Colin Barr

Following the money in banking, economics, and Washington

FDIC seeks $2.5 billion from failed bank honchos

January 4, 2011: 4:43 PM ET

Will she roar?

Three years after the financial meltdown started, bank watchdogs are promising taxpayers will have their day in court.

The Federal Deposit Insurance Corp. said Tuesday it has approved lawsuits targeting 109 former directors and officers of failed banks in actions that seek $2.5 billion in damages.

But don't celebrate the righteous legal offensive just yet. So far, despite the obligatory talk of a wave of bank failure lawsuits, the FDIC has actually filed only two director-and-officer liability cases naming 15 defendants.

Further suits presumably are in the offing, though the bank fraud investigation mill grinds slowly.

Professional liability suits are only pursued if they are both meritorious and cost-effective. Before seeking recoveries from professionals, the FDIC conducts a thorough investigation into the causes of the failure. Most investigations are completed within 18 months from the time the institution is closed. Prior to filing the claim, staff will attempt to settle with the responsible parties. If a settlement cannot be reached, however, a complaint will be filed, typically in federal court.

In any case, the FDIC has some catching up to do. It sued professionals in 24% of failures that took place during the previous failure wave, tied to the savings and loan crisis of the late 1980s and early 1990s.

The comments come on the heels of the worst year for bank failures in two decades, with 157 banks collapsing. Hundreds more are on the FDIC's problem list, though the agency says it expects to see fewer failures this year.

And even if successful, the cases the agency's board has authorized would recover just a small fraction of cost of the failures since the start of the financial crisis in 2008.

The most recent FDIC estimate puts the cost of bank failures over the past three years at $73 billion -- which is why the federal deposit insurance fund is on schedule to return to fully funded status, if all goes well, in 2027.

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Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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