Abstract
Too big to fail banks pose a threat of another meltdown that may cost the taxpayer hundreds of billions of dollars despite Dodd Frank’s orderly liquidation provisions. The FDIC has brought more than 1000 cases against directors and officer of smaller banks but none against too big to fail institutions (TFTI). This can be attributed to the fact that state law in many states has a lower standard for negligence than Delaware where TFTI instutions are located. FIRREA trumps state law and establishes a gross negligence standard that trumps Delaware law, where gross negligence alone is insufficient as a cause of action. This raises the question of why no actions have been brought. Popular theories which placed the likelihood of financial meltdown as many deviations from the norm have meant that financial meltdown could not be predicted; however, banking practices in the mortgage backed securities market including liar loans indicated that a meltdown was predicted, and Boards of Directors and CEO’s were grossly negligent in not being informed of the quality of such mortgage backed securities either as a result of their own ineptitude or the failure of gatekeepers including lawyers and accountants who failed to bring shortcoming in this market to their attention.
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Notes
David Viniar, then chief financial officer at Goldman Sachs, said in August 2007 that the meltdown was ‘25 standard-deviation moves [from the norm], several days in a row’ (Larsen, 2007).
But updated figures from Wilmarth, 2011:‘The Troubled Asset Relief Program [“TARP”] provided $290 billion of capital assistance to the 19 largest U.S. banks [each with more than $100 billion of assets] and the largest US insurance company, American International Group [“AIG”][;] … smaller banks [with assets under $100 billion] received only $41 billion of TARP capital assistance’.
Amount of jury verdict is cited in Icard appeals case, below.
Figure of $6 milion for the lawsuit is from International Business Times, 2011. Figure for settlement is from Section 1 of FDIC v. Smith et al Settlement and Release Agreement, 12 December 2011.
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Friedland, J. Directors at too big to fail institutions should be liable. Int J Discl Gov 13, 195–203 (2016). https://doi.org/10.1057/jdg.2016.4
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DOI: https://doi.org/10.1057/jdg.2016.4