Negligence Suits Inhibit Banks in Recruiting Board Members

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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 management.

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. …

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