In a front-page article in Monday’s LA Times (see: “In major policy shift, scores of FDIC settlements go unannounced”), reporter E. Scott Reckard filed a story that’s still breaking in the blogosphere wherein we learn that, since 2007, the Federal Deposit Insurance Corporation (“FDIC”) deliberately withheld information from the public and the press concerning fraud and negligence settlements with “scores“ of banks.
Reckerd reported that his newspaper had filed a Freedom of Information Act (FOIA) request with the Federal Deposit Insurance Corporation and “…obtained more than 1,600 pages of FDIC settlements, made from 2007 through this year with former bank insiders and others accused of wrongdoing. The agreements constitute a catalog of fraud and negligence: reckless loans to homeowners and builders; falsified documents; inflated appraisals; lender refusals to buy back bad loans.”
In major policy shift, scores of FDIC settlements go unannounced
By E. Scott Reckard, Los Angeles Times
March 11, 2013, 4:05 a.m.
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…
The story continues on noting that virtually all of the covert deals included confidentiality clauses between the FDIC and the banks with whom it had concluded settlements, with guarantees made by the government agency that it would not publicize the results of its litigation.
The HuffPo picked-up the story late Monday afternoon: “FDIC Secretly Settling Bank Cases For Years With 'No Press Release' Clause: Report”…
…At the request of rule-breaking bankers, a top U.S. regulator has for years settled bank cases in secret, raising the bar on just how far regulators are willing to go to help the industry they regulate…
…
…The FDIC would not comment to the LAT about the no-press-release clauses, but a spokesman did say that it announces settlements "when damage payments are large and media interest intense." And many of the settlements turned up by the FOIA request were indeed fairly small. That does not explain the non-announcement of the Deutsche Bank settlement, which was relatively large and would probably have attracted some media interest.
The no-disclosure clauses might have helped the FDIC settle cases more easily, saving it the expense of going to trial. But so far the agency has been able to recover only $787 million of the $92.5 billion lost to bank collapses between 2007 and 2012, according to the LAT. Those bank failures were often helped along by the banker misbehavior flagged in the FOIA documents, which the LAT calls "a catalog of fraud and negligence: reckless loans to homeowners and builders; falsified documents; inflated appraisals; lender refusals to buy back bad loans."
The revelation comes just days after U.S. Attorney General Eric Holder admitted publicly that some banks are simply too big to prosecute without hurting the broader economy. Instead, U.S. regulators have repeatedly doled out wrist slaps to major banks over allegations such as money laundering, mortgage fraud and foreclosure fraud, while declining to file criminal charges against either banks or individual bankers.
Regulators are also cracking under heavy banker pressure when it comes to implementing Dodd-Frank financial reform laws. The "Volcker Rule" that tells banks they can't gamble with their own money has been repeatedly delayed, and could soon be delayed again, the Wall Street Journal recently reported…
As I was preparing to post this, I took a quick look over at Naked Capitalism, about 90 minutes ago, and I realized that
Yves had (as usual) beaten me to the punch…
…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….
Yves then links to the LA Times story…
…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.
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Bold type is diarist’s emphasis.)
h/t to Kossack quasimodal
