In the aftermath of the financial crisis, we’ve come to learn the facts of the top bank executive’s luxurious life, with numerous private estates and apartments, private jets, billion dollar bonuses and gold-plated waste bins. Sounds like a dream job, don’t it? But what if you were to be held personal accountable if your bank failed? If you were to be sued by the government, dragged through court and charged with a billion dollar fine? Even if you did nothing wrong? Would you still want the job?
“The process went on 20 years ago and is happening again now.”
It seems like there will be an openings for some experienced managers in the financial industry over the next months. The Federal Deposit Insurance Corp, (FDIC), has authorized lawsuits against more than 50 officers and directors of failed banks and 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, Bloomberg Reports.
FDIC, which has closed down 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 agency’s acting general counsel, says in an interview.
“We’re ready to go,” Osterman states.
“We could walk into court tomorrow and file the lawsuits.”
Want Money Back
The FDIC has so far brought only one case against financial officers or directors tied to the 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 still ongoing, Osterman says.
The usual practice is, if FDIC investigators finds something suspicious early in the process, they send letters to the bank executives alerting them that a law suit may be coming to recoup a portion of the losses.
15 bank directors and officers at BankUnited recivied such a letter on November 5th last year.
According to the letter, they’ve “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,” and that they had “breached their fiduciary duties.”
However, the FDIC says they only file suits “where they are believed to be sound on the merits and likely to be cost-effective.”
Meaning; there’s a lot of room for interpretation.
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 says the goal is to reach as many settlements as possible.
The Cost Effectives
Obviously there’s been some purely criminal activity going on in the heat of the boom, but the main issue have turned into a question if these persons are able to refund the FDIC with a couple of hundred million dollar, or not.
The severity of the mismanagement is subsidiary.
The former IndyMac employees, accused of granting loans that were unlikely to be repaid, denies any wrongdoing.
Attorney Lawrence Kaplan is representing two of the IndyMac defendants. He says 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, who’s a lawyer at Paul Hastings Janofsky & Walker LLP.
“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 says.
So, Who Want A Job?
I guess that wasn’t mentioned in any of the IndyMac executives’ job contracts – an “impossible standard of care,” I mean.
But then again, if it was, we probably wouldn’t have got the amusements of John Thain, Dick Fuld, Vikram Pandit, Lloyd Blankfein, Jamie Dimon, among others.
Wonder if any of the above ever thought:
“Holy shit! If something goes wrong, I will be held personal responsible and sued by the authorities for almost everything I owe…”
Well, personally I doubt any of them hardly knew what a CDO was until they blew up in their faces two years ago.
You cold argue that they should have known.
In that case, they also should have know about the “impossible standard of care.”
It’s not something new.
In fact, the same happened to the bank executives after the so-called savings and loan crisis in the late 80’s/early 90’s.
A 20 Year Process
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, says.
“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.”
According to FDIC, 2010 will be the peak year for bank 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 by the end of the second quarter, according to Bloomberg.
Introducing: The B-Team
One particular interesting question arise from this questionable case:
What kind of people are willing to take on the leadership of a major financial institution knowing that they’re signing up for job that requires an “impossible standard of care”?
In my view they’re either overconfident, reckless or stupid. (Perhaps all three).
And that’s not the people we need; not running US banks, nor any other important business.
But that’s what we’ll get with a practice like this.
As the resent crisis seems to be an evidence of.
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