3 WaMu execs agree to settle FDIC lawsuit for up to $64 million
Three executives who led high-risk home lender Washington Mutual Bank as it skidded toward the biggest bank failure in U.S. history have agreed to settle a government lawsuit for as much as $64 million — far from the $900 million the Federal Deposit Insurance Corp. had sought.
The settlement with Washington Mutual’s longtime chief executive, Kerry Killinger, and top aides Stephen Rotella and David Schneider is not final yet. But FDIC officials said it could be filed by next week in U.S. District Court in Seattle, where WaMu was based.
Proceeds were to be added to $125 million that bankrupt parent company Washington Mutual Inc. has agreed to pay to settle a separate FDIC lawsuit targeting 12 WaMu independent directors. The funds will be distributed to creditors through the U.S. Bankruptcy Court in Delaware.
Settlement details weren’t released, but the FDIC said Tuesday that the defendants would pay relatively little out of pocket.
Most of the recovery was expected from an insurance policy covering negligence by officers and from the defendants’ agreement to abandon claims for retirement and severance pay, assuming the Bankruptcy Court rules that they deserve the benefits.
In their suit, regulators said the bank failed in 2008 because the executives focused only on mortgages that could be sold for the greatest profit: subprime, pay option and home equity loans often made without verifying borrowers’ incomes.
“Washington Mutual Bank epitomizes everything that went wrong with the banking industry and contributed to the financial crisis,” said Sen. Carl Levin (D-Mich.), who as chairman of the Senate’s Permanent Subcommittee on Investigations had held hearings spotlighting WaMu’s aggressive lending.
Levin said the settlement “shows again how bank executives can beat the system.” He called Killinger and his aides “truly the 1%: 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.”
Defense attorneys declined to comment. They had previously depicted the FDIC suit as “political theater” and said the executives were guilty of nothing beyond well-meaning business judgments that backfired.
WaMu shareholders were wiped out when the FDIC seized the bank and sold it to JPMorgan Chase & Co. for $1.9 billion. The deal allowed the FDIC to avoid paying for deposit losses.
Killinger, who was fired just before WaMu collapsed, earned $65.9 million during his final four years at the bank. Under the settlement, he would forfeit certain retirement benefits but not a $15-million “golden parachute” severance payment that had been made to him.
Rotella and Schneider would forfeit their demands for severance pay but keep their retirement benefits under the settlement, FDIC officials said. Schneider also forfeited a bonus he said was due to him.