Analysis: What caused the failure of regional banks? Senators blame excessive CEO salaries

New York (CNN) US senators have hit the recently busted former executives of Silicon Valley Bank and Signature Bank over their salaries, stock sales and bonus payments as the financial institutions struggle to stay afloat.

The two-and-a-half-hour hearing by the Senate Banking Committee was intended to hold the leadership accountable for the mismanagement that led to bank failures and the regional banking crisis, but much of the focus was focused on CEO compensation.

High salaries, imposed by legislators on both sides of the aisle, made executives greedy. Executives prioritized profit margins and share prices over the fundamental health of their banks, leading to a sector collapse that rippled through the economy.

What is happening: SEC filings show former SVB CEO Greg Baker sold more than $2 million in SVB stock in late February and $1.1 million in stock in January, before the bank failed.

At the time of its collapse, SVB had 31 unresolved supervisory warnings. However, Baker received a $1.5 million bonus as part of his 2022 compensation package which had a total value of approximately $10 million.

Joseph DiPaolo, former CEO of Signature Bank, received about $8.6 million.

“You were paying bonuses until literally hours before regulators confiscated your assets,” Sen. Sherrod Brown, chairman of the Senate Banking Committee, told Baker in Tuesday’s hearing.

“Workers face the consequences, and CEOs ride off into the sunset,” Brown said. “Only in corporate boardrooms can you get your business off the ground, take the whole economy with you and move forward. We can’t let that happen again.”

Baker said his cash and stock bonuses were “predetermined” and that he was unaware when they would be paid.

Sen. Bob Menendez said regulators identified key weaknesses in the SVB’s incentive program, which he claimed encouraged “excessive risk-taking to maximize short-term financial metrics.”

“In other words, the incentive structure that you and your colleagues have put in place rewards rapid growth and profitability, while constraining efforts to manage increased risk to the company… your organization’s compensation structure has clearly not been compatible with the long-term interests of shareholders and term deposit holders.”

Republicans also made their way into CEO salaries. Throughout the hearing, they are He criticized banks for incentivizing them to take risks and for failing to hedge their excess securities. Around the time of the failure of SVB, more than 85% of the bank’s share capital was invested in securities with a maturity of more than 5 years.

“If you bought those hedges [against Treasuries purchased by the bank], would lower your earnings, wouldn’t it? If you were to make less money, that would affect your bonus, right? Senator John F. Kennedy added.

Senator Tim Scott added that the banks’ management teams seemed more “focused on the pursuit of profitability than on stability.” He noted that this “sounds like greed”.

What then: The Federal Deposit Insurance Corporation and the Federal Reserve both have the authority to take some of that Reimbursement and punishment of bank executives. Brown said he is working on a bill to make it easier to do so.

Senator Elizabeth Warren said she was working with Brown on the regulation.

“Currently, the law says that people like Mr. Baker and Mr [Scott] tea [former chairman of Signature Bank] They can come to Washington, they can push for weaker banking regulations, they can risk their banks, they can pay themselves tens of millions of dollars. And when the banks are blown, Mr. Baker and Mr. Shay get all the money. This is just plain wrong.”

ChatGPT goes to Washington

OpenAI CEO Sam Altman also made his way to the Senate on Tuesday. There, he urged lawmakers to regulate AI, reports my colleague Brian Fung.

He said this new AI technology is a huge and potential “printing moment,” but added that it would also require some legal safeguards.

“We believe that regulatory intervention by governments will be critical to mitigate the risks of increasingly powerful models,” Altman said in his opening remarks to a Senate Judiciary Subcommittee.

Altman’s emergence follows the wild success of his company’s chatbot tool ChatGPT, which has renewed the arms race over artificial intelligence and raised concerns among some lawmakers about the risks posed by the technology.

A growing list of tech companies have deployed new AI tools in recent months, with the potential to change the way we work, shop, and interact with each other. But these same tools have also drawn criticism from some of the biggest names in tech for the potential to disrupt millions of jobs, spread misinformation and perpetuate bias.

In his remarks Tuesday, Altman said the potential for AI to be used to manipulate voters and target disinformation is among the “areas of my greatest concern,” especially because we’re going into next year’s election and these models are improving. “

Altman suggested that the US government create a licensing regime to regulate and monitor companies operating with powerful AI tools. Altman said that this “combination of licensing and testing requirements” can be applied to “the development and release of AI models above the capability threshold.”

Altmann also warned that artificial intelligence could eliminate jobs.

“There will be an impact on jobs,” Altman told the Senate. “We’re trying to be very clear about that, and I think it’s going to require a partnership between industry and government, but often taken by government, to figure out how we want to mitigate that. But I’m very optimistic about how great the jobs future will be.”

Get ready for more Tesla cars

Tesla (TSLA) It will start publicly advertising its cars for the first time in its short history. To date, the company has built its position through earned press and word of mouth.

CEO Elon Musk announced the change Tuesday night at the company’s annual meeting in Austin, Texas.

“We’ll try a little publicity, and see how it goes,” Musk said.

The crowd was very positive about Musk and Tesla, according to my colleague Chris Isidore. “I didn’t realize people wanted it that much,” Musk said of the announcement later in the meeting.

The resolution is a complete turnaround. The billionaire CEO has argued for years that there is no need for the company to advertise because demand for vehicles outstrips supply without any additional promotion.

The only thing that has changed for Tesla is the greater competition from existing automakers, who allocate a large portion of their advertising budget to electric vehicles, even to cars not yet available for sale.

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