Inside the FDIC: Thirty Years of Bank Failures, Bailouts, and Regulatory Battles by John F. Bovenzi

Author:John F. Bovenzi [Bovenzi, John F.]
Language: eng
Format: epub
Publisher: Wiley
Published: 0101-01-01T00:00:00+00:00

The Department of Justice (DOJ) is responsible for defending the federal government, hence taxpayers, against lawsuits. The staff at DOJ strongly believed that government officials couldn't bind future sessions of Congress. Otherwise, what would be the point of subsequent elections? Every time Congress changes a law, whether it is related to health care, energy policy, environmental protection, financial regulation, or anything else, it is likely to affect private or public contracts. Does this mean that Congress should never change the law? Conversely, should contractors still be entitled to receive everything they otherwise would have received? The exposure to taxpayers would be enormous.

These different perspectives between S&L shareholders and the DOJ suggested that there would be a long and complicated legal struggle before the issues would be resolved. But this wasn't simply going to be litigation between disgruntled shareholders and the federal government. The FDIC got involved as well, and sued the federal government.

How could the FDIC do this, since it is part of the federal government? In its role as receiver, the FDIC is responsible for managing the estates, or the remaining assets, of failed banks and S&Ls. The FDIC's legal responsibility is to maximize the value of those assets in order to return as much money as possible to the creditors of the failed institutions. As part of that duty, the FDIC will sue certain parties for damages if it believes the claims have merit and that they are cost effective. Any recoveries from such lawsuits are returned to the failed institution's creditors.

Under the law, payments are made to creditors in a certain order of priority. Uninsured depositors and other creditors are reimbursed in full before the owners of a failed institution are paid anything. In other words, the failed bank's owners are first in line to lose money when their company goes out of business.

The goodwill lawsuits raised two important concerns at the FDIC. First, if failed-bank shareholders sued the government directly and won, reimbursement would go directly to them rather than to other creditors who had more senior claims. Second, if these shareholders initiated lawsuits that circumvented the statutory priority of claims, what would prevent other failed-bank creditors and shareholders in other situations from doing the same in the future?

Believing the confusion of roles untenable, in November 1996 the FDIC as receiver sued the federal government on behalf of all of the creditors (not just the shareholders), of the failed S&Ls that had goodwill lawsuits. This was less a judgment on the merits of the shareholder lawsuits than it was an effort to protect other creditors and ensure that the legal priority for claims was adhered to in the event the courts determined those claims had merit. At the time, I was the director of the FDIC division that was responsible for managing the receivership process. I fully supported taking this step. My intent was that the FDIC remain a passive litigant, preserving the rights of creditors, without spending a lot of their money.

As you might imagine,

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