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US to sue execs over bank failures

But it's the lawyers who will profit.
Wamu kerry killingerEnlarge
Kerry Killinger, former Washington Mutual Bank chief executive testifies before Congress. Will he do the perp walk? (Mark Wilson/AFP/Getty Images)

It's the kind of headline that can send a frisson down your spine:

"Regulators to file suits against US bankers"

That nugget was on page 1 of the Financial Times, a news brief tucked in prominently at the top of the left column. The teaser made it sound even more enticing:

“Regulators are expected to file up to 100 lawsuits against chiefs of bailed out banks over the next two yeas, as they seek to hold people accountable for management failings.” (Emphasis added.)

Could it be? Are the actual bankers whose negligence caused the pain and suffering of the recent financial crisis finally going to be held accountable? Are prosecutors going to name and shame the executives responsible for mutli-billion dollar taxpayer funded bailouts? Should we expect to see a perp walk? Will some end up behind bars?

Well… it’s not quite as simple as that.

Here are the key details of the FT’s coverage: The good news is that the FDIC has authorized lawsuits against 158 bank board members. For now, it doesn’t get more satisfying than that.

The lawsuits stand to recover only a fraction of the losses — “more than $3.5 billion.” The biggest haul is expected to come from failed lender Washington Mutual, which has $900 million at stake. That's a step in the right direction, but a small one compared to the estimated $59 billion to $80 billion that the FDIC spent to cover 348 bank failures since the crisis began.

There may be more lawsuits to come, however. FDIC says they’re still in the early stages of investigating bank directors, the FT reported. But if history is any indicator, don't expect the government to be made whole. After the savings and loan crisis of the 1980s, the FDIC recovered only $4.1 billion of the $103 billion it spent on failed banks.

Meanwhile, it remains to be seen whether the executives will take much of a hit. These are civil suits, not criminal ones, meaning no prison time. The FDIC is seeking to freeze the assets of senior WaMu execs and their spouses, according to Business Week. And like many businesses, the banks (meaning: shareholders) paid for insurance policies to protect their directors and officers in the event of lawsuits. So it’s the insurance companies that are being targeted, given that the banks are insolvent.

Oh, and the U.S. government isn’t even first in line for collecting the insurance money. “Any money recovered from [director and officer] policies will cover only a fraction of the cost of bank failures as claims first go to pay the legal costs of policyholders.” 

In other words, it’s the lawyers who stand to get the windfall from the FDIC’s suits.

So don’t bother checking eBay for a good deal on a private jet from a former banker.

Follow David Case on Twitter: @DavidCaseReport

http://www.globalpost.com/dispatches/globalpost-blogs/macro/us-sue-execs-over-bank-failures

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