Banking Law

The Dancing Bear Tires

The Wall Street Journal broke a story today that, thus far, has been ignored by most of the rest of the main stream media. It's Friday and Bank of America's and Citigroup's woes dominate the banking stories. Yet, this one's a little gem for those of us who appreciate irony.

Beal Bank, headquartered in Plano, Texas, is a buyer of distressed real estate loans, which they then work out for profit. We've previously talked about Beal Bank here and here. In 2001 and 2002, it bought thousands of subprime loans originated by the FDIC as receiver of the failed Superior Bank, which was seized by the FDIC in 2001. Following the seizure, the FDIC as receiver continued the subprime lending operations of Superior, which, as it turns out, wasn't a good idea, because those origination operations were grinding out loans by the carload that didn't meet various representations and warranties made by the FDIC when it sold the loans to Beal Bank. In other words, the FDIC seized a dysfunctional subprime mortgage lender and continued its errant ways, rather than shut it down. Hard to believe, but there you have it. The sordid details were laid out in a page one article in the Wall Street Journal in July of last year.

Beal sued the FDIC in 2002, seeking to force the FDIC to honor its repurchase obligations under the purchase and sale agreements. That's similar to what Fannie Mae is trying to force the FDIC to do in the case of IndyMac, although the IndyMac loans were not originated by the FDIC, but by the failed savings bank. The FDIC learned its lesson, obviously. An internal FDIC legal assessment discussed in the earlier Wall Street Journal article predicted that the FDIC's exposure to Beal Bank could be "as much as $70 million."

That guess was a tad low. In December, the FDIC settled for a reported $90 million. Neither side publicly announced the settlement. The article doesn't state why not, but perhaps the FDIC insisted upon a confidentiality provision in the settlement agreement, in an attempt (futile, it would seem) to avoid further public embarrassment. Beal Bank is privately owned and doesn't have to disclose the settlement and the FDIC obviously didn't see any upside in announcing that it paid through the nose for its past mistakes. To err is human, unless you're located inside The Beltway, in which case to admit human fallibility is grounds for being the main course in everyone's favorite game, "Who's For Dinner?"

$90 million might seem like a lot of cash, and it certainly is to Beal Bank, but it pales in comparison to the $10 billion Fannie Mae wishes to extract from the FDIC's hide. Perhaps that's why the Beal Bank litigation settlement will blow by with minimal damage.

Note that it took six years of litigation to wring a settlement from the FDIC, whose spokesperson stated, "The FDIC recognized throughout the litigation that there were substantial repurchase obligations based on the contract terms." Six years to settle on an amount, when liability was not really contested. How typical.

As one weary warrior put it so well, when you litigate with the government, you're "dancing with a bear." You only stop dancing when the bear gets tired.

Full post as published by Bank Lawyers Blog on January 16, 2009 (boomark / email).