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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
sunbright
December 24, 2012 at 7:14 am

I received a message from Suntrust Bank the other day that they were charging me $100.00 for a Visa credit card I got from them about 2 months ago. Has any one heard of this from any other banks?
Thanks

David S.
December 24, 2012 at 1:28 am

The exact same laws that the common citizen would be subject to should be applied to these CEO's, if not more severe. Fine them first (civil court) then throw them in jail (criminal court). If they ever do get out of jail, they should NEVER be allowed to be a CEO of a company ever again - no exceptions (similar to a lawyer getting disbarred).

John M
December 24, 2012 at 12:17 am

Forget fines and lawsuits. It's time to treat them like the criminals they are. Throw them in jail. That's what they would do to us.

Earl Reilly
December 20, 2012 at 7:55 pm

I heard that at one time bankers in Switzerland faced jail time if their bank failed. I do not know if this is true, but it works for me here in the good old USA, the land of opportunity and crooks.

Nora
December 20, 2012 at 3:21 pm

The single focus of limited prosecutions undertaken by regulatory agencies has primarily been recovering some of the taxpayer's losses, rather than getting at the truth, or jailing the guilty as a deterrent. It appeases us somewhat, they believe, so the charade can continue. It does nothing to alter the basic relationship between government and banks which is clearly symbiotic in nature, and truly the underlying problem. If we want financial tyranny to continue, we should rely on the FDIC to maintain it through slap on the wrist actions like this. For real change to occur, we have to sever the umbilical cord between banks and our government, as they need each other to oppress us, and above all else our continued consent.

Tony
December 20, 2012 at 2:34 pm

This is an example of the Savings & Loan tragedy we had many years ago. Prosecution of these negligent executives should prevent future taxpayer bailouts. In my area,one of the defendants of the FDIC lawsuit became the regional director of a newly opened Northeastern based bank locally. Amazing how one is bankrupt today yet back in the same profession the next day. We need to strengthen the statutes related to the entire banking industry. Greed is the primary cause of our bank failures, inclusive of the appraisers who set inflated prices based on market comparables that they know should not be used in the arrival of a certain value of an asset.Appraisers should also be listed as defendants in the FDIC suits.

daren
December 20, 2012 at 1:44 pm

Yes, I think it's about time that these corporate high rollers are held accountable. Remember Enron? I know it's the american way to do business like your a pirate on the high seas, but when is it enough? Most of the problems we have is due to greed in the banking industry. Risky loans, signing off that the loans were a good investment. A lot of people got rich, many more lost everything. When we do hold the banks, and their management accountable they threaten to raise credit worthiness, and try to make the economy suffer more than it needs to. Then greed of the banks got us into this mess, they stall growth because they are upset with not being to do as they please. It is almost extortion

wwells
December 20, 2012 at 1:42 pm

Yes hit them as hard as we can everytime @ the same time if the FDIC can move aginst them through the legal system, the average citzen should also be able to persue them. Once the feds prove them guilty that opens the flood gates.

mhensel
December 20, 2012 at 1:07 pm

The only way to fix the system is to prosecute those that stole from the taxpayers, thus discouraging similar schemes from being perpetrated in the future. Heavy fines, even jail time should be a standard consequence.

jtemple
December 20, 2012 at 11:59 am

If they are found guilty, they should be locked up, stripped of every dollar they cost the FDIC, all of their assests should be sold, and they should be forced to relinquish future earnigs until their debt to the FDIC is paid in full. Nail them, get every penny back they stole and make it hurt. Fix what you break.