Mirabile Dictu! FDIC Suing Former WaMu CEO, Two Execs, for $900 Million « naked capitalism

Thursday, March 17, 2011

Mirabile Dictu! FDIC Suing Former WaMu CEO, Two Execs, for $900 Million

The FDIC is suing three former WaMu executives for their role in the bank’s failure. The directors of the board, according to the Wall Street Journal, already settled for $125 million. More details:

The Federal Deposit Insurance Corp. sued three former executives of the failed Washington Mutual Bank, along with two of their wives, in a lawsuit filed on Wednesday.

The FDIC is seeking $900 million in damages for alleged gross negligence and other failures by the former executives in the run up to WaMu’s collapse in September 2008…

The former WaMu executives charged by the FDIC are Kerry Killinger, the former chief executive officer, and his wife, Linda; Stephen Rotella, a former president and chief operating officer, and his wife Esther; and David Schneider, the former president of home loans for WaMu, who now works for WaMu’s new owner, J.P. Morgan Chase & Co….

The WaMu suit is the FDIC’s highest-profile action against bank executives for alleged wrongdoing during the financial crisis. As of March 15, the FDIC had authorized the filing of lawsuits seeking to recover $3.57 billion from 158 officers and directors at failed banks.

Killinger and Rotella issued strongly-worded objections to the litigation. I can’t wait to get my hands on a copy (it does not appear to be available through the FDIC site).

33 Comments:

KnotRP says:

March 17, 2011 at 2:35 pm

The directors of the board, according to the Wall Street Journal, already settled for $125 million of the shareholder’s money.

There, fixed that for ya.

Wake me up when a banker pays out of his own estate.

Hu Flung Pu says:

March 17, 2011 at 4:55 pm

All of the WaMu folks are douchebags, but… that’s not what the article says. Clearly, some large portion of the $125 million came from some form of D&O settlement (the premiums for which were paid for by the shareholders over the years, of course), but… I’m betting that the directors actually had to write some checks themselves in this situation. And I’m betting that those checks exceeded the board fees they’ve received over the years. (I’ll can probably find out what these numbers are.) Now, that’s not to let them off the hook – they failed miserably in their oversight duties. But… the directors aren’t the ones who made the REAL money. The big money was made by Killinger and his posse of management clowns, and that’s where you want to see the FDIC take no prisoners. Anyhow, I’m sure more details will follow.
- olddeadmeat says:
  
  March 17, 2011 at 5:42 pm
  
  I would very much like to know if the directors actually bled, or if their insurance covered the $125 million.
  
  Still waiting to see one of these guys go to Federal PMITA prison.
  
  (PMITA – go see the movie Office Space & you’ll figure out the acronym. I don’t generally like to post vulgarity, but considering what Wall Street big bankers have been doing to the rest of us, it seems appropriate.)
- decora says:
  
  March 17, 2011 at 8:11 pm
  
  yes…
  
  but the more this happens, the more the boards of other companies have to be thinking twice now, before rubber stamping CEO decisions. .. . ? maybe?

KnotRP says:

March 17, 2011 at 2:37 pm

Of course, the shareholders also pay the insurance that funds the defense for the bankers…

The whole arrangement reaks of control fraud in multiple forms.

anon62453 says:

March 17, 2011 at 2:55 pm

Ms. Smith, please let me know if you would like a copy of the complaint.

Pixy Dust says:

March 17, 2011 at 3:02 pm

I’m glad to see some action from the feds.
In the ’80s I worked at a direct mail ad agency that held the WaMu account. It wasn’t unusual to have apprehensions about their requests. Our agency’s legal council advised WaMu against one job I participated on. They insisted so we proceeded.
I’d freelanced in other agencies doing credit card direct mail campaigns. We often would look at each other in bewilderment. The big players in this industry are lawless and expect state and federal legal authorities to just try to stop them. With their high-priced teams of sharp-shooter corporate attorneys, good luck with that.

Oh, but let’s cut funding for government….

Chevy Chase Bankster says:

March 17, 2011 at 3:35 pm

900 Million? Why not “round” it up a bit? This is all pee and vinegar anyway. It’s time to stockpile spaceblankets, peanut butter, flares and an inflatable raft (for sewer esapes).

readerOfTeaLeaves says:

March 17, 2011 at 3:37 pm

Just to make one minor point clear; Linda Killinger is Wife #2.
Apparently, there’s a backstory…for those interested, here’s a good link.

http://www.bizjournals.com/seattle/stories/2009/01/26/story3.html

One supposes that Wife #1 is not culpable. Wife #2 was previously married to an (Iowa…?) AG. Funny, how small the world can be, eh?

ScottS says:

March 17, 2011 at 4:36 pm

Times’ version:

https://www.nytimes.com/2011/03/18/business/18bank.html

Highlights:
In a statement, Mr. Rotella vigorously denied the allegations. “This action runs counter to the facts about my relatively short time at the company,” he said. “It is also unfair and an abuse of power.”

…

In a statement, an F.D.I.C. spokesman, Andrew Gray, said the agency, as a matter of practice, would take action against former officers and directors when a case has merit and is expected to be cost-effective. “This is done on behalf of creditors of the failed institution,” he said. “The F.D.I.C. investigates every failure to determine whether there is a solid basis for legal action, and a sound source for recovery.”

fiscalliberal says:

March 17, 2011 at 4:46 pm

Some how I have the feeling that Shela Bair is much more effective than Mary Shapiro.

In fairness Shapiro is reconstructing a major organization after George Bush and Chris Cox got done destrying it by defunding it.

We have a long way to go before things get fixed.

RSDallas says:

March 17, 2011 at 5:02 pm

Unfortunately this is all smoke and mirrors. This does nothing to unwind the billions of dollars that our society is now straddled with. So they single out a few crooks. They need to bring the crooks to justice that got bailed out on the public’s behalf.

Pixy Dust says:

March 17, 2011 at 5:32 pm

Hey it’s a step in the right direction.
I’d love to see a bankster army being frog-marched too, but investigations take time. Especially when there is so much fraud and secrecy, and so few qualified federal investigators to handle the load.
- Procopius says:
  
  March 18, 2011 at 6:10 am
  
  Agreed. The way Bush & Co. dismantled regulatory agencies and the Justice Department is going to take time to fix. Unfortunately, President Obama doesn’t seem to feel any urgency about it.
- RSDallas says:
  
  March 18, 2011 at 2:58 pm
  
  Pxy, I just don’t know. How can it not be any clearer as to where the United States Goverment and Fed
- RSDallas says:
  
  March 18, 2011 at 3:10 pm
  
  Pixy, our so called great leaders have made it clear to me where they stand as it relates to our corporations and banking institutions. They have clearly decided that the rights of certain banks within the banking system and at least some large corporations come before the rights of the American public, despite the consequences to the American public. That’s just not right. Our government protected many institutions that made decisions (on their own) that rendered them insolvent and therefore bankrupt. These institutions should have been allowed to fail. The United States of America and its citizens would be better off today as a result of this. Our great Nation is blessed with great wealth. I don’t buy the notion that our society would have collapsed if we didn’t save these institutions. At the end of the day the debt has to be recognized by someone.

janice says:

March 17, 2011 at 5:56 pm

This reminds me of when a big collective of gangsters throw one group in the collective under the bus. Why isn’t the FDIC indicting more people? Looks like WaMu failed to attend some don’s birthday party.

Hu Flung Pu says:

March 17, 2011 at 6:15 pm

Here are the issues:

Where the big failed banks are concerned – WaMu and IndyMac, for example – the FDIC are going after them. Every one of them. But, these cases will take years to work themselves out. And the Big Defense – which tends to be quite effective with juries – is, “Everyone was doing this. It seemed reasonable at the time (that’s why everyone was doing it!) How can you pin it all on us?” Don’t get me wrong – this is a weasley, logically fallible defense – but it often works with juries.

Where the small banks are concerned, the problem is that in most cases few of the directors have much of a net worth to go after. Occasionally, there are a few big fish here and there, but typically it’s small-time local yokels and they don’t have a lot of money between them. So, the FDIC sends out a letter to the D&O insurer (of the failed bank) before the policy lapses letting them know that litigation is imminent, and then typically they settle with the insurer without touching the directors’ outside net worth. Now, sometimes the actions of a small bank’s board are so egregious that the FDIC feels compelled to reach beyond the D&O insurance, but those are pretty rare cases. I believe that in the late-80s/early-90s about 25% of all directors of failed banks were pursued in some way, shape or form. But, in the vast majority of those cases the D&O insurer was the only party that paid up.
- PQS says:
  
  March 17, 2011 at 7:06 pm
  
  I would like to know if the directors of these failed banks you reference were ever barred from operating in the same capacity.
  
  Those of us down in the galley can get denied all sorts of benefits for running afoul of the law – (no student loan with any sort of drug conviction, limited hiring capacity with other sorts of infractions, etc. etc.) Would be nice if some bigwig got told he’ll never work in this town again – might, just might, make them think before they do it again….
  - Hu Flung Pu says:
    
    March 17, 2011 at 7:26 pm
    
    Yes, if you’re an Officer or Director of a failed bank, 99.9% of the time you are effectively barred for the rest of your life from any position that requires FDIC regulatory approval (which applies to all Directors and most Senior Officers). But… you can still work at a bank – just in a position that doesn’t require regulatory approval.
    
    I’ve only seen on exception to this rule and it was based on the fact that the bank that the CEO ran was a subsidiary of a larger holding company and it was deemed that this CEO’s bank only failed because the Fed cited “Source of Strength” rules in closing it down (that is, this CEO’s bank was deemed a source of strength to be used to offset losses at other subsidiaries beneath the holding company). Now, in reality, this CEO’s bank would have failed on its own eventually, but… he weasled out of the situation. This is VERY rare, however.

Johnny Lunch Box says:

March 17, 2011 at 6:47 pm

Awesome:

Ms Blair was listening. Just maybe this will be the begining of a cleansing process that our country needs. I myself refuse to be invested in the markets till the theives of Wall Street are taught a lesson not only by way of clawbacks that leave them destitute like they left us but also by hard core prison time. Just maybe we can rebuild the moral character of our nation so we can be respected by the rest of the world again.

Johnny Lunch Box

JPM

johnny Lunch Box says:

March 17, 2011 at 7:36 pm

Not to worry! Follow the herd on Wall Street as most are heading for Rikers Island or they may follow Bernie Madoff to Butner prison. My personal choice would be for one in California as Arnold is building a 10 000 bed state of the art Prison Hospital using over 8 billion dollars of yours and mine taxpayer dollars.

Prison economies don’t require millions of dollars to see you through the golden years. 3 square a day, a bed, fitness centers and the best of medical treatments all for free. Rikers has 12000 attendants to see to the needs of 13000 prisoners. You get color TV, phone privileges’, laundry service free hair cuts. A much better deal then our legless vets gets returning from the wars.

Hard to say what Perks Bernie might be getting in Butner? Having a suspected stash of billions in cash I’m sure he is getting the best of respect and might even have time for a soothing back massage from the Warden. Imagine fresh Brook Trout sautéed in a light cream sauce, petite snow peas, followed by pie ala mode.

Even the illegals know a good deal when they see one. 30 million are busting down the doors to get in. Hurry reservations are going fast. Bankers are lined up around the block trying to beat out the illegal’s for some of the best turf.

Ooof Dah!! There goes Mr Lewis.

Johnny Lunch Box

JPM

Deontos says:

March 17, 2011 at 7:36 pm

Google ARTICLE:
WaMu execs: FDIC suit is “political theater”
Puget Sound Business Journal – by Kirsten Grind
Date: Thursday, March 17, 2011, 11:28am PDT

Click here to download the FDIC suit. http://www.bizjournals.com/seattle/FDIC%20lawsuit.pdf

Click here to download Kerry Killinger’s response.
http://www.bizjournals.com/seattle/Killinger%20Statement%20on%20FDIC%20suit.pdf

Hu Flung Pu says:

March 17, 2011 at 8:21 pm

Here’s the toughest part for the prosecutors (the regulators blessed everything until things started going south):

************
The work of the management and board committees were, in turn,
subject to continuous review and scrutiny by outside auditors and, perhaps most importantly, by
federal bank regulators.
The presence and prominence of the federal bank regulators at Washington Mutual cannot be
overstated. First, they had offices on premises “24/7”. Second, they had unfettered access to the
books, records, accounts, committee minutes, and personnel of the Bank. They roamed freely and
paid particular attention to the quality of the assets—i.e., the mortgages—and the liquidity of the
Bank. Third, well into the summer of 2007, the Office of Thrift Supervision consistently reported to
management and to the board that Washington Mutual’s asset quality and liquidity profile evidenced
a strong and well managed bank. Those judgments were confirmed by the Bank’s external auditors
who paid particular focus to the adequacy of loan loss reserves—again, a measure of quality and of
the transparency of management regarding prospective risk.

**************

You’ll note that the lawsuit doesn’t mention that Killinger & Co. violated specific regulatory orders, merely that it didn’t conform with certain “Guidance”. And that’s going to be the crux of the defense: “If we were doing something so wrong, why didn’t the regulators tell us prior to year-end 2007?”

Don’t get me wrong – these guys are guilty as hell and complete pigs. But proving that is going to be a bitch. The regulators handed them an “out” on a silver platter by not being more vigilant. Although at least they have all of the warnings from the Chief Credit Officer… that’ll help a little.
- ScottS says:
  
  March 17, 2011 at 8:56 pm
  
  Suits me. It’s like your two worst enemies got into a fight.
- monday1929 says:
  
  March 18, 2011 at 11:47 am
  
  Just helps to prove Control Fraud.

Deontos says:

March 17, 2011 at 7:51 pm

In order to prevent anyone from getting the DREADED “blog sickness” … Affreux Nausée! I have just posted the first paragraph of the “Killinger Statement”. Anything you read in the linked files above is “At Your Own Risk”.

FOR IMMEDIATE RELEASE
MARCH 17, 2011

STATEMENT ON BEHALF OF KERRY K. KILLINGER IN RESPONSE TO FDIC COMPLAINT
The civil lawsuit filed by the FDIC today against Kerry Killinger is baseless and unworthy of the
government. The factual allegations are fiction. The legal conclusions are political theater. Trial in a
courtroom that honors the rule of law—and not the will of Washington, D.C.—will confirm that Kerry
Killinger’s management, diligence and commitment to Washington Mutual responsibly and
consistently served the interests of its depositors, customers and shareholders.

Washington Mutual’s management structure was a model of corporate governance.

surferdude says:

March 17, 2011 at 10:08 pm

interesting that the fdic is going after executives of WAMU, which did not cost the FDIC a single penny when it failed. if the FDIC had any courage, it would go after CitiBank and Bank of America, which each received open-bank assistance from the FDIC. Moreover, what about going after the prinicpals of the failed Franklin Bank, SSB, which cost the FDIC $1.5 billion. but that would mean the FDIC would have to sue Lewis Ranieri. ironic how Ranieri can lecture about the immorality of homedebtors walking away when underwater, but he did the same thing by exercising the put to the FDIC.

other large cost failures to the insurance fund where the FDIC has not announced any litigation include BankUnited ($4.9 billion); Guaranty Bank ($3.0 billion); Colonial Bank ($2.8 billion); AmTrust Bank ($2.0 billion); and Corus Bank ($1.7 billion). btw, where is the Treasury IG material loss report on Corus Bank, which failed in September 2009 (maybe it is not very flattering to the OCC).

in any event, the FDIC should be using its limited resources to go after failures that actually cost the insurance fund some money. another interesting point, what is the standing for the FDIC to bring suit against WAMU as all depositirs were made whole at no cost to the insurance fund. i guess must think it should use its limited resources to help unsecured creditors. if the FDIC recovers money for unsecured depositors, is that not at odds with the theory of market discipline to aid in the supervision of TBTF banks. so the FDIC is saying if you are an unsecured creditor at a large bank, do not worry as we will protect you through litigation. someone really needs to press the FDIC on this litigation.

Hu Flung Pu says:

March 18, 2011 at 12:09 am

Excellent point. And one that I had forgotten about, as I spend all of my time in the land of small banks. While the WaMu execs are total dirtbags… they didn’t cost the insurance fund anything. I, also, would prefer that the FDIC spend its time on execs and directors of failed banks that put a dent in the insurance fund.

Where WaMu is concerned, perhaps the SEC would be the more appropriate party to lead a prosecution (as if they aren’t busy enough). I’m sure the WaMu execs were engaged in all manner of naughty accounting shenanigans toward the end.
- monday1929 says:
  
  March 18, 2011 at 11:53 am
  
  Wasn’t the reason WAMU was gifted to JPM was that they were not connected to the fascist power structure? Could this be the reason they remain a target?
Francois T says:

March 18, 2011 at 12:46 am

“if the FDIC had any courage, it would go after CitiBank and Bank of America”

I’m sure Ms Bair would love to go after B of A and Citi; alas, the Durbin Axiom* is still valid today. In these conditions, the FDIC would not survive more than 6 months, if that.

*Durbin Axiom: “Quite frankly, the banks own this place!” (“this place” being the US Senate)

Grace says:

March 17, 2011 at 10:11 pm

Somethings wrong with America. If you haven’t noticed, then the problem is solved. You’re what’s wrong.

“WAKE UP PEOPLE!” – JOIN THE REVOLUTION
Read “Common Sense 3.1” at ( http://www.revolution2.osixs.org )

We don’t have to live like this anymore. “Spread the News”

herman sniffles says:

March 18, 2011 at 12:47 pm

Going to the wrong cocktail parties can be SO dangerous.

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