Ex-WaMu Officers to Pay Fraction of $64 Million Settlement of FDIC Lawsuit

Three former executives of Washington Mutual Inc. will together pay $400,000 out of pocket as part of a $64 million settlement with the Federal Deposit Insurance Corp. over the largest U.S. bank failure, according to a person briefed on the matter.

The FDIC earlier sought $900 million from chief executive officer Kerry Killinger, chief operating officer Stephen Rotella and top lending officer David Schneider. The executives led the bank on a lending spree against the advice of internal risk managers while “knowing that the real estate market was in a ‘bubble’ that could not support such a risky strategy over the long term,” according to the lawsuit the agency filed in March in U.S. District Court in Seattle.

Under the settlement, the $64 million will consist of the payments by the three executives and a payout from the failed bank’s insurance policy. In addition, the executives will drop claims to millions of dollars of Washington Mutual’s remaining assets, according to two senior FDIC officials, who spoke yesterday on condition of anonymity because the settlement hasn’t been made public.

Killinger had sought retirement benefits, while Rotella and Schneider wanted to collect “golden parachute” payments. Schneider also sought his bonus, the FDIC officials said. The three men were seeking $24 million in all, according to another person briefed on the details.

The FDIC officials said the settlement would be made public within a week.

Barry Ostrager, a lawyer at Simpson Thacher & Bartlett LLP who represents Rotella and Schneider, and Barry Kaplan, a lawyer for Killinger, said they couldn’t comment on the settlement.

Seized by Regulators

Seattle-based Washington Mutual, with $307 billion in assets, was seized by regulators on Sept. 25, 2008, after being weakened by losses linked to subprime loans. Its deposits, assets and certain liabilities were sold to JPMorgan Chase & Co. (JPM)

The cash payments made by the three former officers will total about $400,000, according to the person briefed on the settlement. In its lawsuit, the FDIC said that Killinger and the other executives encouraged risk-taking to maximize short-term gain and pump up their own compensation. The three executives were paid “more than $95 million” from January 2005 through September 2008, the FDIC said.

Lawrence Kaplan, a lawyer with the law firm Paul Hastings LLP in Washington, said closing the claims the executives made on the bank’s assets avoids an embarrassing outcome for the FDIC, in which the agency might have to make a payout to officers of a failed bank dragged down by reckless lending.

“Releasing the claim on the receivership avoids the FDIC ever having to write a check to these executives,” Kaplan said in an interview.

Senator Carl Levin, a Michigan Democrat who investigated Washington Mutual as part of a broad probe into the financial crisis, complimented the FDIC for going after the three executives, while noting that the men would pay only a small portion of the penalty.

“Washington Mutual Bank epitomizes everything that went wrong with the banking industry and contributed to the financial crisis,” Levin said in an e-mailed statement yesterday. The settlement “shows again how bank executives can beat the system.”

To contact the reporter on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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