Executives from two large American banks that failed dramatically in March appeared in front of the Senate Banking Committee on Tuesday to respond to questions about why their banks went under and what regulators could have done to avoid the calamities.
Along with questions about how these banks failed, senators used the hearing to also address executive pay and whether senior executives in the United States are being rewarded more for short-term gains – like rising stock prices – than for ensuring their companies’ long-term health.
Executives at Silicon Valley Bank and Signature Bank and were paid millions of dollars over their tenures up until their banks failed, the bulk of the compensation coming in the form company stock. That stock is now largely worthless but the CEOs still pocketed millions from the planned sales of their shares before the banks’ collapse.
Senator Sherrod Brown, the Democratic chair of the Senate Banking Committee, took aim at executive compensation to open the hearing.
“You were paying out bonuses until literally hours before regulators seized your assets. To people in Ohio and around the country, this feels sickeningly familiar,” Brown said. “To most Americans, a lack of Wall Street accountability tracks with their entire experience with our economy. Workers face consequences; executives ride off into the sunset.”
Silicon Valley Bank’s former CEO Greg Becker received compensation valued at roughly US$9.9 million in 2022, and also sold stock in the company only a few weeks before it failed. Joseph DePaolo, CEO of Signature Bank, also sold stock in the company in the years leading up to its collapse.
DePaolo did not appear in front of the Senate on Tuesday due to health concerns; instead Signature’s co-founder and the bank’s president agreed to testify.
Becker used his testimony and answers to senators’ questions to say that Silicon Valley Bank was a victim of a confluence of factors, including a social media-driven bank run. His arguments seemed to make little headway with politicians on both sides of the aisle, who focused their questions on failures by the bank’s management to understand how rising interest rates could negatively impact their balance sheet.
“You say you took risk management seriously. I find it hard to believe that comment,” said Senator Tim Scott, the ranking Republican on the committee.
Senator John Kennedy, R-Louisiana, called the bank’s interest rate management “bone deep, to the marrow, stupid”.
The anger over CEO pay echoes that of roughly 15 years ago, when the 2008 financial crisis led to taxpayer-funded bailouts of major banks. The CEOs and high-level bankers still received millions in pay and bonuses, most notably at nearly failed insurance conglomerate American International Group.
“The recent bank failures prove yet again that banker compensation is at the core of causing banks to take too much risk, act irresponsibly if not recklessly, and blow themselves up,” said Dennis Kelleher, co-founder of Better Markets, which was founded after the Great Recession focused on financial industry reform.
Clawing back CEO pay has gained bipartisan attention despite the fierce divisions between the two political parties.
Four senators – two Democrats and two Republicans – have introduced legislation that would give the Federal Deposit Insurance Corporation authority to claw back any pay made to executives in the five years leading up to a bank’s failure.
The bill is sponsored by Elizabeth Warren, D-Massachusetts, Josh Hawley, R-Missouri, Catherine Cortez Masto, D-Nevada, and Mike Braun, R-Indiana. The White House, while not endorsing the specific bill, has called on Congress to pass laws to reform how bank CEOs are paid in the event of a failure.
Warren asked both Becker and Shay if they planned to return any of the compensation they received over the past few years to help cover some of the estimated US$22.5 billion their banks’ failures cost the FDIC. Shay say he did not. Becker did not directly answer the question, and Warren responded she would “take that as a ‘no’.”
Warren called the responses “just plain wrong”, adding “if we don’t fix it, every CEO for these multibillion-dollar banks will keep right on loading up on risks and blowing up banks and everybody else is going to have to pay for it”.
Executives at big companies also tend get most of their pay each year in company stock. That means CEOs and other insiders have much to gain if the company’s stock rises. And shareholders typically like it this way. The thought is that by tying a CEO’s compensation to the stock price, it better aligns their interests with shareholders.
But the executives also have a lot to gain if they can sell their stock before the share price takes a steep dive.
Since 2000, the Securities and Exchange Commission has given CEOs and other corporate insiders a way to defend themselves against charges that they bought or sold stock using information unavailable to others, an illegal practice known as insider trading.
The method, known as the 10b5-1 rule, lets insiders enter into written plans to buy and sell stock in the future. The goal was to let insiders make trades, but not when they have their hands on material information not available to the public.
Over the years, complaints have risen about insiders abusing some loopholes in the 10b5-1 rule. In December, the SEC announced amendments to close the loopholes.
In March, the Justice Department announced the first insider trading prosecution based exclusively on the use of 10b5-1 trading plans. It charged the CEO of a healthcare company in California with securities fraud for allegedly avoiding more than US$12.5 million in losses by entering into two 10b5-1 trading plans while knowing the company’s then-largest customer might be terminating its contract.
The SEC also charged the CEO with insider trading after avoiding the 44 per cent drop in the company’s stock price when it announced the customer had terminated the contract.