Personal Liability for Bank Failures

Officers and directors of a corporation cannot be held personally liable for the corporation's debts unless there is a "piercing of the veil" which allows for that sort of personal liability. The corporate form, after all, is designed specifically to avoid personal liability.

joefromchicago-
Thank you.

You may find the following article of interest:

August 1, 2009
Talking Business
‘Nice’ Wasn’t Part of the Deal
By JOE NOCERA
A few weeks ago, a woman named Judith Kipper asked Lawrence Summers a question that’s been on everyone’s mind " one that helps explain why the country is so angry at the big banks right now.

Mr. Summers, the president’s top economic adviser, had just finished giving a speech in Washington, and was taking questions. Ms. Kipper, an expert on Middle East policy, was in the audience.

After first mentioning “the apparent unwillingness of banks to keep people in their homes,” she pointedly asked Mr. Summers: “Do you have confidence that the banks, who helped to create the problem, and the C.E.O.’s and C.F.O.’s who are still there, are assuming a little bit of responsibility or at least self-discipline to do what is right for the country and not only for their bottom line?”

Mr. Summers was just as pointed in his reply. “No one should be confused about the extent to which the public sector has provided a foundation for financial recovery,” he said sternly, ticking off such measures as the Troubled Asset Relief Program and the trillions of dollars in various government guarantees to the financial sector. He concluded, “It is very important that those in the financial system consider carefully their obligations to their fellow citizens.”

But what are those obligations? Here we are 10 months past the frightful events of last September, when it appeared that the financial system was headed off a cliff. A number of the banks, including JPMorgan Chase and Goldman Sachs, have returned their TARP loans to the government. The second quarter was hugely profitable for not only JPMorgan and Goldman, but for Bank of America and Citigroup, as well. Executive compensation is likely to soar again; Goldman has already set aside billions for year-end bonuses, while at Citi, an important trader may well be able to lay claim to $100 million that he says he is contractually owed. Clearly, things are looking up if you work for a financial firm.

And yet, even as the banks’ prospects have improved, the government had to call a big meeting just this week of the nation’s largest mortgage servicers " which include the big banks " because it is so unhappy with the sluggish pace of loan modifications. Foreclosures continue to rise. According to an analysis by The Wall Street Journal, overall loan volume continues to decline; small businesses, especially, are gasping for credit. For many Americans, credit card rates have skyrocketed.

It is hard to look at the discrepancy between how the banks appear to be doing and how the real economy is doing and not conclude that something is wrong. A few weeks ago, after I wrote a column defending the Bank of America-Merrill Lynch deal, a reader left a message on my voice mail. “You think Bank of America has it tough because they have to pay 8 percent on their bailout money?” he practically shouted into the phone. “They just raised the interest on my credit card to 27 percent!” The message ended when he slammed down the phone in fury.

Companies talk all the time about “giving something back.” But here is an industry that helped create a huge financial mess, and taxpayers have put trillions of dollars at risk to help revive it. If ever an industry should want to give something back, you would think it would be the financial firms, wouldn’t you? That is why people are so mad. They feel they have bailed out the companies and have gotten nothing in return. All of which raises the question: what do the banks now owe the country?

•

This is hardly the first time this question has stirred enormous anger. During the Depression, there was just as much antipathy toward the big money center banks, especially after the famous Pecora committee hearings exposed some of their seamier practices.

There was also, however, a surprising outlet for some of that anger. Under the laws at the time, bankers faced both criminal and civil liability when their banks went bust. “Bankers went to jail over this,” said Gary Richardson, an economics professor at the University of California, Irvine. This was true even though, in many cases, the failed bank had been a victim of the Depression-era bank panic, rather than a bad actor that had taken foolish risks, as is the case today.

“The government has always recognized that banks are special institutions with an important role in society,” said Mr. Richardson. “The whole ethos at the time was, ‘We’ll give you a lot of freedom, but if something goes wrong with these special institutions, we’ll punish you severely.’ ”

In part, that is why many bankers didn’t fight the set of regulations put in place by President Franklin D. Roosevelt; what they got in return was the elimination of that personal liability. The banking system also got financial assistance from the government’s Reconstruction Finance Corporation.

Still, by the mid-1930s, according to the Newsweek columnist (and F.D.R. historian) Jonathan Alter, Roosevelt was openly complaining that the nation’s bankers seemed to have forgotten how much the government had done for them. “In 1936,” Mr. Alter said, “F.D.R. compared them to a drowning man who is saved by a lifeguard and four years later returns to ask the lifeguard angrily: ‘Where’s my silk hat? You lost my silk hat!’ ”

In many ways, that is how people feel now about the banks. When I asked government officials and others this week what they thought the banks owed the country, I heard the same comments over and over: they needed to do more for Main Street, because taxpayers had done so much for them. “The people who invested billions of dollars in tax money in these banks expect them to join the effort to fix the broken credit market " not to fight every inch of the way to protect business as usual,” said Elizabeth Warren, the Harvard professor and chairwoman of the Congressional panel overseeing TARP.

Barney Frank, the chairman of the House Financial Services Committee, told me the banks needed to start making more loan modifications " and pay themselves less. “Their mistakes got us into trouble,” he said. “For them to be paying themselves this kind of money amounts to a moral deficiency.” Frank Partnoy, a banking and derivatives expert at the University of San Diego, pointed out that lawyers often take cases on a pro bono basis. And doctors usually treat people who show up at an emergency room, even if they lack insurance. Bankers, he said, need to start doing the same thing, even if it cuts into their profits.

Even President Obama weighed in this week, telling BusinessWeek that “if you’ve presided over an enormous meltdown that has resulted in about $10 trillion worth of wealth being lost, that you might want to be a little self-reflective and perhaps change your business goal. And when I see Wall Street not doing that, it tells me not only that they have forgotten the recent past, but that they are putting the country’s economy at further risk.”

So why isn’t it happening? Why aren’t we seeing kinder, gentler banks trying to repay their debt to society? When I spoke to bankers this week, they sounded aggrieved at all the anger directed their way, and they claimed they were doing the best they could. And from their perspective, they are.

But their perspective is that of anyone running a business: their priority is to maximize profit for shareholders. That’s what capitalists do. And because they are banks operating in this difficult environment, maximizing profits means, for instance, jacking up credit card interest rates to cover increasing write-offs, and foreclosing when that makes more economic sense than modifying a loan. To ask them to put aside the profit motive, even temporarily, for the good of the country " it’s not even in their frame of reference.

The problem, though, is that a big bank isn’t just another capitalist institution; we’ve all learned that in the past year. For one thing, they are so important systemically that they can’t be allowed to go bankrupt. They always have the government as their ultimate backstop if they make too many mistakes.

Which is also why, if bank behavior does change, it won’t be because bankers see some new light. It will be because the government forces change on them. It has happened before, and not just during the Depression. Banks used to hide basic facts about credit card loans " until Congress passed the Truth in Lending Act in 1968. Banks never used to lend in low-income neighborhoods " until the Community Reinvestment Act of 1977 forced them to start.

If we want banks to modify more loans, or extend more credit to small businesses, or roll back executive compensation, the government is going to have to enact rules to make those things happen. For the banking industry, that is the flip side of having a government safety net: the government also gets to set the rules. It needs to start doing so.

Late this week, I asked the Treasury secretary, Timothy Geithner, what he thought the banks owed the country. In responding, he made a point that often gets lost in all the anger. We did get something in return for all that bailout money, he said. We got a salvaged economy, and a still-functioning banking system. “Nothing we did was for them,” he said. Rather, it was for the American people, who would have been in far worse straits if government had allowed the banks to go bust.

I have to admit, Mr. Geithner’s answer caught me up short. Last fall, I was keenly aware of the reasons the government was rescuing the banking system, and wrote often about the rationale and why it made sense. But as the crisis receded, and the banks began returning to business as usual, I had lost sight of that important fact. Instead, I was just as angry as everyone else.

Turns out, bankers aren’t the only ones who have forgotten what the government did 10 months ago.

Very interesting article, but that deals with criminal liability. I understood your question to be about civil liability. I don't know what the criminal law was like in the 1930s or why bankers would have been jailed for the failures of their banks. If they had committed some kind of fraud, of course, they could face criminal as well as civil liability, and that's true today as well.

Exactly.



Indeed.



Eliminating "too big to fail" needs to be a top priority. They broke up Ma Bell as a monopoly years ago, they can/should break up the big banks today and implement sufficient controls to make sure we never again have to deal with "too big to fail".



I'd feel a whole lot better about this if Mr Geithner was representing taxpayers rather than Goldman Sachs. He's Big Bank through and through and I don't trust him for a second to think that salvaging Big Bank (and Big Bankers) is the only way to go. Yes, I agree, we had to bail out the banking industry last fall -- we were too heavily dependent on the success of the Big Banks. That doesn't mean that dependency is a good thing. Nor does it mean that it's the best working model for future prosperity.

Goldman Sachs Group Chief Executive Lloyd Blankfein told employees to avoid making high profile purchases, the New York Post said, citing sources.

Blankfein, who first asked employees to avoid large purchases late last year, has stepped up his campaign in recent weeks, a source told the paper.

"This is a sensitive time for us, and (Blankfein) wants to make sure that we're not being seen living high on the hog," the paper quoted an anonymous Goldman executive as saying.

Goldman has faced a torrent of unwanted publicity recently including an unflattering story in Rolling Stone magazine, which accused the bank of having a key role in various market bubbles stretching back to the 1920s. source

A "sensitive time" for them to not give "appearances" of living high. ACK!!!!!