By Nathaniel C. Nash N.Y. Times News Service WASHINGTON - A blizzard
of negligence lawsuits filed by federal regulators against the
outside directors of failed financial institutions is alarming
bankers, who say the trend is inhibiting their recruitment of
qualified board members.
Federal Deposit Insurance Corp. has 500 such suits pending
against directors, insurance companies, accountants and law firms,
seeking to recover hundreds of millions of dollars in losses from
failed institutions. And officials say the number could easily
double over the next year.
Bankers warn that the reluctance of experienced professionals to
serve on boards could ultimately weaken managements of financial
institutions around the country, prompting future problems.
They also say such litigation is leading to a sharp increase in
liability insurance premiums, forcing some banks to go without
insurance or with limited coverage.
``It is almost impossible to find new directors,'' said Brian
Smith, executive vice president of the United States League of
Savings Institutions, the industry's largest trade group.
``The first line of defense is the quality of directors and
managers,'' he said. ``And to the extent it is more difficult to get
sophisticated business judgment on the board of an institution, you
can have a perverse return to the very condition regulators are
concerned about - domination by a single chairman of the board or
group of officials whose actions go unchecked.''
Federal regulators disagree that their actions will have a
negative impact on the industry. They say they are simply pursuing
every channel they can to reduce the cost of the savings and loan
rescue, and that holding directors accountable will lead to stronger
Armed with vast new powers from the savings and loan bailout
law, regulators can impose civil penalties of up to $1 million a day
covering periods in which directors and officers are deemed to have
violated banking laws.
While the regulators say their new-found toughness is meant to
fulfill their responsibilities to recover the maximum amount of
funds lost by failed institutions because of mismanagement, they add
that it also serves to put directors on notice that they must take
their responsibilities seriously.
``I want to be sure that everyone who bears responsibility for
losses are paying what they ought to pay,'' said Mark I. Rosen,
deputy general counsel for FDIC. …