Clawback!

It's just as ominous as it sounds.

"The rule authorizes the FDIC to recover pay for the two years preceding its appointment as receiver from senior executives and directors 'substantially responsible' for the firm’s failure. The agency would determine the size of the clawback after evaluating an executive’s role in the shareholders’ overall losses after liquidation."  -Bloomberg, 7/6/2011

In theory, this targets those outrageous salaries and bonuses awarded to Wall Street bank executives in the financial free-for-all leading up to the crisis.  But as we see time and again, those guys just aren't affected by all these regulations.  Community banks, on the other hand, are still subject to this rule and are suffering under it.

This is another in a long line of examples in which FDIC "regulations" are really subjective assessments influenced by examiners' biases (good and bad).  A multiple choice test:  which of the following qualifies as "substantial" responsibility?

1. A single bank manager hides liabilities from the bank board and regulators.
2. Bank management encourages and rewards a culture of maximum profit while ignoring risk.
3. Bank management goes after sub-prime borrowers for the high rate of return while ignoring the borrowers' ability to pay.
4. Bank management decides to expand into a booming market to keep shareholders happy, and the market busts.
5. A loan officer sells mortgages to several individuals employed by the same company, who are later laid off and default.

Answer:  all of the above.  In each case, one or more individuals made a decision that went bad - they truly are "substantially" responsible for the results.  Note that "substantial," however, is not the same as "negligent."  Any rational person would consider the first three negligent - #1 is fraud that can happen anywhere, #2 is exactly what Wall Street banks did, and #3 is why several cities have sued Wells Fargo.  But #4 and #5 are just plain bad luck.  Does that mean they still need to be held accountable to the tune of two years' pay?

Eventually the FDIC capitulated and revised their stance:

"The agency, in changes to the initial proposal released in March, clarified that an executive or director would be considered substantially responsible if there was a failure to conduct their responsibilities 'with the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances.'"

Again, completely subjective.  Exactly how much is a "degree?"  What is "ordinarily prudent?"  FDIC Exposer considers ourselves to be ordinarily prudent, but that doesn't mean we know jack about banking.  A "like position" under "similar circumstances?"  That invites a 20/20-hindsight rationality that only the FDIC can perfect.  (We are currently working on that post.  It's a doozy.)

Community bankers are not fat cats.  Their job is to create a successful bank, just like any other small business.  When the local manufacturer closes and no one can afford items at the only grocery in town, do we go after Mom and Pop for price gouging?  True, there are bad seeds in any industry, big and small.  But the vast majority - and even the vast majority of banks closed by the FDIC - are honest people who made a bet and lost it all or lost just enough to be anxious.

In this economy, everyone's anxious.  We all have friends who didn't make it, mostly due to bad luck.  But the rest of us are getting through it, one hard-working day at a time.  We are the constituency politicians claim to fight for while shoving money into the real fat cats' hands - we are the backbone of America.

Is that really who we want to punish?