LA Times: FDIC Keeping Bank Failure Settlements Under Wraps

Tuesday, 12 Mar 2013 07:58 AM

By John Morgan

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The federal agency responsible for fighting shoddy and illegal loan practices by the nation’s banks is helping keep scores of legal settlements a secret and is accepting cents on the dollar from the offending banks in order to dispose of the cases, according to the Los Angeles Times.

The Times obtained more than 1,600 pages of settlements by the FDIC made since 2007 with former bank insiders and others accused of wrongdoing.

“The agreements constitute a catalog of fraud and negligence: reckless loans to homeowners and buildings; falsified documents; inflated appraisals; lender refusals to buy back bad loans,” the Times stated.

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The defendants tend to settle because they can avoid admitting guilt and can limit damages, the Times said, while the FDIC benefits by collecting money without the cost of litigation.

A “no press release” clause in some deals is an incentive because it helps the banks and their officials avoid bad publicity.

Since 2007, 471 banks have failed, and the FDIC has seen a large backlog of cases involving unsound loans.

The FDIC collected $787 million from claims related to bank failures between 2007 and 2012, a “fraction of its total losses,” the Times reported.

“In the old days, the regulators made it a point to embarrass everyone, to call attention to their role in bank failures,” former bank examiner Richard Newsom told the Times.

Newsom said he is baffled by the current no-publicity policy, unless the FDIC does not “want people to know how little they are settling for.”

FDIC spokesman David Barr said the agency tries to settle the cases before filing lawsuits. He said the FDIC tells banks that while it will not publicize the settlement, it also cannot legally keep them secret.

The Times detailed some of the cases, the most prominent of which was a $54 million settlement with Deutche Bank over a $13 billion California bank failure.

In another lawsuit, the FDIC sought $600 million from former IndyMac Chairman and CEO Michael Perry. Perry agreed to pay $1 million and was banned from life from the industry, and the FDIC pursued an additional $11 million in the case from insurers, the Times said.

Of the more than 7,000 FDIC-insured institutions, the number of those at greater risk of collapse fell to 651 from 694 in the fourth quarter, the smallest since before the 2008 credit crisis, according to Bloomberg.

In 2012, 51 banks failed, compared with 92 in 2011. The FDIC said it has shuttered four banks thus far in 2013.

The FDIC announced last month U.S. banks reported $141.3 billion in aggregate net income last year, the second-best tally on record.

“When you look back to where we were just a few years ago, the progress made to date is meaningful,” FDIC Chairman Martin Gruenberg said in a briefing, Bloomberg reported.

“But troubled loans, problem banks and bank failures remain at elevated levels, while growth in lending and revenue remains sluggish.”

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