The closure of three more banks this past Friday night underscores the difficult environment now facing many banks and also suggests that the pace of bank failures is accelerating. These developments may also have important implications for the D&O insurance placement market banks may have to confront in the months ahead.
On November 21, 2008, the FDIC announced (here) that state bank regulators had closed The Community Bank of Loganville, Georgia and that the FDIC has been named as a receiver.
The FDIC also announced on November 21, 2008 (here) that as part of an FDIC-brokered deal, U.S. Bank had acquired the banking operations of Downey Savings and Loan Association of Newport Beach, California and PFF Bank and Trust of Pomona, California.
With the addition of these three banks, the total number of 2008 bank closures now stands at 22. The FDIC’s complete list of all bank failures since October 2000 can be found here. The 2008 year-to-date total represents the highest annual total since 1993 and is already double the highest annual number of bank failures for any year reflected on the FDIC table. (There were 11 bank failures in 2002).
Moreover, the pace of bank failures has accelerated as the year has progressed. 18 of the 22 bank failures in 2008 have taken place since July 1, 2008, and nine have occurred just since October 1, 2008. The November 2008 month-to-date total of five bank failures is already the highest number of failures for any month reflected on the FDIC table.
In addition, as noted in a November 22, 2008 Washington Post article (here), the most recent bank failures expanded "what is by far the most expensive crop of bank failures in modern American history." Downey, which had $12.6 billion in assets is the third largest bank failure this year (after Washington Mutual and IndyMac). The FDIC projects that it will spend $2.3 billion as a result of the three most recent closures. The FDIC also projects that it will spend almost $15 billion total on the year-to-date 2008 closures. The Post article notes that this 2008 annual amount is "more than twice the total of any previous year."
The states with the highest number of 2008 closures so far are California (4), Georgia (3), Nevada (3), and Florida (2), which may be expected due to the well-chronicled trouble in the housing markets in those regions. But banks in states outside these more notoriously troubled areas are also failing, including, for example, banks in Missouri, Minnesota, Kansas and Illinois. In other words, while the banks in the states with the most significant housing trouble are faring poorly, banks in other states may also face challenges.
At this point, the reasonable presumption is that there will be further bank failures to come. It seems unlikely that there will be hundreds of failures as occurred during the S&L crisis, but the number of failures yet to come could be substantial. The slowing economy and the likelihood of continued deterioration in the residential and commercial real estate sectors suggest that the pace of bank failures could continue well into 2009 and even beyond.
One of the possible consequences from a wave of bank failures could be surge of related claims. I have previously noted (here) the possibility that we could be headed toward a new era of "dead bank" litigation. It is hardly surprising then that D&O underwriters’ concerns regarding banks and other traditional lending institutions are increasing, even with respect to those, such as community banks, that have seemingly avoided many of the problems of the current financial crisis.
Very recently, it has become apparent that the D&O underwriting industry has taken a much more defensive approach to banking institutions, again even including in some instances institutions such as community banks. To be sure, financial institutions in general have faced greater underwriting scrutiny for some months now as the credit crisis has unfolded. Recently, the level of scrutiny has increased and the scope of the scrutiny has widened. The carriers that are active in this space are taking a much harder line, and have shown an unaccustomed willingness to walk away even from long-standing relationships.
These carriers’ apparently altered underwriting stance has changed the insurance environment for many banking institutions. Some smaller banks that have for years enjoyed significant competition among D&O underwriters may now find that they face a changed situation. Banks that are facing operational or financial challenges may now find insurance placement difficult.
The changed insurance underwriting environment for banks and other financial institutions is part of the evidence some commentators have cited to support their view that a harder D&O insurance market may be approaching (refer, for example, here). Whether the overall D&O insurance market will harden remains to be seen. But it seems likely that the D&O insurance market for financial institutions, at least, could become challenging as we head into 2009.
Court Rejects Starr Foundation Lawsuit Against Former AIG CEO, CFO: According to a Bloomberg article (here), on November 17, 2008, New York Supreme Court Justice Charles Ramos dismissed a lawsuit that the Starr Foundation had filed against former AIG Chairman and CEO Martin Sullivan and former AIG CFO Steven Bensinger, calling the case a "waste of time."
Starr’s May 2008 lawsuit contended that the defendants had "fraudulently reassured" Starr in August 2007 that AIG’s "risk of loss from its credit-default swap portfolio was remote." Starr alleged that it would have sold its entire portfolio of AIG stock if it had known the extent of the company’s subprime exposure.
Starr’s President, Florence Davis, testified that the foundation had been "reassured" by the defendants’ August 2007 remarks. However, in an affidavit, Davis acknowledged that the foundation sold more than 12 million AIG shares, worth almost $1 billion, between August and October 2007, and only stopped because the company’s share price fell below $65 a share.
Judge Ramos questioned Davis at the November 17 hearing, seeking to clarify this seeming inconsistency in Davis’s comments. Judge Ramos apparently found Davis’s answers less than satisfying. The Bloomberg article reports that Judge Ramos told Davis "You are being more than difficult. You are being contemptuous, and you are very, very close to contempt of court and I’m talking criminal contempt. Now answer my question."
According to the Bloomberg article, following this barrage, Davis asked for a break to get an asthma inhaler.
Under questioning from the defendants’ counsel, Davis also testified that the foundation did not sell its remaining shares in February 2008, even after AIG had disclosed its subprime woes, because the price was "too low." Defense counsel argued that this showed that the foundation based its decisions to sell or to hold on its own criteria, and not based on the defendants’ disclosures.
Just an aside, but do you suppose that the Starr Foundation’s Chairman, Hank Greenberg, who was also Sullivan’s predecessor as AIG’s Chairman and CEO, had anything to do with the foundation’s pursuit of this litigation against the defendants? Nah….
And Finally: Speaking of AIG, the Delaware Corporate and Commercial Litigation Blog (here) has posted links to video clips of portions of the recent Delaware Chancery Court hearing regarding the AIG derivative litigation about the government’s bailout of the company. The footage is a reminder that the expression "courtroom drama" does not apply to everything that happens in a courtroom.