A SPECIAL S&L DEAL FOR A CONGRESSMAN?
By Ralph Nader
Since the wholesale failure of savings and loans and banks in the 1980s, the Congress and the
regulatory agencies have adopted a number of significant reforms designed to improve the
protection of the federal government's taxpayer-supported deposit insurance funds.
Despite the new laws and improved supervision, the principal bulwark against mismanagement,
recklessness and fraud remains where it has always been--in the hands of the boards of directors
that govern the activities of each institution.
As the General Accounting Office put it when it reviewed the new reforms in 1993:
"An effective corporate governance system is the first line of defense to ensure an institution's
safety and soundness. How well an institution's board of directors and management fulfill their
responsibilities greatly affect the soundness of a bank's policy and operating decisions as well as
the timely identification of correction of unsound operations."
But, recent actions and comments by the Federal Deposit Insurance Corporation relating to director liability raise some major doubts that the keepers of the deposit insurance fund really
understand the critical importance of enforcing the fiduciary responsibilities of all directors.
Last month the FDIC reached a settlement in a suit claiming gross negligence on the part of the
directors and officers of Clyde Federal and Savings Association of North Riverside, Illinois. The
institution failed in 1990 incurring losses of $67 million for taxpayers. The settlement calls for
payment of $850,000 by the directors, but one of the directors--Representative Henry Hyde,
Chairman of the Judiciary Committee of the U. S. House of Representatives--is not contributing
anything to the settlement.
Hyde continues to deny that he has done anything wrong and says he was "guilty of no
negligence, much less gross negligence." Hyde's attorney is quoted as saying that his client "is
not contributing anything and he refuses to contribute anything" to the settlement.
The special deal for Hyde is apparently just fine with FDIC. "It's totally immaterial to us," a
spokesman for the agency said. "As long we're getting all the money we think is appropriate, we
try to accommodate some individual, special requests."
This "just show me the money" policy misses the point of the director liability suits that were
brought after the failure of 2,700 banks and savings and loans in the 1980s.
No one, not even the most optimistic government lawyer, thought that the director and
professional liability suits filed in the wake of the savings and loan debacle would bring in
anything but a fraction of the costs of the failures. The settlement in the Clyde case is a prime
example--losses of $67 million and a settlement of a gross negligence suit against the directors of
$850,000.
Reformers in Congress and the regulatory agencies, however, did see the liability suits as a
critically important means of emphasizing and enforcing the fiduciary responsibility of people
who accept directorships of insured institutions. The suits and resulting monetary judgements, it
was argued, would be a deterrent to others who might take their responsibilities lightly or fail to
raise questions when reckless schemes were brought to the table.
A by-product of the civil actions, it was hoped, would be a strengthening of the "first line of
defense" represented by corporate boards of directors of financial institutions. Without directors
willing to step up to their responsibility, the federal government's deposit insurance funds and the
nation's taxpayers are in peril, new laws and regulations notwithstanding.
If the FDIC lets directors like Congressman Hyde walk away from a court settlement, the agency
sets a dangerous policy that not only smacks of favoritism, but takes the heart out of the concept
of corporate governance that says all directors--outside as well as inside--share in the fiduciary
responsibility.
Ironically, when a rollback of regulations was being considered in the last Congress, FDIC sent a
strong message to Capitol Hill emphasizing the need for all directors to be responsible for the
well-being of insured institutions. Here is what the agency said:
"All directors of insured depository institutions, regardless of whether they are inside or outside
directors, have a duty to set policies of their institutions and see that those policies are
implemented and adhered to while meeting its community needs on a safe and sound basis. We
believe good corporate governance and effective regulatory oversight require that all directors
know that they will be held responsible for fulfilling their duties to properly manage their
institution. Put differently, telling outside directors that they can be negligent with impunity is
definitely the wrong message."
But, it is just that--a wrong message--that FDIC is sending to the nation's insured institutions
when they let Henry Hyde escape without paying an equal share of the $850,000 settlement in the
Clyde case.
Despite the statement by the FDIC spokesman that the question of who pays is "totally
immaterial", the agency has to face the fact that there is an appearance of favoritism when the
sole non-contributor to the settlement is the powerful Chairman of the Judiciary Committee of
the U. S. House of Representatives--a committee that helps write the nation's civil and criminal
laws and has oversight of the nation's courts.
The bank and savings and loan failures in the 1980s shook the confidence of the American
people in the nation's financial system and efficacy of federal and state regulation. The cleanup of
the mess was supposed to restore the people's faith in the vigor and fairness of the regulatory
system and the strength of the deposit insurance fund.
The settlement in the Illinois case raises new suspicions about how the system works. To begin
with, the $850,000 settlement is meager when taxpayers lost $67 million--not exactly a powerful
message to send to governing boards of nation's insured financial institutions. The story gets
worse when the most illustrious and most influential member of the board of directors walks
without contributing to even this small settlement.
When the Congress adopted reform legislation and voted billions of taxpayer dollars for the
savings and loan debacle, the members of the House and Senate Banking Committees became
tigers, promising to keep up constant and vigorous oversight of the recovery efforts regardless of
whose political or corporate toes were stepped on.
The settlement of the Clyde Savings and Loan case, the FDIC's ho-hum attitude about who pays, the muddled message on the responsibility of directors and the role of a key member of the House of Representatives provide an opportunity for the Banking Committees to prove they were serious about those promises to keep oversight alive.