The Federal Deposit Insurance Corp. has authorized lawsuits against more than 50 officers and directors of failed banks as the agency aims to recoup more than $1 billion in losses stemming from the credit crisis.
The lawsuits were authorized during closed sessions of the FDIC board and haven’t been made public. The agency, which has shuttered 294 lenders since the start of 2008, has held off court action while conducting settlement talks with executives whose actions may have led to bank collapses, Richard Osterman, the FDIC’s acting general counsel, said in an interview.
“We’re ready to go,” Osterman said. “We could walk into court tomorrow and file the lawsuits.”
The FDIC, which reviews losses for every bank failure, has brought only one case against officers or directors tied to recent collapses -- a suit filed in July seeking $300 million in damages from four executives of IndyMac Bancorp Inc.
When a bank fails, the agency’s investigators take about 18 months to complete their autopsies, meaning most of the probes stemming from the financial crisis are ongoing, Osterman said.
If FDIC investigators determine litigation is possible early in their review process, they send letters to officers and directors alerting them that a suit may be coming to recoup a portion of the losses to the agency’s insurance fund.
BankUnited
One such letter was attached to a Nov. 24 motion filed by the FDIC in the bankruptcy case of Florida’s BankUnited Corp. The Nov. 5 letter, addressed to 15 bank directors and officers, said that BankUnited “blindly made loans to borrowers who, for the most part, were un-creditworthy, creating an unduly high risk of inevitable failure when the housing market began to decline.” The executives “breached their fiduciary duties,” the letter said.
As federal receiver for failed banks, the FDIC uses its deposit insurance fund to backstop the cost of the collapses, selling the bank assets to recoup any lost money. The agency has three years from the date of the failure to file suits seeking compensation for a civil wrong.
The FDIC “brings suits only where they are believed to be sound on the merits and likely to be cost-effective,” according to an agency policy statement that dates from the savings-and- loan crisis of the 1980s. That requires considerations of whether an individual, if sued, has the means to pay or an insurance policy to cover all or part of the claim.
“It doesn’t make sense to file a lawsuit if at the end of the day you have a low chance of recovery,” Osterman said.
$1 Billion
The recently authorized lawsuits, if filed by the agency and not settled, would claim damages of more than $1 billion, according to FDIC spokesman David Barr. Osterman said the goal is to reach as many settlements as possible.
“It’s in both our interest and theirs to try and settle this matter before it gets into the court and we get into expensive litigation,” he said.
If the savings-and-loan crisis is any guide, more lawsuits are coming. During that period, the FDIC sued executives from more than 24 percent of the 1,813 lenders that failed.
“The process went on 20 years ago and is happening again now,” Thomas Vartanian, a partner at law firm Dechert LLP in Washington, said in an interview. “This is the way it’s going to go over the next few years as they catch up with doing these investigations and doing claims.”
FDIC Chairman Sheila Bair has said 2010 will be the peak year for failures, and the agency’s list of so-called problem lenders suggests banks will keep collapsing at an accelerated rate in coming months. The confidential list had 829 banks with $403 billion in assets at the end of the second quarter.
Compensation Structure
In the IndyMac case, executives are accused of granting loans that were unlikely to be repaid while seeking to benefit from the bank’s compensation structure. The former employees have denied any wrongdoing.
Lawrence Kaplan, an attorney whose firm is representing two of the IndyMac defendants, said the paucity of cases filed to date shows the difficulty of assigning blame for a crisis that took down so many financial companies.
“The current crisis was caused by economic conditions that few, if any experts, including leading federal officials, saw coming,” said Kaplan, a lawyer at Paul Hastings Janofsky & Walker LLP in Washington.
“As a result, claims that directors and officers of many failed banks engaged in negligence lack credibility as such claims attempt to hold those directors and officers to an impossible standard of care,” Kaplan said.
To contact the reporter on this story: Phil Mattingly in Washington atpmattingly@bloomberg.net.
To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net
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