Silverado's Legacy: Pressure on Directors

Neil Bush's time in the spotlight should be about over. Both edges of his personal sword of Damocles have now fallen upon him and inflicted their pain.

First, the Office of Thrift Supervision affirmed the cease-and-desist order recommended by an administrative law judge as a proper sanction for his conduct while serving as director of Silverado Banking, Savings and Loan Association of Denver.

Now, a federal district court judge in Denver has approved a $49.5 million settlement in the $200 million lawsuit brought by the Federal Deposit Insurance Corp. against Neil Bush and 12 other directors or executives of Silverado.

This should end the matter. Journalistic exaggeration notwithstanding, there never was credible evidence that he had committed any crime.

Neil Bush has become older, sadder, wiser - and considerably poorer. He probably has learned that, even when his father was Vice President of the United States, he had to do more to earn fees of $20,000 to $30,000 a year as a thrift institution director.

It wasn't enough to show up on time, when summoned by management, and wave his hand on cue to affirm their decisions.

|Unqualified and Untrained'

To obtain a cease-and-desist order, the Office of Thrift Supervision summarized the situation: "In this case, Neil Bush accepted a position for which he was unqualified and untrained.

"He did not seek, nor did he receive, sufficient assistance... Certainly, he had no experience in managing a large corporation, especially a financial institution with almost $2 billion in assets.

"Unfortunately he was not cognizant of conflict-of-interest situations he encountered as a director of Silverado."

Two of the investors in his fledgling oil-and-gas-exploration business received loans from Silverado amounting to $106 million. One of these two borrowers received a $900,000 line of credit in which Neil Bush could have been, but actually never was, an indirect beneficiary.

Ties to Borrower Concealed

In fact, the borrower never used his line of credit. The President's son voted in favor of these transactions, with two abstentions, but never disclosed to the Silverado board his ties to the applicants.

When Silverado collapsed under the weight of its bad real estate loans and fraudulent stock schemes, leaving the American taxpayers with a potential $1 billion bill, Neil Bush was among those held accountable - even though he had not been an officer of the thrift nor had he received any remuneration other than for his fees as a director.

In its cease-and-desist order, the Office of Thrift Supervision displayed little sympathy for the plight of Mr. Bush: "No activity is more critical to the survival and success of any insured financial institution than the faithful performance by its officers and directors of their fiduciary duties.

"By their efforts, the institution operates; only through their diligence, loyalty, care, and candor may it prosper. Failure of a director to satisfy these fiduciary duties undermines the foundation of an institution's safe and sound operation.

"For this reason, a director's adherence to his fiduciary duties must be an obligation keenly appreciated and scrupulously followed. This is a case where a director failed to meet these standards."

As we leave Mr. Bush to pick up the pieces of his shattered life and the taxpayers to fund the $1 billion loss, it should not be assumed that the impact of the Silverado case is at an end. In the areas of both professional responsibility and director liability. Silverado has assumed a role of transcendent importance.

Timothy Ryan, director of the Office of Thrift Supervision, announced that Coopers and Lybrand, the auditor for this thrift institution, had agreed to sign a consent decree.

Measuring Stick for OTS

Mr. Ryan stated that the Silverado case will be used as a measuring stick to evaluate the acceptable level of professional responsibility that lawyers, accountants, appraisers, asset managers, and the like must observe in representing their savings and loan clients. (There is a six-year statute of limitations for past transgressions.)

Since the OTS thought Coopers and Lybrand, in its 1986 audit of Silverado, had understated materially the losses suffered - to the tune of $35 million - it compelled the Big Six firm to sign a humiliating consent decree.

Coopers and Lybrand agreed to conduct a formal review every three years of the performance of all of its partners who conduct audits of bank or thrift institutions; banned the partner who had done the Silverado audit from ever doing another one for an S&L; and agreed that, in the future, all of its employees who conduct audits will sign a statement that they will comply with minimum professional standards for an audit.

The main message of Silverado is that the days are over in which professionals can close their eyes to the legally and ethically questionable conduct of their clients.

Ethics Coming Back into Vogue

We may not be returning to the halycon days of professional responsibility. The law firm of Lord, Day and Lord exemplified this responsibility by refusing to represent its longtime client, The New York Times, in the Pentagon Papers case because the material to be published had been removed without permission. But the Silverado case indicates that professional ethics soon will be back in vogue.

Few would deny that the OTS is on the right track in insisting upon increased attention to professional responsibility. Some questions exist, however, as to the extent of their zeal in the director-liability area.

A smug, self-serving OTS press release affirmed the cease-and-desist order recommendation of the administrative law judge in the Bush case: "This decision sets a clear standard by which directors of federally insured depository institutions can determine appropriate conflict-of-interest situations." Perhaps, and perhaps not.

There is little doubt that Neil Bush should have disclosed his independent dealings with the potential borrowers from Silverado. But the OTS extended his failure to do so in a general definition of director responsibility that is troublingly broad.

Role of Outside Directors

The federal agency seems to make little distinction between an outside director who, in policy-making capacity, devotes only days - or, at most, weeks - a year to board business and an executive of the thrift supervision responsible for its day-to-day management.

Taken to an extreme, this new standard of director performance advanced by the OTS would make any thrift director a guarantor of the honesty, and perhaps the performance, of each fellow director and of the executives of the institution.

This appears to be an impossibly high standard by which to judge an outside director. There are enough problems to be solved in dealing with the S&L crisis, without having the OTS sending signals that it might institute a reign of terror that would serve to scare away competent outside directors.

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