by Catherine McBreen
There is a significant amount of discussion in recent weeks regarding whether the FDIC is aggressively prosecuting the senior executives and directors of the over 300 banks they have closed in the past few years. There are numerous new rules and burdens of proof that are about to be applied to these cases and there is a belief that the taxpayers are waiting for these individuals to be tarred and feathered.
My first job out of law school was working for a law firm that represented the FSLIC (Federal Savings and Loan Insurance Corporation). You may recall (but probably don't) that numerous savings and loans were closed in the late 1980's and the FSLIC insurance fund basically went bankrupt. Eventually the FSLIC was somehow merged into the FDIC and the savings and loan crisis eventually went away.
There were, however, numerous prosecutions and settlements that occurred as a result of these closures sometimes affecting famous politicians and others....Whitewater, anyone?
I can't tell you what an interesting and gratifying experience it was to be involved in this process. We were reviewing the records and loans made sometimes by greedy individuals with no thought of customers and shareholders...and hopefully bringing the to justice. Sometimes, however, it was terribly sad.
We would be told sometime mid-week that we were going to go to a savings and loan closure on Friday. This was before the time of cell phones. We would get our hard copy tickets on Thursday and some documentation. We would not know the name of the organization until the day before we left and, of course, we were sworn to secrecy. The FSLIC did not necessarily know that much farther ahead of us because the reporting and reconciliation of funds and assets was primarily completed on a monthly basis at that time, so they did not necessarily have all of the information they needed until the very end.
One time we were at the airport and we were paged and told to call our office. A senior politician had gotten wind of a closing and convinced the FSLIC to hold off.
We would arrive at the location on Friday afternoon and check into a hotel. Then we would meet up with the federal marshall. A few minutes before 5pm on Friday afternoon we would walk into the lobby of the building, ask for the chief executive and others. The Federal Marshall would instruct the employees to lock the doors of the building but to remain inside. A big notice would be put on the door stating that the bank was under the supervision of the FSLIC and they would be receiving information in the mail regarding their accounts.
We would meet with the employees and discuss next steps, which would vary depending on whether the FSLIC had been able to find another savings and loan to purchase the assets. Eventually the employees would be allowed to return to their desks, under close supervision, gather their things, and leave the building.
We would spend the entire weekend inventorying everything in the desks and offices of the building. One time I was in the office of the chairman of a savings and loan in Texas. There was a beautiful painting on the wall. I noted that it looked like a Picasso painting I had studied in Art History class. Turns out it was an original Picasso and there were several other outrageously expensive pieces of artwork in the building. Hopefully the sale of these are pieces were used to pay back some of the uninsured depositors.
The next few weeks we would spend meeting with depositors who had uninsured accounts (in excess of $100,000 in accounts in their own name). This was a very sad and stressful process. We would explain to them why their accounts were not fully insured, why they would only be getting $100,000 back and how to file a claim in case there would be anything left after the bankruptcy was resolved. The reality was that most of these uninsured depositors would have claims that would fall so low in priority in the bankruptcy of the organization that they would never receive any of their funds.
One time I met with an elderly widow. Her life savings was represented by $250,000 of certificates of deposit all in her own name. She lost $150,000. She had a heart attack that evening and died.
A Mennonite man I met with in the Pacific Northwest had all of the funds for his company held in his own name in his community bank. He lost $400,000. He went home and killed himself.
In contrast, I met a cowboy in Wyoming who came into the bank with a gun in his holster (it was legal there). When I told him he had lost $14,000 he laughed and told me he had lost more in a poker game. He also said that he knew when he was getting a 15% interest rate on his money that he probably was engaged in a poker game.
I tell you all of this not to chastise the FDIC but to point out that this is a very complicated process. In some cases there are very greedy individuals that deserve to be punished....like the Texas banker with the Picasso paintings. In other cases, there are genuinely good bankers who get caught up in a local economy undergoing stress. In trying to support their community, they often make bad decisions. Hopefully the FDIC will be able to cull out the bad from the good.
The other thing I would like to point out is that no one ever needs to be uninsured by the FDIC. There are numerous ways that accounts can be structured to ensure the maximum levels of insurance.
In the next few months Millionaire Corner will be creating FDIC insurance training to he help you review your own accounts.
The process is slow and it will take the FDIC a long time to figure out the liability in these situations. Even though we now live in the time of mobile phones and the internet, the facts are generally very difficult to ascertain. Unfortunately, however, I am sure there are still numerous sad stories regarding the victims of these failed institutions.