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Three former Washington Mutual executives are close to a settlement with the Federal Deposit Insurance Corporation over claims they were grossly negligent and breached their fiduciary duty in the run-up to the biggest bank collapse in US history, according to people familiar with the situation.
The people said on Monday that Kerry Killinger, ex-chief executive of WaMu, Stephen Rotella, former chief operating officer, and David Schneider, the ex-home loans president, were close to agreeing a settlement of less than $100m to settle the case. The FDIC had demanded $900m.
If agreed, the settlement would be one of the most high-profile in the aftermath of the financial crisis. The FDIC and lawyers for the executives declined to comment.
The FDIC in March filed a complaint in the US District Court in Seattle alleging that the WaMu team had caused the bank to take “extreme and historically unprecedented risks” with a home loans portfolio that subsequently caused the bank to collapse in 2008. JPMorgan Chase acquired WaMu’s assets.
The bank regulator said the executives had pursued a strategy of issuing high-risk loans to borrowers who could not afford the mortgages in the already overheated markets of California and Florida.
“Defendants thus gambled billions of dollars of WaMu’s money on the prospect that the bank somehow would manage to avoid losses on higher risk loans to high-risk borrowers in high-risk areas, despite their own awareness of the inevitable decline in the overheated housing market,” the FDIC said in its March complaint.
The FDIC, which insures US bank deposits and stands to lose money when banks fail, is considering legal action against hundreds of bank executives at different institutions that failed after the 2008 crisis, in an attempt to recover pay-outs made by its fund.
In the WaMu case, the FDIC said that the three executives received more than $95m in compensation between January 2005 and September 2008, “which rewarded them for the bank’s short-term gains”.
The three executives denied the claims. In a vehement rejection of the FDIC case, lawyers for Mr Rotella and Mr Schneider accused the regulator in July of pursuing “a pure public relations stunt designed to deflect criticism away from the FDIC, which has been – and continues to be – under fire for its regulatory failures with respect to WaMu and refuses to take any responsibility for its central role in the financial crisis.”
Additional reporting by Shahien Nasiripour and Kara Scannell in New York