Banking Law

With all the furor lately over bullies who drive sensitive adolescents to end their lives by harrassing them mercilessly, you have to wonder why no one takes the time to call out the FDIC for all of its public blustering about how hard its going to smack down all of those officers and directors of failed banks with liability suits that will hurt like hell. They've been talking about it for the last couple of years, but to date, only one lawsuit has been filed. Yet, just last Friday, Bloomberg "broke" another story about the coming tsunami of D&O liability litigation, with over $1 billion (to be) served.

The lawsuits were authorized during closed sessions of the FDIC board and haven?t been made public. The agency, which has shuttered 294 lenders since the start of 2008, has held off court action while conducting settlement talks with executives whose actions may have led to bank collapses, Richard Osterman, the FDIC?s acting general counsel, said in an interview.

?We?re ready to go,? Osterman said. ?We could walk into court tomorrow and file the lawsuits.?

Well, if you're "ready to go," don't talk about it to the main stream press, make like Nike and JUST DO IT!

What's the purpose of all this public posturing in a "Jesus is Coming and He's Pissed" mode? Does the FDIC think it's scaring potential defendants into rolling over and playing dead? Is it actually squeezing substantial settlements out of officers and directors (or, more precisely, their insurance carriers) prior to filing suit?

The last fist fight I had in my life was as a 20 year-old, when I was jumped by two thugs outside a bar, who tried to take my money by threatenting me with all the bad hurt they were going to put on me unless I coughed up my wallet. I responded "If you were tough enough to take it from me, Alice, you would have done it by now instead of talking about it."

Of course, that prodded them to beat me senseless, although my brother "The Boxer" arrived in time to knock one of them unconscious and a crowd held the other until the police came roaring up to haul them away. So while a rational man might say that by talking tough, the punks would have led him to hand over the wallet and avoid the beating, to those of us of Irish ancestry with hard heads, a lack of a strong sense of self-preservation, and a prefernce for mixing it up, all the threats do is make us dig in our heels and call punks "punks." "Show them the money" is not what runs through our minds.

If officers and directors aren't settling prior to filing of lawsuits, perhaps all of this is merely priming the pump that the FDIC assumes will turn on the recovery spigots once the lawsuits are actually filed because directors and officers of the targeted banks will be "softened up", so terrified by anticipation of being pummeled that once the complaint is served, they'll "give it up" gladly just to avoid the anticipated pain. Or perhaps, there's something else at work, something suggested by the article's author, Phil Mattingly, and Mr. Osterman.

The FDIC "brings suits only where they are believed to be sound on the merits and likely to be cost-effective," according to an agency policy statement that dates from the savings-and- loan crisis of the 1980s. That requires considerations of whether an individual, if sued, has the means to pay or an insurance policy to cover all or part of the claim.

"It doesn?t make sense to file a lawsuit if at the end of the day you have a low chance of recovery," Osterman said.

Even if the FDIC thinks that the defendants have cash or a viable insurance policy, maybe the FDIC thinks that, ultimately, on many of these cases, it may have trouble winning on the merits if the defendants go all "jihad-like" and fight to the death. Certainly, an attorney for some of the defendants in the IndyMac case thinks the FDIC is going to have some difficulties.

Lawrence Kaplan, an attorney whose firm is representing two of the IndyMac defendants, said the paucity of cases filed to date shows the difficulty of assigning blame for a crisis that took down so many financial companies.

?The current crisis was caused by economic conditions that few, if any experts, including leading federal officials, saw coming,? said Kaplan, a lawyer at Paul Hastings Janofsky & Walker LLP in Washington.

?As a result, claims that directors and officers of many failed banks engaged in negligence lack credibility as such claims attempt to hold those directors and officers to an impossible standard of care,? Kaplan said.

Mr. Kaplan's spinning this in favor of his clients, naturally. That's why he gets paid the big bucks. Still, you have to wonder whether the FDIC's blowing smoke in many of these cases because it hopes it can run a bluff on enough directors and officers to force a settlement pre-filing or shortly after surviving a motion to dismiss and Rule 11 sanctions.

Personally, I think Mr. Kaplan may be onto something. Sheila Bair publicly opined that no one saw anything this bad coming down the pike. I've heard rumors that there exist certain former agency personnel who tried to raise the alarm about the potential meltdown years before it arrived but were stomped on by superiors. If I were a defense counsel today, I would feel a lot better about my chances than I would have felt in the late 1980s and early 1990s when the last wave of FDIC and RTC litigation washed over former directors and officers of failed banks and thrifts.

Then again, when I say "a lot better" I don't mean "good." I mean "not as helpless."