS:  The bill gave Treasury the power to decide what executive compensation was "excessive," and he would vote against it again.

Does she think the $6 million package given to Fannie/Freddie executives adequately link pay & performance?  Do they meet your definition of "outrageous?"

MINOW:  Not as bad as they were, but they’re "troubling."

FRANK: The bill Bachus is talking about is the one that limited pay for both private & public entities. There was another one he wasn’t addressing. And now here’s Paul Kanjorski….

KANJORSKI (D-PA):  We could get into trouble if we decided we should be the arbiters of executive pay.  (Kanjorski raised $1 million from the Finance, real estate & insurance industry for his 2008 reelection bid.)  His concern, he says, is for the constituents in his district who make an average of $13 an hour. ($215,200,  54.3%, #3)

STIGLITZ:  Would executives work less hard if they were taxed more?  No.

NEUGEBAUER (R-TX):  Who’s doing it right? What’s the model? ($146,810, 38.21%, #10)

BEBCHUK:  Firms where compensation and CEO turnover is more sensitive to performance tend to be better.

MINOW:  Home Depot went from bottom of the list to top of the list when they went from a CEO who had 90% of pay NOT tied to performance to 90% of their pay tied to performance.

STIGLITZ:  Important that "performance" not linked to a stock market that may rising due to nothing they are doing.

BEBCHUK:  It should be a matter of giving shareholder rights.

NEUBERGER:  But don’t I have the right to buy or not buy the stock?

BEBCHUK: The ability to sell the share on the market gives you no protection.

MINOW:  That’s an outdated approach, especially for institutional investors who are stuck — they don’t have the luxury of unloading the stock because of transaction costs.

NEUBERGER:  I don’t agree with that.  You can send a message by selling your stock at any time.

STIGLITZ:  Corporations are creations of the state, we write the laws that govern them.  We should think about how we writes those laws, which have to do with systems of corporate governance. We can create a better system.

SHERMAN (D-CA):  I would say selling the stock is an imperfect solutions.  They get stuck with capital gains taxes, and then they have the opportunity to invest it in another company that has bad executive compensation structure too.  "The results in Massacussetts were a victory of populism against the establishment."

FRANK:  There are two bills.  The one Bachus was talking about we passed, it was blocked in the Senate.

SHERMAN:  "Ah, it’s always the Senate."

HENSERLING (R-TX):  On Christmas Eve, taxpayers were exposed to unlimited losses when the Administration announced lifting the caps to GSEs (Fannie & Freddie) and then announce $6 million compensation packages.  I hoped we could question Ed DeMarco,  today.  Barney says he would show up within the month but I think we should have that opportunity.

MOORE (D-KS):  I asked Ed Liddy, head of AIG, if he and other executives would pay back their bonuses.  He said they would.  A report issued in Dec last year that only a fraction had been.  In March of this year, they’re scheduled to get another round of bonuses.  Are there things we should learn about govt’s intervention with AIG? ($1,39,097, 50.49%, #4, Moore retiring in 2010)

BEBCHUK:  I agree, government hasn’t asked enough.

MINOW:  I hope we never do another bailout, but if we do, we should oppose stricter conditions.

STIGLITZ:  When we turned over the money, we didn’t do enough to regulate behavior, not only executive compensation schemes but lending.  If compensation is tied to how much money they have in the bank, that’s an incentive not to lend.  Look at the transaction Buffett had with Goldman Sachs:  if we did the same thing, we would’ve gotten a lot more back.

CAMPBELL (R-CA):  To get at the root of the problem, we need to give greater ability to shareholders to express it through the board to have  alternative members (rather than micromanage the pay). What about quarterly vs. semi-annual reporting?

STIGLITZ:  When it comes to institutions like taxpayer-funded institutions, we have to try  to affect the actual behavior for those who represent risk to our systemic system.  But that may be broader than just the big banks.

MILLER (D-NC):  How do we stop the vulgar excess that takes money from the middle class and the real economy? It is undermining all we need to be doing. I don’t want to be regulating compensation, but the way the market is supposed to work is that the market squeezes costs and compensation.  But in the financial sector, profits in that sector ballooned to 40% of all corporate profits.  Are competitive forces working, and why not?  Are boards of directors more about celebrity appearances?

BEBCHUK:  I don’t think making them full-time employees works because that makes them "insiders."  I think allowing shareholders to replace them more easily would allow markets to work better.

STIGLITZ:  When you say 40% of all corporate profits came from the financial sector, most of those are phantom profits.  That underscores the necessity of not tying compensation to those profits, which disappear when they get restated later.  The financial sector has enormous discretion to manufacture them.

LANCE (R-NJ): Why did Warren Buffet have an "arm’s length" transaction with the banks, and why did the American people not get an arms’ length transaction? Did the administration not get one for them?

STIGLITZ:   They wanted to get money to the banks.  They could have gotten a better deal.

LANCE:  I haven’t seen any great learning curve with this reagard.

MINOW: I think the initial transaction was made in a moment of panic, but looking at what the President proposed last week, there have been some lessons learned.

LANCE:  What should we do make sure the problems with Fannie and Freddie don’t happen again?

MINOW: I agree with the Chairman, they need to be rebooted.

STIGLITZ:  It was really a system of governance that was bound to fail.  I agree.

GREEN (D-TX):  The public understands when the CEOs of the biggest companies make more than the average workers make in a year. And those CEOs envy the hedge fund managers who pay lower taxes.  I support letting people make bonuses as big as they want as long as they don’t create perverse incentives that threaten to bring down the economy.  I had to hold my nose and bail out AIG, Bear Sterns and the auto industry. Would the world be a better place if we hadn’t?

STIGLITZ:  I think the world would’ve been a better place if we let AIG fail.

GREEN:  Bear Sterns, AIG and the auto industry.

STIGLITZ:  Some of them, yes.

GREEN:  What about you, Bebcheck?

BEBCHEK:  Some of the counterparties, yes.

GREEN: What about those who said we should just do nothing, and take a lassaiz-faire attitude? Do you agree?

MINOW:  No.

(Green continues to berate everyone into saying that "doing nothing" would be bad, having not gotten the answer he wanted endorsing his votes for the bailouts.)

CLEAVER (D-MO):  One of the first things we dealt with when I came on this committee, when Oxley was the chairman & Frank was ranking member, had to do with regulating Fannie & Freddie.  My concern is that history has been distorted, because Mr. Oxley proposed trying to deal with Fannie & Freddie compensation, and as I recall they didn’t get any support for the White House.

FRANK:  Oxley’s comment was that "what he received from the White House was the one finger salute."

BACHUS:  Barney voted against it.

FRANK: I voted in it in committee until it got to the floor and the R’s put in an amendment to block affordable housing, then I voted against it.

KILROY (D-OH):  What advice to you have for us so that we can fairly compensate people and define performance, and if the central issue is board governance, if boards have the attitude that we all deserve that kind of compensation, how do we get into changing that?

MINOW:  We’ve all focused on supply side (what Accountants have to do) and not the demand side (the heads of the mutual funds, the asst secretary responsible for ERISA).  You should have them in here, because they routinely vote for these boards, and we should remind them what fiduciary responsibility is about.

STIGLITZ:  I agree but that does not go far enough.  The compensation schemes that put at risk the national economy need to be addressed through the tax structure.  Asserting that taxing capital gains would have adverse effects are just wrong.

BACHUS:  One thing that troubles most Americans is that some of the large banks do borrow very cheaply from the Fed.  That is subsidized by taxpayers in one way or another.  The assumption is that the money would use it for lending and it has not.

GRAYSON:  Is there any sign that those executives who were responsible for losing $12 trillion in this economy held accountable?

STIGLITZ:  No.

MINOW: No.

BEBCHUK:  Financial incentives encouraging it did not stop, but some no longer have their jobs.  Many have been able to pocket and keep bonuses based on results in 2006 and 2007 that were reversed in 2008.

GRAYSON:  What happens to the country if this continues?

MINOW:  Bankruptcy for the country.

STIGLITZ:  We’re likely to have the same kind of problem again. Socializing the losses and privatizing the profits is not too capitalism.

BEBCHUK:  It could be very costly.

BARNEY:  The idea that executives will just stop showing up if they can’t get obscene bonuses is crazy. They’re not going anywhere.

(END OF HEARING)