Newspaper article THE JOURNAL RECORD

FDIC Adhering to Insurance Limits When Banks Fail

Newspaper article THE JOURNAL RECORD

FDIC Adhering to Insurance Limits When Banks Fail

Article excerpt

N.Y. Times News Service In 1986, Dr. Franklin Danziger invested $250,000 in the Gateway National Bank, a new bank in Phoenix, and accepted a position as a director.

Now, six years later, the bank has failed, his investment has been wiped out, he has been fined $5,000 and he vows, "I'll never be a bank director again."

The doctor, a cancer specialist with a network of clinics in Phoenix, is one of thousands of business people across the country who are finding that the prestige of being a director for a bank or savings institution brings more responsibility and risk than they had expected.

Regulators accused Gateway's directors of failing to properly oversee the bank's credit card business, where losses led to the bank's failure.

As the soaring rate of bank failures since the mid-1980's has depleted the coffers of the Federal Deposit Insurance Corporation, the government has stepped up its efforts to recover some losses by suing bank directors and officers.

Now, banks are finding it more difficult to keep and recruit board members.

Even though insurance companies pay most of the successful claims, directors are becoming alarmed at the growing risks of sitting on a bank's board.

The federal banking law passed last year gives regulators new authority to force changes at troubled banks and increases directors'

exposure to government scrutiny.

Directors are also alarmed by a crime law passed a year earlier that limits a bank's ability to pay the legal expenses of directors who are sued.

The FDIC, now in the midst of 800 investigations or suits against bank directors, officers and advisers, collected $319 million from settlements last year and $363 million in 1990.

"I hope that directors are getting the message that we are going to sue if there is a good claim," said John Thomas, the FDIC's associate general counsel.

His message has been heard.

Ronald Scherer, a director of Jefferson Savings Bank in West Jefferson, Ohio, told regulators at the Office of Thrift Supervision this month that liability questions cost him a chance to recruit a prized director.

David Thomas, the chairman and founder of the Wendy's fast-food chain and an investor in the bank, had agreed to become a director until Thomas's lawyer advised him of the risks.

"He is one of the smartest people I ever met, and would have made a great director," Scherer said. "But with the regulators inclined to penalize directors for errors in judgment, the risks of the position outweigh the rewards."

Apart from the prestige and business contacts, directors earn fees that range from a few hundred dollars at the smallest banks, to $40,000 a year at Citibank.

But Donald B. Shackelford, president of the U.S. League of Savings Institutions, said that since most directors were already successful business people, "for them, the avoidance of risk is a lot more important than what they earn as a director. …

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