Banking Law

The failure of a bank or thrift has many unfortunate consequences for those who ran it. For one thing, the FDIC may very well sue them at some point down the road, alleging, at the very least, that they were negligent (or grossly negligent, where applicable state law requires a standard higher than ordinary negligence). That can inflict serious heartburn and many sleepless nights, as well as financial pain and suffering, on the defendants.When you own or run a bank, you don't get the option of taking it through Chapter 11 of the Bankruptcy Code for a nifty "reorganization." Instead, the FDIC takes it thorough a receivership and wipes you out. No second chances in the land of the FDIC-insured. One strike and you're out.

Recently, some critics have complained that the FDIC has not been filing as many lawsuits as it should be filing against the former officers and directors of failed banks, only five so far out of 347 failures. Professional bank-hater and law professor (I apologize for the redundancy) Bill Black is, as he usually is, outraged by the fact that failed bankers aren't being drawn and quartered by the thousands.

"Everything is wrong about this," said William Black, a University of Missouri-Kansas City law professor who was a top lawyer at the Office of Thrift Supervision and its predecessor when U.S. savings and loan thrifts were collapsing in the late 1980s and early 1990s.

"The FDIC is suing a tiny percentage of officers compared to the S&L crisis," Black said. "The cases should be strong, given that they had so many warnings."

"Given that they had so many warnings." I'd say that was an idiotic statement, except I don't want to be politically incorrect and offend idiots. On the other hand, perhaps Black has been clairvoyant while the rest of us labor under the cloud of the absence of prescience, or perhaps he assumes that from 1997 through 2007, everyone else was getting the same warnings he was receiving, beamed straight from the Planet Mongo to Black's brain through the fillings of his teeth. Sorry Bill, like Human League, the rest of us are only human.

Black's act is getting even more stale than it was when we first started yawning at his ravings. When it comes to what my teenage nephew would call "D-bags," I say all you have to do to recognize one is to paint it black.

Inasmuch as the vast majority of the failures that have arisen out of the latest crisis have occurred within the past two years and, as an FDIC spokesperson explained, it takes an average of 18 months for the FDIC to fully investigate potential claims against former officers and directors, it is highly likely that more suits are coming. The fact that the FDIC is taking its time to thoroughly (I"m sure) investigate potential claims so that it can survive a motion to dismiss and Rule 11 sanctions for having filed a frivolous and groundless lawsuit make a solid case so that innocent lives will not be destroyed, is a good sign. At least, it's a good sign to those of us not thirsting for the blood of the first born of broke bankers.

It's not as though the FDIC hasn't had plenty to do since the fall of 2008. Their employees have to worry about something a bit more pressing than "publish or perish" or how to spend a three-month summer vacation.