WASHINGTON, D.C. –U.S. Sen. Sherrod Brown (D-OH), Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, conducted a hearing entitled, “Pay for Performance: Incentive Compensation at Large Financial Institutions” today. The hearing examined executive compensation practices at the largest financial institutions and the role that excessive compensation packages played in causing the financial crisis.
“While risky Wall Street practices caused millions of Americans to struggle to stay in their homes or access credit for their small business, the brass on Wall Street saw record salaries, bonuses, and perks,” Brown said. “To add insult to injury, American taxpayers continued to see risking compensation packages at the financial institutions they just bailed out. Protecting U.S. taxpayers means putting an end to risky compensation packages that allow Wall Street to reap all the rewards when times are good, but stick taxpayers with the bill when things go bad.”
Today’s hearing was part of a series held by Brown, who was recently tapped to chair the Financial Institutions and Consumer Protection Subcommittee, entitled “Banking that Benefits Main Street.” In 2010, Brown introduced the SAFE Banking Act to prevent institutions from becoming “too big to fail” by imposing sensible size and leverage limits. The legislation would also ensure that banks have the resources to cover their losses and hold Wall Street accountable, prevent future bailouts, and protect American homes, jobs, pensions, and businesses.
Witnesses at today’s hearing included:
- Kurt Hyde, Deputy Special Inspector General for the Troubled Asset Relief Program;
- Lucian A. Bebchuk, William J. Friedman & Alicia Townsend Friedman Professor of Law, Economics, and Finance, Harvard Law School;
- Robert J. Jackson, Jr., Associate Professor of Law, Columbia Law School; and
- Michael S. Melbinger, Partner, Winston & Strawn, LLP
Below are Brown’s remarks as prepared for delivery.
In 1933, the Pecora Commission investigating the causes of the 1929 stock market crash called as its first witness Charles Mitchell, the CEO of what is now Citibank. Mitchell’s testimony revealed that he had paid himself and his top officers millions of dollars from the bank in interest-free loans.
As a result of this testimony, Mr. Mitchell was disgraced. We are here today to examine Mr. Mitchell’s successors, and the role that excessive and risky compensation packages played in causing the financial crisis.
During the 1970s, average compensation for a CEO was nearly 30 times the average pay of a production worker. By 2007, CEO compensation had increased to nearly 300 times that of the average worker.
According to Thomas Philippon of NYU and Ariel Reshef of University of Virginia, the financial sector was paid a 40 percent wage premium above their counterparts in other industries.
In 2007, major Wall Street banks paid an estimated $137 billion in total compensation, and roughly $33 billion in year-end bonuses alone. A significant portion of this compensation has come in the form of stock options that both encourage risk-taking and provide banks with special tax loopholes that Senator Levin and I have sought to close.
In part because of these payment schemes, the largest banks engaged in risky activities and took on leverage as high as 30 to 1 or 40 to 1. The evidence suggests that bank executives were not being paid based upon the merits of their work – unless there is merit to creating a financial crisis unseen since the Great Depression. The average total compensation for CEOs for some of the largest TARP recipients was approximately $21 million.
And a study by Linus Wilson of the University of Louisiana-Lafayette shows that CEOs of banks that received emergency debt guarantees from the FDIC were paid an average of $4.25 million more than the CEOs of banks that did not receive FDIC support.
Is it any wonder that Federal Reserve Chairman Ben Bernanke says that banks’ compensation practices “led to misaligned incentives and excessive risk taking, contributing to bank losses and financial instability”?
So today we ask what, if anything, has changed in terms of Wall Street pay? And we ask what, if anything, can be done to rein in the excess and the dangerous incentives that helped bring our economy to the brink of collapse?
The Dodd-Frank Act provides a framework for reforming pay practices at Wall Street megabanks. Title Nine of Dodd-Frank enacts important corporate governance reforms to address compensation practices, including disclosure and “say on pay.”
And Section 165 provides the Federal Reserve with authority to impose risk management standards, or other necessary prudential standards, for large, complex financial companies. It appears that significant tools exist for regulators to put an end to runaway pay and “heads I win, tails the taxpayer loses” compensation packages.
I look forward to hearing from our witnesses about how these tools can be put to good use.