Banks Bemoan FDIC's Rules On |Parachutes'

Bank executives, directors, and lawyers are taking the Federal Deposit Insurance Corp. to task for proposing restrictions on golden parachutes at troubled banks and thrifts.

The FDIC is accused of over-reacting - and making it difficult for the industry to attract the talent it needs to restore stability and profitability.

"The government should be encouraging the best and brightest" to enter banking, said Richard Alexander, a former regulator and now a partner at the Washington law firm of Arnold & Porter.

He is one of many critics who see the FDIC's rules on executive pay and director indemnification payments as "scaring away good talent."

Under a proposal issued in September, the FDIC would ban the lucrative executive severance bonuses known as golden parachutes at troubled institutions. The agency also wants to tighten rules on indemnifying directors involved in liability lawsuits - a rule that is also being criticized for making it hard to attract able board members.

Punishing the Innocent

While critics acknowledge the regulators' point that some bankers have had their pockets lined after their institutions came close to failure, they believe the entire industry should not be made to suffer.

Regulators are so serious about the matter that last February they forced Alan P. Hoblitzell, former chairman and chief executive of troubled MNC Financial Inc., to return $915,865 in severance after he took early retirement from the Baltimore-based company, which faced millions in losses.

Several months later, regulators stopped a $1.25 million buyout of Charles Zwick's contract as chairman and chief executive of Miami-based Southeast Banking Corp.

In July, Mr. Zwick sued the company to honor that commitment. In September, regulators sols the ailing institution to First Union Corp., Charlotte, N.C.

FDIC Sees Abuses

Robert Miailovich, assistant director of the FDIC's division of bank supervision, declined to comment on individual cases but said, "There have been abuses."

Golden parachutes were originally conceived to protect senior executives' interests when their companies were involved in a hostile takeover.

Over the years, banks and thrifts have offered the protections liberally as part of compensation packages.

The Bank Fraud Act of 1990 authorized the FDIC to set a strict golden parachute rule in its role as guardian of the Bank Insurance Fund.

Under the FDIC rules proposed to carry out the law, the agency must approve any golden parachute offered departing executives of troubled banks.

Such banks will usually have ratings of 4 or 5 on the Camel regulatory scale, which is based on capital, asset quality, management, earnings, and liquidity.

Certifying Integrity

To pass muster with the FDIC, such an institution must also demonstrate that the executive committed no fraudulent act, is not substantially responsible for the institution's condition, and has not violated banking and criminal laws.

The rule "would prohibit the payment before it is even made," said Mr. Miailovich.

The FDIC will permit golden parachutes if they are used to recruit executives to help save a troubled institution, to compensate employees fired in efforts to downsize the bank, or to pay off deferred compensation plans.

Some industry experts argue that the real threat to banks isn't the golden parachute rule but the associated limitations on paying legal fees for directors sued over their part in a bank's loss.

Six Criteria for Payment

All institutions would have to meet six criteria before paying legal fees for directors and officers.

For example, the institution's board would have to certify that the director has a "substantial" likelihood of prevailing on the merits of any legal proceeding.

The board must also determine in writing that the indemnification payments would not adversely affect the institution's safety and soundness.

And the director must agree, in writing, to reimburse the institution if he doesn't win.

Robert E. Barnes, president and chief executive of Bay View Federal Bank, a $2.9-billion-asset thrift in San Mateo, Calif., said the indemnification rule makes life for directors "terrifying."

"I have said to a number of people that, if it wasn't my livelihood, I would not be on the board of a financial institution," he said.

Hampering Recruitment

"Directors are being held to a higher fiduciary and corporate standard than at any other company that I am aware of," said Mr. Barnes. "That makes it extremely difficult to recruit and also retain directors. I just recently had one of my directors say, |I can't take this risk, I'm leaving.' And he resigned."

L.D. Mullins Jr., a founding director of Community Savings, a $565 million-asset institution in North Palm Beach, Fla., wrote the FDIC that, nowadays, he would never consider being a director.

"How can I, in good faith, risk my personal fortune on some future examiner's opinion?" he asked. "Somehow, you must work on ways to attract qualified directors to the business rather than discourage them as this proposal does."

Stanley M. Huggins, senior partner in Huggins & Associates, a Memphis firm specializing in banking law, said board members have already been "scared to death" by a number of high-profile lawsuits against directors of failed banks. He said the FDIC's proposed rule does little to calm their fear.

"The bottom line is, if you've got some deep pockets and you are on the board of a failed bank or thrift, you've got some trouble," he said. "The cumulative effect [is that] wealthy, competent, and sophisticated people are having second thoughts" about serving on boards. "Even healthy institutions are going to have a problem retaining directors."

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