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Corporate and Financial Institution Compensation Fairness Act of 2009

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Location: Washington, DC


CORPORATE AND FINANCIAL INSTITUTION COMPENSATION FAIRNESS ACT OF 2009 -- (House of Representatives - July 31, 2009)

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Mr. FRANK of Massachusetts. Mr. Speaker, I recognize myself for such time as I may consume.

Mr. Speaker, I have encountered gaps between rhetoric and reality in this Chamber, never one as great as the wildly distorted description of this bill that we've got before us.

Let's be very clear. There are differences between the parties here on the whole, at least as reflected in the committee vote. I think it will probably be different on the floor. There is much less difference than there used to be about one piece of it, the say-on-pay.

When the say-on-pay bill came up previously in 2007--by the way, when the Republicans were in the majority prior to 2007, on this, as on many other issues, we Democrats tried to do some reforms, predatory lending being one--we got nowhere--credit cards being another. We did try, in our Committee on Financial Services, to bring this up. The Republicans used their majority not to allow it.

In 2007, when we were in the majority, we did bring it to the floor, and it passed over the objection of most Republicans, and I will introduce into the Record their comments denouncing say-on-pay. But 2 years later, they have moved some. So they are now for reform on say-on-pay, many of them, although a somewhat watered-down form.

I should say there is a stark difference between us remaining on whether or not any action should be taken whatsoever by the Federal Government to restrain compensation practices that inflict excessive risk on the economy. We should be very clear; this assertion that this amounts to control of all wages and prices is nonsense. There is, of course, nothing about prices at all in the bill. As to wages, what it says is that the SEC shall impose rules that prevent excessive risk-taking, and the reference to wages is only in that context.

The amount of wages is irrelevant to the SEC. What this bill explicitly aims at is the practice whereby people are given bonuses that pay off if the gamble or the risk pays off but don't lose you anything if it doesn't. That is, there is a wide consensus that this incentivizes excessive risk for you a shorter time. If you're the head of a financial institution or you're one of the decisionmakers or you take actions that are risky and 1 month later it looks like they paid off and you get your money and then 6 months later it turns out it blew up, you don't lose any of the money you got. And if at the outset you take a risk and it costs the company a lot of money, that doesn't cost you anything.

All we are saying is that there has to be some balance to the risk-taking. And people ask, What is excessive risk? Excessive risk is when the people who take the risk pay no penalty when it goes wrong; when they have a heads they win, tails they break even situation; when the company loses money and the economy may suffer, but the decision-makers do not.

Now, one of the sillier remarks we heard was this will cause us a problem with international competition. In fact, say-on-pay, when the Republican Party overwhelmingly opposed it 2 years ago, was already borrowed from Great Britain, the United Kingdom. And we were told during 2006 that we were losing a lot of business to Great Britain, that we should cut back on Sarbanes-Oxley, for instance, because people would go to England. But England had the very proposal that they were saying was going to drive people away.

In fact, today--I will read from an article from a couple weeks ago. The Prime Minister of England says they are going to adopt plans forcing banks to hold back half of all bonuses for up to 5 years to discourage excessive risk-taking. That's our major financial competitor. And the conservative opposition is critical because it's not mandatory.

We have been in conversations with the European Union, the United Kingdom, with Canada, and others. This will be done on a coordinated basis. In fact, American salaries, American compensation has been much higher.

So, no, there is no price control; no, there is no wage control; no, it is not a problem for international competition. And by the way, as to every institution, every credit union--you heard that rhetoric--the bill exempts any institution with less than $1 billion in assets, and it gives the SEC the authority to even raise that so there's even less. But here's the nub of it: The Republican Party has reluctantly been dragged--reality sometimes has an impact--to supporting a watered-down version of say-on-pay.

Say-on-pay, by the way, says that the shareholders of the company can vote and express their opinion. The gentleman from Texas was upset that we don't have a Federal Election Commission mechanism for these votes. But why only these votes? Shareholders vote on everything. Apparently it's only when the shareholders tend to vote on pay that Republican sensibilities are trampled.

We do not, in this bill, talk about the amounts. We do say the shareholders should. We say, in consultation with all the advocacy groups who represent shareholders and pension funds and elsewhere, that the people who own the company, the shareholders, should be able to express their opinion on the compensation.

We go beyond that to say that we believe the Federal Government has interest--not in the level of compensation, that's up to the shareholders--in the structure. When you have, as we have seen, structures whereby companies lose lots of money, and they lose lots of money on particular deals, but the people who made those deals make money on them, that has a systemic negative impact on this society because it incentivizes much too much risk.

Now, what is the Republican approach to that? Nothing. They admit that these are problems. They regret that these things are happening, but their regrets won't stop the damage. In the Republican substitute there is a watering down of say on pay, but they at least acknowledge that reluctantly. But when it comes to the practice of large corporations in the financial area structuring bonuses that incentivize excessive risk, my

Republican friends admit that that's the case and lament it and are adamant that we should do nothing about it. That's the big difference.

We believe that the SEC--and by the way, as to the form, it was a Republican former Member of this body, Christopher Cox, who was Chair of the SEC, proposed disclosure. He broached it first. He said we have an important public interest in knowing it.

So we are going to take the form of disclosure of compensation prescribed by a Republican Member of this House as Chairman of the SEC, with his colleagues, and let the shareholders say yes or no. We are going to go beyond that and say that the SEC should look at this and say, you know, you have a situation here where people making the decisions will have an incentive to take too much risk. If you tell people that if they take a risk and it pays off they are enriched, and if it fails miserably, they don't lose anything, they will take more risk than rationally should be taken.

You should not incentivize people to take risks where they can only benefit and never suffer a penalty. That's all this bill says. We will prevent that kind of thing from happening. We won't set amounts. We won't deal with wage controls. We won't do anything else, and we exempt institutions under $1 billion.

So I await the Republican counter. Yes, they want to water down say-on-pay, but they reluctantly accept it, but they have zero to offer with regard to the situation of excessive bonuses. And yes, we did get some reluctant agreement that we put some limits on the people who are recipients of TARP funds, but one of those who received TARP funds prospered with those funds, paid back the funds, and are now engaging in the same risky bonus practices they had before.

The Republican position, at least in committee, was to do nothing about it, zero. Ours is, have rules, not that set the limits, not that set wage controls, but simply say that you cannot structure it so that whatever level of compensation you have, you profit if the bonus pays off and you lose nothing if the bonus causes great damage to your company and the economy.

Mr. Speaker, I reserve the balance of my time.

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