Magazine article American Banker

Viewpoint: Regulatory Blitz for Subprime Players?

Magazine article American Banker

Viewpoint: Regulatory Blitz for Subprime Players?

Article excerpt

The recent failures of NetBank and Miami Valley Bank - two in one week - brings back many memories of my time at the FDIC during the last banking crisis in the United States in the late '80s and early '90s.

Those were the bad old days when bank failures were routine, the deposit insurance fund was itself becoming insolvent, and then-FDIC Chairman Bill Seidman was a celebrity. In those days once a bank was closed, everyone and everything that ever touched it entered a new realm; let's call it the land of bad things.

What do I mean by that?

* Members of bank boards of directors were routinely investigated by the FDIC and sued for negligence - successfully, more often than not. Perhaps bank directors had not realized when they signed on to what they considered a prestigious position that they were putting their assets on the line. In fact, the joke in those days was that the FDIC had a new name for bank directors - "defendants."

* Accounting firms were treated similarly, particularly after giving a clean bill of health to a sick institution. And law firms were not exempt - very large settlements were reached with some very large law firms.

* Directors and senior officers were also routinely subjected to administrative enforcement actions by the banking regulators, resulting not only in civil money penalties of up to $1 million per day, but sometimes in outright bans from further employment in any bank. In rare cases, usually involving financial crimes such as fraud, insider abuse, or money laundering, referrals were made by regulators to the Justice Department for prosecution.

* And after the enactment in 1989 of FIRREA - the Financial Institutions Reform, Recovery, and Enforcement Act - bad things could also happen to vendors or independent contractors, including lawyers, accountants, and appraisers. Such firms, if considered an "institution-affiliated party," could be subject to civil money penalties if they knowingly participated in an unsafe or unsound practice that caused more than a minimal financial loss to the failed bank. Such parties could also be barred from having any further participation in a bank's affairs.

You would be surprised at how easy it was in those days for the regulators to find such practices unsafe or unsound. And a "minimal" financial loss? Let's just say that's a pretty minimal standard.

* Anyone who had previously had a contract with the failed bank - lessors, vendors, service providers, employees - was subject to the FDIC's so-called superpowers, that is, the agency's ability to void a contract at will, with compensation, of course, but without any possibility of punitive damages.

* Though depositors with less than $100,000 in a failed bank were quickly paid off, general unsecured creditors, including excess depositors (those with more than $100,000 in a bank at the time of its failure), were not so fortunate. …

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