The Federal Deposit Insurance Corp. has told the Wall Street Journal it is conducting 50 criminal investigations of former executives, directors and employees at U.S. banks that have failed since the start of the financial crisis. The article notes that more than 300 banks and savings institutions have failed since the start of 2008.
"In an interview, Fred W. Gibson, deputy inspector general at the FDIC, which works with the Federal Bureau of Investigation to investigate crime at financial institutions, said the probes involve failed banks of all sizes in cities across the U.S.," the article states. [However, a look through the FDIC's failed bank list shows that most of these banks are around $200 million in assets or smaller.] "The FDIC is also ramping up civil claims to recover money from former bankers at busted lenders. He declined to identify any of the people or banks under investigation. 'We anticipate results from our investigations, although we cannot predict when a particular case will reach a stage at which disclosure of specifics would be appropriate,' Mr. Gibson said."
Gibson mentioned in the interview that the agency is going after "loan officers at the vice president or senior vice president level."
As several commenters on the Wall Street Journal's website note, this looks at first blush like a case of a government agency going after the small players who can't properly defend themselves, rather than bigger, more powerful companies that gamed the system and won.
Commenter Beverlee Roper wrote: "Federal agencies work on a system of 'bean counting' to track their enforcement performance. A referral to the Dept. of Justice for filing a criminal or civil case in federal court is a primo 'bean.' Beans, however, are not weighted. As a result, lots of moms and pops go to directly to jail, while the big fish continue swimming in the country club pool. Why? Because the first group hires lawyers commensurate with their income, as does the latter. One case against Mr. Countrywide will tie up a handful of feds for years. Not good for the bean count, the performance evaluation, and any hope of a 'step' increase at the end of the year. No, the big actors here live in Greenwich, Darien, and Westport. They're the ones Hank Paulson saved with my money. Those colleagues at his former employer (has he gone back to Goldman Sachs yet?) float Fed bonds, charge the taxpayer fabulous interest, dream of the next bubble ... and live with their bonuses -- higher this year than any year in history. No FDIC investigation there....Karma will get 'em in the end. Right?"
The most-recommended comment was this one from Jeffrey Hatmaker, calling the government to account for the financial crisis: "In six months months the headline will be: Bank Directors Pay Fines to Settle Cases. A note to all the naive people who erroneously blame Wall Street bankers for the sorry state of our financial system: It is the U.S. Government agencies that oversee financial institutions that must shoulder 80% of the blame! If the government agencies overseeing these institutions were competent, thousands of bankers and politicians would be in prison right now."
In one lawsuit the FDIC filed November 1, it accuses eleven former directors and/or officers of Heritage Community Bank, Glenwood, Ill. ($232.9 million in assets at the end of December 2008) of failing to properly manage and supervise Heritage and its commercial real estate lending program. According to the FDIC, the bank "routinely financed commercial real estate projects -- including speculative ones (i.e., projects without committed buyers or tenants) -- without any meaningful analysis of their economic viability, and often with inadequate appraisals. It repeatedly made loans with excessive 'loan-to-value' ratios, meaning the loans were too large given the value of the projects. The Bank also failed to properly evaluate the creditworthiness of CRE borrowers and guarantors to ensure they could reliably repay their loans. While the Bank's credit analysts should have been positioned to rigorously and objectively review proposed loans to guard against the risk of loss, Defendants failed to structure the CRE Lending Program to let the credit analysts do their job. The credit analysts were inexperienced in banking, often entry-level employees who, as a practical matter, could not say 'no.'"
The Heritage officers and directors issued a statement in which they said: "With the advantage of 20-20 hindsight, the FDIC blames the former officers and directors of a small community bank for not anticipating the same market forces that also caught central bankers, national banks, economists, major Wall Street firms, and the regulators themselves by surprise. The allegations in the complaint are utterly without merit and Defendants expect to be fully vindicated by the court."
The outcome of this case will set an interesting precedent for the other 49 banks the FDIC is investigating.