Little banks may be FDIC’s big targets

November 23, 2010

Banking & Finance

By Ted Carter

The FDIC has let it be known it’s conducting 50 criminal investigations of former executives, directors and employees at U.S. banks that have failed since the start of the financial crisis.

Penny Crosman, a writer for Banks Systems & Technology, says indications are it’s the little guys the feds are after. Most of the 300 banks that have failed are around $200 million in assets or smaller.

“Are they going after the right guys?” Crosman asks, and wonders: “If these community banks were the biggest gamers of the system, wouldn’t they still be around, reveling in their spoils?”

As several commenters on the Wall Street Journal’s website note, this looks at first blush like a case of a government agency going after the small players who can’t properly defend themselves, rather than bigger, more powerful companies that gamed the system and won, Crosman writes.

In a Nov. 1 lawsuit, the FDIC went after former officers and directors of the Heritage Community Bank, Glenwood, Ill. , a $232.9 million institution when it failed. The officers and directors argue they are simply guilty of the same flawed judgment as the big banks on Wall Street ahead of the fall 2008 crash. They plead to “not anticipating the same market forces that also caught central bankers, national banks, economists, major Wall Street firms, and the regulators themselves by surprise.”

Specifically, the Heritage officials are accused of failing to properly manage and supervise Heritage and its commercial real estate lending program. According to the FDIC, the bank “routinely financed commercial real estate projects — including speculative ones (i.e., projects without committed buyers or tenants) — without any meaningful analysis of their economic viability, and often with inadequate appraisals.

The bank repeatedly made loans with excessive ‘loan-to-value’ ratios, meaning the loans were too large given the value of the projects. The bank also failed to properly evaluate the creditworthiness of commercial real estate borrowers and guarantors to ensure they could reliably repay their loans.

If that’s the criteria for lawsuits against the failed community banks, the court docket is going to be jam-packed. But strangely absent will be the officers and directors of the Biggie Banks that got the billions in bailout money.

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