Tuesday, September 17, 2013

FDIC Goes After Directors of Failed Banks

By Tim Dulaney, PhD, FRM and Tim Husson, PhD

In recent months, the Federal Deposit Insurance Corporation (FDIC) has been filing a significant number of lawsuits against bank executives to recoup losses stemming from the onslaught of bank failures following the financial crisis.  The annual number of bank failures reached a peak at 157 in 2010 and has declined steadily since.

Source: FDIC Failed Bank List
These bank failures were a significant test of the FDIC system.  The fund backing the FDIC guarantee has been depleted by nearly $90 billion over the past five years as the agency has worked to deal with these bank failures.   According to a recent report by Cornerstone Research, damage claims by the FDIC in director and officer lawsuits are typically in the 5%-25% range (see page 9).

According to Law360, the FDIC's recent action is likely due to the three-year statute of limitations imposed on litigation concerning officer and director wrong-doing.  The investigation of a bank failure typically takes the FDIC roughly 18 months, so the bank failures that occurred at the peak are now commencing litigation.  Law360 is also reporting that the FDIC was emboldened by a $169 million judgment against former executives of IndyMac, who were found to have approved risky commercial loans which led to that institution's eventual FDIC takeover.  The Cornerstone report notes that:
To date, the FDIC has claimed damages of $3.6 billion in the 69 lawsuits that have specified a damages amount. The average damages amount has been $53 million, with a median value of $27 million.
The FDIC's increased pressure on individuals mirror's the SEC's recent emphasis on prosecuting individuals as well as financial institutions.  This new regulatory approach may help prevent impropriety at the executive level by increasing the personal consequences for the key decision makers.  It will be interesting to see how this approach will be received by the courts.

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