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?
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