Using Clawbacks to Punish Bank Executives

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Using Clawbacks to Punish Bank Executives

By PETER J. HENNING

A common complaint has been the absence of prosecution of financial executives for their role in the economic crisis in 2008, but what is equally striking is the large compensation those executives received while their companies pursued increasingly risky policies that led to the crisis.

The Federal Deposit Insurance Corporation has taken small steps to address this issue. It is pursuing claims for damages against former top executives at Washington Mutual, which became the largest bank failure in history. The F.D.I.C. has also adopted a new clawback rule for failed banks that would allow it to try to reclaim two years worth of executive compensation.

The F.D.I.C. is pursuing its case against Kerry K. Killinger, Washington Mutual’s onetime chief executive, and two other executives at the bank for risky lending practices that led to its shutdown in September 2008. The complaint alleges they were grossly negligent and breached their fiduciary duty for undertaking a so-called “higher-risk lending strategy” that increased the bank’s exposure to subprime mortgages concentrated in California and Florida, undermining its capital base when the housing market collapsed.

The defendants have assailed the F.D.I.C. claims as a public relations move, asking for dismissal of the lawsuit because they exercised reasonable business judgment in shifting the bank into subprime loans. A brief filed by Stephen J. Rotella, Washington Mutual’s former chief operating officer, contends that the case “amounts to a pure public relations stunt designed to deflect criticism away from the F.D.I.C., which has been — and continues to be — under fire for its regulatory failures with respect to WaMu and refuses to take any responsibility for its central role in the financial crisis.”

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2. K & R

Here's a K&R because this deserves more attention than it's getting.