Bank Lawyer's Blog

The Not-So-Secret Facts of Life

The LA Times obtained a bunch of documents from the FDIC pursuant to a FOIA request and uncovered some startling news: the FDIC is settling lawsuits against those it alleges caused banks to fail. Worse than that, the FDIC is agreeing not to issue press releases regarding many of the settlements. This earth-shattering news is labeled a "major policy shift" from the way the FDIC handled failed bank litigation that arose out of the last big bank meltdown, "when the FDIC trumpeted punitive actions against banks as a deterrent to others."

Before I address that last point, let's listen to some more suspicious minds support the Times theme that all of this "secret settlement" skulduggery smacks of some kind of plot to let evil-doers escape the lynch mobs that surely would have strung them up if only the FDIC had set public outrage en fuego by  trumpeting these settlements from the top of the Rocky Mountains.

Critics fault the government for going easy on banks in the aftermath of the financial crisis. At a Feb. 14 hearing, Sen. Elizabeth Warren (D-Mass.), founder of the Consumer Financial Protection Bureau, criticized FDIC Chairman Martin J. Gruenberg along with other bank regulators for their reluctance to make examples of Wall Street firms by taking them to trial.

Quoting "The Founder" is a go-to proposition for the Times, and one that lacks the punch that soundbites from other less usual suspects bring to the table. In addition, the Times' accusations range far beyond Wall Street banks. It's mostly (if not entirely) the little guys that are being pursued. God forbid they should get a break today from anyone other than MacDonalds.

Attorneys who have represented bank officials and the FDIC said regulators are now far likelier to settle cases before filing lawsuits than after the last spate of failures, when more than 2,300 institutions collapsed in the 1980s and early 1990s, bankrupting a fund that insured savings and loan deposits. That crisis grew out of Reagan-era deregulation, which allowed thrifts already hurting from 1970s inflation to make riskier investments, including commercial real estate deals that soured en masse during the second half of the 1980s.

Critics describe the FDIC's current practice of low-profile deal-making as a major departure from the S&L crisis.

"In the old days, the regulators made it a point to embarrass everyone, to call attention to their role in bank failures," said former bank examiner Richard Newsom, who specialized in insider-abuse cases for the FDIC in the aftermath of the S&L debacle. The goal was simple: "to make other bankers scared."

Newsom said he couldn't understand the shift, unless the agency doesn't "want people to know how little they are settling for."

The FDIC should disclose as much as it can, said Lauren Saunders, managing attorney at the National Consumer Law Center in Washington. "Transparency is always better, and serves as a deterrent to future misconduct."

Yes, let's deter the future conduct of owning, managing, and directing a community bank that concentrates on loan products that the regulators find are being originated and managed within the parameters of safety and soundness guidelines until, within a few months, the world falls apart in the greatest economic collapse since the Great Depression. Thereafter, although we feel compelled to go after many failed bank officials, directors, and third parties because we've got an obligation to recover whatever losses to the fund we are able whenever we can do so without being laughed out of court, we understand, in our heart-of-hearts, notwithstanding the posturing we might do for political or litigation purposes, that these times are different than late 1980s.

This is what neither the Times nor its talking heads understand (or, if they do understand, will admit): the facts are different this time. In the 1980s, there were a number of outright crooks involved in the banking and, especially, the thrift business in certain parts of the country, some wearing stetsons and cowboy boots, others clad in three-piece Armani suits. There were fraudulent appraisals, my-dead-cow-for-your-dead-horse swaps, 100 percent loan-to-value ADC loans on raw dirt, rapid multiple flips that would have taxed Shawn Johnson, and similar shenanigans. The damages were also limited to certain regions of the country where real estate bubbles were exploited (or partially created) by financial institutions who engaged in outright speculation until those bubbles burst. Also, many of the worst players were (relatively) smaller players.

In the latest debacle, the causes of losses are more complicated and the resulting economic consequences much more devastating and widespread. Many of the hundreds of banks that failed collapsed because they were steamrolled by the swiftness of the onset, and the depth, of the economic collapse triggered, in large part, by subprime residential mortgage loans, the complex web of securities they spawned, and the resulting residential real estate inflation. Commercial real estate wasn't the primary cause of the collapse this time, it was a casualty of the collapse. You can argue until you're blue in the face about the nuances of fiduciary duties and CRE concentrations, but in all but the low hanging fruit cases, the FDIC doesn't have smoking guns laying in plain sight to use to extract huge settlements or litigation awards out of either defendants or, more importantly, their insurance companies, who are fighting back.

As to the lack of a "deterrent" to future potential wrongdoers that allegedly results from not making settlements public, I wouldn't be concerned that "silent settlements" are encouraging prospective bank officers and directors to do anything. Those who haven't said "screw it" and opted to sip mai-tais in Cabo until they need their livers "Rolfed," or are seriously considering an alternative exit strategy, aren't chomping at the bit to jump feet-first back into subprime anything or to make CRE or any other product or service their concentration-of-choice, and their primary regulatory supervisors wouldn't let them go there even if they yearned to do so. "Other bankers" are plenty scared Mr. Newsome, without the need to read about FDIC settlements. At least, that's the story with the vast number of smaller banks in this country.

I suppose there might be some deterrent effect if the FDIC announced settlements against the officers and directors of the large Wall Street banks that helped create the mess we're in and which then failed, so that future Wall Street bankers would...oops...none of them failed. That's right: they were bailed out. My bad!

Buried in the story is the rationale for keeping mum (until FOIA forces disclosure) about settlements.

Defendants benefit by settling because they can avoid admitting guilt and limit the damages they might face in court. The FDIC benefits by collecting money without the hassle and expense of litigation. The no-press-release arrangements help close those deals.

Those are valid reasons, and they make sense for both parties.

Let's hope the Times drills a little deeper next time and strikes oil instead of gas.

No Dice For United Western

A reader sent me a copy of yesterday's decision of Federal District Court Judge Amy Berman Jackson in the United Western Bank lawsuit against the OCC that sought to set aside the January 2011 decision of the OTS to appoint the FDIC as receiver for the bank. To make a long story short, Judge Jackson ruled in favor of the OCC and refused to overturn the decision of the OTS (now defunct and subsumed by the OCC). I haven't had an opportunity to read the opinion or carefully consider it, and will not have an opportunity to do so until this weekend.

My initial reaction is that this is no surprise. From a couple of telephone calls I received today from other banking law attorneys who've been following the case, it appears to be no surprise to most banking attorneys. As I said when I first wrote about this case two years ago, the legal deck was stacked against the plaintiff from the start. As I also noted the following year, "no matter what my heart tells me, my head tells me not to bet against the OCC."

It may be disappointing to many that David failed to slay Goliath, but given the high legal bar to jump over, you'd need the helping hand of God to clear it, and, in this case, divine intervention was not forthcoming.

Updating

While it's been a hectic week, I wanted to resume blogging long enough to update a couple of recent posts with comments made by readers via email. The first concerned last week's post on Liz Warren's rabid rapid ascent into the stratosphere of the Senate. I closed that post by expressing the hope that Barney Frank's push to fill John Carey's vacant Senate seat would be successful so that, albeit for a short time, we could have both Lizzie Borden Warren and Barney ("Thufferin Thuccotash") Frank going hog wild in tandem on pro-consumer, BIG GOVERNMENT EXPANSION proposals that would have absolutely no chance of surviving a Senate filibuster, much less making it through a Republican-dominated House, but would contain as much moon battery and tom foolery as any blogger might wish for in his or her fondest blog-fodder dreams. Not being glued to Bay State political nuances, I had failed to notice that Massachusetts Governor Deval Patrick had spurned Barney's advances and instead chosen Patrick's very own former chief of staff to fill the interim Senate seat. Out of power, out of mind. I guess we'll have to make do with playing Wack-a-Wack-Job with Liz for the foreseeable future.

As a consolation prize, Barney gets to say "I'm not a real Senator, but I play one on stage."

Another reader, an experienced bank lawyer who has taken on the OTS and OCC from time-to-time, gave me a couple of intriguing comments about my most recent post, which discussed the FDIC's lawsuit against former officers and directors of the failed Charter Bank of New Mexico. I wondered why, after all the writedowns of CRE loans by the OTS and all of the resultant losses tied to those loans that could have been alleged by the FDIC, the FDIC focused instead on a smaller amount of losses caused by a subprime mortgage lending unit.

In the wake of the NLRB holding, and the simple fact that the OTS was running without a properly appointed director for several years, from March 2009 until the 2011 handover and in violation of the Vacancies Reform Act, wouldn’t you limit your case to the non-OTS determined issues too?

The Appointment of the Receiver in January 2010 was, perhaps, an illegal act in itself.

Fun food for thought.

Fun food for thought, indeed, although I haven't had the time--and no one is paying me--to think about it. Perhaps legal counsel for the former officers and directors of Charter Bank will have both the time and the financial incentive.

The Curious Case Of Charter Bank

The FDIC's first lawsuit of 2013 against former officers and directors of a failed FDIC-insured financial institution involved a former thrift that was the subject of a number of blog posts over the past several years, Charter Bank of Santa Fe, New Mexico. In one post, I recounted how I was taken behind the woodshed by OTS personnel and supporters for questioning the severity of that agency's writedown of the value of collateral securing commercial real estate loans in the bank's portfolio. Most of the discussions at that time (and since that time) that I have had with folks on all sides of that bank's failure and subsequent "resolution" have focused on the commercial real estate loans, especially acquisition and developments loans.

Given that focus, I was surprised to read that the claims against the former board and certain executive officers of Charter involved not commercial real estate loans, but a subprime residential mortgage operation that the bank established in Denver at perhaps, with hindsight, was one of the worst possible times to do so: 2006. It's been more common during the latest wave of lawsuits that involve a failed community bank that concentrated on commercial real estate lending, for the FDIC's complaint to allege negligence, gross negligence, and breach of fiduciary duty arising out of excessive growth, concentrated in CRE, funded by "hot money," without adequate capital in light of the risk, and without proper risk management policies, procedures, and/or practices for that type of lending concentration. Usually, the FDIC selects a portfolio of CRE loans where they think they can prove the allegedly wrongful acts and omissions caused identifiable monetary losses, totals the aggregate amount of losses on those loans, and sues for that amount.

In this case, I guess the FDIC chose what it thought was the "lower hanging fruit": losses related to the bank's subprime lending unit. The three-year statute of limitations has expired, and the FDIC's lawsuit made it under the wire, so unless there was a tolling agreement signed by potential defendants (unlikely), this is likely to be the only claim against the former officers and directors of the bank that the FDIC pursues. I simply find it unusual that, after all the allegations and "controversy" concerning CRE loan losses at that institution, it was subprime lending that caught the FDIC's eye.

Curious.

Oh Georgia, No Peace, No Peace I Find

It was bad enough when Georgia reached the top of the heap (or bottom, depending on your view) of states in the number of FDIC civil lawsuits against former officers and directors of failed banks. Now, it appears that Georgia may be leading in a race to become the state with the most former bank officers and directors who've been indicted.

The former president and six other officers of First National Bank of Savannah on Friday were indicted by a federal grand jury in Savannah, accused of defrauding First National Bank and other banks out of millions of dollars.

[...]

The indictment comes on the heels of the 2011 prosecution of Savannah real estate developer Richard Guerard for scheming with First National Bank officials and employees to defraud the bank and others to cover loan shortfalls for two of his companies.

He pleaded guilty in May 2011 and was sentenced to 52 months in federal prison in August 2011.

The First National Bank indictments arise out of an alleged scheme by the defendants to hide losses from shareholders, directors, and the regulators that the bank suffered from soured commercial real estate loans through an alleged witches brew of straw borrowers, side deals, "hidden promises," "recruiting other banks to fund non-performing loans based on fraudulent misrepresentations about the quality of the loans," and falsifying and fabricating bank records and other documents. Other than that, everything appears to have been upfront and above-board.

There's a sense of "deja vu" to the allegations, in that other community banks that have failed due to CRE loans that went bad have been alleged by the FDIC to have gone to some lengths to conceal the nature of the losses by the use of similar techniques. Not many of those allegations have resulted in criminal indictments, but these indictments may signal that more of those are on the way.

Of course, indictments present only the government's side of the case. We haven't heard yet from defense counsel. I'm sure their response will paint a different picture.

Nevertheless, lawyers who represent banks that are "in distress" some times find it necessary to point out to bank officers, and occasionally to bank directors, as well, that attempting to mask losses can subject responsible officers and directors to allegations that, among other things, they have filed false financial records, including their quarterly CALL Reports. These types of indictments are a lesson. I hope those who might benefit from such a lesson are paying attention. For some, the time for paying attention has passed. For them, the best approach at this time might be fervent prayer.

If Ignorance Is Bliss, Some Bank Directors Must Be Orgasmic

Former Commissioner of the Texas Department of Savings and Mortgage Lending, Danny Payne, has been advising community bank boards of directors and what he's finding during his educational sessions is disconcerting.

In banks that have been hit with a cease and desist order, memorandum of understanding, or agreed orders involving significant capital depletion or the removal of management, Payne often finds board members listening to what he has to say with an intense focus. "On the other hand, when I give the presentation to a healthy bank, the board seems bored, doesn't ask questions and is not focused," he said. "It is indeed scary that they seem to think they have no worries and things won't ever get that bad for them."

[...]

The community leader and/or local business director simply does not comprehend their role and liability in banking," he said. "That is exactly what I have found."

As Payne points out, this lack of comprehension can have serious adverse consequences for the financial institution and, eventually, the director.

He said directors often fail to realize that the FDIC may sue the board members to recover losses if the bank fails.

The bank's primary federal regualtor can also hit directors with civil money penalties and other enforcement action if they breach their fiduciary duties.

I've been speaking to bank and credit union groups over the past couple of years about the lessons good banks can learn from bad banks, and one of the off-the-cuff basic lessons I try to convey is that for a bank director, espousing the philosophy of "What, Me Worry?" is a great way to embrace a lifetime vow of poverty, which is just fine if you plan to become a Cistercian monk, but simply disastrous if you plan to remain financially solvent. Like Danny, I find too many audience members focused more on daydreams of sexual congress with Tyra Banks than fulfilling their fiduciary duties to community banks.

Payne, and other experts quoted in the linked article from SNL's "Community Pulse, make some additional important points, among them:

• Because of increasing regulatory demands placed on bank directors, it is "advantageous to have board members who have strong backgrounds in audit, executive compensation, and risk management." (David Baris, executive director of the American Association of Bank Directors).
• It is important to have the support of a diverse group of successful and engaged leaders, each of whom brings unique strengths to the bank's governance, and it is also critically important that they all have a strong grasp of financial statements while coming from diverse backgrounds (G. Kent Cleaver, president and COO of Avenue Bank, Nashville, Tennessee).
• New and increased regulation is not only significantly affecting community banks' bottom lines but is causing confusion and fear simply because of the complexities. The lack of management experience with this heightened regulatory oversight and numerous new mandates are causing serious concerns at the senior management level as well (Payne).

The bottom line, Payne said, is that management teams and boards need to solicit outside expertise and advice before acting. "The traps are too numerous and deep not to," he said.

I'm not certain how many more lawsuits and enforcement actions it's going to take to get the point across that being the director of a community bank is no longer simply an honor, it's a serious, full-time occupation. It's also not necessarily any less less dangerous than than being an IED disposal expert in Kandahar Province, although instead of blowing up your physical body, it's your net worth, reputation, and emotional well being that are at risk.

I hope Danny has success in getting through to his audience. However, I won't hold my breath.

More Mailbagging

A few recent emails are worth a comment (or three).

1.    A credit union trade official wrote to comment on my recent spate of blog posts regarding news reports about the brutally different results for robbers who pick on credit unions versus robbers who pick on banks. The latter are apt to be apprehended with their persons intact, while the former are apt to meet their maker, then meet his evil twin "Skippy" (aka "The Dark Price"). My correspondent intimated that I might be leaning toward the bankers on this matter, due to some sort of suppressed pacifist tendency that, if not nipped in the bud, might flower into a marijuana brownie-munching, Birkenstock-wearing meltdown. He thought I might soon be shouting "When guns are outlawed, only credit unions will have guns!"

Rest assured: I will never wear Birkenstocks.

2.    Last night's ramble regarding IndyMac officers who did not "beat the rap" prompted one financial institution attorney to wonder when the defendants would demand indemnification from New York Senator Charles "Chuckles" Schumer, and then answer his own question with "Oh wait, I forgot he doesn't have to answer for his actions . . ." A man after my own heart.

Long-time readers may recall my many potshots at that cretin esteemed member of the US Senate when his election year electioneering precipitated the run on IndyMac that forced the OTS to close it. Not that the OTS would not have had to close the steaming heap of goat custards that comprised IndyMac eventually, but that agency and the FDIC might have made a more orderly transition to oblivion than the lines-around-the-block debacle that Schumer's "leakage" precipitated. I reminded my correspondent that my original lambasting of Chuckie Cheese earned me a-whole-lotta-hate from leftards and moonbats, including one prominent, New Yawk City-based, bank-hating blogger who just about had to invent an entirely new language in order to articulate epithets vile enough to accurately describe my bovine nature. Man, that was a sweet memory!

3.    Finally, to the reporter who wrote to complain that she "didn't like me" because, in an off-the-cuff comment in a throwaway line in a blog post of over six months ago that was read by maybe three people (two of whom are related to me), I "twisted her words": please accept my most Grand Canyon-esque yawn of abject inertia. I deny that I twisted anything, least of all your words, but now that I know that I bug you without consciously attempting to do so, I'll be sure to not only twist your words, but your tail, whenever the opportunity presents itself. This is what happens to "one" when "one" takes "oneself" seriously, quite often by referring to "oneself" in the third person.

Keep those cards and letters coming kids. I don't have time to respond to them all, but I enjoy even the barking mad ones.

IndyMac Hands Round One To FDIC

When federal district court judge Otis T. Wright, II, ruled last year that bank officers in California did not have the benefit of the Business Judgment Rule, I thought that was a bad omen for the defendants in the case, former officers of IndyMac. Last week, the axe dropped on those defendants, when the jury in the case found that the defendants were both negligent and had breached their fiduciary duties, and awarded the FDIC $168.8 million. I don't know about you, but an adverse judgment of that size would throw a wet blanket over my Christmas spirit.

Kevin LaCroix analyzed the decision and speculated that even if the officers had had the benefit of the Business Judgment Rule, they may have lost the case anyway, because the jury found that they had breached their fiduciary duty of due care. I don't think that's necessarily true, but at this point, we won'r know. The case is sure to be appealed, on among other grounds the allegation that the judge erred in his ruling on the applicability of the BJR to officers, as well as the application of California, not Delaware, law to decide the question (as we discussed in January). There's a split in authority at the federal district court level in California that needs to be clarified. Whether these defendants will now settle (if that's possible), or whether this case will be appealed, remains to be seen.

The defense attorneys I've chatted with on a preliminary basis think that since this is the first jury decision on a case arising out of the current crop of FDIC lawsuits, it is likely to encourage the FDIC to bargain hard, at least facially, on the issue of whether or not the economic collapse of 2008 was reasonably foreseeable by reasonably prudent officers and directors of failed banks. Obviously, defendants in these cases have strongly asserted that it was not. On the other hand, the defendants in this case worked for one of the poster children of the debacle, IndyMac. Juries are composed of your "peers" and in case anyone hasn't noticed this fact, your "peers" are pissed at banks generally, and failed banks in particular. OK, primarily at Wall Street banks that were bailed out, but failed banks come in a close second, especially high profile failures like this one. I don't know whether that same degree of anger would also play out among members of a jury who are also members of a community where the former officers and/or directors involved are respected participants and who aren't subject to the allegation that they were pumping up profits to milk bonuses from the bank at any cost, which was the FDIC's story line in the IndyMac case. Nevertheless, the defense "It was the economy, stupid" didn't get rave reviews on opening night.

As Kevin notes, this story is far from over.

The just completed trial apparently represents only the first trial phase of this matter. There apparently will be a separate trial phase that will address the FDIC’s allegations as to scores of other loans as well as allegations with respect to the bank’s loan portfolio as a whole. The FDIC apparently is seeking total damages of more than $350 million. In addition, the FDIC’s separate case against Perry, the bank’s former CEO, will continue to go forward as well.

Given the magnitude of the jury’s verdict, there undoubtedly will be post-trial motions and, after the conclusion of all remaining trial phases, appeals as well.

Moreover, as Kevin also discusses, collecting the judgment may be a tough nut to crack. Thus far, there does not appear to be an insurance fund available that hasn't been drained by defense costs. This is another issue that may be subject to permutations by appellate court decisions.

Georgia Leads The Pack In Litigation

Three years ago, we referred to Georgia as the elephant graveyard of community banks. As an unfortunate result of that status, three years later Georgia is leading the country in the number of FDIC lawsuits against former directors and officers of failed banks.

In a blog post today, Kevin LaCroix discusses (among other matters) some disturbing aspects about this trend.

This latest lawsuit is the tenth that the FDIC has filed as part of the current bank wave involving directors and officers of a failed Georgia bank. Because the FDIC has not updated its online litigation page in over a month, I am not completely sure of the current overall number of lawsuits filed, but I believe that this latest suit represents the 35^th that the agency has filed against directors and officers of failed banks so far. In other words, over 28 percent of all the D&O lawsuits the FDIC has filed so far have been filed in Georgia. Of the approximately 440 banks that have failed during the current bank failure wave, about 80 were in Georgia, or about 18 percent of the total. For whatever reason, the FDIC’s D&O litigation activity is disproportionately concentrated in Georgia. By contrast, Florida, which also has seen a significant number of bank failures as part of the current bank failure wave, has only seen one lawsuit – so far.

Kevin also links to an article in the Atlanta Journal-Constitution by the always excellent Scott Trubey about the latest lawsuit. Scott has been following the community banking meltdown in Georgia since its earliest days.

Kevin notes that, because the lawsuit was filed well beyond the expiration of the three-year statute of limitations, the defendants most likely signed a tolling agreement. Whether or not such agreements should be signed can be a tough call. In this case, it didn't benefit the defendants.

Kevin also points out the consistency of the FDIC in repeatedly alleging both gross negligence and ordinary negligence against both officers and directors of failed banks, notwithstanding the fact that a recent decision by a federal district court in Georgia has held that, because of the business judgment rule, directors cannot be held liable for ordinary negligence, and the fact that another federal district court judge in Georgia held that the business judgment rule applies to officers, as well as to directors.

In light of that earlier decision, it would seem that the defendants in the new lawsuit have a basis on which to seek to have the negligence claims against them dismissed. (The FDIC, undoubtedly anticipating this argument, included in its complaint specific allegations asserting that the defendants are not entitled to rely on the business judgment rule, at paragraph 55.)

Until an appellate court of final jurisdiction rules on the issue, the FDIC is apparently going to continue to pitch ordinary negligence claims and hope that it can get one of them to stick. At some point, you would think Rule 11 might present a deterrent; however, that day has not arrived. Until it does, defendants in Georgia will have to pay their lawyers to file (and win) motions to dismiss claims of ordinary negligence.

Where There's A Policy, There's A Way

A recent settlement by the FDIC of a lawsuit against five former bank officers whose bank failed (and, therefore, the FDIC contended, with the benefit of its customary 20/20 hindsight, MUST have been negligent, grossly negligent, and fatally debauched), led to some speculation by a few of my readers that the FDIC is not really interested in punishing the malign, but merely in squeezing blood out of turnips. While I agree that the FDIC as receiver of failed banks is always primarily interested in recouping its losses, I'm not so sanguine about the absence among the bank regulatory Tourquemadas of the desire to flay sinners. On the other hand, my readers have a point.

As discussed by Kevin LaCroix in his blog post on the case, the former officers sued the bank's D&O insurance carrier for denying coverage of the FDIC's claims, and the carrier defended on the "insured versus insured" exclusion contained in the insurance policy.

The individuals contend that the policy’s base form had a regulatory exclusion, which had it remained in the policy would have precluded coverage for the FDIC’s action against them. The individuals allege further that the bank had purchased an endorsement to the policy that removed the regulatory exclusion from the policy. The individuals essentially contend that the point of the endorsement to remove the regulatory exclusion was to ensure that the policy provided coverage for claims brought by the FDIC, and the carrier therefore should not be able to rely on a different exclusion to try to deny coverage for an FDIC claim.

According to defense counsel’s press release, in their settlement with the FDIC, the five individuals assigned their claim for bad faith and breach of contract to the FDIC, while retaining their right to try recover from the D&O insurer their defense fees incurred prior to the settlement. The parties also exchanged covenants not to bring any further actions against each other, and the settlement also included a covenant by the FDIC not to assert any claims against the five individuals’ property or assets. The FDIC will control and prosecute the assigned claims against the insurer at the agency’s own cost and expense. The officers maintained their right to continue their own retained claims.

Critically, the officers agreed to the entry of a judgment against them in favor of the FDIC, then assigned their claims against the insurance company to the FDIC. Since The FDIC will look solely to the insurance carrier to collect the agreed upon judgment, a cynic might posit that the defendants agreed to a judgment that might have been a wee bit higher than an objective view might have justified. As a slap-happy optimist, I'd never encourage that view, but Kevin LaCroix is not an optimist.

However, the problem with these type of consent judgment/covenant not to execute type deals is that this approach can run the risk of slipping into a collusive arrangement, with the insured individual willingly agreeing to a settlement amount that has no relation to the his or her true liability exposure. Without meaning to suggest anything one way or another about this particular deal, I will say that in my prior life as an insurer-side coverage attorney, I did see deals that were questionable.

You can't blame either side for doing what it believes is in its own best interest. In this case, the insurance company might have avoided any possibility of collusion between the defendants and the FDIC by deviating from the normal business model of an insurance company: collect premiums, deny liability.