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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
‘Well, this one’s doing it, so how can I not do it, if I don’t do it, then the people are go-
ing to leave my place and go someplace else.’” Managing risk “became less of an im-
portant function in a broad base of companies, I would guess.”
And regulatory entities, one source of checks on excessive risk taking, had chal-
lenges recruiting financial experts who could otherwise work in the private sector.
Lord Adair Turner, chairman of the U.K. Financial Services Authority, told the Com-
mission, “It’s not easy. This is like a continual process of, you know, high-skilled
people versus high-skilled people, and the poachers are better paid than the game-
keepers.” Bernanke said the same at an FCIC hearing: “It’s just simply never going to
be the case that the government can pay what Wall Street can pay.”
Tying compensation to earnings also, in some cases, created the temptation to
manipulate the numbers. Former Fannie Mae regulator Armando Falcon Jr. told the
FCIC, “Fannie began the last decade with an ambitious goal—double earnings in
years to . [per share]. A large part of the executives’ compensation was tied to
meeting that goal.” Achieving it brought CEO Franklin Raines million of his
million pay from to . However, Falcon said, the goal “turned out to be un-
achievable without breaking rules and hiding risks. Fannie and Freddie executives
worked hard to persuade investors that mortgage-related assets were a riskless invest-
ment, while at the same time covering up the volatility and risks of their own mort-
gage portfolios and balance sheets.” Fannie’s estimate of how many mortgage holders
would pay off was off by million at year-end , which meant no bonuses. So
Fannie counted only half the million on its books, enabling Raines and other
executives to meet the earnings target and receive of their bonuses.
Compensation structures were skewed all along the mortgage securitization
chain, from people who originated mortgages to people on Wall Street who packaged
them into securities. Regarding mortgage brokers, often the first link in the process,
FDIC Chairman Sheila Bair told the FCIC that their “standard compensation prac-
tice . . . was based on the volume of loans originated rather than the performance and
quality of the loans made.” She concluded, “The crisis has shown that most financial-
institution compensation systems were not properly linked to risk management. For-
mula-driven compensation allows high short-term profits to be translated into
generous bonus payments, without regard to any longer-term risks.” SEC Chairman
Mary Schapiro told the FCIC, “Many major financial institutions created asymmetric
compensation packages that paid employees enormous sums for short-term success,
even if these same decisions result in significant long-term losses or failure for in-
vestors and taxpayers.”
FINANCIAL SECTOR GROWTH:
“I THINK WE OVERDID FINANCE VERSUS THE REAL ECONOMY”
For about two decades, beginning in the early s, the financial sector grew faster
than the rest of the economy—rising from about of gross domestic product
(GDP) to about in the early st century. In , financial sector profits were
about of corporate profits. In , they hit a high of but fell back to 
