The Federal Deposit Insurance Corp. has accused 18 former officers and directors of the parent company of Midwest Bank with reckless practices that led to the Chicago-area bank's failure during the financial crisis.
The onetime executives of Midwest Banc Holdings in Melrose Park, Ill., disregarded guidelines imposed by regulators and loaned a combined $100 million to six borrowers without sufficiently assessing their ability to repay the loans, the FDIC said in a lawsuit filed Tuesday in U.S. District Court in Chicago.
Midwest also failed to part with roughly $85 million in preferred shares it held in Fannie Mae and Freddie Mac that lost much of their value after the government-sponsored enterprises went into conservatorship in 2008.
"Defendants approved a number of large and grossly imprudent loans, which, combined with director defendants' gamble on declining investment securities, caused damages in excess of $128 million," the lawsuit said.
Regulators shuttered the $3.2 billion-asset Midwest Bank in 2010; its loans, deposits and 26 branches were acquired by FirstMerit (FMER) in Akron, Ohio.
The defendants — who include James Giancola, a former chief executive of Midwest; Jerome Fritz, a former chief operating officer; and Robert Genetski, a director who led a committee that oversaw the bank's assets and liabilities — say the FDIC is selectively second-guessing lending decisions and holding Midwest responsible for failing to foresee the subprime crisis that led to the rescue of Fannie and Freddie.
"The complaint alleges no misconduct and the record will establish that each of the former directors and officers properly exercised their business judgment, which cannot now be second-guessed in litigation by the FDIC," Nancy Temple, a lawyer for the defendants, said in an email.
The government backed Fannie and Freddie "and encouraged investments in them by Midwest Bank and others," Temple's email also said.
The FDIC's allegations tie in part to a March 2004 order from regulators that directed Midwest to revise its lending policies and procedures. The bank revamped the guidelines but approved a series of loans starting in July 2008 that departed from them, the lawsuit says.
In one case, Midwest extended $18.4 million in credit to a construction company and its owner despite evidence the borrowers had insufficient cash to meet their existing obligations and without demanding sufficient collateral to protect the bank in the event of a default, the FDIC charged.
On another occasion, Midwest allegedly loaned $27.5 million to a real estate developer who had failed to keep up with payments on $22.9 million the developer had borrowed from Midwest three years earlier.
The lawsuit also charges Midwest with holding on to $85.1 million of preferred shares in Fannie and Freddie the bank acquired starting in 2006.
In the previous year Midwest had adopted a policy to write off losses from securities that were unlikely, in the opinion of its auditors, to regain value, the lawsuit said. That meant the bank would have to reduce its earnings by the amount of the writedown.
Though Midwest took a loss of $17.6 million on the shares in March 2008, its management allegedly continued to debate over the next seven months whether to hold the shares even as they lost millions of dollars more in value.
The securities lost the remainder of their worth in September 2008 following the government's takeover of Fannie and Freddie.
"This hand-wringing exercise over whether to hold or sell [other than temporarily impaired] stock while the stock continued to drop in value, thereby costing additional millions of dollars, was the very problem that the bank's policy announced in 2005 was designed to prevent," the FDIC charged.
The losses on the investment in Fannie and Freddie put Midwest "into a hole," Giancola told investors on a call in November 2008. Midwest later received $85.5 million in funds through the Troubled Asset Relief Program after being unable to raise capital on its own.