WASHINGTON -- Congress could help federal regulators recover up to $1 billion more from directors and officers of failed banks, House Banking Committee Chairman Henry B. Gonzalez said Wednesday.
The Texas Democrat said Congress ought to invalidate the "regulatory exclusion" most insurance companies have written into their director and officer policies to insulate themselves from lawsuits by regulators.
"Regulatory exclusions are an effort by insurance companies to transfer their financial responsibility to cover the losses caused by negligent officer and directors squarely onto the backs of taxpayers," he said at a committee hearing.
Lawyers from the Federal Deposit Insurance Corp. and the Resolution Trust Corp. testified that Congress ought to pass legislation banning regulatory exclusions.
John V. Thomas, the FDIC's associate general counsel, said the agencies want Congress to nullify the exclusions retroactively in the so-called D&O policies.
But most other committee members in attendance balked at the prospect of the government's retroactively changing contracts entered into by two private-sector parties.
Asking Regulatory Remedy
"Going back retroactively," said Rep. Charles Schumer, D-N.Y., "this Congress ought to be darn careful before it does that."
Rep. Jim Leach, R-Iowa, the panel's ranking minority member, questioned the move's constitutionality. "I'm really sympathetic to the dilemma you have," he told the government lawyer's. "But you're asking an awful lot of this body. . . . Isn't there a regulatory remedy?"
Rep Leach suggested that federal regulators bar banks and thrifts from buying insurance policies that contain a regulatory exclusion.
During the 1980s, when so many banks and thrifts were failing, insurance companies started adding regulatory exclusions to their policies. When the FDIC and RTC have sued directors and officers of failed institutions, most courts cite the exclusions and throw out the government's claims.
Warning from Insurer
Lena Mkhitarian, senior vice president at National Union Fire Insurance Co. in Pittsburgh, warned that the cost of D&O policies would skyrocket if current law were changed to void regulatory exclusions. Weak banks wouldn't even be able to get coverage, she added.
Insurers are willing to protect bank executives against claims from employees, customers, and shareholders, she said. But the industry cannot afford to fight the federal government, according to Ms. Mkhitarian.
"Regulatory claims are quite severe from the insurer's point of view," her statement asserted. "Regulators have generally devoted far more resources to prosecution of their claims than would be possible for private parties."
In a written statement to the committee, the American Bankers Association also opposed congressional tinkering in this area. Without affordable insurance, banks would be unable to attract quality directors, the ABA said.