On Wednesday, The Federal Deposit Insurance Corp. (FDIC) sued three former top executives of Washington Mutual (WaMu). Federal regulators accused the executives for taking excessive and historically unmatched risks with the failed bank’s home loan portfolio.
FDIC filed the civil lawsuit in federal court in Seattle against former WaMu CEO Kerry Killinger, Chief Operating Officer Stephen Rotella, Home Loans PresidentDavid Schneider and Killinger’s and Rotella’s wives. The suit alleges that they increased risks for the bank for their personal welfare.
According to the FDIC, the executives focused on increasing their own compensation attributed to short-term gains, and therefore ignored WaMu’s longer-term safety and soundness. The FDIC stated that the three executives expanded WaMu’s risky lending in the presence of insufficient loan standards and controls to support the high volume of risky loans.
Risky loan options included adjustable-rate mortgages, home-equity lines of credit and subprime mortgages. These loans were approved without proper documentations.
FDIC also alleged that Killinger and Rotella fraudulently transferred assets to their wives to keep them away from their current and future creditors. The court has been asked to freeze those assets.
Cumulatively, WaMu recorded more than $100 billion in loans and suffered billions in losses once the real-estate bubble burst, due to gross negligence, violation of fiduciary duty and fraudulent transfer of the executives.
Though the suit filed did not disclose the amount, but the FDIC has been seeking about $900 million in damages in private negotiations with the executives.
Killinger and Rotella commented the lawsuit to be baseless, unfair and lacks credibility.
FDIC has closed down 347 banks since January 2008 after it failed during the financial crisis. The recent suit is FDIC’s most prestigious legal action in recovering losses from failed banks.
The failure of WaMu in 2008 was the largest in the U.S. banking history. It was acquired by JPMorgan Chase & Co. (JPM) for $1.9 billion in a deal brokered by the FDIC. The other major acquirers of failed institutions since 2008 include U.S. Bancorp (USB) and BB&T Corporation (BBT).
In July 2010, FDIC sued four former executives of failed California-based IndyMac Bank, seeking $300 million in damages.
The FDIC’s board has succeeded in approving civil lawsuits against 158 bank executives, employees and directors, and has regained about $2 billion in bank losses, which were the result of misconduct.
We expect FDIC to continue with its action and soon be able to prove its allegations against banks with suitable reasons and recoup the losses.
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