Mar 13 2013

Sheila Bair’s FDIC

(h/t Susie Madrak @ Crooks & Liars)

Sheila Bair, FDIC Chair June 2006 – July 2011.

In major policy shift, scores of FDIC settlements go unannounced

By E. Scott Reckard, Los Angeles Times

March 11, 2013, 4:05 a.m.

Three years ago, the Federal Deposit Insurance Corp. collected $54 million from Deutsche Bank in a settlement over unsound loans that contributed to a spectacular California bank failure.

The deal might have made big headlines, given that the bad loans contributed to the largest payout in FDIC history, $13 billion. But the government cut a deal with the bank’s lawyers to keep it quiet: a “no press release” clause that required the FDIC never to mention the deal “except in response to a specific inquiry.”

Deutsche Bank, now the world’s largest, settled to resolve claims that subsidiary MortgageIT sold shaky loans to Pasadena-based IndyMac Bank, which imploded under the weight of risky mortgages and construction loans. The IndyMac failure – considered one of the early events that helped usher in the 2008 financial meltdown – caused a scene reminiscent of the grim bank failures of the 1930s, with panicked depositors lining up outside branches trying to reclaim their money.

Overall, the FDIC collected $787 million in settlements by pressing civil claims related to bank failures from 2007 through 2012 – a fraction of its total losses.

“In the old days, the regulators made it a point to embarrass everyone, to call attention to their role in bank failures,” said former bank examiner Richard Newsom, who specialized in insider-abuse cases for the FDIC in the aftermath of the S&L debacle. The goal was simple: “to make other bankers scared.”

Newsom said he couldn’t understand the shift, unless the agency doesn’t “want people to know how little they are settling for.”

(FDIC spokesman David) Barr says attorneys representing the FDIC make clear to the defendants that, although it will not publicize settlements, it also cannot legally keep them secret.

The ban on secret settlements was a provision in one of the laws passed after the S&L crisis. Although the measure doesn’t require the FDIC to call attention to settlements, nondisclosure agreements like that with Deutsche Bank violate “the spirit of the law,” said Sausalito, Calif., attorney Bart Dzivi, a former Senate Banking Committee aide who drafted the provision.

FDIC Under Scrutiny For Not Announcing Settlements

By: DSWright, Firedog Lake

Tuesday March 12, 2013 8:06 am

The clause is added to keep the regulator quiet on reputation damaging legal settlements. Typically settlements are announced by regulators in hopes of deterring would be law breakers but the FDIC has changed its previous policy without explicitly stating why.

What an odd game. During the Savings and Loan Crisis a law was passed banning secret settlements which means no matter how poorly the FDIC is negotiating with criminal bankers they can not agree to keep the settlement secret. Instead the FDIC merely agrees not to announce the deals in hopes that no one looks for the information.

But why not announce it? Isn’t the point of settling in the first place to punish the guilty but avoid costly trials? Sending a press release is practically free and lets everyone know that certain practices will not be tolerated by regulators. Secret deterrence is a contradiction in terms and an open invitation to continue treating crime as a business expense.

FDIC Hides "Scores" of Bank Settlements Since 2007

Yves Smith, Naked Capitalism

Tuesday, March 12, 2013

The FDIC’s excuse is unpersuasive. It amounts to, “well, we publicize big settlements, why bother with these?”

In fact, this practice is yet another gimmie for banks. First, by not publicizing the settlement, it saves the target embarrassment. But far more important, it also helps them escape private litigation. A claimant has a much more persuasive suit if he can tell a judge or jury, “Look, XYZ bank engaged in this conduct, we have proof in the form of an FDIC settlement.” Mind you, it doesn’t mean for every settlement you have private litigants lurking in the wings, but given how many investors lost money in a big way during the crisis, you’d have to think that in a meaningful percentage of cases, hard evidence that a bank engaged in a particular form of prohibited behavior would be very useful to private parties.

The worst is that these secret settlements look to have become institutionalized. The only rationale I can think of (and it’s not great) is that the FDIC became overly concerned about exposing weak banks to litigation, and once it established the new pattern, it’s been unwilling or unable to roll it back. But in the S&L crisis, when the FDIC had so many dead banks drop in its lap that it had to go to Congress for additional funding, it didn’t hold back.

Which Aspect of the FDIC’s Litigation Failures is the Most Embarrassing and Damaging?

By William K. Black, New Economic Perspectives

Posted on March 12, 2013

The article contains four key facts we did not know about the FDIC’s leadership and its litigation director.  The only question is which of these … facts provides the most revealing insight into the disgrace that the FDIC has become.  The first fact is that the banks and bank officers can now cut deals with the FDIC designed to keep their settlements secret.  What that tells us is that the FDIC’s leaders are indifferent or clueless about deterrence and earning public respect for the integrity of the FDIC’s efforts to hold the officers who drove the crisis accountable.

The second key fact that we learned from the article is that the size of the settlements, for some of the most culpable fraudulent mortgage lenders, is so embarrassingly low that the FDIC’s litigators and investigators have proven to be an embarrassing failure.

The third fact that emerges is that the FDIC’s real purpose in entering into these settlements crafted to try to keep the public from learning about them is not to secure a higher settlement but to protect the FDIC leadership from embarrassment for their failures of nerve, competence, and any understanding of the overriding need to ensure that no executive walks away making a profit from fraudulent lending.

The fourth fact that emerges is that the FDIC does not understand how a banking regulator and its litigators must deal with control fraud.  It is fine for the FDIC to lose half its litigated cases against the senior officers who run control frauds where its wins lead to large awards that remove any gains the controlling officers received from the bank.  What the “C-suite” defendants need to understand is the moral certainty that the FDIC will, as a matter of principle, never agree to a settlement that leaves a non-judgment proof controlling officer with wealth he gained by leading the bank to make fraudulent liar’s loans.  When elite defendants engage in fraud the banking regulators’ paramount task is not to maximize the expected value of the recovery – it is to deter future frauds because control fraud causes catastrophic losses and drives our recurrent, intensifying financial crises.  The defendants need to know that the FDIC will be remorseless in litigating against the senior officers running control frauds.

Bank Shots

By Charles P. Pierce, Esquire

March 13, 2013 at 9:00AM

I’m not sure what’s more breathtakingly arrogant — that there are members of the government who look the people straight in the eye and tell them that, no, nothing’s going to be done, despite the fact that you and I and the streetlamp know precisely who the crooks are, and what they did, and what should happen to them, or that there are members of government who insist that doing nothing about any of it is to act in the public good. It is one the little tin drums at this place that, too often, our elected leaders seem to believe that The American People are made of ribbon candy. Don’t prosecute Nixon. The country needs “closure.” Don’t chase Iran-Contra too hard. The country “can’t afford” another failed presidency. Don’t arraign the liars and fantasts who brought on the ruin that is the Iraq war. Look forward. Not back. Self-government gets infantilized and the crooks skate.

Call me crazy, but if some operation gets so big that it renders its crimes untouchable by the civil authorities, when power immunizes the criminals, then something’s too big to be allowed to exist. And if the institutions that are supposed to protect us from those crimes, through the customary mechanism of punishing the criminals in such a sway as to discourage other people from becoming criminals, are so worried that protecting us will do us more harm than good, then we’ve fallen through the looking glass to a place where self-government is rendered subject to a simple protection racket. I’d consider most of these guys more respectable if they threw firebombs or broke people’s kneecaps.

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