[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE GOVERNMENT AS DOMINANT SHAREHOLDER: HOW SHOULD THE TAXPAYERS'
OWNERSHIP RIGHTS BE EXERCISED?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON DOMESTIC POLICY
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
DECEMBER 16, 2009
__________
Serial No. 111-132
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.fdsys.gov
http://www.oversight.house.gov
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts JOHN J. DUNCAN, Jr., Tennessee
WM. LACY CLAY, Missouri MICHAEL R. TURNER, Ohio
DIANE E. WATSON, California LYNN A. WESTMORELAND, Georgia
STEPHEN F. LYNCH, Massachusetts PATRICK T. McHENRY, North Carolina
JIM COOPER, Tennessee BRIAN P. BILBRAY, California
GERALD E. CONNOLLY, Virginia JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois JEFF FLAKE, Arizona
MARCY KAPTUR, Ohio JEFF FORTENBERRY, Nebraska
ELEANOR HOLMES NORTON, District of JASON CHAFFETZ, Utah
Columbia AARON SCHOCK, Illinois
PATRICK J. KENNEDY, Rhode Island BLAINE LUETKEMEYER, Missouri
DANNY K. DAVIS, Illinois ANH ``JOSEPH'' CAO, Louisiana
CHRIS VAN HOLLEN, Maryland
HENRY CUELLAR, Texas
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
JUDY CHU, California
Ron Stroman, Staff Director
Michael McCarthy, Deputy Staff Director
Carla Hultberg, Chief Clerk
Larry Brady, Minority Staff Director
Subcommittee on Domestic Policy
DENNIS J. KUCINICH, Ohio, Chairman
ELIJAH E. CUMMINGS, Maryland JIM JORDAN, Ohio
JOHN F. TIERNEY, Massachusetts MARK E. SOUDER, Indiana
DIANE E. WATSON, California DAN BURTON, Indiana
JIM COOPER, Tennessee MICHAEL R. TURNER, Ohio
PATRICK J. KENNEDY, Rhode Island JEFF FORTENBERRY, Nebraska
PETER WELCH, Vermont AARON SCHOCK, Illinois
BILL FOSTER, Illinois
MARCY KAPTUR, Ohio
Jaron R. Bourke, Staff Director
C O N T E N T S
----------
Page
Hearing held on December 16, 2009................................ 1
Statement of:
Brown, Orice Williams, Director, Financial Markets and
Community Investment, Government Accountability Office,
accompanied by A. Nicole Clowers, Acting Director, Physical
Infrastructure, Government Accountability Office; Professor
B. Espen Eckbo, Tuck School of Business at Dartmouth;
Professor J.W. Verret, George Mason University School of
Law; Anne Simpson, senior portfolio manager for Global
Equity, California Public Employees' Retirement System;
Alan Tonelson, research fellow, U.S. Business and Industry
Council Educational Foundation; and Ralph Nader, consumer
advocate, accompanied by Robert Weissman, president, Public
Citizen.................................................... 17
Brown, Orice Williams.................................... 17
Eckbo, Professor B. Espen................................ 42
Nader, Ralph............................................. 92
Simpson, Anne............................................ 72
Tonelson, Alan........................................... 81
Verret, Professor J.W.................................... 68
Letters, statements, etc., submitted for the record by:
Brown, Orice Williams, Director, Financial Markets and
Community Investment, Government Accountability Office,
prepared statement of...................................... 19
Cummings, Hon. Elijah E., a Representative in Congress from
the State of Maryland, prepared statement of............... 11
Eckbo, Professor B. Espen, Tuck School of Business at
Dartmouth, prepared statement of........................... 44
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio, prepared statement of................... 5
Nader, Ralph, consumer advocate:
A Review of Corporate Governance......................... 128
Prepared statement of.................................... 94
Simpson, Anne, senior portfolio manager for Global Equity,
California Public Employees' Retirement System, prepared
statement of............................................... 74
Tonelson, Alan, research fellow, U.S. Business and Industry
Council Educational Foundation, prepared statement of...... 83
Verret, Professor J.W., George Mason University School of
Law, prepared statement of................................. 70
THE GOVERNMENT AS DOMINANT SHAREHOLDER: HOW SHOULD THE TAXPAYERS'
OWNERSHIP RIGHTS BE EXERCISED?
----------
WEDNESDAY, DECEMBER 16, 2009
House of Representatives,
Subcommittee on Domestic Policy,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2154, Rayburn House Office Building, Hon. Dennis J.
Kucinich (chairman of the subcommittee) presiding.
Present: Representatives Kucinich, Cummings, Tierney,
Watson, and Jordon.
Staff present: Jaron R. Bourke, staff director; Michael
Clark, professional staff member; Jean Gosa, clerk; Charisma
Williams, staff assistant; Leneal Scott, information systems
manager, full committee; Adam Hodge, deputy press secretary,
full committee; Adam Fromm, minority chief clerk and Member
liaison; Kurt Bardella, minority press secretary; Benjamin
Cole, minority deputy press secretary; Christopher Hixon,
minority senior counsel; Hudson Hollister and Marvin Kaplan,
minority counsels; and Brien Beattie, minority professional
staff member.
Mr. Kucinich. Good morning. The Domestic Policy
Subcommittee of the Oversight and Government Reform Committee
will now come to order.
Today's hearing will examine the way that common equity
shareholder rights acquired by the Treasury Department under
authorities provided in the Emergency Economic Stabilization
Act of 2008 have been exercised to date, and to assess
alternative frameworks for exercising and protecting the
taxpayers' interests.
Without objection, the Chair and ranking minority member
will have 5 minutes to make opening statements, followed by
opening statements not to exceed 3 minutes by any other Member
who seeks recognition. And, without objection, Members and
witnesses may have five legislative days to submit a written
statement or extraneous materials for the record.
Today and tomorrow we will be examining how the Treasury
Department is managing common equity, or voting, shares
acquired under the Emergency Economic Stabilization Act of
2008. As a result of activities conducted under the Troubled
Assets Relief Program, the Government is now a principal
shareowner in four large, complex, and troubled companies: two
from the financial services industry--AIG and Citigroup--and
two from the auto industry--GM and Chrysler.
Like it or not, the U.S. Government is today the major
common equity shareholder, the principal owner, in two of these
companies, AIG and GM, and has an outsized role in two others.
Establishing a clear chain of authority, responsibility, and
accountability for our current exercise of fiduciary
responsibility in the case of the four companies is an
essential and unavoidable task if Congress, and in particular,
the House of Representatives, is to uphold its constitutionally
defined fiduciary responsibility to protect the public
interest.
The main objective of these hearings is to assess how and
how well the Treasury Department has upheld its fiduciary
responsibilities in managing the resulting U.S. Government
shareholding, and also to assess how and how well it has
mobilized the full array of Government capabilities in support
of turning around these firms and their industries, and in
support of the broader purposes of Emergency Economic
Stabilization Act.
A major theme today and tomorrow will be corporate
governance. To an important degree, the failures of all four
companies have resulted from failures in corporate governance--
failures in risk management, failures in compliance, failures
to hold executives accountable, and failures to rein in
excessive corporate pay. And so the first question we have to
ask is: Have the actions of the Federal Government had the
effect of upholding best practices in corporate governance? Or,
rather, does the way in which Treasury is managing our more
than $200 billion stake in these four companies actually
constitute a major step backward in corporate governance?
But this is only one part of what we need to examine.
Remember that in choosing to provide the extraordinary
authorities of EESA, Congress was not acting primarily as an
investor. As defined in the Emergency Economic Stabilization
Act of 2008, the Troubled Asset Relief Program [TARP], was
intended to serve several purposes. Beyond providing liquidity
to the financial system, EESA has as its second main purpose to
ensure that the authorities and facilities created ``are used
in a manner that'' promotes jobs and economic growth, helps
homeowners stay in their homes, protects home values,
retirement accounts, and life savings, ``maximizes overall
returns to the U.S. taxpayer,'' and ``provides public
accountability'' for the exercise of the authorities granted.
Thus, the purposes and obligations of the U.S. Government are
not at all limited to the maximization of shareholder value,
and our fiduciary obligations are not at all exhausted merely
by upholding established best practices in corporate
governance, as necessary and urgent as this is.
Now when it comes to broader issues, there is a really
fundamental inequity.
Consider first how the Treasury Department has handled the
financial companies. When it came to intervening in the large
financial institutions, and certainly AIG and Citigroup, the
U.S. Government could have simply purchased the companies for a
song. Or it could have forced the banks through bankruptcies,
and forced creditors and other stakeholders to take major
haircuts to share the pain. But, instead, the path that was
chosen guaranteed payoffs for all creditors, and guaranteed
outsized bonuses to even the employees who were most directly
responsible for nearly blowing up the world economy. The
upshot: This holiday season, bankers are taking home the
largest bonuses ever paid. Creditors have been made whole, and
shareholders that counted on government support and stayed with
the companies are seeing values restored, while others that
bailed out and came back in after TARP money was flowing have
made a killing.
But now wait; there is more. On the front page of this
morning's Washington Post we see that the Treasury is so eager
to placate the people at Citigroup and help them get out from
under the thumb of the paymaster that it has agreed to allow
Citigroup to keep billions of dollars in tax liabilities it
would owe as soon as it pays back the TARP funds. These taxes
are worth more than any alleged ``profit'' to taxpayers from
the TARP repayment and interest.
I want the administration to know that we are going to look
into this. I want the administration to know that we are going
to look into this deeply. And I want all those at Citigroup who
have had their tentacles across this Government to understand
that we are watching this and we are looking at their every
move that they have made. And if you want any further
reference, you can look at Matt Taibbi's article in Rolling
Stone, which I have read thoroughly, and it raises plenty of
questions about Citigroup and people in the administration.
Now contrast the kid glove treatment given to the financial
sector with the treatment of the auto companies and their
stakeholders under TARP, the overall support and level of
effort expended for the American auto industry, and the broader
impact of the crisis and of Government intervention on U.S.
manufacturing. In the case of the auto companies, shareholders
were wiped out, and creditors, including pension funds, were
forced to accept as little as 10 cents on the dollar for their
previous investments. The impact of the auto rescue on
employment was not to avoid major cuts in jobs or production.
Instead, it was to accelerate pre-existing plans for downsizing
U.S. production, work hours, pay scales, and dealerships by as
much as 4 years. Plant closings, brand reductions, and, as we
all know, dealer closures, and other restructurings were also
advanced. More difficult to see, but equally important, is the
impact on suppliers and their employees. What we do know is
that even after the bailout, in October, GM's then CEO spoke
openly of sourcing even more parts from Korea.
Finally, there seems to be a pattern of favoritism shown to
the financial services industry, and of ``malign neglect,''
when addressing issues of manufacturing, job creation, and
decent blue-collar wages. To my knowledge, today's and
tomorrow's hearings are Congress's first attempt to create some
measure of accountability over Treasury's handling of U.S.
shareholder interests financed through TARP. What the Domestic
Policy Subcommittee has found preliminarily is that too much of
what the Treasury Department has done seems to be designed to
evade and obfuscate accountability. This is not acceptable. We
need to find another way forward. We need to find or establish
new agencies, with clear lines of authority, to do the jobs
that TARP was intended to do. Left up to Treasury on its own,
those jobs are not getting done, and probably never will be.
[The prepared statement of Hon. Dennis J. Kucinich
follows:]
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Mr. Kucinich. I yield to the gentleman from Ohio, Mr.
Jordan.
Mr. Jordan. Thank you, Mr. Chairman. Let me thank you for
holding today's hearing. I commend you for focusing the
subcommittee's time on the vital question confronting the U.S.
economy and the American taxpayers: Given the unfortunate road
of the bailouts we have gone down, how should the Government
manage its interest in private sector companies so as to ensure
that the taxpayers are repaid as quickly as possible?
Unfortunately, TARP has become nothing more than a slush
fund for the administration. The trend toward the
nationalization of private sector firms did not stop with the
banking sector. TARP has been used to secure Government
ownership of automobile manufacturers, bail out insurance
companies, and subsidize mortgage modifications, among other
programs.
Now President Obama says that he intends to use repaid TARP
funds for the so-called job creation programs, the second
stimulus bill that is slated to be on the calendar today. This
trend of using taxpayer money authorized for one purposes for a
completely different purpose is troubling and, frankly, it must
stop.
Many of us voted against TARP--I know the chairman and I
both did--and our skepticism about the bailouts of private
firms, I think, has been vindicated. We have seen numerous
problems at the companies under the Government's control. For
example, the committee has explored the flaws in the AIG trust
agreement. This agreement, established by Mr. Geithner when he
was president of the New York Fed, creates an unaccountable
entity responsible for the management of the taxpayers' 80
percent interest in AIG. In addition, AIG has been hampered by
the control of the Obama administration's so-called pay czar.
Thirteen of AIG's top 25 employees have already left, and AIG's
recently hired CEO and other top executives threaten to leave
due to the pay czar's rulings.
These developments reveal another pitfall of the bailouts.
While we don't like paying these employees' competitive
salaries--we may not like that--the reality is that without
talented employees, AIG will simply not be able to repay the
American taxpayers.
The politicalization of General Motors and Chrysler has
also demonstrated the problems created by the bailouts. In
order to fully repay the taxpayers for the bailout of GM, the
company will have to achieve a larger market capitalization
than in any other time in its history. Making decisions that
adhere to the wishes of the Obama administration's auto task
force may benefit the unions or other special interest group,
and satisfy the demands of powerful Members of Congress but
will not lead to business success and taxpayer repayment.
We have an obligation, Mr. Chairman, to ask how and when we
can escape from this mess. The American people have a right to
know how this administration intends to manage taxpayer
interest and all the firms that have been bailed out. We must
ensure that the American people are paid back quickly and that
as much of their money as possible is salvaged from this
unprecedented and unwise intervention into the U.S. economy.
This is a hearing that takes us in the right direction in
answering these important questions and, again, I want to thank
you for your willingness to put this together and for our
witnesses for being here this morning.
Mr. Kucinich. I thank the gentleman.
The Chair recognizes Mr. Cummings of Maryland. You may
proceed.
Mr. Cummings. Thank you very much, Mr. Chairman.
Today's hearing highlights two issues for me: that the
economy is far from out of the woods and we will not know the
final cost of the financial crisis for some time.
Economists may herald the end of the technical recession,
but I would hate to have to make that argument to the 10
percent of our Nation that is out of work, the millions of
small businesses that still cannot access credit, or the
millions of homeowners who find themselves in or near
foreclosure. Further, the American taxpayers were made
involuntary investors in several firms last year to provide the
financial market the stability necessary to ensure they kept
functioning in the midst of unprecedented circumstances. Given
the dire straits for so many Americans, in return for their
investments in AIG, GM, and other firms, they are owed not only
our efforts to maximize the value of the equity they have
acquired, but also a frank evaluation of the manner in which
those investments are managed.
In the last month we have seen Bank of America, Citigroup,
and Wells Fargo announce repayment of their TARP obligations.
Further, the interim CEO at General Motors, Edward Whitaker,
announced yesterday that the auto maker would repay its
Government loans by June 2010. The news of repayments by these
firms receiving extraordinary assistance is a sign that the
financial sector has all but recovered. But it also raises
three critical points that we must now address:
First, despite the public pronouncements by Bank of
America, Citigroup, and Wells Faro that they are off the
Government tab, the taxpayers still retain equity positions in
some of the firms, highlighted by their 34 percent stake in
Citigroup. As a result, we remain shareholders and must
continue to diligently play a role in the future of the firm.
Second, some analysts have criticized the Treasury's
decision to allow these firms to repay the Government, arguing
that the firms have gotten out of executive pay restrictions
while still presenting systemic risk. Therefore, it remains to
be seen whether we have sacrificed economic stability for the
benefit of a few Wall Street firms.
Third, and most importantly, despite propping up Wall
Street, credit is not flowing to small- and medium-sized
businesses, the firms that Nobel Prize winning economist Joe
Stiglitz called the source of job creation. This begs the
question: With or without Government equity positions, how can
we get these firms to start lending again?
Mr. Chairman, once again I thank you for holding this
hearing. Despite the technical end of the recession and shows
of strength by Wall Street giants, the rest of America still
desperately needs our help. I welcome the testimony of our
distinguished witnesses and look forward to a frank and
productive discussion, and, with that, Mr. Chairman, I yield
back.
[The prepared statement of Hon. Elijah E. Cummings
follows:]
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Mr. Kucinich. The gentleman yields back.
I want to thank the witnesses for being here. There is a
vote that has been called. We are going to go vote, then we are
going to come right back. It will probably be about 30 minutes.
Sorry for the delay. We will move as expeditiously as possible.
We will go right to your testimony as soon as we return. Thank
you very much.
We stand in recess for 30 minutes.
[Recess.]
Mr. Kucinich. The committee will come to order.
I want to thank all the witnesses for their patience. There
are no additional opening statements and the subcommittee will
receive testimony from the witnesses who are before us.
For those who are just joining us, this hearing is
entitled, ``The Government as Dominant Shareholder: How Should
the Taxpayers' Ownership Rights be Exercised?''
I want to start by introducing our first panel.
Orice Williams Brown is Director of GAO's Financial Markets
and Community Investment team. Her work is concentrated on
securities and futures oversight, banking insurance and
accounting policy. Currently, she leads GAO's work on the
financial crisis, Treasury's troubled asset relief program and
regulatory reform.
We also have here, as backup, A. Nicole Clowers, who is
currently an Acting Director at GAO and leads GAO's work on
surface transportation. She has led GAO's evaluations of the
Federal Government's assistance to the auto industry, among
other topics. Ms. Clowers will not be testifying, but will be
available to answer questions.
Espen Eckbo. Professor Eckbo is the Tuck Centennial
professor of finance and founding director of the Lindenauer
Center for Corporate Governance at the Tuck School of Business
at Dartmouth. He has written widely on a variety of corporate
finance related topics, currently serves on the Advisory Board,
Center for Leadership and Governance of America's Health
Insurance Plans.
Professor J.W. Verret is senior scholar at the Mercatus
Center and assistant professor of Law at George Mason
University School of Law. He is an expert on corporate
governance and has published in a number of legal journals.
Ms. Anne Simpson is senior portfolio manager for Global
Equities at the California Public Employees' Retirement System,
the largest public pension system in the United States, with
approximately $200 billion under management. CalPERS provides
retirement and health benefits to more than 1.6 million public
employees, retirees, and their families, and more than 2500
employees. Previously, Ms. Simpson was the executive director
of the International Corporate Governance Network, a body whose
members are drawn from over 40 countries.
Alan Tonelson is a research fellow with the U.S. Business
and Industry Council Educational Foundation, a Washington
research organization studying U.S. economic technology and
national security policy. Mr. Tonelson's articles on American
politics, foreign policy, globalization, and technology policy
have appeared in nearly every influential publication. He is a
frequent commentator on radio and television.
The next person, Ralph Nader, needs no introduction, but I
am going to introduce him anyway. Mr. Nader is an historic
figure who, more than any other single person, has helped us to
drive safer cars, eat healthier food, breathe better air, drink
cleaner water, and work in safer environments. He has been
doing this work for more than four decades. Mr. Nader's
advocacy led to the passage of a National Traffic and Motor
Vehicle Safety Act. He was instrumental in the creation of the
Occupational Safety and Health Administration, the
Environmental Protection Agency, the Consumer Product Safety
Commission, the National Highway Transportation Safety
Administration. By starting dozens of citizens groups, Ralph
Nader has created an atmosphere of corporate and governmental
accountability. He was named by The Atlantic as one of the 100
most influential figures in American history and by Time and
Life Magazines as one of the most influential Americans of the
20th century.
When I was mayor of Cleveland, Ralph Nader helped me save a
city's municipal electric system, something that the people of
Cleveland remember and are always grateful for.
Finally, I want to introduce Robert Weissman, who is here
accompanying Mr. Nader. Robert Weissman is president of Public
Citizen, a nonprofit research, lobbying, and litigation public
interest organization, with 150,000 members and supporters. He
is co-author of a forthcoming book, Corporate Ethics
International, examining how government can leverage its
investment in Citigroup to advance public policy objectives.
Mr. Weissman will not be testifying, but will be available to
answer questions.
I want to thank all of you for appearing before this
subcommittee today.
Now, any person who is going to be testifying, including
the people who are sitting in the second row, if you may answer
a question, I am going to ask that all the witnesses, including
those who just may be only answering questions, please rise and
raise your right hands to be sworn.
[Witnesses sworn.]
Mr. Kucinich. Thank you. You may be seated.
Let the record reflect that the witnesses answered in the
affirmative.
Ms. Brown, you will be our first witness. We ask you to
proceed for 5 minutes. Your entire statement will be included
in the record. Once the light goes to red, we would like you to
wrap it up so we can keep this moving. But whatever you submit
to this committee will be in the record of the hearing, so you
can just give us a summary.
You may proceed. Thank you.
STATEMENTS OF ORICE WILLIAMS BROWN, DIRECTOR, FINANCIAL MARKETS
AND COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE,
ACCOMPANIED BY A. NICOLE CLOWERS, ACTING DIRECTOR, PHYSICAL
INFRASTRUCTURE, GOVERNMENT ACCOUNTABILITY OFFICE; PROFESSOR B.
ESPEN ECKBO, TUCK SCHOOL OF BUSINESS AT DARTMOUTH; PROFESSOR
J.W. VERRET, GEORGE MASON UNIVERSITY SCHOOL OF LAW; ANNE
SIMPSON, SENIOR PORTFOLIO MANAGER FOR GLOBAL EQUITY, CALIFORNIA
PUBLIC EMPLOYEES' RETIREMENT SYSTEM; ALAN TONELSON, RESEARCH
FELLOW, U.S. BUSINESS AND INDUSTRY COUNCIL EDUCATIONAL
FOUNDATION; AND RALPH NADER, CONSUMER ADVOCATE, ACCOMPANIED BY
ROBERT WEISSMAN, PRESIDENT, PUBLIC CITIZEN
STATEMENT OF ORICE WILLIAMS BROWN
Ms. Brown. Mr. Chairman, Ranking Member Jordan, and members
of the subcommittee, I am pleased to be here this morning to
discuss the Government's role as shareholder in AIG, Citigroup,
Chrysler, and General Motors. As requested, I will briefly
touch on three broad issues.
First, from our previous work on Federal financial
assistance to large firms and municipalities, we have
identified three fundamental principles that provide a
framework for considering and evaluating assistance: one, the
problems confronting the industry need to be clearly defined,
distinguishing between those that require an immediate
financial response from those that are likely to require more
time to resolve; two, determine whether the national interests
will be best served through some type of government
intervention or whether market forces and established legal
procedures such as bankruptcy should be allowed to take their
course, and, if Federal financial assistance is needed, clear
objectives and goals for this assistance must be established;
and, three, given the significant financial risk the Federal
Government may assume on behalf of taxpayers, the structure
created to administer any assistance should provide for
appropriate mechanisms to protect taxpayers from excessive or
unnecessary risks, such as concessions by all parties, controls
over management, and compensation for risk. However, the recent
crisis has posed unique challenges in adhering to this
framework due to its sheer size and scope.
Next, I will touch on the Government's role as shareholder,
which differed by type of institution and assistance provided.
For example, the Federal Reserve Bank of New York, as a
condition of the secured loans it provided to AIG, created a
trust to hold the convertible preferred shares it acquired as a
condition of this credit. Conversely, Treasury obtained Citi
common shares after Citi requested that Treasury's initial
investment be converted to common shares to strengthen Citi's
capital structure. For Chrysler and GM, Treasury obtained an
ownership interest in return for the financial assistance
provided to help the companies restructure.
According to Treasury, it has developed several core
principles to guide its oversight of its investments going
forward. These included acting as a reluctant shareholder, not
interfering in day-to-day management decisions, ensuring a
strong board of directors, and exercising limited voting
rights. Treasury has established conditions such as executive
compensation requirements and voting on certain limited
matters, and routinely monitored the companies' operations.
Finally, as part of our ongoing work with SIGTARP, we are
reviewing three areas: the extent of Government involvement in
corporate governance and operations of companies that have
received exceptional assistance; how Treasury ensures that
companies are complying with key covenants; and the
Government's management of its investments and divestiture
strategies.
One issue we are exploring is the advantages and
disadvantages of a trust arrangement versus direct management.
For example, directly managing the investments gives the
Government greater control over these investments, but it also
raises potential conflicts of interest when the Government is
both a regulator and investor. GAO and SIGTARP are also
reviewing the Treasury's plans for divesting, which are still
evolving; and, except for Citi, Treasury has yet to develop
exit strategies for unwinding the investments in others.
In closing, I would like to note that Treasury faces a
number of competing and, at times, conflicting goals. For
example, protecting the taxpayers' interests must be balanced
against its plan to divest its ownership interests as soon as
it is feasible. Consequently, Treasury may have to balance its
desire to exit as quickly as possible with the need to maintain
its equity interests long enough for the companies to
demonstrate sufficient financial progress.
Second, establishing and monitoring benchmarks is an
important part of Treasury's management of these investments
because they inform the ultimate decision on when and how to
sell each investment. Regularly monitoring the benchmarks will
be important for Treasury to help ensure that taxpayer
interests are maximized.
And, finally, while many agree that TARP funding has
contributed to the stabilization of the economy, the
significant sums of taxpayer dollars that were invested in a
range of private companies warrant continued oversight and
development of a prudent divestiture plan.
Thank you. My colleague, Nicky Clowers, who is
knowledgeable about the assistance provided to the automobile
industry, and I will answer any questions at the appropriate
time.
[The prepared statement of Ms. Brown follows:]
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Mr. Kucinich. Thank you very much for your testimony, Ms.
Brown.
Professor Eckbo, you may proceed for 5 minutes.
STATEMENT OF PROFESSOR B. ESPEN ECKBO
Mr. Eckbo. Thank you, Mr. Chairman and distinguished
members of the committee. Thank you for inviting me to testify
today.
I argue in my testimony that the Government, as a large
shareholder, should adopt a proactive stand in terms of
exercising its voting rights to promote best governance
practices. To be clear, I am not advocating direct Government
intervention in the business operations of the firms in which
it is a large shareholder. For that, the troubled firms should
hire turnaround expertise. I do not believe the Government can
morph itself into turnaround expert in competition with private
equity and similar expertise.
What I do recommend is the form of shareholder activism
commonly exercised today by large institutional shareholders,
such as pension funds in particular, and which is needed to
ensure that the companies operate under the most efficient
governance systems. My recommendations follow from the fact
that the Government is a large shareholder, and not because it
is the Government. The recommendations hold for any large
shareholder, State or private.
Minority shareholders benefit from the presence of a large
block holder because only the latter has the economic incentive
to exercise voting rights in an efficient manner. Thus, the
Government is now in a unique position to improve inefficient
governance systems and practices. However, to have this
positive effect, the Government must take a proactive stance on
share voting in accordance with the value maximization
principle and existing best governance practices derived from
this principle.
My written testimony discusses the following areas: general
director election reform, structural takeover defenses,
downsize and combining the two roles, the CEO and board
chairmanship, and executive compensation.
The common theme underlying all of these areas of concern
is a lack of confidence in boards. Should we be surprised that
shareholders question executive compensation in a system where
the director election system is rigged in favor of candidates
nominated by corporate insiders, where the firm insists on an
arsenal of poisonous takeover defenses, and where the top
executive also runs the board?
Things like shareholder say-on-pay, majority rules in
director election, appointment of an independent lead director
are simply band-aids to help offset the fact that a majority of
shareholders find it too costly to actively vote in today's
system. If shareholders can reasonably expect to be able to
replace directors who they consider incompetent or unwilling to
represent owners, why would anyone insist on say-on-pay?
So the most important governance task in the United States
today is to fix the director election system itself. SEC has
begun to address this concern and now is the time for a large
Government shareholder to voice its report.
It is a common misconception that the shareholder value
maximization objective is somewhat charitable toward
shareholders. Rather, it is the very fundament on which our
corporate system rests, much like a rising tide raises all
boats, so that shareholder value maximization serves the
interest of all constituencies higher up in the priority food
chain. As a large shareholder, the U.S. Government, as the U.K.
government before it, should actively seek directors who
understand these fundamental points.
Given the prominence of say-on-pay issues in today's
debate, how can this issue be resolved? It is unlikely that
shareholders are any better than boards in determining the
right pay. Three points. First, executive pay should be
structured so as to depend on firm performance; thus, the
insistence on restricted stock options or restricted stocks
representing large--typically 60 percent--of the total pay
package. This is in line with the recommendations recently by
Mr. Feinberg for TARP recipients.
Second, the more difficult issue is to determine the total
pay package itself, and not just the split between cash and
stock. The total pay package ought to reflect the executive's
value added, his or her marginal productivity. Unfortunately,
while it is possible to get a reasonable estimate of the value
added of, say, Michael Jordan joining the Chicago Bulls--which
may be why no one seems to be arguing that sports superstars
and others are overpaid--estimating the margin of productivity
of a CEO who works in a large organization is much more
difficult. Awarding millions of dollars in executive pay,
without being able to forcefully communicate to investors why
the CEO is supposed to be worth, is part of why shareholders
demand a say. Here, boards and compensation consultants need to
work harder.
Third, pay packages will also reflect the relative
bargaining power. High profile executives commonly hire
professional negotiators to assist in negotiations with the
board. The board often does not meet this challenge and risks
being seen as pushovers. Since executive pay awards largely
come out of the pockets of shareholders, it again comes down to
whether the board understands its central role as maximizer in
shareholder value.
In sum, we need not only a more efficient director election
system, but also to promote an efficient board structure and
elect directors who understand the fundamental role of
shareholder value maximization in the corporate system. We need
better boards and for the Government to lead the way in its
capacity as a large shareholder today.
Thank you for your attention.
[The prepared statement of Mr. Eckbo follows:]
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Mr. Kucinich. I want to thank you, Professor, for your
testimony.
I want to acknowledge the presence of committee members,
ranking member, Mr. Jordan, Mr. Cummings of Maryland, Mr.
Tierney of Massachusetts. Thank you all for being here.
Professor Verret, you may proceed with your 5 minute
testimony.
STATEMENT OF J.W. VERRET
Mr. Verret. Thank you, Chairman Kucinich, Ranking Member
Jordan, and distinguished members of the committee. It is a
privilege to testify in this forum today. My name is J.W.
Verret. I am an assistant professor of law at George Mason and
a senior scholar with the Mercatus Center. I also had the
opportunity to consult for the Special Inspector General for
TARP and the GAO on a corporate governance audit of TARP firms.
The past year has seen some unprecedented events in the
history of American business. Through the bailout, our
Government has become a controlling shareholder in many
bedrocks of the business community.
Some political leaders have argued that since the
Government owns these companies, it should seek to control
their day-to-day business decisions. The reason I have joined
you today is to explain why this view is not only misguided,
but downright dangerous to the taxpayers' investment, as well
as the pension funds and retirement funds of ordinary
Americans.
Government ownership in private companies perverts the
accountability of both Government and business. To understand
why, we must appreciate that Government leaders and business
leaders are held accountable by entirely different means.
Governments are accountable to voters based on their ability to
get re-elected; business leaders are held accountable by their
ability to maximize profits for their shareholders. And the
overwhelming majority of those profits for shareholders go to
Main Street investors. Working Americans like teachers,
firefighters, policemen, all depend upon this mechanism to fund
their retirements.
Maintaining a buffer between short-term political interests
and long-term financial soundness is absolutely critical. The
economic evidence from around the globe is overwhelmingly clear
that political ownership of private banks and financial
companies results in lower GDP growth, increased need for
subsequent government bailout, and politicized lending
practices. I am concerned that we may see politics driving
business decisions, such as TARP banks encouraged to subsidize
lending in battleground States, for example.
The Treasury Department owns one-third of Citigroup. This
fact has given the Government enormous power over Citigroup's
operations. Consider the case of Andrew Hall, a legendary
commodities trader at Citigroup, who generated an average of
$250 million a year over the last 5 years for Citigroup and
Citigroup's investors, including their investors now, which
would be the taxpayer and which would be the pension funds and
retirement funds of everyday Americans.
Mr. Hall was paid a percentage of that annual $250 million
he generated for Citigroup. His annual salary was definitely
high, but it was an entirely performance-based package. The pay
czar decided that Mr. Hall's salary was just too large to
justify to populous pressures, so Citigroup was forced to sell
off Mr. Hall's division at a deep discount. Losing Andrew Hall
will cost Citigroup hundreds of millions of dollars per year,
and that cost will fall on Citi's investors, including the
American taxpayer. But the decision was politically
advantageous to the executive branch in the short-term, so it
was inevitable because of the Government's share ownership.
The case of General Motors is even worse. GM has been
pressured by political leaders, responding to alliances with
failed automobile dealerships, to keep those failed dealerships
open. Political leaders have exerted pressure to force GM to
overpay on its shipping contracts so that truckers using
politically favored unions, like the Teamsters, win the bids.
Make no mistake, the cost of this crony capitalism is borne by
the American taxpayer. Government shareholders don't have to
play by the same legal rules as the rest of us, a fact which
will strain the governance mechanisms of our capital markets at
a time when they are already in crisis.
Bipartisan legislation pending in the House and Senate
stand to address these problems and create a buffer between the
taxpayers' investment and political leaders who would use that
investment to pander to special interests. The TARP Recipient
Ownership Trust Act of 2009, introduced in the House by
Congressman Bacchus and in the Senate by Senators Warner and
Corker, would require the Secretary of the Treasury to place
ownership of TARP investments in trust to be held on behalf of
the American people. The act would task the trustees of that
trust, appointed by the President, with a fiduciary duty to
maximize the value of the investment, and it would include a
sunset provision to get out of TARP investments by December
2011.
The prospect of the Government actively voting their shares
in TARP recipients holds grave risks. Political leaders have
stuffed the Federal budget with pork barrel projects at great
cost to the American taxpayer. We must not permit them to do
the same with the private budgets of private banks. If we do,
the taxpayer will be left holding the tab.
Thank you for the opportunity to testify.
[The prepared statement of Mr. Verret follows:]
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Mr. Kucinich. Thank you for your testimony, Professor.
The Chair recognizes Ms. Simpson. You may proceed for 5
minutes.
STATEMENT OF ANNE SIMPSON
Ms. Simpson. Thank you. Good morning. First of all, many
thanks to the committee chairman, the ranking member, and the
honorable members for an opportunity to testify before you. My
name is Anne Simpson. I am the senior portfolio manager for
Global Equities, as the chairman kindly mentioned, and, as
such, I am responsible for CalPERS corporate governance
program.
As you will be aware, CalPERS is the largest public pension
fund in the United States. We have assets of some $200 billion
that we are responsible for, which we invest on behalf of 1.6
million beneficiaries.
As a long-term global investor in more than 9,000 public
companies, we have both a direct and an indirect interest in
the success of the TARP program. We have a direct interest
because, regardless of the reduced values that we still see in
these companies, we hold well in excess of $7 billion in both
debt and equity in recipient companies. We have an indirect
interest, or I should say perhaps a systemic interest in the
success of the TARP program because CalPERS is as close to
being a universal and permanent owner as it is possible to be.
We need the system to work. We rely upon this critical sector
of the economy functioning as much as any others.
My role here today, though, is to share something of
CalPERS' experience in its corporate governance program for the
following reason: We have taken governance very seriously, we
devote resources to it, and we have seen, across our portfolio,
that wherever capital is allocated, governance can make a
difference to the mitigation of risk and also to the
enhancement of returns.
Specifically, I would like to just share with you what we
do in addressing problems at financially troubled companies and
how we use a governance framework to approach the difficulties
those companies have.
And, finally, I would like to say something about what we
consider best practice to look like in this field; in other
words, what we have learned about what can work and what
doesn't work, and how we hope that the Government, as
shareowner, will join the community of responsible shareowners
in engaging with governance reforms.
First, though, our experience on using governance as an
approach to dealing with financially troubled companies.
CalPERS, for over 15 years, has developed a program around the
theme of the focus list. This is where companies in the most
trouble, by sector, are identified each year on a number of
screens. What we do is then analyze the governance of the
companies to see where we, as an active and engaged owner, can
have a positive impact on the company's health. We look at a
range of issues, from the governance structures to the quality
of the board, and in combination the results warrant some
attention.
Our external consultants will show up, monitor the
performance of these companies each year, and their conclusions
are that over the 5-year period of the engagement--note that is
a fairly substantial period of time--these companies have been
seen to outperform their benchmark by some 15 percent. The full
details are referenced in our written testimony.
We are firmly of the view that this form of transformation
is something to be considered with TARP recipient companies,
and we have conviction and we have, we feel, convincing
evidence that transparency and accountability foster risk
mitigation and value creation not just for TARP recipients, but
we see this as important for the entire market.
The issues that we think important are set out in our
written testimony, but we want to focus on the principles of
optimizing shareholder returns--maximizing is a word that
perhaps suggests risk can be traded off for returns--
accountability to the owners; transparency; equitable treatment
of minorities; and a focus on compensation for long-term
results, including a concern with risk.
Finally, we want to ensure that boards are led by not only
independent directors, but those who have the skills and
experience--and we would emphasize diversity in this context--
in order to break through some of the group think which
bedeviled the companies that got into difficulty.
Finally, governance reform is no guarantee, but it gives us
a framework to hold boards accountable, and we urge the
Government, as a fellow shareowner, to help us develop and use
the tools we need to hold these boards accountable.
Thank you.
[The prepared statement of Ms. Simpson follows:]
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Mr. Kucinich. Thank you, Ms. Simpson.
The Chair recognizes Mr. Tonelson. You may proceed for 5
minutes.
STATEMENT OF ALAN TONELSON
Mr. Tonelson. Mr. Chairman, ranking minority member,
Members Cummings and Tierney, thank you so much, on behalf of
the 1,900 member companies of the U.S. Business and Industry
Council, for this opportunity to testify.
Given the current economic crisis, which shows no real
signs of easing whatever, this subject of this hearing could
not be more important. Yet, USBIC's member companies are very
encouraged by this committee's recognition that the ongoing
debate about improving the Government's performance as a
dominant shareholder, or even major player, in critical
industries must be dramatically broadened. It is of course
important to achieve greater transparency and greater
accountability in rescues and bailout programs. It is of course
important to develop sensible exit strategies. But the
overriding challenges facing the U.S. Government in this
shareholder role is how to ensure that it can not only support,
but spearhead a viable recovery strategy for the entire
economy.
Since the crisis ultimately stems from the American
economy's failure in recent decades to produce nearly as much
as it consumes, and its decision to fill that gap by incurring
dangerous levels of debt. A viable recovery strategy clearly
must focus on greatly increasing production relative to
consumption; that is, the genuinely productive, wealth-creating
sectors of the American economy need to start reversing the
recent pattern and start to grow more rapidly than the rest of
the U.S. economy. And those productive sectors are dominated by
manufacturing.
Now, clearly, our 1,900 members have a huge stake in
helping to achieve this reorientation; they are manufacturers.
They have a longstanding commitment to creating jobs, and
sponsoring innovation, and spurring productivity, and boosting
production in this country. Think of them as Main Street
manufacturers.
By the same token, they will be prime victims of
Washington's continued clinging to an outmoded economic
strategy that has made this U.S. economy dangerously finance-
heavy. But if this painful recession and this economic crisis
teaches us nothing else, it has to teach us that everyone else
will be hurt. Everyone else in this economy, every single actor
will suffer unless this reorientation is actually completed.
As my written statement details, since the recession's
official beginning in December 2007, the economy has tragically
moved farther from this goal of being more production-oriented,
not closer to it. Notably, inflation-adjusted manufacturing
output has fallen four times faster than the rest of GDP.
Perhaps even more alarmingly, our manufacturing capacity--not
capacity utilization, but the capacity itself--is shrinking at
the fastest rate ever.
Because our economy's sickness has developed over many
years, the TARP and the rest of our economic recovery
strategy--the same recovery strategy approved by the White
House and endorsed by this Congress--cannot legitimately be
blamed for most of this regression. But they haven't helped
either, and show little promise of actually doing so. The
problems reflect much more than the jaw-dropping gap between
Government support for finance and Government support for U.S.-
based manufacturing. And, of course, Government support for
finance entails much more than simply the TARP program. Much
more.
The problems reflect the very goals apparently set by the
administration for finance and for an automotive sector that is
a bellwether for the rest of manufacturing. Let nobody be under
the misimpression that the automobile industry is the only
industry in the American manufacturing sector that has run into
major structural problems. That is far from true. Nothing could
be less true. The goal for finance seems to be encouraging this
sector to return to its pre-crisis scale and full range of
activities, productive or not, with only modest structural and
regulatory change.
The first apparent goal for the U.S. auto industry seems to
be managed contraction, managed dramatic contraction, and even
transition to niche-producer status. Not only is this strategy
likely to contribute to the further shrinkage of the entire
manufacturing sector, it flies in the face of everything known
today about the prerequisites for automotive competitiveness. A
second main goal seems to be turning the auto industry from a
high-wage industry into a much lower wage industry. How in the
world can that help middle class families repair their own
finances without growth slowing belt tightening of a dramatic
nature?
How to ensure that Government, as shareholder, helps
refocus our economy on wealth creation again? My statement
makes numerous recommendations, but I will briefly focus on
two.
These are two that our--am I short of time?
Mr. Kucinich. I appreciate your testimony. Your time has
expired----
Mr. Tonelson. I am sorry.
Mr. Kucinich [continuing]. But if you would like to just
wrap it up and just tell us your two points.
Mr. Tonelson. OK. First of all, the Government shareholding
role must be coordinated with the entire recovery strategy
actively and, second, policy success will require much better,
much more detailed, and much more timely data about the economy
as a whole and the manufacturing sector as a whole. Currently,
too often, policymakers are flying blind.
[The prepared statement of Mr. Tonelson follows:]
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Mr. Kucinich. Thank you very much, Mr. Tonelson, for your
testimony.
The Chair recognizes Ralph Nader for 5 minutes. You may
proceed, sir.
STATEMENT OF RALPH NADER
Mr. Nader. Thank you, Mr. Chairman and members of the
committee.
It seems to be here in Congress the more important a
hearing is for the people of this country, the less the press
attends the hearings. It is kind of inverse proportion here. So
you ought to be commended.
In my written testimony with Robert Weissman, I give a lot
of examples of our principle thesis: that the corporations
which have been bailed out came to Washington. They entered the
political arena and you simply cannot say, from an American
Enterprise Institute framework, that you have to have the rules
of private enterprise when General Motors and AIG, etc., fell
all over themselves to be bailed out by the American taxpayer.
So the question we are facing is proper political judgment
when the Government is a common shareholder of considerable
magnitude and when the Government also represents the taxpayer
in terms of saving these companies, which have been
characterized by colossal mismanagement, colossal recklessness
with other people's money, and colossal self-enrichment. So it
is the management failure that even tanked their own
companies--although not necessarily their compensation plans--
that brought them to Washington.
There has been very little attention paid to the procedural
safeguards for Government bailouts. For many years, I have been
urging Congress and the executive branch to establish
procedural standards so these bailouts do not reflect secret
edicts over weekends or dictates from the executive branch. The
nature of the corporate State, that is, corporate government,
what Franklin Delano Roosevelt told Congress in 1938, was
fascism. That is the words he used. The corporate State
requires concentration of power in one branch of government at
the expense of the other two, and that branch is the executive
branch.
This was illustrated by the weekend massive bailout of
Citigroup, when Robert Rubin went down and met with Mr.
Bernanke and Mr. Paulson, and emerged with a press statement on
the following Monday with a $300 billion guarantee of
Citigroup's toxic assets and a $45 billion investment by the
taxpayers. There was no notice to the public, no congressional
input or participation, no taxpayer standing was permitted to
challenge this edict, no judicial review, no standards. In
other words, let's face it, dictatorship.
This is a repudiation of the congressional authority under
the Constitution. A lot of money was involved. A lot of money
was obligated; it was done by the executive branch. Not even
reaching the contemptuous four-page bill that Mr. Paulson sent
to the Congress, where both Republicans and Democrats rebelled,
which basically said give the Treasury all the authority, with
no judicial review, plus $700 billion, thank you very much. So
the procedural issue is very important here.
The substantive policies, of course, reflect the procedural
standards. When you have bad procedures, when you have
autocratic secretive procedures, you tend to get bad
performance substantively, and our testimony illustrates that
in some detail. But the major thesis of the testimony is that
when the Government is a dominant or controlling shareholder
not of its own asking, the Government has an obligation not to
invest passively; it should use its ownership powers to clean
up management and, mindful of its duty to safeguard taxpayer
financial interest, it should also pursue statutory public
interest mandates in areas such as consumer, environment
protection, financial stability, and financial honesty. And
that reflects, of course, the state of workers, the state of
consumers, the state of investors, elaborated in our testimony.
Three quick examples. One is that the Government did not
condition its bailout and equity infusion of AIG on the firm's
credit default swap counterparties accepting a haircut. So it
was basically not just a bailout of AIG, it was a bailout of
Goldman Sachs and others. Again, very, very secretive; a
stunning display of executive power without congressional
participation.
The second quick example is the double standard that you
mentioned, Mr. Chairman. It is really amazing how fast they
move to bail out crooked and reckless companies in the
financial industry, but then they really hang the manufacturers
out to dry. Not that they don't deserve a strong hand, but the
contrast is really stunning in terms of the inferred dependency
that the executive branch believes the rest of the economy
relies on the financial sector. This is delegation run awry,
when the GM deal was negotiated not by Congress, not by the
executive branch, but by a delegated secretive White House task
force made up of Wall Street expatriots with little or no
experience in the auto industry.
The other point I want to make is that people fall by the
wayside here. The bankruptcy system now in the corporate area
is a kangaroo court. Congress has to revisit corporate
bankruptcy law. It is a prearranged, choreographed bankruptcy
system where many interested parties are given no participatory
roles or they are given arbitrary shortened participatory roles
which are basically nominal.
Mr. Kucinich. I would just ask that you wrap up your
testimony.
Mr. Nader. Let me just end with this example.
Mr. Kucinich. Thank you.
Mr. Nader. General Motors eliminated, under bankruptcy, its
liability to victims of defective products it had sold before
the bankruptcy. This is truly outrageous. This is a manifest
injustice which is revealed by the person of Amanda Dinnigan, a
10-year-old girl from Long Island, New York, injured by the
allegedly faulty seatbelt in a GMC Envoy that snapped her neck
in a crash. Her father, an iron worker, estimates her health
care costs at $500,000 a year. Her lost quality of life will
obviously be tragic. That and hundreds of other cases were
rubbed out by this bankruptcy court.
Only legislation can correct this manifest injustice to
innocent victims of corporate defective merchandise.
Thank you.
[The prepared statement of Mr. Nader follows:]
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Mr. Kucinich. Thank you very much, Mr. Nader.
As Chair, I am going to now go to the question period. I
would like the gentleman from Maryland, Mr. Cummings, to begin.
So if you would go to 5 minutes of questions.
Mr. Cummings. Thank you very much, Mr. Chairman.
I want to read an excerpt from a column that Carl Icahn
write in The New York Times on March 29th of this year. He
writes, ``Sadly, though, under American corporate law, share
ownership does not count for much. Barney Frank might be
surprised to learn that a lawsuit would have almost no chance
of success in court, even for a majority shareholder like the
government. AIG would most likely argue that the oft-cited
'business judgment' rule gives management wide latitude to set
compensation without shareholder interference. What the
government should have gotten was board representation in
return for its large investment in AIG.''
I just want to ask you all--whoever feels best qualified to
answer the question, please do--while we know that AIG now has
a substantially different board, Mr. Icahn still points out
that shareholders have the deck stacked against them. In your
opinion, was Icahn correct or is the current model--for
example, the Credit Facility Trust--the best means of
representing and ultimately extricating the Government from its
investment in AIG?
Mr. Verret. Well, Congressman, I would offer that one of
the things that concerns me about corporate liability is that,
typically, a controlling shareholder would share the same
liability to the other shareholders as the board or the
executive. But when the Government is the controlling
shareholder, it has sovereign immunity, so it would not get any
liability at all, any chance of liability.
Now, I am aware that Mr. Icahn is critical of the business
judgment rule, which is part of State corporate law. You know,
sometimes shareholders win and sometimes they lose. I know that
a challenge to Citigroup is still ongoing in the Delaware Court
of Chancery, and it survived a motion to dismiss, and I know
that there have been a number of cases that have won, a number
that have settled, and some of them don't. So I think there is
a healthy debate about the business judgment rule.
Mr. Cummings. I was intrigued by your testimony, Professor,
and I was just wondering how do you react when we have the AIGs
of the world taking Government money and then basically saying
screw you to the American public as they go off and do all
kinds of wonderful things, junkets and bonuses and whatever?
How is the American public, who owns it, how do you think it is
best that they exercise some control over that?
Mr. Verret. Well, I worry----
Mr. Cummings. Or you don't think they should have any
control?
Mr. Verret. I worry that the exercise of control will
revert to the sort of pork barrel----
Mr. Cummings. I got all of that. But what I am saying to
you is that--you are a law professor?
Mr. Verret. Yes, sir.
Mr. Cummings. And I know law professors, you sit in those
nice offices and everything. But I am talking about the real
nitty gritty. We have the American people who are losing their
houses, losing their savings, losing their jobs, losing
everything. They give to these corporations their hard-earned
tax dollars, and then we have these corporations basically
spitting in their faces and saying, you know, screw you. So
what happens from a political standpoint, it becomes very
difficult, after you have helped somebody extricate themselves
from a drowning situation, to have them do that to you.
So the question becomes--I got all the corporate law. I got
that, I understand it. But how do the American people then get
some kind of foothold in this governance so that they can make
sure that those things don't happen. You follow what I am
saying?
Mr. Verret. I appreciate your concern----
Mr. Cummings. Mr. Nader, I would like for you to chime in
on this, if you don't mind.
Mr. Nader. Yes, of course. We have recommended a principle
which basically says if the Government doesn't facilitate the
civic organization of the ultimate beneficiaries--workers,
investors, etc.--no regulatory or bailout process is going to
be fair and going to be enforced. What you are talking about is
reciprocity. Look at what people have given up involuntarily:
their jobs, their savings, their pensions, their consumer
protections. And what are they getting in return? An in-your-
face attitude by these managers who directly or inherited
reckless management that basically says we are going to
continue business as usual and we are going to pay our people
enormous bonuses.
There is a level of arrogance and lack of remorse here that
is unprecedented in American corporate history.
Mr. Cummings. So you think this is new. You said it is
unprecedented.
Mr. Nader. In its magnitude and its face. In Japan, they
would apologize on national TV for far less transgressions, the
corporate executives.
Mr. Cummings. Thank you very much. I see my time has
expired.
Mr. Kucinich. I thank the gentleman.
I am going to recognize Mr. Jordan for 5 minutes, then I
will go to Mr. Tierney, if he would like.
Go ahead, Mr. Jordan.
Mr. Jordan. Thank you, Mr. Chairman.
Professors, did you ever think you would see the day where,
in the United States of America, we would have, in fact, a
Federal Government pay czar telling private American citizens
how much money they can make? And before you answer that, I
want to go to what Mr. Nader--because I think he does have a
valid point. In the limited context we are talking about, these
institutions came to the U.S. Congress, stuck their hand out
and asked for money. Maybe it is understandable, but when you
think about where we are today and couple that with statements
made by some Members of Congress, particularly Senator Schumer,
where he indicated that maybe in the future we should look at
any publicly traded company, executives at those companies,
being subject to the pay czar. Did you ever think you would see
that day? And I want the professors to have first whack at it.
Mr. Eckbo. I think you actually saw say-on-pay demands back
in the 1930's after the crash. You saw it also in the early
1990's, and you have seen say-on-pay demands in Europe for a
while. So I think the issue of shareholders wanting to have a
say on pay is not terribly new. I did not expect to see it here
as much as I have seen it, but I think it has to do, as I said
before, I think it has to do with a failure of boards in
general. So if you can trust your board, you can also trust
their pay policies.
I don't think shareholders or taxpayers are asking for a
say on pay because they don't like the numbers per se, but
because they don't trust the decision process that went behind
those numbers. That is why I am saying we need to reform our
ability to get boards to represent ourselves as taxpayers or as
shareholders, more specifically. We need the election reform to
be accepted.
Mr. Verret. I think in answer to your question, Congressman
Jordan, and also in answer to Congressman Cummings' question, I
think one of my concerns is that, look, most of the investors
in Citigroup, in Bank of America are pension funds and
retirement funds. Ordinary Americans are investing in these
companies, and I think they have already been hit hard enough.
Look, they have foreclosures, they are facing unemployment, and
now Government leaders are going to use their pension funds and
their 401-Ks as a vehicle for more special interest spending
for special interests, and I think that is the last thing they
need right now.
And I would also offer, with respect to say-on-pay. A lot
of folks make an analogy to say-on-pay as it is used in the
United Kingdom. One of the major differences between us and the
United Kingdom is most of their investors are--most of their
large institutional investors are insurance companies and
private company pensions. We have a lot more union investors
here, and I think that offers a lot more conflict of interest
if you empower a certain minority of the shareholder electorate
that has a special interest----
Mr. Jordan. Let me just change gears for a minute and I
will let you jump in here. The transparency issue that some
brought up and particularly Mr. Nader brought up I think is
very valid. I happen to live in a district where they closed
the General Motors facility. I remember being on the conference
call the night before they were going to make the announcement
and the folks on the--Mr. Sperling on the conference call said
the Government, the auto task force will only weigh in if it is
a major decision. Many Members of Congress were on that call;
they asked questions.
Finally, it came to my question and I said, How do you
define major? And he didn't have a definition for it, which
means it can be any darn thing they want. We actually know that
auto task force submitted General Motors, the executive of
General Motors submitted a report to the auto task force their
restructuring plan. It was denied. So who is making decisions?
We would like to know what was in those--I have asked to see
those. Oh, proprietary information; we can't get access. So I
can see both sides of this equation, but this lack of
transparency, and when you couple that with what I believe Ms.
Brown said in her testimony, exit strategies are still
evolving. We don't know where this is--and that is the biggest
concern. We would like to know where this is going, how the
taxpayers are going to get out of this, what it means for our
economy.
So talk to me, if you would, professor, about what I view
as a lack of transparency with where we are right now, and then
I will go to Ms. Simpson--I know you wanted to jump in--and Mr.
Nader.
Mr. Verret, you can go first.
Mr. Verret. Sure. I would absolutely agree. I think this is
where the liability for controlling shareholders comes in as
well. Usually, if any other controlling shareholder would have
done some of this stuff, they would have been taken to court
and they would face tremendous liability. But Treasury gets a
complete get out of jail free card from its securities and
corporate liabilities; it is free to engage in insider trading
if it wants to. So we have seen no accountability and no
transparency.
Mr. Jordan. I am out of time.
Ms. Simpson and then Mr. Nader real quick, or whoever
wanted to jump in. I am sorry.
Ms. Simpson. Thank you. Briefly. I would like to comment on
this question about accountability because it is quite normal
in a board election, in an American company, that the
shareholders can't vote no; they cannot actually remove the
board. Likewise, it is expensive and fiendishly complicated to
actually put a director forward. Therefore, we must take the
bigger picture here and realize that the reforms on majority
voting, as it is called, and proxy access, as it is called, are
critical to giving owners the ability to behave responsibly and
hold boards to account. Power--a vacuum and we have a vacuum.
So, in the U.K., I would suggest that say-on-pay was a sort
of additional extra. The reason pay is better aligned with
performance and the multiples are not so eye-popping is because
owners have the right to vote no when boards come up for
election and it is very simple to put candidates forward.
So we hope that those two wider reforms do come to pass in
the United States and we think it will be a big step forward.
Thank you.
Mr. Kucinich. I thank the gentleman. The gentleman's time
has expired. We may have a second round of questions; I think
we will, given this panel.
The Chair recognizes Mr. Tierney for 5 minutes.
Mr. Tierney. Thank you, Mr. Chairman.
I am struck, Mr. Verret, by some of your testimony here. I
guess the way I read your theory is that even though the
companies came to Washington on their hands and knees looking
for a bailout, and that, in exercising the shareholder
responsibility, the Government should still just step back and
let those same failed executives and people go about their own
way without any interference; that even as people with an
interest in it, we should just step aside and let it go,
meaning that they can then continue to disregard whether it is
tax law or labor law, environmental law, regulations or
whatever that protect what now is a principal shareholder. I
don't think I quite get that reasoning.
Mr. Verret. Well, that is not where I am going,
Congressman. I would offer that I would like to see a trust set
up to run the Government's investment in these companies. I
would like to see these trustees, appointed by the President,
insulated from short-term political pressure in the net
election. Those sort of conflicts----
Mr. Tierney. What would the relationship between those
trustees be with the taxpayers whose money is what is invested?
Mr. Verret. Well, in the bill that has been introduced by
Senator Warner, Senator Corker, and also by Congressman Bacchus
in the House, they would have a fiduciary duty to maximize the
taxpayers' investment.
Mr. Tierney. Much like the way there is a fiduciary duty
for these failed executives to maximize the investment of their
shareholders, which they did by taking exorbitant salaries and
many times other violations of good management practices?
Mr. Verret. Well, I wouldn't bail out this trust any more
than I would have bailed out these companies, and I think that
is a big part of the problem, the moral hazard problems of
bailouts; and I am not a supporter of the bailout any more than
I think a lot of Members of this body.
Mr. Tierney. So you would have let AIG and Citigroup and
all those banks just go down?
Mr. Verret. I would have let some of the banks go down,
absolutely, because I think they got a great deal.
Mr. Tierney. All of them or just some of them?
Mr. Verret. I wouldn't have given AIG nearly as much as
they did; I would have cut the counterparties' exposure; I
wouldn't have given----
Mr. Tierney. But you would have given them something.
Mr. Verret. Oh, I would have tried to make sure they didn't
bring down the financial system, but I wouldn't have given such
a giveaway that I think we saw----
Mr. Tierney. So yours is a question of degree. You would
have bailed them out; you just would have bailed them out
differently.
Mr. Verret. Well, I wouldn't have bailed out Citigroup; I
would have let Citigroup fail, absolutely.
Mr. Tierney. Well, but AIG?
Mr. Verret. I think AIG, you had to do something because it
would have brought the whole----
Mr. Tierney. So you would have bailed them out; you just
would have done it a different way than the people that made
the decision like Paulson and others.
Mr. Verret. I would have given them a very small percentage
of what they gave them. And I think----
Mr. Tierney. All right. I just want to establish it is a
matter of degree that we are talking about.
Mr. Verret. Sure.
Mr. Tierney. A different look on that basis.
Mr. Tonelson, what are your specific ideas on how we
rebuild our manufacturing base? I read your testimony and I
agree with some of the generalities you have in there, but if
you had to say there are three or five specific policies that
we ought to start embarking on right now to reestablish
manufacturing, what would they be?
Mr. Tonelson. Well, thank you so much, Congressman Tierney.
There is no doubt that there are steps that have already been
widely discussed that urgently need to be taken and, in my
view, in fact, in the view of my organization, the most
important steps involve the transformation of U.S. trade
policy; and I will be very specific. There is no excuse for
Congress, under Democrats, not to have passed a strong currency
manipulation bill. The practice of exchange rate protectionism
by China and other Asian countries is an abomination--should be
an abomination to anybody who styles themselves the champion of
the free market. It has been going on for 10 years, at least;
it has crippled the American manufacturing base, American
manufacturing output, American manufacturing jobs.
We have been talking about this problem since 2002 or so. I
can understand why a Republican administration in which the two
non-trade policy was called by outsourcing multinational
companies refused to act. I don't understand why this
Democratic President and this Democratic Congress refuses to
act.
The second recommendation, there are already very important
Buy American provisions in the stimulus bill. These Buy
American provisions need to be expanded to cover all Federal
procurement. And I understand there are problems regarding our
World Trade Organization obligations. Unfortunately, these
obligations may need to be suspended. We face an economic
emergency; it is a crisis. That word is used for a reason and
times of emergency require emergency measures; and when
international obligations like this prevent us from taking
common sense measures not only to rebalance our own economy,
but to rebalance a dangerously lopsided world economy, then
those obligations need to be set aside.
So those are two very specific steps that can be taken this
week.
Mr. Tierney. If the chairman will give us unanimous
consent, I just have a few more seconds, Mr. Nader, I would be
interested in hearing your comment on that.
Mr. Kucinich. Mr. Nader, you may respond to his question,
and then I will go to the next----
Mr. Tierney. Thank you, Mr. Chairman.
Mr. Nader. OK, thank you.
I think, first of all, the China example is perfect. You
can't have free trade with dictatorships. Why? Because
dictatorships impose the costs and keep the costs down, like
labor costs and prohibition of independent trade unions. So
China has not only a dictatorship advantage in terms of trade,
but it also has an absolute advantage. The late Paul Samuelson,
economist emeritus at MIT, changed his views in a recent
academic paper and basically said the costs of outsourcing are
expanding beyond the benefits of outsourcing. That is what
absolute advantage does.
Third is the under-valuation of the currency, the yuan.
Fourth is the rampant criminal counterfeiting of products that
are coming into this country from China and other countries.
And, finally, there is no consumer protection. There is no
consumer protection treaty with China. We are getting
contaminated fish, defective tires, ingredients in our
pharmaceuticals that are hazardous--in one case it has already
killed 200 Americans. There is no consumer protection treaty,
so you have a superior advantage of shoddy goods coming in,
driving out goods that meet consumer standards in this country.
And then we need a level playing field. The idea of all the
Federal subsidies and tax expenditures favoring the fossil fuel
industry creates an unlevel playing field with sustainable
energy and energy conservation. Part of it is being remedied in
Congress in recent years, to be sure, but still the subsidies,
for example, to the nuclear energy industry is massive in terms
of no nuclear plants can ever be built in this country without
100 percent Federal loan guarantee, according to Wall Street
finance firms.
So that isn't true for solar energy, for example. Solar
energy doesn't get 100 percent guarantee. And solar energy can
be one of the great manufacturing segments of our economy in
terms of jobs produced, in terms of innovation applied here, in
terms of climate change and other environmental issues, and,
above all, in terms of its decentralized nature, contrary to
highly centralized fossil fuel and nuclear installations into
every community in the country creating jobs, production jobs
and maintenance jobs.
Mr. Kucinich. Thank you. Thank you very much, Mr. Tierney,
Mr. Nader.
I voted against the bailouts because I don't believe that
Government should be picking winners and losers in the private
sector. Now, the testimony that I have heard here from some of
the witnesses and, indeed, the debate that goes on between some
Democrats and Republicans in the Congress is that the corporate
State and the Federal Government are somehow two distinct
entities. I want to look at that in light of just one example,
today's report, ``Tax Deal is Worth Billions to Citigroup; Deal
Made to Recover Bailout; Firms Exempted from Rule when U.S.
Sells Its Stake.'' The Federal Government quietly--quietly--
agreed to forego billions of dollars in potential tax payments
from Citigroup as part of a deal announced this week to wean
the company from the massive taxpayer bailout that helped it
survive the financial crisis.
Now, one of the concerns that I have had is that the
personnel between corporate America and the Federal Government
has basically been interchangeable at the top. You look at
Citigroup, they are in the top level, decisionmaking level in
the Government; there are people who used to work for them, as
is the case with Goldman Sachs. So you wonder why there is very
little change between one administration and another. You look
at the bailout, the terms of the stock ownership; you look at
TARP, post-TARP, the relationship between the Federal
Government and the corporations.
If I look at what happened here with this Citigroup deal,
you would assume that the Government, if it is taking
ownership, would protect the taxpayers, first responsibility.
But the Citigroup deal that was exposed today, the Government,
instead, is protecting shareholder interests over taxpayer
interests, to ceding billions of dollars in taxes. So it raises
the question whether or not we have had a merger that has
occurred here, kind of a hostile takeover of the Government
through the TARP by Wall Street. You want to talk about moral
hazard? How about the destruction of a democratic system using
our own money? This is why TARP was dangerous, because it is
not only the Government reaching in to direct private
enterprise, but it is private enterprise reaching in the other
way to direct the Government. Who owns whom? This is one of the
answers to the questions. Citigroup has a blank check. And I
don't think it would be different with a Democrat or Republican
administration; it is the same thing.
I have a question for--and I speak as someone who has been
following these issues for years, and we are going to--fair
warning for the Treasury Department, which is coming here
tomorrow. They are going to be asked a lot of details and for
documents on this Citigroup thing. I said it before in my
opening remarks. Matt Taibbi, in Rolling Stone, did a pretty
good piece on detailing the financial connections between Wall
Street players, how they are now in the administration and how
policies seem to follow ways that help Wall Street at the
expense of Main Street.
Now, the question to Mr. Nader and Mr. Weissman. Some have
said that the Federal Government did impose conditions before
bailing out the companies. With respect just to the four
companies which the United States now owns, how would you
assess the significance and effectiveness of those conditions
the United States did require, and what should the Government
have required of TARP recipients but failed to demand?
And then I will invite others to comment if we have time.
Mr. Nader. Let me ask Mr. Weissman to come up and answer
that part of the question. Thank you.
Mr. Kucinich. Mr. Weissman has already been sworn. You may
proceed.
Mr. Weissman. Thank you, Mr. Chairman.
I think you raise the core distinction in your opening
remarks. There were the most minimal standards imposed on the
TARP recipients, and I think we should really distinguish
between the TARP recipients and those in which the Government
took a controlling interest, which, as an aside, is the core
issue at this hearing and is completely different from
receiving loans. The conditions were minimal. Ultimately, there
were some very modest executive compensation conditions
imposed. In the case of AIG, they did demand the very short-
term CEO step down.
The contrast is with the conditions imposed on General
Motors, as well as Chrysler, where there was an extremely
intensive review of policies that were being proposed by
management, ousting of management, new management has come in
that has since come and gone in the case of General Motors. The
conditions, however, that were imposed, the scrutiny that was
imposed in the case of General Motors I think was admirable.
The criteria, though, by which that was applied raises several
questions. It is not at all clear what the aim of the task
force was in imposing the stringent conditions.
Mr. Kucinich. Can you give any specific examples of where
you think that we lost out on opportunities?
Mr. Weissman. Well, one--well, maybe two. One striking
example is that the administration, the Obama administration
bragged that it imposed more severe wage cuts on the auto
workers, and General Motors and Chrysler, than the Bush
administration had done in its negotiations with the auto
industry. It makes no sense whatsoever to bring down the wages
both of those workers but, more importantly, the standard in
the auto industry and manufacturing overall. As owners of these
companies--we are not lenders to these companies; we, the
public, are owners of the companies; they are are the dominant
owners; they are effectively our companies--we have important
statutory public policy objectives that we ought to be
pursuing. We are, right now, in the midst of climate change
negotiations.
Mr. Kucinich. So whose interest did we represent, then, did
the Federal Government represent?
Mr. Weissman. I think in the case of--it is actually a
little bit difficult to say, in the case of General Motors,
what the objective was. I think the ultimate objective was to
keep it as a going concern, just as a going concern, but
without regard to why it is the public would want to maintain
General Motors as a going concern. In the financial area, I
think we actually represented the interest of management and,
to some extent, the interest of maintaining Wall Street and the
financial system.
Mr. Kucinich. My time has expired and I try to be fair in
the allocation of time here. We are going to have a second
round of questions. I want to get back to that and ask other
people to join in.
The Chair recognizes the distinguished gentlelady from
California, Ms. Watson, for 5 minutes, then we are going to go
to a second round.
Ms. Watson. All right.
Mr. Kucinich. Thank you, Mr. Weissman.
Ms. Watson. Thank you, Mr. Chairman. I am going to be very
quick on this so that we can get around the second round.
Mr. Nader, I am glad you are back at the table. I missed
your first presentation, but if, as you assert, bailed out
companies have no legitimate interest apart from Government
when Government becomes the dominant shareholder, is it
appropriate to re-purpose the companies' objectives and
policies toward, for instance, consumer service, environmental
responsibility, and worker investment, and to delay the
relinquishment that these changed priorities are achieved or
protected even if that delays return for functionality or
profitability? What is your opinion?
Mr. Nader. Well, I think there is a congruence between
statutory purposes and the health of a company like General
Motors. After all, it got into trouble, one, because it didn't
have fuel efficient vehicles and it had a bad mix of choice of
vehicles, relying so heavily on the SUV. It got into trouble
because, as Ross Perot said, its management, in his words,
``Hates its customers, hates its workers, and hates
themselves.'' It was entirely at cross purposes with what
professional management should incur. I could argue also that
General Motors' fit and finish got them into trouble, compared
to Honda and Toyota. So a lot of the statutory purposes already
on the books advocated as not only taxpayer representation for
value, but also shareholder power, would enhance the health of
General Motors.
This whole area is one of cognitive dissonance. The more
the Government helps GM, how does Ford react, you see, which
didn't ask for Government help? There are all kinds of
conflicts here. But one thing that seems to be sure is that a
basic principle of capitalism is that the owners control what
they own, and that principle is massive and historically
violated by big business that basically says to shareholders,
institutional and otherwise, if you don't like the way we run
the country--the company--that was a slip--if you don't like
the way we run the company, sell; in other words, exit, not
voice. And that is why, in response to Congressman Jordan's
point--and that is why I am always amazed by people calling
themselves free enterprise conservatives. What is say? What is
say on pay? There is no say on pay proposed in Congress or by
these corporations; it is just a non-binding referendum. It is
an opinion poll by shareholders. If shareholders own the
company, they should be able to mandate high executive salaries
and they should be given a very small staff to do so.
So I have no problems at all in terms of strengthening
corporations in this country once they desperately come to
Washington and get on their knees for a bailout in terms, as
our testimony points out, in terms of exercising shareholder
power as a model for the rest of the country--not passive
shareholders--as a model for institutional shareholders, who
should be at least as aggressive as CalPERS, and also to
represent the taxpayer investment; and I don't think they are
necessarily contradictory at all.
Ms. Watson. Let me----
Mr. Kucinich. [Remarks made off mic.]
Ms. Watson. Yes, just one more question connected. Thank
you.
Mr. Kucinich. Your time expired, but if you want to--OK,
continue with your question. Go ahead.
Ms. Watson. I wanted to go to Professor Verret. You said
that we probably should not have bailed out to the degree that
we have. But you know what? It is connected to jobs. Michigan
is suffering greatly from unemployment. When I go back to my
district, Los Angeles, California, they don't ask me about
debt; they want to know what we are doing to get them back to
work. So I see the connection between capitalizing the banks
and bailing out so that they can hold on to employees. The
unemployment rate is unacceptable right now. So can you give me
an opinion as it relates to jobs and less bailout?
Mr. Verret. Sure. In answer to your question, I would say
that I share your concerns about jobs and about employment. My
concern is about process, is about the ability to keep
everything off budget, off the Federal budget. We saw it once
before with Fannie and Freddie, and folks said, well, Fannie
and Freddie is off budget, they are not on the Federal budget.
Well, they are on there now. And, in fact, they have been
the beneficiary of the largest guarantee of these companies.
Fannie and Freddie have been the beneficiary of a $400 billion
guarantee. This morning the Wall Street Journal reports the
Treasury is going to ask for more very soon. So I am worried
about this sort of off budget stuff. I think we can help folks
through the Federal budget and not have to keep it off budget,
because ultimately the taxpayer is going to be left holding the
tab anyway, in the future. I think keeping it secret is what I
have a problem with.
Mr. Kucinich. I thank the gentlelady.
Ms. Watson. I yield back.
Mr. Kucinich. Thank you very much. Appreciate it.
Mr. Tierney.
Mr. Tierney. Thank you.
Mr. Verret, can I just ask you what is your take or your
opinion on real say-for-pay by shareholders? Not the referendum
Mr. Nader was talking about, but ought they not have the
ability to really determine what the pay is going to be of
their executives?
Mr. Verret. Well, right now they do have the power to get
rid of compensation committees, and I know that the California
Pension Fund and a number of other institutional investors do a
lot of good work in targeting compensation committee members
that aren't doing their jobs; and they say, look, you have to
go and they use their majority voting powers to get rid of
them. I think that is a very effective way to do things.
I worry on say-on-pay just because I worry about some
special interest shareholders using this power as part of their
negotiations with companies, and I think we have seen some
shareholders misuse powers to the detriment of all the ordinary
Americans that own shares through their 401-Ks.
Mr. Tierney. That is a pretty subjective view. You say they
are misusing their powers, but they are shareholders, and who
is not to take the other argument that they are acting on
behalf of those people whose money they are holding and going
to drive that interest, which is in fact not special to them.
Everybody has a special interest; every shareholder has a
special interest. The board of director member who is a
shareholder who sits on there and pads the pockets of the
executive because he is an executive somewhere else and is
going to be reciprocated when the guy whose pay he is jacking
up is going to sit on his board and jack his up, that is pretty
special interest. I just take note of that on that basis.
Mr. Nader, can you think of any reason why we continue to
allow corporations to deduct, as a business expense, from their
taxes exorbitant pay for executives? Ought we not look at some
point at protecting taxpayers by just saying beyond some point
that is not going to be tax deductible?
Mr. Nader. Well, you know, the Congress established a
million dollar limit----
Mr. Tierney. I meant a real limit, though.
Mr. Nader [continuing]. And they circumvented it with stock
options and so forth, so it is like trying to block water going
downhill. So if you are going to restrict the tax deductibility
of executive compensation, you have to also pay attention to
how they are going to circumvent it; and they are very creative
in circumventing it.
One thing we have to understand, this whole subject of this
committee, Congressman, is that corporations are very fast
learners in gaming regulatory and bailout and subsidy systems
from Washington, and Citigroup is a perfect example of that in
today's Post. They are very, very creative in gaming, so you
have to make sure that if you restrict it in one area, you have
to take into account other evasive processes.
But I think that if you give shareholders the authority to
decide, not just to give their opinion, and you have pension
funds and institutional shareholders, that will take care of a
lot of the problem. They are not going to approve the pay of
$70 million for Goldman Sachs' CEO if they are given the
authority. And why shouldn't they be given the authority within
their framework? They own the company. But the split between
ownership and control, which was pointed out by Berle and Means
back in the 1930's, is the way the executives dominate the
corporation and strip the owners of control.
The professor just noted that there could be some mischief
by some shareholders. Well, they have to get over 50 percent,
don't they? If 51 percent is mischief, I don't know what your
definition of mischief is.
Mr. Kucinich. The gentleman desires to engage in a----
Mr. Tierney. I am happy to pass that along, Mr. Chairman.
Mr. Verret, I think it is a fair question to you. Fifty-one
percent, does that satisfy you that any mischief is at least
interpreted differently than what you might view?
Mr. Verret. Well, the voting rates of shareholders aren't
100 percent, so some shareholders vote more often than others,
and folks who hold shares through their 401-Ks don't have time
to vote their shares everyday; whereas, the union pension boss
has time to vote their shares every day that they do.
Mr. Tierney. Do you think it is the so-called union pension
bosses that are voting for $70 million pay raises?
Mr. Verret. In answer to your question, if shareholders
valued----
Mr. Tierney. I don't think--is it a yes or a no? Do you
really believe--do you believe that it is the pension funds and
others like that, or the union pension funds that are voting
the head of these firms $70 million in compensation?
Mr. Verret. I think they are voting based on their own
interest, and I think they will vote for things based on what
they can get from it.
Mr. Tierney. Please, Mr. Verret. You are a professor and
you know better. All right? Do you really believe that those
are the people that are voting a $70 million compensation
package for the chief executive officer?
Mr. Verret. I think they will or will not--I don't know
what they are voting for, but I know they will or will not vote
based on what sort of deals they can work with the company, and
I worry about----
Mr. Tierney. I think your credibility suffers a loss there
when you answer that way and you are not just forthright on
that, because I really have to believe that you don't think for
a minute that they are the ones that are voting the $70 million
pay packages. And if you do, then, as a good professor, maybe
you will go back and look at your documentation a little bit on
that.
Mr. Verret. Well, I would disagree completely. I think that
we have seen a lot of collusion between unions and firms on all
sorts of deals. So I think they might vote for it if they got
some sort of special deal for themselves as well. And I think
when unions and boards collide or when governments and boards
collide, the taxpayer and the ordinary Main Street shareholder
is the one who is left holding the tab.
Mr. Tierney. I have to press this a little further. So the
only special interest you see sitting on boards are people that
represent labor pension groups?
Mr. Verret. Well, there are all sorts of special interests
involved, absolutely, sure. They are not the only ones.
Mr. Tierney. Right. Thank you.
Mr. Kucinich. I thank the gentleman.
While we are having this discussion, I am thinking of all
these workers whose pension funds began to evaporate with the
fallout on Wall Street and whose pension funds get collapsed in
bankruptcies.
This will be the last series of questions here. Start with
Professor Eckbo. Your testimony, sir, outlines how the
Treasury's passive voting strategy could, in principle, allow a
director to be elected with just one vote of a minority
shareholder. Would you explain or expand on what you see as the
perils of passive shareholding, what corporate tricks or even
scandals could fester while the United States is the dominant
shareholder? And, as a followup, could the companies repeat the
excessive compensation practices, short-sighted vision, and, in
some cases, potentially criminal behavior while the United
States is the dominant shareholder under Treasury's plan for
shareholding? Professor.
Mr. Eckbo. Mr. Chairman, I think it is important to start
with the fact that the U.S. corporate system is a board-driven
system from a legal perspective, so whatever decisions the
boards are taking is going to be binding for the firm. And as
we talked about earlier today, shareholder control of its own
corporations is a function of how costly it is to replace these
board members when they turn out not to be so good.
Mr. Kucinich. What about the Treasury as a passive
shareholder?
Mr. Eckbo. In my mind, when you finally get these large
shareholders who have all the incentives in the world to
actually take the world and pay the cost of being an active
shareholder, which is the problem with the small ones, then we
would like Treasury to play that role.
Mr. Kucinich. To play the role of?
Mr. Eckbo. As an active large shareholder.
Mr. Kucinich. And what would that mean?
Mr. Eckbo. That means, for example, it means, in my mind,
to try to restructure the system on a broad scale to support,
to push for election reform for directors. It means go into the
company and vote charter amendments, for example, where we take
away staggered board provisions; we separate the chairmanship
and the CEO position, which is common today in the United
States. It is illegal in some other countries because of
conflicts of interest that are involved. So you take these
actions in order to get--and, of course, you get directors that
you think are capable of running the company the way it should
be done.
Mr. Kucinich. Does anybody want to chime in here, any other
panelist? Ms. Simpson, what do you think about Treasury's
passive voting strategy?
Ms. Simpson. I want to just come back to this point about--
--
Mr. Kucinich. No, what do you think of that? I know you
want to talk about what you want to talk about----
Ms. Simpson. It is critical for all shareholders----
Mr. Kucinich [continuing]. But just answer the question,
would you?
Ms. Simpson. It is critical for all shareholders to be
active responsible owners and to push this governance overhaul,
which is absolutely necessary. So majority voting, yes. Proxy
access, absolutely. Removal of all the barriers to
accountability like staggered boards, super-majority voting,
poison pills, you know, there is a list of a dozen or so
barriers to accountability and we want all owners to actually
engage with these reforms; otherwise we have simply missed a
huge opportunity.
Mr. Kucinich. Anyone else want to join in? Anybody.
Professor Verret, do you want to join in?
Mr. Verret. In part, I wonder how passive it is, just
because I know that they have said that it is passive and we
have seen that they have a press release about it, but there is
no binding regulation about it; and that is part of what
worries me, is that there is no binding regulation on Treasury
on how it is going to vote, and I think you lose some
separation of powers and some accountability to the people and
the Congress through that. Treasury also lists some exceptions.
It says we won't vote shares, with the following exceptions.
Ironically, it lists all the things shareholders would want to
vote on; election of directors and dividends and things of that
nature. So I think we probably share a concern with respect
to----
Mr. Kucinich. You know, you raise a point as to what is
passive. At what point, when you are sitting there as a large
shareholder, you pick up a phone and talk to someone, that can
have an impact. What is the transition from passive to active?
And is passive like a wall saying, we don't want to look, we
don't want to hear anything? That, of course, would have some
hazards if you are doing due diligence.
Mr. Tonelson.
Mr. Tonelson. Just one really fast point. That is why it is
so essential that this Government shareholder role be tightly
coordinated with the rest of our economic recovery strategy,
because you don't want the situation where Government, as
shareholder, decides to push a certain set of policies that may
be good for the well being of that particular company if the
whole economy happens to be moving in an entirely different
way.
Mr. Kucinich. So you see the position of the Government as
shareholder in a broader economic context. In other words, you
have to look at economic policy.
Mr. Tonelson. You have to.
Mr. Kucinich. Not in isolation.
Mr. Tonelson. You can't silo these things anymore.
Something that used to be as big as GM, and that still has such
a vast supplier chain--and let me say I am not here as the
champion of GM. Lots of our member companies have done business
with it and, you know what? They didn't find it to be a lot of
fun. OK? But a U.S.-owned automotive industry is vital to
American economic success. We will not be a prosperous country
without a big healthy automobile industry owned by Americans.
And the strategy for that cannot be set simply by U.S.
Government representatives voting in piecemeal ways on
individual decisions and challenges that GM faces as a company.
That role has to be integrated with a much broader strategy
toward incentivizing more production, more job creation in
manufacturing in this country.
Mr. Kucinich. You know, Mr. Nader used the term cognitive
dissonance earlier. I am sure this is something that is
troubling a lot of economists and people who try to see a
division between the public sector and the private sector. But
you are putting your finger on something in terms of looking at
the macroeconomic implications of the policies, because if we
are told that some firms are too big to fail, if we take that
view--I don't happen to believe that. I think that you break
them up if they are too big to fail. But since we have that
model that we have essentially confirmed the other day, then we
better look at the macroeconomics and better play a role in
determining that, because, on one hand, we can't say too big to
fail and then, on the other hand, say we can't look at what you
are doing.
Mr. Tonelson. Exactly. And I will give you one very
specific example. No one would like to see GM make a great
small fuel efficient car more than me. However, we have to keep
in mind that no economy on this planet, in its history, has
ever produced small fuel efficient cars profitably while
keeping their automotive markets open. It has never happened.
The Europeans haven't done it because their auto markets are
closed; the Japanese haven't done it; the South Koreans haven't
done it. Their markets are closed. The margins just aren't
there, and especially when you force American companies into
competition with foreign rivals that are either highly
subsidized or that put this tight lid on labor costs, you have
a total no-win situation. You are forcing GM, for example, to
take an absolutely suicidal course.
Mr. Kucinich. You know, we are in a whole new era here in
the era of bailouts, because what we have done, we have
actually, unwittingly, created symmetry between our bailout
policy and our trade policy, where trade policy does not admit
to workers' rights, human rights, environmental quality
principles, and with the Government as shareholder trumping
taxpayers' rights in favor of shareholders. There is an
alignment there with trade policy and bailout policy that could
actually result in moving jobs out of this country.
Mr. Tonelson. Oh, absolutely.
Mr. Kucinich. Actually accelerating the movement of jobs.
Mr. Tonelson. You could create--I am sorry.
Mr. Kucinich. Mr. Nader and then I am going to go to one
final question.
Mr. Nader. Can I just elaborate quickly?
Mr. Kucinich. Yes.
Mr. Nader. On the China thing, imagine. Just look at this
flow: worker taxpayer dollars, small business taxpayer dollars
go to Washington; they help fund the bailout of General Motors;
the U.S. Government owns 60 percent of GM. GM's policy is to
move its future into China; that is going to be its big market.
It is already huge. So what happens? If the Government, as
shareholder and representative of the taxpayer, plays a passive
role, they are basically allowing GM, with U.S. taxpayer
support, to dislodge and hollow out communities here, go to
China and export back into the United States. Do you see the
conundrum here?
These are hard questions, but you certainly, as a matter of
principle, don't want to say to workers whose taxes go to
Washington and small business that they are going to finance
the hollowing out of their communities by GM's declared policy
to expand in China and a non-binding promise that, temporarily,
they won't export back into the United States. But everybody
knows that is not binding. And if the U.S. 60 percent share
doesn't kick in, that is the way it is going to go. I mean,
this is unbelievable. We are stripping down our economy on
behalf of manipulative dictatorships who determine costs. No
marketplace determines labor costs in China. These are
dictatorially determined costs and we call it free trade.
Mr. Kucinich. Mr. Tierney for 5 minutes.
Mr. Tierney. No, I don't want 5 minutes.
Are you, Mr. Tonelson and Mr. Nader, then advocating that
we just get out of General Motors or that we differently
exercise the authorities of power that you have as a basis of
your stock or your stake in the company?
Mr. Tonelson. General Motors, just speaking for USBIC, has
to be run in the way that will give it a real chance for
success. You absolutely needed a viability strategy, but the
Federal Government's viability strategy, the Obama
administration's viability strategy failed completely to
acknowledge the globalized nature of automotive production. It
just ignored that; it didn't exist. Let's make believe it
hasn't happened for the last 20 years. How in the world can
that succeed? How can you expect General Motors to succeed in
that context, with that lack of forethought?
Mr. Tierney. Mr. Verret, what do you say to all that?
Mr. Verret. Well, I don't profess to be an expert on the
automotive industry, so I don't want to go outside of my
expertise too much. But I will say----
Mr. Tierney. Give it your best shot. Go ahead.
Mr. Verret. Sir?
Mr. Tierney. Go ahead, give it your best shot.
Mr. Verret. Yes. I will say that I worry at taking the
macro view. I do worry about both the effects of bailouts, the
incentive effects. You know, we bailed out Chrysler before and
I think it is a supportable proposition that the reason why we
had to bail out Chrysler and GM was in part because they saw
that they had that safety net, and I think it led them to take
more risks than they needed to.
And I think that is why--I know we focused a lot on what we
disagree about, but I admire the chairman's vote on the
bailout; I think it took a lot of courage and I think that is
an admirable vote and a way of thinking that I think we should
consider more. And I worry about the off-budget nature of some
of the sorts of deals that governments and business tend to
make when they get in bed together.
Mr. Tierney. Thank you.
I yield back, Mr. Chairman. Thanks.
Mr. Kucinich. This is going to be the final question of
this hearing, and this would be to any witness that would care
to respond.
Is Treasury the only, or even the best, entity to control
the U.S.' shares? Now, Professor Eckbo calls attention to the
U.K. approach in your testimony in establishing a special
corporation to exercise the government's shareholding, improve
transparency, and provide clear lines of accountability. I know
that Ms. Simpson is familiar with this as well.
I would like to ask any of the witnesses that they think
about this concept and, in particular, Mr. Nader and Mr.
Weissman, to comment on what model might be implemented to
facilitate the broad principles or best practices that you
outline in your testimony.
So, Mr. Nader, would you want to comment on that, Mr.
Weissman, and then maybe go back to Mr. Eckbo and Ms. Simpson?
Mr. Nader. I think everybody knows eventually the
Government is going to sell its shares in General Motors and
these other companies, so my view is, instead of having another
delegation--from the congressional to the executive to some
trust fund--that the Treasury, under clear standards provided
by the Congress, behave as a shareholder with multiple
obligations, which I don't think are, in the short-term,
conflicting. They have to represent not only taxpayer value,
shareholder value, but the whole purpose of bailing out GM, the
main purpose is to save communities and save jobs and keep a
major factor of an industry in this country.
So inescapably, when GM came to Washington and prostrated
itself in front of the Congress, it went into the political
arena. There have to be political judgments because of all the
public investments, and those judgments can be made in the most
enlightened form through congressional participation, openness,
and standards of accountability.
For the record, I would like to put in this review of
Corporate Governance, the Role of Institutional Shareholders by
Robert A. G. Monks, who arguably----
Mr. Kucinich. So ordered.
Mr. Nader [continuing]. Arguably is the leading shareholder
activist in the country. And he has some very good
recommendations to the point of your question, Mr. Chairman.
Mr. Kucinich. Without objection, so ordered.
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Mr. Kucinich. Anyone else want to join in? Mr. Tonelson.
Mr. Tonelson. The Treasury Department has absolutely no
expertise in fostering productive activity, in fostering wealth
creation; it is not the Treasury's job. It is not their fault,
but they shouldn't pretend that they have that expertise.
Second point is that----
Mr. Kucinich. So what do we do, then, with this situation
we are in right now?
Mr. Tonelson. These responsibilities have to be given to
those sections or those agencies that have that competence. And
if we can't find them, or in the right combinations, new forms
have to be created.
But one other critical point. If the U.S. Government is
not--if it doesn't have a voice in making these critical
decisions that will literally make or break critical
industries, in a globalized world economy, those decisions will
be made by foreign governments, and their first priority will
not be the well being of the American people or their economy.
So we have no choice but to act. Failing to act amounts to
making policy that will damage us grievously.
Mr. Kucinich. Before I go to Professor Eckbo, I would like
Ms. Simpson to comment on this. Your fund deals with many
troubled companies. How do you handle that, in terms of the
interest of your members?
Ms. Simpson. What is critical to this is separating out the
different objectives. CalPERS's sole purpose is a fiduciary
objective; we are there to invest on behalf of the
beneficiaries. The U.K. model is intended to separate out
government's interest for addressing political issues, which
are quite legitimate from investment objectives; and, as an
investor, it sets out in its mandate that it will vote, that it
will engage with companies, and that political questions will
be referred to ministers for proper political judgment where
ministers can be held accountable.
So, on CalPERS's side, we would like to see the fiduciary
part of the agenda taken forwards and, as we said earlier,
would welcome the Government as an owner working alongside us
with a fiduciary objective.
Mr. Kucinich. OK.
Professor Eckbo.
Mr. Eckbo. My recommendation of the U.K. FI as a model was
very much because I wanted a separation between the Government,
the political influence over the management of the shares, per
se, and it creates more transparency and more responsibility on
the part of the trust or the corporation that you are setting
up. I also said in my testimony that I would probably put all
the shares in the same unit, both the banking shares and the
auto shares, because I don't see a tremendous difference in
terms of the qualifications of the people in that trust that
they need in order to manage that trust properly.
I just wanted to make one comment, if I can, on this issue
that you raise, which is very important. If I, as a taxpayer,
would like to subsidize employment in Michigan, should I do it
through my ownership stake in GM?
Mr. Kucinich. By what, sir?
Mr. Eckbo. Through my share ownership in GM. Should I use
GM as a tool, as a taxpayer, as a tool to further my goals to
get employment subsidies in Michigan? In my view, sometimes you
can have your cake and you can eat it too. If you operate GM,
as we heard across the table, to maximize the value of GM, I
think the U.S. Congress will also have more funds to do its
goals, which is to subsidize employment in Michigan. I don't
think we have to tie the two together, necessarily.
So I think the answer to your question should you be an
active investor, I say yes in the governance area. People say
what about these other social goals that you are pulling in,
the macro economy and the employment record. I am saying we
should probably separate the two, in my mind.
Mr. Kucinich. Well, you know, it is an interesting point
you raise, because what has happened in the latter part of the
20th century, a whole body of investment information came alive
dealing with socially responsible investing, and that is there
was an understanding that your investment choices had a social
impact; and that social impact could be monetized.
Mr. Eckbo. Right. I agree with that. The Congress also
operates under the--it needs revenues to further its goals, and
I think the tax revenues that you are looking for can be
maximized by having these corporations do their jobs as well as
possible within the private sector. So I think mixing those two
could be costly.
Mr. Kucinich. OK, now, Ms. Brown, you have been very
patient sitting there. Would you like to comment on this, or is
there anything that this discussion--that has occurred to you
that you would like to comment on or say?
Ms. Brown. I would only note that the work that we
currently have underway, we are looking at the issue of the
Government says it has taken a hands-off approach. We are
actually looking at what the Government is actually doing in
all of the institutions that have received exceptional
assistance. So we are looking at Bank of America, Citigroup,
AIG, GM, Chrysler, GMAC, as well as Fannie Mae and Freddie Mac.
So we are actually looking at kind of what the Government
says it is doing and what it is actually doing. And I would
note that when it comes to the Government being a passive
investor, the Government has been involved in changing the
board structure in certain situations. If you take AIG, for
example, there is primarily a new board in place. The trustees
had a role in identifying members for the board; they did an
analysis of what they thought the new board needed to look
like, the expertise they needed to bring into the board. And I
would also like to note that when it comes to AIG, there is a
provision that if AIG does not pay four consecutive dividend
payments, the Government has the right to vote two members to
the board of directors.
Mr. Kucinich. Thank you.
Last question to Mr. Weissman. Is there any practical
advantage the Government now has as a result of being a
dominant shareholder that it did not have before it became a
shareholder?
Mr. Weissman. [Remarks off mic.]
Mr. Kucinich. Could you speak directly into the mic so we
can hear you?
Mr. Weissman [continuing]. The question that you have been
raising, and I wanted to disagree with Professor Eckbo on a
comment that is in the GAO report. The GAO experts consulted
said that the Government should manage its shares as if it were
a commercial investor. The Government is not a commercial
investor. We did not get into General Motors, AIG, Citigroup
because we thought there was a profit opportunity there. We
made a policy decision that there were certain broader
implications that required the continued existence of these
firms. That suggests that, as we manage our shareholding
opportunity, we have to take into account exactly those same
broader policy considerations.
To your previous question, I think that means, therefore,
that you do not rely just on Treasury to manage the share
decisions, you involve agencies like EPA or NTSA or Department
of Commerce, if they are appropriate. Also, I think it speaks
absolutely to the need for Congress to have much more oversight
and engagement in this, because it is not going to come, as we
see now, from this administration.
Finally, to the point that you raised at the outset that is
also related to this, we have to address the issue of exit. We
now have the exit strategy emerging with Citigroup. There has
to be some standard about what the exit is, it can't just be
that we got in to help you out for a little while; we will get
out whenever it is convenient to you. The you, the companies
are us, the Government. The exit decision has to be managed in
terms of what benefits the public and the Government interest
in these corporations, not in the interest of the corporations
themselves.
Ms. Brown. Chairman, could I clarify?
Mr. Kucinich. Go ahead, Ms. Brown.
Ms. Brown. The comment in our statement about the
commercial manner, this was not GAO's assertion that is how it
should be; that was part of a discussion of how the Treasury
explained they are managing the investment. So we were not
endorsing that approach, but simply saying this is how it is
being managed.
Mr. Kucinich. I understand. It is a matter of record now.
Mr. Nader said he wanted to make a comment and then we have
just been notified that I just have a few minutes to go make a
vote, so if you would make a brief comment.
Mr. Nader. OK, very briefly. Here is the conundrum. The
Government says they want to be passive investors. There is no
such thing, when you own 60 percent of the company, of being a
passive investor without tilting the dynamic in favor of the
non-passive or the commercial investors. Let me give you an
example. Proper role for the Government should have been to
deal actively with who is going to be on the board of directors
and who is going to run General Motors, because, historically,
General Motors has been run for the last 60 years by finance
executives or marketing executives, not by engineers, the way
Henry Ford and Chrysler and others started the auto companies.
That, of course, degraded the concept that most people who know
the industry believe is central to the recovery of the auto
industry; it is called product, product, product.
So now GM is run by an ex-telephone executive with a lack
of distinguished members of the board of directors. They have
just fired the replacement for the original CEO, Fritz
Henderson, and there is chaos at the top. So this is what
happens when the Government, which has major responsibilities
for GM's recovery, takes a standoffish position. And it would
be good for the Government Accountability Office to provide
Congress with information as to the degree, if any, the
Government ratified these lack of distinguished boards of
directors and the top management of GM.
As Automotive News--which is no patsy for the industry, but
it is an industry trade journal--has said repeatedly,
especially in its current issue, General Motors needs an auto
guy; it needs somebody who knows automobiles, production
engineering, and innovation.
Mr. Kucinich. What a thought.
Mr. Nader. On that point, I want to submit to the record a
report that we did a couple years ago called Innovation and
Stagnation in Automotive Safety and Fuel Efficiency.
Mr. Kucinich. Mr. Nader, we will accept that for the
record. I am going to have to----
Mr. Nader. Just one sentence.
Mr. Kucinich. I am going to have to----
Mr. Nader. The theme is that General Motors has been
denying the practical innovations that its major suppliers have
been putting forth for decades, and that is a management
failure.
Mr. Kucinich. I want to thank you for your testimony. We
have another vote and we have covered a lot of the territory
today.
This is the Domestic Policy Subcommittee of Government
Oversight and Reform. Our topic today has been the Government
as Dominant Shareholder: How Should the Taxpayers' Ownership
Rights be Exercised? We have had a distinguished panel. I
appreciate each and every one of you participating. You have
opened up other areas for inquiry which this committee will
address. Tomorrow we are going to have Treasury here to testify
and, as I said earlier, we are going to be asking them about a
lot of things, including this Citigroup development.
The committee now stands adjourned. Happy Holidays.
Mr. Nader. Thank you, Mr. Chairman.
[Whereupon, at 12:53 p.m., the subcommittee was adjourned.]
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