5 Financial Stories You May Have Missed – With European Bondage

European Debt Map

1. Lawyers Behaving Badly (Allegedly)…FDIC Suing Bank Lawyers!

MutualBank of Harvey Illinois was hardly a household name when it failed in 2009, but the institution’s failure has cost the FDIC an estimated $775 million in losses. The FDIC has filed a complaint in federal court seeking damages against the usual suspects: directors and former officers of the bank. The interesting twist in this matter is that the complaint also names the bank’s lawyers. The attorneys were paid $3 million in the last four years of the bank’s existence and the FDIC accuses them of failing to advise the bank of “grossly imprudent loan transactions,” “failing to ensure adequate due diligence,” “failing to protect the bank from the lending misconduct of its officers” and a conflict of interest in regards to lending to an entity in which the lawyers held an undisclosed interest. To recap, the FDIC is suing Mutual Bank’s lawyers, for, amongst other things, not advising the bank that the loans they were about to make were imprudent. In light of how many imprudent loans were made in the last few years, should more lawyers be worried?

FDIC’s Latest Failed Bank Lawsuit Targets Bank’s Lawyers

2. The Solid Gold Whistle ~ Cashing in on Dodd-Frank

Under the new rules promulgated by the Dodd-Frank Act, whistle-blowers are entitled to between 10-30% of the fines and penalties collected. Those rules now have an interesting and potentially lucrative test case. Former employees of BNY Mellon and State Street have alleged that the two institutions systematically overcharged pension funds on their foreign exchange transactions. The cases are amongst the first publicly reported bounty claims filed with the SEC. (Although hundreds have been filed.) Both BNY Mellon and State Street have denied any wrongdoing and are vigorously fighting civil lawsuits filed by state attorneys general and others in the matter.

The amounts reportedly involved mean that should either bank be found guilty the whistle-blower bounty could run well into the tens of millions. Could such large bounties potentially cause perverse results? Regulators are already talking about refining the rules to avoid these types of unintended consequences.

After Tip, the Claim For Reward

3. Why the FDIC Hates the Insured vs. Insured Exclusion

Carriers use the insured vs. insured exclusion to deny coverage when a bank sues one of its own officers or directors. But what happens when the FDIC takes over a failed bank as they have done 410 times since 2008?  Carriers in the past have argued that the FDIC essentially steps into the shoes of the management of the bank and therefore pursuing the directors falls under the insured vs. insured exclusion.  The courts have generally held that the FDIC is exempt from the exclusion and they can indeed sue the D&Os.  However as we start to see the FDIC suing bank directors from recently failed banks, carriers are once again trying to enforce the exclusion. Occasionally courts have ruled in favor of the carriers, so the issue is not completely settled. Spoiler alert: A well crafted D&O policy can help avoid these muddy issues.

FDIC Failed Bank Litigation and the Insured vs. Insured Exclusion

4. Stop Trading on Congressional Knowledge (STOCK) Act Introduced

Two separate bills are making their way through Congress, both aimed at addressing the use of non-public information by members and employees of Congress.  A report released earlier this year by four universities found that on average, stock portfolios held by House members from 1985 to 2001 beat the market average by approximately 6% annually. In 2004, the same group of professors found that the average stock portfolios held by members of the Senate beat the market average by about 10%. While insider trading laws do apply to members and employees of Congress, there is currently no law that prohibits Congress and staff from trading on nonpublic information about congressional activity.  Because of recent regulatory involvement in the financial sector (Dodd-Frank, etc.) advance information about new regulations has been extremely valuable.  Virtually all federal agencies, save Congress and the Supreme Court, have rules banning them from trading on nonpublic information.  It is probably naïve to think that smart people with access to nonpublic information and no rule to prohibit such trading on that information would not take advantage of the opportunity.  But we always hope for more from our politicians.  The new bill(s) should remove the temptation.

European Debt Map (small)

Italy's net bank debt, courtesy of the Telegraph's interactive debt map. The map at the top of the page shows the UK's.

Senators introduce “STOCK Act” to stop “insider trading” in Congress

And European Bondage…

The link below shows the rather unnerving intertwining European debt relationships.  Italy owes 121% of their GDP.  Who do they owe?  Well, French banks hold over $300 billion of Italian bonds. Mamma Mia.

Graphic European Debt Crisis Explained

About Richard Magrann-Wells

Richard is a Executive Vice President with Willis Towers Watson’s Financial Institutions Group based in Los Angel…
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