With outrage among politicians and the public over pay practices at bailed-out financial firms reaching a peak, the nation's top bankers are testifying today at the inaugural hearing of the Financial Crisis Inquiry Commission.
Critics are stewing over recent reports that banks will once again be awarding massive sums of cash and stock to their top staff. The financial crisis had an array of causes but chief among them, many argue, were compensation practices that encouraged excessive risk-taking by some of the country's most powerful financial institutions.
"I did not run for office to be helping out a bunch of fat cat bankers on Wall Street," President Obama told journalists last month.
The commission, a bipartisan panel, was appointed by Congress and charged with investigating the worst financial turmoil to hit the country since the Great Depression.
"People are angry and they have a right to be," said Phil Angelides, the chairman of the Financial Crisis Inquiry Commission, at the start of the hearing, which began at 9 a.m.. "The fact is that Wall Street is enjoying record profits and bonuses in the wake of receiving trillions of dollars in government assistance while so many families are struggling to stay afloat."
Billions on the Side for Banker Pay
During the first nine months of 2009, the country's six largest banks set aside $112 billion for compensation, according to a November report by the New York state comptroller's office. Some are on track to exceed the compensation levels of 2007, before the worst of the financial crisis hit.
Leaders for four of the banks are scheduled to testify today: Goldman Sachs CEO Lloyd Blankfein, JPMorgan Chase CEO Jamie Dimon, Bank of America CEO Brian T. Moynihan and former Morgan Stanley CEO John Mack, who remains chairman of the firm.
Perhaps the bank heavyweight who has seen the most backlash over his firm's compensation plans is Blankfein, who himself spoke out against compensation excesses at a banking conference in September.
"There is little justification for the payment of outsized discretionary compensation when a financial institution lost money for the year," he said.
Goldman Sachs, however, likely did not conclude 2009 with a loss -- the bank beat analysts' expectations by reporting third-quarter earnings of more than $3 billion in October -- and its compensation kitty shows it: the bank reserved $16.7 billion for compensation during the first nine months of 2009, putting it on track to pay its employees an average of $700,000 each.
But Goldman and its peers have announced steps to change their compensation practices.
"Every institution is using one or some combination of (techniques) to eliminate excessive risk-taking for compensation and focus on the long term and that aligns the interest of the institution with the interest of the employee with the interest of the consumer -- they're all inextricably linked," said Scott Talbott, chief lobbyist for the Financial Services Roundtable, told ABC News.
Clawbacks and Performance Measures
Last month, Goldman announced that for at least 30 Goldman managers, compensation won't be in cash: the bank said they will instead be awarded stock that can't be sold for five years. That stock can be "clawed back" -- taken back by the firm -- if it is determined that the executive took excessive risks.
Morgan Stanley, meanwhile, is preparing to defer 65 percent of compensation for its 25 top executives and tie a quarter of their compensation to firm performance measures, a person familiar with the bank's compensation plans told ABCNews.com. It established clawback provisions last year, the person said. (Morgan Stanley made headlines over compensation last month when Mack became the first big bank CEO of 2009 to announce that he was forgoing his annual bonus, a move that Mack also made in 2007 and 2008.)
Bank of America told ABC News that it, too, is tying its compensation to bank performance -- specifically, the bank's stock price -- and that it also will defer much of its bonus awards.
"We understand the anger felt by many citizens," Moynihan said at today's hearing, explaining that Bank of America's compensation pool this year will be greater than last year's but "certainly not back to pre-crisis levels."
JPMorgan is expected to devote a smaller percentage of its revenues to compensation than it did the year before, though actual compensation levels will probably rise because the bank's earnings were significantly higher in 2009 than 2008. In October, the bank reported third-quarter earnings of $3.6 billion, nearly seven times its earnings for the same period the previous year.
At today's hearing, Dimon defended his firm's pay practices.
"Before the financial crisis and since, we have used a disciplined and rigorous approach to compensation," he said in prepared remarks.
JPMorgan is scheduled to announce its final 2009 compensation totals on Friday, with others making their own announcements next week. As of the first nine months of 2009, JPMorgan set aside $21.8 billion for compensation, second only to Bank of America, which reserved $24.2 billion.
For the Obama administration, such astronomical sums are not only infuriating, but also damning. Since the administration took office in January 2009, President Obama and his economic team have vowed to change the ways of Wall Street.
On Jan. 29 of last year, President Obama denounced Wall Street's bonuses as "shameful" and "the height of irresponsibility."
"There will be a time for them to make profits and there will be time for them to get bonuses," he said. "Now is not that time."
In May, Treasury secretary Tim Geithner stated, "I don't think we can go back to the way it was. That would not be responsible for us, not good for our financial system. So I think we're going to need to see very, very substantial change in practice."
And in September the President delivered a stinging speech on Wall Street, declaring, "We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses."
Not Enough Change?
Just last month, Obama again voiced his frustration with the big banks.
"They don't get it," he said in a "60 Minutes" interview. "They're still puzzled why it is that people are mad at the banks. Well, let's see. You guys are drawing down $10 million, $20 million bonuses after America went through the worst economic year that it's gone through in decades and you guys caused the problem."
"I did not run for office," he said, "to be helping out a bunch of fat cat bankers on Wall Street."
Despite all the administration's tough talk, critics claim little has changed.
The compensation changes announced by the banks thus far "are in no way sufficient" for risk management, said Nell Minow, the co-founder of the corporate governance research group The Corporate Library.
"It's a small step forward . I'm not saying they're going backward, but it's certainly inadequate," she said, adding that the bank's clawback provisions aren't strong enough and the stock the banks are awarding might make it possible for some "to ride the wave of the market without doing anything in particular for their companies."
Their compensation awards, meanwhile, don't take into account the billions in government assistance the banks received during the financial crisis, she said.
"Right now, they should be discounting the bonuses based on the support that came in through the bailout, which they're not doing, and they should be deferring a lot of bonuses in order to rebuild the credibility that they destroyed with the American people."
Some critics lay the blame largely at the administration's feet.
"President Obama voices outrage but fails to stem the abuse," wrote Peter Morici, professor at the University of Maryland's business school, this week.
"It is not surprising that their CEOs, who get the biggest paydays, claim huge bonuses are essential for rewarding talent," Morici said. "When my students grade themselves, they reach self-serving conclusions, too."
"Sadly, Obama, Geithner and [Federal Reserve chairman Ben] Bernanke could halt this madness, but don't."
The administration and the central bank have taken some steps to address compensation issues. The Fed has launched a review of pay practices at the country's biggest banks, while President Obama last June appointed Ken Feinberg to crack down on compensation at seven companies receiving what the administration deemed to be "exceptional assistance" from taxpayers.
New Moves: FDIC Penalties & Bank Tax
Feinberg in October slashed the 2009 annual salaries for the 25 highest-paid employees at these seven companies by an average of 90 percent from last year's levels. Overall compensation, including yearly bonuses and retirement pay, was cut by an average of around 50 percent. Executives who want over $25,000 in perks such as private planes, limos, or country club memberships have to apply to the Treasury Department for permission.
Then in December Feinberg capped cash salaries at $500,000 for the 26th to 100th highest-paid employees at four of these companies – AIG, Citigroup, GM, and GMAC – except in "exceptional cases", of which there were under a dozen. Chrysler and Chrysler Financial were exempt from Feinberg's rulings because they had no employees – with one exception – among their 26th-100th highest-paid that earned more than $500,000.
Bank of America was exempt from Feinberg's rulings because the bank had paid back their bailout funds. Shortly after Feinberg's December rulings, Citigroup also paid back its funds, exempting them from the pay czar's purview as well. Going forward, Feinberg will only have power over AIG, GM, GMAC, Chrysler, and Chrysler Financial.
Most recently, the Federal Deposit Insurance Commission announced that it would consider implementing penalties for banks whose pay plans encourage excessive risk-taking while the Obama administration is mulling a separate tax on banks to recoup losses associated with the federal bank bailout, the Troubled Asset Relief Program.
Talbott yesterday voiced opposition to the proposed tax.
"It will decrease a bank's ability to lend, thereby stifling the economic recovery," he said.
Minow said that her hope in reining in compensation lay with bank boards and shareholders, rather than government officials.
"It took a village to make this problem, it will take a village to fix it," she said. "The (Financial Crisis Inquiry) Commission will play a very important role but at the end of the day the boards of the directors and the shareholders are going to have to do the heavy lifting."
With reports from ABC News' Zunaira Zaki and Charles Herman.