Rosalind Evans
Top executives from two central U.S. banks that experienced significant failures in March faced a Senate Banking Committee hearing on Tuesday. They were interrogated about the reasons behind their banks’ collapses and the actions regulators could have taken to prevent the crises.
In addition to inquiries about the failures, the hearing also delved into the issue of executive pay, examining whether senior executives in the U.S. are being incentivized more for short-term gains, such as rising stock prices, rather than ensuring the long-term health of their companies.
The former CEOs of Silicon Valley Bank and Signature Bank received substantial compensation during their tenures, primarily in company stock. Although the value of that stock has now plummeted, the CEOs managed to pocket millions from the planned sales of their shares before the banks’ collapse.
At the hearing, Senator Sherrod Brown, the Democratic chair of the Senate Banking Committee, began by criticizing executive compensation.
“You were rewarding yourselves with bonuses until the last moment before regulators seized your assets. This feels sickeningly familiar to people in Ohio and across the country,” Brown stated. “For most Americans, the lack of accountability on Wall Street reflects their overall experience with our economy. Workers face the consequences while executives ride off into the sunset.”
In 2022, Silicon Valley Bank’s former CEO, Greg Becker, received compensation valued at approximately $9.9 million. He also sold company stock just a few weeks before the bank’s failure. Joseph DePaolo, the CEO of Signature Bank, also sold stock in the company in the years leading up to its collapse.
Due to health concerns, DePaolo could not appear before the Senate on Tuesday. Instead, Signature’s co-founder and the bank’s president testified on his behalf.
During the hearing, Becker argued that Silicon Valley Bank fell victim to a combination of factors, including a bank run driven by social media. However, his arguments failed to persuade politicians from both sides of the aisle, who focused their questions on the bank’s management failures to understand the negative impact of rising interest rates on their balance sheet.
“When you claim to have taken risk management seriously, I find that hard to believe,” remarked Senator Tim Scott, the ranking Republican on the committee.
Senator John Kennedy, a Republican from Louisiana, described the bank’s interest rate management as “profoundly foolish.”
The outrage over CEO pay mirrors that of approximately 15 years ago during the 2008 financial crisis, which resulted in taxpayer-funded bailouts of central banks. CEOs and high-level bankers still received substantial pay and bonuses despite the bailouts, particularly at the nearly failed insurance conglomerate American International Group.
“The recent bank failures once again demonstrate that excessive banker compensation lies at the heart of banks taking excessive risks, acting irresponsibly if not recklessly, and self-destructing,” stated Dennis Kelleher, co-founder of Better Markets, an organization focused on financial industry reform established after the Great Recession.
The clawback of CEO pay has gained bipartisan attention, despite the deep divisions between the two political parties.
Four senators, two Democrats and two Republicans, have introduced legislation granting the Federal Deposit Insurance Corporation the authority to reclaim any payments received by executives during the five years preceding a bank’s failure.
The bill, sponsored by Elizabeth Warren (D-MA), Josh Hawley (R-MO), Catherine Cortez Masto (D-NV), and Mike Braun (R-IN), has not received specific endorsement from the White House. However, the administration has called on Congress to pass laws reforming how bank CEOs are compensated in the event of a failure.
During the hearing, Senator Warren asked both Becker and the president of Signature Bank if they planned to return any of their compensation from recent years to help cover
the estimated $22.5 billion in losses incurred by the FDIC due to the banks’ failures. The president of Signature Bank replied negatively, while Becker did not provide a direct answer. In response, Warren interpreted the responses as a refusal.
Warren described the replies as “completely wrong” and warned, “If we don’t fix this, every CEO of these multibillion-dollar banks will continue to take on excessive risks and cause more bank failures, and everyone else will have to pay for it.”
CEOs at major companies predominantly receive their annual pay in the form of company stock. Consequently, CEOs and other insiders gain significantly if the company’s stock price rises. Shareholders generally support this approach, as it aligns the CEO’s interests with theirs.
However, executives also benefit significantly from selling their stock before the share price plummets.
Since 2000, the Securities and Exchange Commission (SEC) has provided CEOs and other corporate insiders with a defence against allegations of insider trading, wherein they buy or sell stock based on non-public information. The defence mechanism, known as the 10b5-1 rule, allows insiders to establish written plans for future stock trades. The intention was to enable insiders to trade without access to material non-public information.
Over the years, concerns have grown regarding insiders exploiting loopholes in the 10b5-1 rule, in December, the SEC announced amendments to closing these loopholes.
In March, the Justice Department pursued its first insider trading prosecution solely based on using 10b5-1 trading plans. The CEO of a healthcare company in California was charged with securities fraud for allegedly evading losses exceeding $12.5 million by executing two 10b5-1 trading plans while being aware that the company’s largest customer might terminate its contract.
The SEC also charged the CEO with insider trading for avoiding a 44% decline in the company’s stock price when the termination of the contract was announced.
The Senate hearing brought severe concerns about the banking industry’s executive pay and risk management. The failed banks’ CEOs faced scrutiny for their lucrative compensation packages and the timing of their stock sales before the collapse. Lawmakers from both parties expressed their determination to address these issues and hold executives accountable for their actions. As discussions continue, the focus on reforming CEO compensation and strengthening risk management practices will be crucial in ensuring the long-term stability and resilience of the financial sector.
