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FDIC lawsuits go after bank execs

By Claes Bell, CFA · Bankrate.com
Thursday, December 20, 2012
Posted: 7 am ET

If you've ever felt a twinge of resentment toward bankers who land on their feet financially even as their institutions collapse, you'll probably be happy to know the Federal Deposit Insurance Corp. has started cracking down on management at failed banks this year.

According to a new study by Cornerstone Research, the FDIC filed more lawsuits against bank directors and officers this year than in 2010 and 2011 combined. In fact, in the fourth quarter of 2012 alone, the agency filed nine separate lawsuits, around four times more than during all of 2010.

For instance, remember IndyMac Bank? Its failure in 2008 cost the FDIC's Deposit Insurance Fund $12 billion, but the agency may be set to recover some of that, thanks to a big judgment against former IndyMac executives. From Jeff Horwitz at American Banker:

The verdict in U.S. District Court for the Central District of California declared three former IndyMac execs culpable for more than $168 million in loan losses. The decision may prove pivotal to the FDIC in recouping a small portion of the more than $12 billion of losses it suffered in the wake of the lender's bankruptcy. The men's liability for the bank's mistakes allows the FDIC to pursue insurance claims involving policies protecting them against findings of negligence.

The case was litigated on behalf of the FDIC by Nossaman LLP, a Los Angeles law firm. It is the first suit to go to trial among 39 that the regulator has brought against the directors of failed banks.

FDIC attorneys claimed during the trial that the worst of the IndyMac Homebuilder Division's excesses began in 2004. They argued that was when the three defendants -- division Chief Executive Scott Van Dellen, Chief Lending Officer Richard Koon and Chief Credit Officer Kenneth Shellem -- concluded that lender competition for blue-chip residential construction loans was driving down margins. The three executives responded by shifting their division's focus to targeting "smaller, less price competitive builders," the FDIC said.

Meanwhile, the executives failed to put in place the controls required to manage this business, the regulator said.

They've probably ruined a lot of executives' holidays, but the suits may end up benefiting consumers.

Despite being cushioned from the full blow of a bank failure by FDIC insurance, consumers often pay the price when banks fail by getting less favorable rates and higher fees than they had at their old bank. More bank failures also mean fewer choices for consumers in local markets. And of course, bank failures put taxpayers at risk because the FDIC is backed by the full faith and credit of the U.S. government, which ultimately means we would all be on the hook in the event of a truly catastrophic run of bank failures.

While these lawsuits likely will recoup only a small percentage of the FDIC's losses of the past few years, they might well be worth the trouble if going after the personal fortunes of executives who play key roles in a bank's collapse can help curtail risky behavior in the industry. Still, it also will likely discourage banks from loosening their purse strings when it comes to consumer lending, too.

What do you think? Is suing executives at failed banks a good idea? Do you think the threat of lawsuits will keep bankers on the straight and narrow?

Follow me on Twitter: @ClaesBell.

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24 Comments
Ernie T
December 20, 2012 at 11:55 am

If it was one of us the common person we would put in jail with out any question because we could not afford a crooked high price attorney

m8d
December 20, 2012 at 11:41 am

Just need to do what they did to bankers in Iran execute them.

m8d
December 20, 2012 at 11:40 am

Just need to what they did to bankers in Iran execute them.

Don Wicke
December 20, 2012 at 11:40 am

To many bank and financial executives got away without penalty after the financial crisis. They still got their rewards and the middle/lower classes have to suffer the burden of financial loss. The exec's lobby for deregulation, and then line their own pockets from irresponsible risk taking. There should be more aggressive legal prosecution against the executives that ruined our economy. They all need to know that doing a bad job deserves punishment and not reward.

joe
December 20, 2012 at 11:35 am

The 2 big 2 fail financial terrorist bankster CEO'S
JP Morgan-Chase, Suntrust Bank, Bank of America, Wells-Fargo take taxpayer funded TARP bail-outs to prevent bankruptcy yet are allow to FRAUDCLOSE here in Florida @ thru-out the USA @ will thru our court systems.

In Florida we now have a ROCKET-DOCKET where approx. 375,000 pending FRAUDCLOSURE cases are hurried thru 2 non-jury trial(NJ)& ruled illegally in favor of non LEGAL STANDING, robo-signing/testifying, Non-existent Destroyed original notes-mortgage plaintiffs. REPUBLICANS AG Bondi, Gov. Scott & majority legislature must be removed their loyalty is 2 their corporate masters, NOT the citizens that pay their hefty salaries & elect them.

Banksters never intended to lend w TARP funds as required by our blank check govt (bush & obama) still don't today its all a HUGE MYTH, unless u have 20-25% down, 700 FICO, secure job, feel like brown nosing the banksters & wait 3-4 months, STILL you will probably NOT close.

Any 100% pro consumer attorney out there looking for a lead-plaintiff this style contingency fee case???

BudinPA
December 20, 2012 at 11:29 am

The greatest deterrent to crime is the certainty of punishment. Put them in JAIL!!!

dizzy
December 20, 2012 at 11:28 am

If it was turned around the banks and the executives would go after anyone of us and not think twice about it..
They have a responsibility to the customers and the people.
They are not above the law....

mary lou mclaughlin
December 20, 2012 at 11:11 am

NO ONE is too big for justice and NO ONE should be rewarded for their greed, lies, and acting like a traitor working against the good people of the world by dealing with Iran and other leades of brutal and unjust nations....traitors are put in jail!

allen debus
December 20, 2012 at 11:06 am

YEAH!!!! Go after those fatcats & teach them a lesson!

diana cato
December 20, 2012 at 11:00 am

Its about time! Finally, being held accountable for their actions. They get paid the big bucks for shouldering a lot of responsibility. NO ONE should get paid for making bad choices that result in financial ruins for those of us that have trusted them with our financial well being.