January 13, 2013
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January 8, 2011

Real Financial Reform or Retribution?

By Frank Ryan
"FDIC warns of legal action against officers of failed banks" was the heading of a November 10 article published by the LA Times.  The article accurately describes the actions the FDIC is taking against some officers and directors of failed financial institutions.

At first blush, the headline appears to put all directors and officers of banks on notice to begin writing big checks.  The outcry from the article was immediate and profound (and in some cases, profane).  The impropriety of such an unrelenting policy towards bankers affected by factors outside their control seemed dishonest at best. 

In checking the FDIC website, I found a different perspective.

Specifically, the FDIC publishes its guidance as the "Statement Concerning the Responsibilities of Bank Directors and Officers" (Policy 5000-3300), which states in part:

The FDIC will not bring civil suits against directors and officers who fulfill their responsibilities, including the duties of loyalty and care, and who make reasonable business judgments on a fully informed basis and after proper deliberation. ...

Lawsuits brought by the FDIC against former directors and officers of failed banks are instituted on the basis of detailed investigations conducted by the FDIC. Suits are not brought lightly or in haste.

All lawsuits against former directors and officers require final approval by the FDIC Board of Directors or designee.

As our economy attempts to heal and the remaining severe economic issues begin to be dealt with, I am concerned that any attempt to blame one group -- in this case, banks -- versus another is counterproductive.

In talking of blame for this economic disaster, perhaps it would be more appropriate to question our own Congress's actions, such as:

  • In creating Fannie Mae and Freddie Mac, who helped facilitate no-document loans, appropriately called "Liar Loans," which allow homes to be affordable to all, at least until the "homeowner" must start making payments.
  • Passing legislation such as the Dodd-Frank Bill but leaving over 250 regulations yet to be enacted so that financial institutions under $1 billion will not be able to comply and larger banks have no idea of what to do.
  • Increasing capital requirements in the middle of a recession, thereby prolonging the recession.
  • Requiring appraisals which use "comparables" to show values of real estate as more valuable when markets are exploding, a process which exacerbates the boom and then collapses when the homes get foreclosed on, which prolongs the bust.
  • Congressional capping the insurance reserve for the FDIC such that the FDIC must "repay" the premiums it receives to the banks it charges in good times and then double the insurances assessment when the funds are depleted in a recession, making raising capital more difficult.
In reality, the problems that the FDIC and bank directors and officers face is having laws written by people who have no concept of what it takes to run an economy.

My experience is that bank officers and directors are extremely responsible.  Most would support legal action against grossly irresponsible officers and directors of failed institutions. 

My experience as well with the FDIC is that they too are very dedicated and responsible people who take their duties very seriously.  I know many employees of the FDIC personally, and our nation owes them a debt of gratitude.

As a result and to effectively stabilize our financial institutions, the following policies should be adopted by Congress:

  1. Government should provide only broad policy guidance to the FDIC about auditing, inspecting, and insuring banks and financial institutions.
  2. Insurance reserves should be viewed as very long-term investments and should be allowed to build in good economic times and potentially deplete in bad economic periods.
  3. Social engineering of the banking system is socially irresponsible.  Providing funds to someone who does not have the experience to manage it is cruel and will extend economic hardships to the poor.
  4. A council of large, regional, and community banks, consumers, businesses, and regulators should be established to review all proposed regulations.
  5. Fraud must continue to be prosecuted relative to all directors, officers, and borrowers who commit such crimes.
Perhaps is it Congress that is too inexperienced and politically motivated to create meaningful regulatory oversight.  Perhaps the FDIC should investigate Congress.

Bullying one group versus another merely because it is politically palatable is absolutely no different from what was done by fascists before World War II.

Solve the problem, fix the system, and get our government out of the bullying business.

Frank Ryan , CPA specializes in corporate restructuring and lectures on ethics for the state CPA societies.  Frank is a retired colonel in the Marine Corps Reserve and served in Iraq and briefly in Afghanistan.
on "Real Financial Reform or Retribution?"