Industry experts and others following the FDIC’s litigation say the agency faces more challenges in bringing cases than it did during the savings and loan crisis of the 1980s. Back then, the FDIC filed lawsuits or reached settlements in roughly 24 percent of the more than 2,000 failures.
“Unlike the last crisis where there was clearly recklessness that directors should have been held liable for, this time it’s more poor judgment or inability to manage risk,” said Christopher Cole, senior regulatory counsel for the Independent Community Bankers of America, a trade group.
There was more blatant fraud involved in a lot of the bank failures during the thrift crisis, he said, making the path toward settlement a little easier. This time around, many directors say their banks were victims of the deteriorating economic conditions, not negligence.
They are also pointing fingers at bank examiners, including the FDIC, for endorsing their business plans in the run-up to the recession. Regulators considered the majority of the banks that collapsed healthy within two years of their demise, said David Baris, a partner at Buckley Sandler and the executive director of the American Association of Bank Directors, a trade group.
“It strikes me as very odd that the FDIC sues directors for things the examiners had reviewed thoroughly before the bank failed,” he said. “If these professionally trained examiners looked at the same loans as the directors and didn’t say, ‘You’re totally screwed up,’ that suggests that maybe it wasn’t so obvious.”
However, agency attorney Osterman said, “while regulators examine institutions for safety and soundness, the director is responsible for this on a day-to-day basis.”
In the lead-up to the crisis, many community banks relied on their boards to give the final okay on a number of loans, a move that some observers say placed directors in peril. Baris advises banks to keep those decisions in the hands of credit officers but says directors usually give their approval after the loans have been vetted.Baris said he is concerned that in its aggressive pursuit of former bank directors, the FDIC will inevitably discourage people from serving on bank boards.
Executives of community banks have borne the brunt of these lawsuits because of the sheer number of small bank failures. Community banks were more often felled by heavy concentrations in real estate, whereas risky bets on exotic derivatives and toxic pools of mortgages crippled big banks.
“When you sue directors like this, it could have a chilling effect on directors who remain in the industry in how they decide to make loans,” Baris said.
The FDIC has been judicious in filing lawsuits against former bank leaders, said banking attorney Ron Glancz of Venable.
Its role as a bank receiver sets the FDIC apart from other banking regulators, many of which have come under fire for failing to hold executives responsible for their involvement in the financial crisis
. Besides, banking attorneys say, it can be easier to pinpoint individual misconduct when an institution collapses.
“There’s a balance. They don’t sue in every case where there is a failure. They look for cases where there’s serious wrongdoing or breach of fiduciary duty or just neglect,” Glancz said.