The New Banking Crisis: Veteran Banking Attorneys Say This Time Around Things Are Very Different

The New Banking Crisis: Veteran Banking Attorneys Say This Time Around Things Are Very Different

 
Written by Teresa Zink for HB Litigation Conferences LLC
 
Scott Christensen and Dennis Klein are partners with the Washington, D.C. firm Hughes Hubbard & Reed, LLP and co-chaired HB Litigation Conferences’ conference on “The FDIC and the New Banking Crisis” held Jan. 15 and 16 in Washington, D.C.   Christensen has represented the FDIC in receiverships and is with the firm’s financial litigation task force. Klein has represented federal banking agencies since 1987 and has worked on nearly every major bank failure in the last 20 years. Copies of their presentations are available in video, audio and text for a fee. Send inquiries to info@litigationconferences.com.   
 
The last several months may have seemed a bit like a reunion for veteran banking litigators, Hughes Hubbard & Reed’s Dennis Klein told participants at the opening of a two-day conference on the FDIC and the New Banking Crisis held in mid-January. When he and partner Scott Christensen sat down to put the conference together, he said, “the thing that kept coming to mind was the famous Yogi Berra phrase that ‘this is déjà vu all over again.’” He found himself reconnecting with old friends and colleagues who last worked together from 1987 to 1995 during the last banking crisis. “I guess all of us, to some extent, have been hibernating and doing other types of litigation,” Klein explained, “Then all of a sudden, just sort of out of nowhere, this banking and thrift crisis hit us again.”
 
At its peak, the last banking crisis had the FDIC employing “more lawyers than anywhere in the history of mankind” and during one two year period nearly 700 banks went under, said Klein.
 
However, Klein asserts “this crisis is different.”   He explains, “right now we are in a very interesting time because I don’t think anybody really knows what kind of legislation is going to be passed and what is going to happen.”  First was the passage of emergency legislation designed to provide funds to buy out bad mortgages from problem banks, “then all of a sudden it seemed that that plan was scrapped and the TARP plan was initiated where Congress started investing in banks and taking stock.” While there are approximately three to four thousand banks scheduled to get TARP funds, Klein says, it is unclear “how this TARP money is actually going to get to the banks in time and what they are going to do with it and how it is going to change things.” 
 
This uncertainty is one of the main differences between the current crisis and the last one. “To some extent, looking back, it makes you realize how thoughtful Congress was in dealing with the last crisis,” says Klein. The emergency FIRREA legislation passed in the late 1980s has been amended but is still the basis of the FDIC’s powers, he noted.
 
Dealing With People’s Homes
 
“One of the main differences between this crisis and the last is the subprime market and the fact that this is all, at least now, consumer-driven,” says Klein. This time regulators are dealing with people’s homes. That fact alone raises a host of political issues that were not a factor in the last crisis, which centered primarily on the overdevelopment of commercial property and involved a fair amount of fraud.
 
The FDIC’s more traditional goals under the FIRREA statute of minimizing costs while maximizing the assets of the banks that they are going to take over “doesn’t sell politically in a situation where you have subprime mortgages and consumers and individuals homes. The way to maximize the assets here is to just foreclose on all the homes, take what you can, sell them, and use the FDIC powers in order to do that. But so far the FDIC has not been willing to do that. They are trying to find other strategies to try to deal with this crisis,” Klein explained.
 
However, he notes, “we are starting to see the consumer problems evolve into the commercial problems. When that happens it might change the dynamics of what the government and what the FDIC is doing.”