Law firms took in more than half a billion dollars in fees from the government last year to deal with the mess left by failed banks and savings and loans, the agencies overseeing the cleanup said yesterday.
Legal costs for the Federal Deposit Insurance Corp. and the Resolution Trust Corp. were about $733 million, with $615 million going to outside law firms and $118 million to legal services provided by lawyers at the agencies themselves, they said.
"This is the biggest volume of legal work that anyone has ever dealt with in history," said FDIC spokesman Alan Whitney. "It's going to be expensive."
The FDIC had been predicting for the last several months that outside legal fees would be in the range of $500 million, Whitney said. He added that he was not surprised by the numbers considering the magnitude of the legal work needed in the cleanup, which includes more than 100,000 pending lawsuits.
Others who have been watching the fees rise expressed surprise at the costs.
"I think it comes out of the blue," said Theodore Jacobs, chief counsel for the House subcommittee on commerce, consumer and monetary affairs. "All of the predictions were for much less. Not $615 million. That's an extraordinary amount of money."
The FDIC, the banking regulatory agency that also oversees the RTC in its job of disposing of the assets of failed thrifts, argues that the cost has been worth it. The agency said that it recoved an estimated $21.1 billion for the two agencies through legal methods, such as suing officers and directors of failed institutions, clearing titles to sell real estate properties, drawing up contracts and defending the government in cases where thrift owners and directors have sued them. That's a recovery of $29 for every $1 spent, the FDIC said.
But Jacobs contends the rate of recovery could be higher if more of the legal effort were aimed at pursuing lawsuits against former officers and directors of failed thrifts.
"Some of these people are very high-profile individuals ... There is some reluctance to hit these people. We want to get to the bottom of that," Jacobs said.
The FDIC contends that it has been aggressive, spending $80 million last year on outside legal counsel to sue former banking executives and directors, recovering $373 million.
Some lawyers have complained that the work for the agencies is given out mostly to a few big law firms, even though more than 1,000 firms have applied to work for the FDIC.
Chicago-based Hopkins & Sutter collected more from the FDIC and the RTC than any other firm in the country with fees of nearly $17.5 million last year. The firm has worked for the FDIC for 25 years and has a large office in Texas, where there have been many bank failures. San Francisco-based Graham & James was second with more than $9 million in fees.
Because of complaints that the same firms get all the work and that smaller firms could sometimes do the work more cheaply, the FDIC yesterday said it has adopted a formal policy that outside firms that receive more than $2.5 million in fees from the two agencies in a given year must receive special approval to do work that puts them above that amount.
But several lawyers said they did not expect the policy to change things.
"The cap has been around for years," said Larry Bates, a banking attorney in the Washington office of Hopkins & Sutter who worked at the FDIC from 1981 to 1987. "There still are major cases where if they need a firm with greater expertise they will authorize using it."
The agency's legal division and the Office of the Inspector General monitor legal bills. The General Accounting Office also has the authority to investigate.
FDIC General Counsel Alfred J.T. Byrne said that the agency, which has 1,035 staff lawyers and expects to grow to 1,500 lawyers by the end of the year, will have to manage more efficiently to meet its budget of $600 million in legal fees this year.
"On the other hand, we have no real control over the volume of work, which is driven in large part by the rate of failures," Byrne said.
Lawyers are not the only ones getting big fees in the cleanup, said Bates, pointing to other professionals such as property managers and real estate agents who also work for the agencies.
"There's been no scrutiny of them," he said. "All the scrutiny appears to be on the lawyers side."
Others argued that no other profession will come close to making as much money as the lawyers working for the FDIC.