Earlier this month, Cornerstone Research, a multistate economic and financial consulting firm, released a study on the characteristics of FDIC lawsuits against the key personnel of failed financial institutions.1 Among its key findings was that the FDIC had filed fourteen more lawsuits in 2013 against the directors and officers of failed financial institutions than in 2012. Average damages in 77 of the 84 lawsuits filed since 2010 were approximately $49 million. 17 of those settled for unspecified amounts. Not all of those targeted directors and officers.
The report graphically showed a dramatic rise in the number of such lawsuits filed since 2010. The good news was that the pace of failures of financial institutions was slowing, with 24 failures in 2013, the lowest number since 2008. In addition, the asset size of institutions failing in 2013 was generally lower than in earlier years. The bad news was that there have been at least 489 institutional failures since 2008. As an aside, the FDIC took control over 427 banks during the period from January 2008 to March of 2012. In the preceding 5 year period, the FDIC took over only 10.
There is no question that a large share of the responsibility is on the backs of bankers who took inordinate, unreasonable and unjustified risks prior to the economic collapse. But the fault does not stop there. The myriad failures of a federal regulatory system designed to breed uncertainty and inconsistency in everything from government bailouts, to restrictive policies in the Federal Reserve Act designed to inhibit the operation of the free enterprise system, to the patently unconstitutional Dodd-Frank Act must share the blame.
Giant federally supported banking institutions are positioned to loan. Smaller independent banks are subjected to higher funding costs and stricter regulations, insuring their inability to compete, courtesy of Dodd-Frank. If financial firms that are deemed “too big to fail”, firms whose failure might cause systemic havoc, are assured of governmental assistance when failure is possible, their incentive to exercise market discipline, and to prevent financial risk-taking, is virtually eliminated. If small institutions are faced with higher lending costs and increased oversight and regulation, they exist at the mercy of the regulators pulling their strings.
The real wonder is that only 489 institutions failed.
Dodd-Frank created two new governmental institutions that small banks, and the American public, must swallow. The Consumer Financial Products Bureau (“CFPB”) and the Financial Stability Oversight Council (“FSOC”) are creations of the current administration; two independent public czars appointed by the President without the consent of the Senate, who operate outside the normal checks and balances offered by the three branches of government.
Understand that CFPB is funded by the Federal Reserve System. But because it operates outside the normal checks and balances system, it operates beyond Congressional oversight. It has the power to assume responsibilities of the Federal Reserve, the FDIC, the FTC, and even the Department of Housing and Urban Development. It has the power to write and enforce rules for financial institutions, again, beyond Congressional oversight. It even has the unilateral authority to control individuals’ retirement savings, and to compel us to buy federal debt.
In every society, we trade freedom for security, and security for freedom. The trick is to find a balance that meets our need for both. One end leaves us with anarchy; the other with tyranny. Often attributed to President Dwight D. Eisenhower is the statement that, “Every step we take towards making the State our Caretaker of our lives, by that much we move toward making the State our Master.”
The pillars of a democratic republic are feeling shaky. As we trade Constitutional protections for benevolent despotism, you can almost feel the quicksand beneath your feet.
1 “Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions”, dated February 2014, Cornerstone Research. For a complete copy of the report, see: http://www.cornerstone.com/getattachment/bbf34483-d4b4-4084-8915-ee7dbdb1dbae/Characteristics-of-FDIC-Lawsuits-against-Directors.aspx.