WHEN Washington Mutual collapsed in 2008, it was the largest bank failure in American history. So the $64.7 million settlement struck last week by federal banking regulators and three former WaMu executives seems like small potatoes indeed.
Worse, most of the money didn’t even come from the former executives’ pockets. Instead, it came from directors’ and officers’ liability insurance policies paid for by the bank.
The deal, agreed to by the Federal Deposit Insurance Corporation, requires that the men, among them Kerry Killinger, WaMu’s former chief executive, forgo claims for insurance coverage and some past compensation that they had requested from the bankruptcy court.
To anyone familiar with WaMu’s Wild West lending practices — “The Power of Yes” was the bank’s motto — the agreement might seem like yet another example of the minimalist punishment meted out to major players in the credit boom and bust.
Here are the particulars: Mr. Killinger paid $275,000 in cash. He also agreed to forfeit claims against his WaMu retirement accounts with a face amount of $7.5 million.
These sums are a pittance when set against the $88 million in compensation that Mr. Killinger received from the bank from 2001 to 2007.
Stephen Rotella, WaMu’s former president, paid $100,000 in cash and gave up a claim to $11.5 million in compensation. David Schneider, its former home loans president, paid $50,000 and forfeited a claim to $5.8 million.
Mr. Rotella and Mr. Schneider were able to hang on to other claims that they have filed in the WaMu bankruptcy: Mr. Rotella retained a retirement account valued at $5.4 million, while Mr. Schneider kept a $1.9 million claim. It is unclear whether WaMu will pay these claims, of course. If it does, the executives will have to pay taxes on them.
“Pretty soft,” is how Senator Carl Levin, the Michigan Democrat who heads the Senate’s permanent subcommittee on investigations, characterized the settlement in an interview on Friday.
“Washington Mutual Bank epitomizes everything that went wrong with the banking industry and contributed to the financial crisis, so the F.D.I.C. was right to go after the bank’s leadership,” Mr. Levin said in a statement issued on Tuesday. “Former WaMu executives Killinger, Rotella and Schneider are truly the 1 percent: they got bonus upon bonus when the bank did well, but when they led the bank to collapse, insurance and indemnity clauses shielded them from paying any penalty for their wrongdoing.”
Officials at the F.D.I.C. said they were pleased with the settlement and that it maximized its recoveries. The $64.7 million will be combined with $125 million that WaMu’s holding company agreed to relinquish to the regulator.
Although the settlement probably disappoints anyone hoping executives might be held personally accountable, it does illustrate what regulators are up against when litigating these matters.
For starters, the F.D.I.C. faced a time constraint. The insurance policies being tapped by the regulator were declining steadily in value as others making claims against the bank were paid.
The F.D.I.C. also had to confront the circular nature of the continuing WaMu bankruptcy and the claims being made against the institution. If the regulator had asked for higher payments from the former executives, the men could have turned around and requested that the bankrupt company pay the amounts under its indemnification policies. If the company did have to cover the F.D.I.C.’s requests, it could reduce the $125 million that WaMu has agreed to give the regulator.
Given these risks and the costs of continuing litigation, the F.D.I.C. said, it made sense to complete the $64.7 million deal.
Lawyers representing Mr. Killinger and Mr. Schneider did not respond to requests for comment.
Mr. Rotella issued this statement through a spokesman: “I believe the facts clearly demonstrate that during my brief tenure at WaMu, my efforts substantially reduced risk and addressed highly challenging business problems that predated my arrival. I continue to strongly dispute the F.D.I.C.’s allegations and regret that we did not have more time to finish restructuring WaMu successfully.”
Mr. Levin’s dismay over the settlement probably arises from his deep knowledge of WaMu and its practices. After all, he led the Senate’s 2010 investigation into the origins of the financial crisis, producing a 650-page report on actions taken by WaMu, Goldman Sachs and the credit ratings agencies, among others.
Mr. Levin’s office referred the findings to prosecutors for possible follow-up. Not much has happened since.
The damning report detailed WaMu’s questionable operations as well as those of its regulator, the Office of Thrift Supervision. That feckless agency was responsible for overseeing three of the biggest disasters in mortgage lending history: Countrywide Bank, IndyMac Bancorp and WaMu. Mercifully, the Dodd-Frank law put an end to the O.T.S., folding it into the Office of the Comptroller of the Currency.
ARE the WaMu executives out of the woods? They’re getting close. Last summer, the Justice Department shut down its criminal investigation into WaMu and its officials, concluding that the evidence it had amassed “did not meet the exacting standards for criminal charges in connection with the bank’s failure.”
Mr. Levin noted that the O.C.C. could still act against WaMu’s former executives.
“There are some real possible enforcement actions they can take to go after civil money penalties,” he said. “They have the ability to go after securities violations for securities WaMu issued that were defective or misleading, unsafe and unsound practices, breach of fiduciary duty, general disregard for banking regulations — there’s still a way to get more accountability.”
Asked whether the O.C.C. would pursue such actions, a spokesman declined to comment.
Unfortunately, the agency’s history does not suggest that it will act aggressively on this matter. If past is prologue, the accountability deficit that many Americans find so disturbing is likely to grow even larger.