The FDIC’s filing of lawsuits against former directors and officers of failed banks increased “markedly” during the fourth quarter of 2012 after a “lull” during the second and third quarters of the year, according to a new study from Cornerstone Research. The study, released December 18, 2012 and entitled “Characteristics of FDIC Lawsuits Against Directors and Officers of Failed Financial Institutions” can be found here. Cornerstone Research’s December 18 press release about the study can be found here.


As of December 7, 2012, the FDIC has filed a total of 23 lawsuits this year, compared to 18 total filed during 2010 and 2011. The FDIC filed nine lawsuits (so far) during the fourth quarter, the same as during the fist quarter, compared to two during the second quarter and three during the third quarter. The 41 lawsuits overall relate to 40 different financial institutions, meaning that so far the FDIC has filed lawsuits in connection with nine percent of the 467 financial institutions that have failed since January 1, 2007.  


(Since the December 7 closing date for the Cornerstone Research report, the FDIC has filed one additional lawsuit {refer here, second item} , bringing the quarter to date total to ten, the total this year to 24, and the total overall to 42. For clarity’s sake, throughout this post I have referenced the data used and analyzed in the Cornerstone Research study, rather than attempting to update it to reflect the additional lawsuit.)


The FDIC’s D&O lawsuits generally have targeted larger failed institutions and those with a higher estimated cost of failure, though the lawsuits the FDIC filed during he second half of 2012 have involved smaller and less costly failures. Overall the failed banks that have been targeted had median total assets of $647 million, compared to $225 million total assets for all failed banks. However, the failed banks targeted during the third and fourth quarters had median total assets of $136 million and $154 million respectively. The median estimated cost to the FDIC for the failed banks that the FDIC has targeted in D&O litigation has been $134 million, compared to a median estimated cost for all failed banks of $55 million. However, during the third and fourth quarters of 2012, the median total costs of failed banks that the FDIC has targeted in D&O litigation was $27.3 million and $58 million, respectively.


Most of the FDIC’s D&O lawsuits have included both officer and directors defendants. Only 11 of the 41 lawsuit the FDIC has filed have involved only officer defendants. 30 of the lawsuits have also involved director defendants, including seven of the nine lawsuits filed so far during the fourth quarter.


One particularly interesting observation in the report relates the failed institutions’ CAMELS ratings in the period preceding the banks’ closures. The CAMELS rating ranks the institutions on a scale of 1 to 5, with 1 being the best score and 5 the lowest. (The CAMELS ratings are not public, but in the agency’s loss review of failed institutions includes a short history of the failed bank’s examination ratings.) The study reports that 86 percent of the institutions subject to FDIC lawsuits had composition ratings of 1 or 2 two years prior to their closure. Not until one to two years prior to failure did any of the institutions have a composite rating of 4 or 5, and 36 percent of the institutions still had a rating of 2 one year prior to closure. The report concludes that “Weak ratings were not a persistent historical problem for this group of institutions. The decline in ratings occurred near the end of their independent existence.”


The study also includes a helpful summary of all of the FDIC lawsuits that have settled so far, although readers should note that the recent settlement of IndyMac CEO Michael Perry (about which refer here) is not reflected on the settlement table on page 11 of the study. The Perry settlement is referenced in the text of the study.


The report notes that the number of lawsuits that the FDIC has filed lags the number of lawsuits that the FDIC has authorized. (The updated number of authorized lawsuits can be found on the FDIC’s website, here.) The report notes that the difference between the number of lawsuits authorized and the number filed increased during 2012. The report comments that “this backlog of authorized lawsuits, the FDIC”s recent success in the IndyMac trial, and the approaching end of the statute of limitations for making a claim against the numerous institutions that filed in 2009 and 2010 suggest that substantially more FDIC cases may be filed in upcoming months.”



The Cornerstone Research report’s statement that the FDIC has initiated lawsuits in connection with nine percent of the banks that have failed since 2007 is interesting. Just to put that into perspective, during the S&L crisis, the FDIC (and other federal banking regulators) filed D&O lawsuits in connection with 24% of all failed institutions. If the FDIC were to file D&O lawsuit in connection with 24% of all failed institutions this time around, that would imply that the FDIC would ultimately file about 112 lawsuits (based on the number of banks that have failed so far since 2007).


 As it turns out, the final number of FDIC lawsuits might well get into that range, as the FDIC’s most recent update indicates that the agency has authorized lawsuit in connection with 89 institutions (or about 19% of the banks that have failed so far). The FDIC has increased the number of authorized lawsuits each month this year, so the authorized number of suits could quickly get reach as high as the implied 112 number of suits.


The study’s report that the more recently filed lawsuits involve smaller institutions than the earlier lawsuits had targeted is really not a surprise. The very largest banks that failed during the current banking crisis failed early on. For example, the two largest failures this time around, WaMu and IndyMac, both failed in 2008, and were among the first failed banks that the FDIC targeted in failed bank litigation. It may not be so much that the FDIC is targeting smaller institutions as such now, it may simply be that there are larger failures were the first to work their way through the system.


The analysis of the failed banks’ CAMELS ratings is also interesting. The implication of the analysis is that the banks that failed deteriorated rapidly. The failed institutions’ relatively high ratings until just prior to their closure seems consistent with the argument that many of the individual defendants are raising in their defense – that is, that the failure of their bank wasn’t the result of anybody’s fault; rather it was the outcome of problems that no one, including the FDIC itself, saw coming.