Statement of
Martin J. Gruenberg, Vice Chairman,
Federal Deposit Insurance Corporation
on
Federal and State Enforcement of Consumer
And
Investor Protection Laws
before the
Financial Services Committee,
U.S. House of Representatives;
2128 Rayburn House Office Building
March 20, 2009
Chairman Frank, Ranking Member Bachus and members of the Committee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) regarding federal and state enforcement of consumer and investor
protection laws.
Earlier this month, in a speech before the National Association of Attorneys General,
FDIC Chairman Bair stated that many of the current problems in the economy were
caused by a widespread failure to protect consumers. It is essential that those whose
actions contributed to the current crisis and who are engaging in practices harmful to
consumers be held accountable. In addition, it is important to take steps to prohibit
these practices from reoccurring in the future.
The FDIC has a strong commitment to the vigorous and effective enforcement of
consumer protection laws and other statutes under our jurisdiction in order to ensure fair
treatment of individuals, protect the safety and soundness of insured financial
institutions, and carry out our core mission of maintaining public confidence in the
banking system. The FDIC brings a unique perspective to this issue because of the
variety of functions it performs including deposit insurer, federal supervisor of state
nonmember banks and savings institutions, and receiver for failed insured depository
institutions.
My testimony today will discuss how the FDIC conducts enforcement both with regard to
failed institutions in our role as receiver, and with regard to open banks in our role as
supervisor. In addition, I will touch on the efforts of the FDIC's Office of Inspector
General (OIG). I also will suggest a measure that would address a limitation on our
existing authority.
Enforcement -- Failed Institutions
In addition to overseeing the national deposit insurance system and acting as primary
federal supervisor for approximately 5,000 state chartered banks that are not members
of the Federal Reserve System, the FDIC is responsible for resolving all failures of
Martin J. Gruenberg, Vice Chairman,
Federal Deposit Insurance Corporation
on
Federal and State Enforcement of Consumer
And
Investor Protection Laws
before the
Financial Services Committee,
U.S. House of Representatives;
2128 Rayburn House Office Building
March 20, 2009
Chairman Frank, Ranking Member Bachus and members of the Committee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) regarding federal and state enforcement of consumer and investor
protection laws.
Earlier this month, in a speech before the National Association of Attorneys General,
FDIC Chairman Bair stated that many of the current problems in the economy were
caused by a widespread failure to protect consumers. It is essential that those whose
actions contributed to the current crisis and who are engaging in practices harmful to
consumers be held accountable. In addition, it is important to take steps to prohibit
these practices from reoccurring in the future.
The FDIC has a strong commitment to the vigorous and effective enforcement of
consumer protection laws and other statutes under our jurisdiction in order to ensure fair
treatment of individuals, protect the safety and soundness of insured financial
institutions, and carry out our core mission of maintaining public confidence in the
banking system. The FDIC brings a unique perspective to this issue because of the
variety of functions it performs including deposit insurer, federal supervisor of state
nonmember banks and savings institutions, and receiver for failed insured depository
institutions.
My testimony today will discuss how the FDIC conducts enforcement both with regard to
failed institutions in our role as receiver, and with regard to open banks in our role as
supervisor. In addition, I will touch on the efforts of the FDIC's Office of Inspector
General (OIG). I also will suggest a measure that would address a limitation on our
existing authority.
Enforcement -- Failed Institutions
In addition to overseeing the national deposit insurance system and acting as primary
federal supervisor for approximately 5,000 state chartered banks that are not members
of the Federal Reserve System, the FDIC is responsible for resolving all failures of
insured financial institutions in the United States. When a bank fails, and thus is unable
to meet its financial or capital requirements (or both), the chartering authority closes the
institution and appoints the FDIC as receiver. As receiver, the FDIC either pays
depositors directly for their insured deposits, or arranges for a purchase of the failed
institution by another insured financial institution.
Immediately following the closing of every failed institution -- regardless of size,
circumstances or primary federal regulator -- our investigations staff and our attorneys
who specialize in professional liability issues together begin an investigation. The
purpose of the investigation is to determine, among other things, whether the failed
institution's directors, officers, and professionals, such as accountants, appraisers and
brokers, were responsible for its losses, and, if so, to hold them accountable.
At the closing, our investigators and attorneys will: determine the reason for the bank's
failure; look for evidence of potential fraud that may have contributed to the institution's
failure; identify any cause of action against directors, officers or other professionals who
contributed to the failure; preserve Bankers Bond and Director and Officer insurance
coverage for any potential or existing claim; maintain and protect the integrity of the
bank's records; and establish the chain of custody for such records.
Among the "assets" the FDIC as receiver acquires from failed institutions are the
institution's pending or potential "professional liability claims," that is, legal claims
against its officers, directors, bond carriers, independent accountants, attorneys,
appraisers and others who provided professional advice to the institution. These are
civil claims filed primarily in federal court. For each existing potential claim, our
attorneys determine whether to seek authority to sue or terminate the investigation,
weighing the merits of the claim, the cost of pursuing it, and the amount likely to be
recovered. If a meritorious claim exists but is not likely to be cost-effective, we refer the
claim to the appropriate primary financial regulator for administrative enforcement
action.
For each insured bank or thrift that fails, our attorneys open 11 different types of
professional liability investigations. The more important of these (in terms of required
staff resources and potential recoveries) are investigations of directors, officers,
attorneys, accountants, fidelity bond carriers, appraisers, perpetrators of mortgage
fraud, securities brokers, and commodities brokers. Since 1986, the FDIC through its
professional liability program has recovered a total of $6.1 billion and incurred expenses
of $1.4 billion. To put this in context, recoveries in recent years are at a relatively low
level because of the small number of financial institution failures from 2004 until the fall
of 2007. In 2008, for example, the FDIC recovered only $31.2 million from professional
liability claims, a historical low. Professional liability activity – and recoveries – are
expected to increase substantially now that institutions are failing and giving rise to
significantly increased professional liability claims and investigations.
Recent failures of insured financial institutions – 3 failures in 2007, 25 failures in 2008,
and 17 failures just since the start of 2009 – have resulted in a substantial increase in
to meet its financial or capital requirements (or both), the chartering authority closes the
institution and appoints the FDIC as receiver. As receiver, the FDIC either pays
depositors directly for their insured deposits, or arranges for a purchase of the failed
institution by another insured financial institution.
Immediately following the closing of every failed institution -- regardless of size,
circumstances or primary federal regulator -- our investigations staff and our attorneys
who specialize in professional liability issues together begin an investigation. The
purpose of the investigation is to determine, among other things, whether the failed
institution's directors, officers, and professionals, such as accountants, appraisers and
brokers, were responsible for its losses, and, if so, to hold them accountable.
At the closing, our investigators and attorneys will: determine the reason for the bank's
failure; look for evidence of potential fraud that may have contributed to the institution's
failure; identify any cause of action against directors, officers or other professionals who
contributed to the failure; preserve Bankers Bond and Director and Officer insurance
coverage for any potential or existing claim; maintain and protect the integrity of the
bank's records; and establish the chain of custody for such records.
Among the "assets" the FDIC as receiver acquires from failed institutions are the
institution's pending or potential "professional liability claims," that is, legal claims
against its officers, directors, bond carriers, independent accountants, attorneys,
appraisers and others who provided professional advice to the institution. These are
civil claims filed primarily in federal court. For each existing potential claim, our
attorneys determine whether to seek authority to sue or terminate the investigation,
weighing the merits of the claim, the cost of pursuing it, and the amount likely to be
recovered. If a meritorious claim exists but is not likely to be cost-effective, we refer the
claim to the appropriate primary financial regulator for administrative enforcement
action.
For each insured bank or thrift that fails, our attorneys open 11 different types of
professional liability investigations. The more important of these (in terms of required
staff resources and potential recoveries) are investigations of directors, officers,
attorneys, accountants, fidelity bond carriers, appraisers, perpetrators of mortgage
fraud, securities brokers, and commodities brokers. Since 1986, the FDIC through its
professional liability program has recovered a total of $6.1 billion and incurred expenses
of $1.4 billion. To put this in context, recoveries in recent years are at a relatively low
level because of the small number of financial institution failures from 2004 until the fall
of 2007. In 2008, for example, the FDIC recovered only $31.2 million from professional
liability claims, a historical low. Professional liability activity – and recoveries – are
expected to increase substantially now that institutions are failing and giving rise to
significantly increased professional liability claims and investigations.
Recent failures of insured financial institutions – 3 failures in 2007, 25 failures in 2008,
and 17 failures just since the start of 2009 – have resulted in a substantial increase in