Beating the rap easier on Wall, not Main, Street

January 5, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Is beating the rap easier on Wall Street than Main Street? It sure looks that way. U.S. authorities have collared few high financiers for their role in the crash. By contrast the Federal Deposit Insurance Corp is lining up lawsuits against 109 mostly small-time bankers, arguing that negligence and fraud contributed to their firms’ demise.

And the regulator has only just begun. It has up to six years to bring cases. So far individuals at just 12 firms have felt the long arm of the FDIC. That’s less than 4 percent of the 322 banks that have failed since 2008. It brought claims against directors and officers at almost a quarter of the banks that went belly up between 1985 and 1992. With another 860 on the FDIC’s current problem bank list, there’s more to come.

Of course, the FDIC is mandated by the 1989 Financial Institutions Reform, Recovery and Enforcement Act to claw back cash from bank employees guilty of professional misconduct. And unlike the Securities and Exchange Commission that regulated Wall Street firms like Lehman Brothers and Bear Stearns, the FDIC has skin in the game. Each time a bank fails, its deposit insurance fund takes a hit.

The FDIC has a successful track record, too. By 2006 it had clawed back $6.2 billion from individuals involved with just over 2,000 failed banks, mostly from the crash in the early 1990s — though the sum was just a fraction of the $105 billion cost to the fund.

In the few crisis-related cases where the SEC has flexed its muscles, it has usually gone after institutions, which has the perverse effect of punishing shareholders rather than the executives in question. Yet there’s surely enough evidence of negligence at the likes of Lehman and Merrill Lynch to warrant some FDIC-style justice.

Wannabe perpetrators shouldn’t get too comfortable on Wall Street, though. In the 1990s the FDIC had enough evidence to squeeze more than $1.1 billion from Drexel and some of its employees — most of it from Los Angeles-based junk bond supremo Michael Milken — for their role in bringing down 53 savings and loans.

That said, the FDIC is guilty on one count: poor prognostication. Writing a review in the late 1990s of its many enforcement actions, the agency said its success in recouping cash “should have a beneficial effect on professional conduct at both present and future financial institutions.” It probably won’t make that mistake again.

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