The FDIC has been doing banks a big favor by agreeing not to publish the fact that they’d engaged in sufficiently wayward behavior for the agency to threaten regulatory action and negotiate a settlement. The Los Angeles Times unearthed this practice via a Freedom of Information Act request:
Three years ago, the Federal Deposit Insurance Corp. collected $54 million from Deutsche Bank in a settlement over unsound loans that contributed to a spectacular California bank failure.
The deal might have made big headlines, given that the bad loans contributed to the largest payout in FDIC history, $13 billion. But the government cut a deal with the bank’s lawyers to keep it quiet: a “no press release” clause that required the FDIC never to mention the deal “except in response to a specific inquiry.”
The FDIC has handled scores of settlements the same way since the mortgage meltdown, a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others.
The FDIC’s excuse is unpersuasive. It amounts to, “well, we publicize big settlements, why bother with these?”
In fact, this practice is yet another gimmie for banks. First, by not publicizing the settlement, it saves the target embarrassment. But far more important, it also helps them escape private litigation. A claimant has a much more persuasive suit if he can tell a judge or jury, “Look, XYZ bank engaged in this conduct, we have proof in the form of an FDIC settlement.” Mind you, it doesn’t mean for every settlement you have private litigants lurking in the wings, but given how many investors lost money in a big way during the crisis, you’d have to think that in a meaningful percentage of cases, hard evidence that a bank engaged in a particular form of prohibited behavior would be very useful to private parties.
The worst is that these secret settlements look to have become institutionalized. The only rationale I can think of (and it’s not great) is that the FDIC became overly concerned about exposing weak banks to litigation, and once it established the new pattern, it’s been unwilling or unable to roll it back. But in the S&L crisis, when the FDIC had so many dead banks drop in its lap that it had to go to Congress for additional funding, it didn’t hold back. Again from the LA Times:
Attorneys who have represented bank officials and the FDIC said regulators are now far likelier to settle cases before filing lawsuits than after the last spate of failures, when more than 2,300 institutions collapsed in the 1980s and early 1990s, bankrupting a fund that insured savings and loan deposits. That crisis grew out of Reagan-era deregulation, which allowed thrifts already hurting from 1970s inflation to make riskier investments, including commercial real estate deals that soured en masse during the second half of the 1980s.
Critics describe the FDIC’s current practice of low-profile deal-making as a major departure from the S&L crisis.
“In the old days, the regulators made it a point to embarrass everyone, to call attention to their role in bank failures,” said former bank examiner Richard Newsom, who specialized in insider-abuse cases for the FDIC in the aftermath of the S&L debacle. The goal was simple: “to make other bankers scared.”
Newsom said he couldn’t understand the shift, unless the agency doesn’t “want people to know how little they are settling for.”
The good news is that these deals are not secrecy pacts, but an agreement not to publicize a settlement. Now that the Los Angeles Times has exposed this practice, one hopes the Times and other media organizations will periodically request a list of these deals, making the “no publicity” provision meaningless. But for the FDIC to have gone down this path in the first place shows how utterly captured bank regulators have become.