It's hard to believe that people in the banking business could read a story like this and not be cynical.
ShoreBank, a South Side community bank that won national acclaim for profitably lending in low-income urban neighborhoods before failing in 2010, is setting itself apart again. Its former leaders are dodging the day of reckoning in federal court that has befallen executives at most other failed banks.
On Aug. 16, when the Federal Deposit Insurance Corp. sued the people it said were responsible for improper lending at ShoreBank, it didn't name a single member of the board as a defendant. Among those omitted: the bank's co-founders, Ronald Grzywinski and Mary Houghton, and director Eugene Ludwig, a former head of the U.S. Office of the Comptroller of the Currency and now CEO of Washington-based consultancy Promontory Financial Group LLC.
Instead, the FDIC named five bank lenders as defendants, none of whom had a title more elevated than senior vice president. In contrast, the agency sued at least one director in all but one of the 75 other liability complaints it has filed nationwide since July 2010 seeking damages from leaders of defunct banks. And that suit was a relatively small affair, seeking $8.2 million and involving a single alleged rogue lender (see the PDF).
Likewise, it's all but unheard of for a failed bank's top decision-makers to escape culpability. Mr. Grzywinski and Ms. Houghton led the bank for nearly four decades; Mr. Grzywinski was chairman and Ms. Houghton was president of ShoreBank's holding company until just months before the bank failed.
The two, along with Mr. Ludwig, were known for their unusually good relationships with bank regulators—a status that caused ShoreBank to become the object of right-wing scorn in 2010 as the FDIC helped organize an extraordinary bailout effort that ended up raising more than $140 million from the largest banks on Wall Street and others. The rescue fell short, and the capital instead was injected into newly created Urban Partnership Bank, which took over ShoreBank's branches and adopted its mission of helping low-income neighborhoods, albeit on a far smaller scale.
The story quotes attorneys who represent directors of failed banks who have been sued by the FDIC and other observers to the effect that the failure to sue the "connected" directors looks, walks, and quacks like a duck, and that duck's name is "cronyism." An FDIC spokesperson denies that there's any smoke here, much less a fire.
“This case is no different in the theory that has been applied in our other professional liability cases as to who is named in the suit, meaning the individuals who approved the loans,” a spokesman writes in an email.
The loan committee that approved the "loss loans" upon which the FDIC's damages claims are based were the officers named as defendants. No directors sat of the loan committee. However, that set of facts hasn't stopped the FDIC from alleging in other cases that the non-loan committee directors were grossly negligent for not adequately supervising the officers. That claim should be reinforced by the fact that, according to the linked article, the loss loans received little review from the board and the loan officer in charge was given "virtually unlimited authority." Those facts should enhance a claim of "failure to supervise" against the outside directors. At least, similar facts have formed the basis for such claims against directors who weren't a former Comptroller of the Currency and two fair-haired favorites of the FDIC due to their long involvement with lending in low-income neighborhoods.
The FDIC spokesperson also claimed that a "1992 policy bars the agency from suing officers and directors for general negligence if the loans in question were made while a bank was rated two or better on the FDIC's internal five-point scale for assessing banks. At the time its offending loans were originated ShoreBank was a two." That policy statement (if, in fact, that's the policy statement to which he's referring) has not saved the bacon of other outside directors in similar circumstances, where the FDIC has alleged "gross negligence" (as opposed to "general negligence") in failing to adequately supervise the lending activities of bank officers.
You'd have to have access to the FDIC's investigative file to determine whether there exist facts in this case that logically distinguish it from other cases in which directors have been sued for a breach of their duty to supervise, and that is not going to happen. Therefore, you can't prove that favoritism influenced the FDIC in this case. However, as a defense attorney quoted in the article in effect observes, you just have to wonder.
As in many areas of business, but especially in those that are heavily regulated, who you know seems to make as much, or more, difference than what you know.