An interesting regulatory action that hasn't garnered much attention is the move by the FDIC--led by Sheila Bair before she left the agency--to clawback compensation from former CEO of Washington Mutual Kerry Killinger and two other executives.

The FDIC's case is fairly straightforward. The agency argues that Killinger and the others do not deserve their compensation for roughly two years leading up to the bank's sordid implosion. Why should they be paid when they were grossly negligent and breached their fiduciary duty for pushing the bank into the subprime mortgages market that led to the institution's demise?

According to DealBook, Killinger and the others respond that this action amounts to PR stunt and that they exhibited reasonable behavior in pushing the bank into the subprime market. "A crucial issue in the suit is whether the executives are protected by the ‘business judgment rule,' which prevents a corporate officer or director from being held liable for poor decisions that end up harming the company so long as the person acted with due care."

It would be easy to argue that WaMu was acting like all other industry participants in pursuing more subprime exposure and that Killinger and the others were therefore acting in good faith. It would be hard to hold any executive accountable based on this standard. A fairly new FDIC proposal, which would allow for clawbacks if executives were found to be "substantially responsible," might be an easier standard, but it will not make a difference in the case of WaMu.

For more:
- here's the article

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