Representatives of four major banks receiving a federal capital investment defended their executive pay practices and pledged not to use those funds to pay investor dividends Thursday.
Speaking before the Senate Banking, Housing and Urban Affairs Committee, executives of Bank of America (BAC), JPMorgan Chase (JPM), Goldman Sachs (GS) and Wells Fargo (WFC) faced skepticism from senators concerned that the federal intervention was not being used to ease the credit markets.
Both committee Chairman Sen. Chris Dodd, D-Conn., and Sen. Tim Johnson, D-S.D., said that with public money comes responsibility to the taxpayers.
"Lenders who receive public funds should use those funds to lend," Dodd said. "At this time of austerity and apprehension it would be regrettable if some carried on as if they do not owe a duty of restraint and modesty to those Americans whose sacrifice helps make your viability and prosperity possible at this moment of national peril."
Johnson specifically asked whether the bankers planned to use the federal funds for either executive bonuses or to pay dividends to investors.
The banking executives noted that even though 2008 had been a difficult year, their institutions had made profits and would use those funds to compensate executives and investors.
Gregory Palm, executive vice president and general counsel for Goldman Sachs, told the senators that 2008 bonuses would be paid out of 2008 earnings and the federal capital infusion wouldn't be touched for bonus pay.
"We are on track to deliver positive results for year end 2008 despite remarkably challenging markets and events," he said. "Net revenue for the year will be lower than in recent years. As such, compensation will be down very, very significantly this year across the firm, particularly at the senior levels. We get it."
Anne Finucane, a global corporate affairs executive for Bank of America, struck a similar note, saying that the company's earnings, while significant, were down from previous years. She also pledged that no federal funds would go to executive compensation.
"This year's bonus compensation pools for senior managers at Bank of America is expected to be reduced by more than 50 percent," she said. "Executive compensation levels are not impacted nor will they be enhanced by the capital infusion from the Treasury."
Barry Zubrow, the chief risk officer for JPMorgan Chase, added that his company pays dividends out of its operational profits not its capital reserves.
"The [federal] money has gone into our capital base," Zubrow said. "We pay dividends out of our retained earnings. … We would anticipate that dividends would continue to be paid out of our earnings stream and not out of our capital base."
In the face of the senatorial skepticism, Jon Campbell, an executive vice president with Wells Fargo, argued that continued dividend payments are critical for financial institutions.
"Continuing to pay dividends at appropriate levels while we maintain appropriate capital levels is critical to investor confidence we need," he said. "So while we clearly agree with you that the use of the funds is not for dividends, to consider restricting dividends could have unintended consequences."
Dodd proved unsatisfied by the answers, however, arguing that money is interchangeable, so the federal assistance, while not explicitly being used for the purposes concerning the senators, was enabling the companies to engage in the practices.
"I want to get over this notion … that you can draw these lines between public money, private money and retained earnings," he said. "This country deserves far better than it's getting."
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