For Bankers of Failed Financial Institutions… the Pain Is Not Over Yet
The Federal Deposit Insurance Corp. (â€śFDICâ€ť) has started laying a foundation for lawsuits against the senior executives and directors that the agency claims were responsible for their bank failing.Â Apparently, the FDIC has already sent out hundreds of demand letters that warn officers and directors about the possibility of civil charges, and announce formal investigations into individuals and subpoenaed directors’ financial statements, among other documents.
Shiela!Â There you are!Â Where the heck have you been girl?Â Last I heard, Hank Paulson sent you for coffee, and youâ€™ve been standing in Geithnerâ€™s shadow ever since.Â Itâ€™s about damn time, girl!
FDIC says they want to assess accountability for the multitude of bank failures and perhaps take shot at replenishing the Deposit Insurance Fund while theyâ€™re at it, and the letters set the stage for civil lawsuits and monetary settlements, if appropriate.Â Some industry people say the FDIC is only targeting the bankers with the most money, including those with insurance policies that will pay damages, but I couldnâ€™t figure out for sure if they meant that doing so was a bad thing.Â Because as far as Iâ€™m concerned, thatâ€™s exactly what the FDIC should doâ€¦ target away, Ms. Bair.
One of those lawyers that everyone wishes they could toss into the octagon, David Baris, a partner at law firm, Buckley Sandler LLP and the executive director of the American Association of Bank Directors said:
“If there’s insurance and there’s money to go after, I believe that the inclination of the FDIC is to try to go after it, whether there is a good case or not.”
Dave, Dave, Daveâ€¦ why are you such a spineless sycophant?Â You believe thatâ€™s the FDICâ€™s inclination?Â Who gives a ratâ€™s behind what you believe, Dave?Â I believe that youâ€™re inclination is to shamelessly defend bankers who bankrupted their banks and took home generational wealth as a result, even before you know any of the facts of the case.Â How close am I, Dave?Â Shut up, Dave.
Besides, officials say such accusations are nonsense, explaining that no one receives a demand letter without cause.
FDIC Deputy General Counsel Richard Osterman was recently quoted as saying:
“Everybody thinks that they’re being pursued because they have money or there is some other reason, but in reviewing the claims, we’re looking at whether we have a meritorious and a cost-effective claim. How far we go will depend on the facts and circumstances in each case. We send in investigators and attorneys to look at the facts. If they find on the face of it there’s nothing there, then we close out the investigation.”
That sounds damn reasonable, Dave, my morally bankrupt friend.
Typically the FDIC begins gathering information that could be useful in a suit the day it takes over a failed bank.Â If an insurance policy exists, and they suspect officers or directors were responsible for the failure, the agency issues a demand letter. The letters outline the allegations board members or officers could face.Â The strongly worded letters, required by insurance carriers as the first step in the process, describe potential damages, and must be issued before a policy expires.
A March 26th letter to board members of BankFirst in Sioux Falls, S.D., for example, which failed in July 2009, is said to have listed everything from poor risk management to violating loan approval policies, explaining that if the agency decides to pursue the case, a director or officer may settle or face civil litigation.Â The letter then demanded payment of over $77 million for “Director and Officer Wrongful Acts.”
Sounds pretty straight forward, right Dave?Â I mean, you know those guys in Sioux Falls are guilty of poor risk management, because they had to be taken over by the FDIC.Â I mean, how hard could it be to avoid risk running a bank in Sioux Falls, South Dakota, Dave?Â Youâ€™d have to violate something to fall apart in Sioux Falls, I would think.Â I mean, how much competition could there possibly be in Sioux Falls?
I canâ€™t believe Iâ€™m saying this, but now Iâ€™m kind of happy that FDIC is broke, because theyâ€™re obviously motivated to recoup funds where possible, and that means no free passes for bankers who captained their ships directly into the rocks, but failed to go down with them.Â For example, on July 2nd, the FDIC filed a $300 million lawsuit in Federal Court against four former executives from IndyMacâ€™s homebuilding division, and thatâ€™s got to put a spring in someoneâ€™s step all by itself.
The FDIC can also issue a “Notice of Investigation,” when a formal probe into specific individuals is the next step, and documents related to an officer’s or director’s personal wealth may also be subpoenaed.Â And, I didnâ€™t know this, but the FDIC apparently has a three-year statute of limitations from the date of a bankâ€™s failure to sue management and board members, so that could certainly explain why these sorts of actions have seemed slow in coming.
And there are challenges when going after officers and directors, however, and theyâ€™re not insignificant.Â Different state laws impose different standards as far as proving responsibility for wrongdoing goes, and not surprisingly, insurance companies are increasingly not covering claims for civil damages arising from a failure of bank policies.Â A former FDIC Chief Financial Officer, William Longbrake, says that insurance companies are seeing the number of banks closing their doors and inserting clauses to prevent the FDIC from going after an insurance payout.
FDIC officials say that although they will send demand letters when negligence is suspected, in order to set up for an insurance claim, they are unlikely to go after executives that are unable to pay damages, which is fine by me, as long as they go after the guys that got away with zillions.
Apparently, in the banking crises of the 1980s and 1990s, the FDIC brought or settled professional liability cases in about 30% of 2,000 failures.Â Now that more than 250 banks have failed since 2008, itâ€™ll be interesting to see how aggressive the FDIC is this time around, especially when you consider that some number of banks have been failing on a weekly basis making the prospect list longer by the day.
Honestly, I had given up on Shiela Bair.Â She was the first to advocate loan modifications for homeowners, which I thought was good coming out of the last year of the Bush Administration, but then she seemed to fit really nicely into Tim Geithnerâ€™s pocket, and that was the end of that.
Okay, so I guess Shiela Bair has another chance with me.Â Iâ€™m willing to believeâ€¦ not that my government will do things right, but that theyâ€™ll go after ill-gotten booty when itâ€™s in their own best interests to do so.Â But I suppose, weâ€™ll just have to see.