FOR a fresh burst of outrage over the lending abuses during the go-go housing bubble, consider the debacle of Bremerton’s Westsound Bank.
The bank collapsed in 2009 amid absurdly reckless construction lending in the pre-recession bubble, as well as cozy insider loans to the bank’s leaders. The Federal Deposit Insurance Corp. ultimately picked up a tab estimated at $100 million. Yet just this November, the FDIC let bank executives and directors settle a civil lawsuit for $1.73 million — pennies on the dollar, paid for by the bank’s insurer.
The story of Westsound’s demise, told by Seattle Times business reporter Sanjay Bhatt, is a renewed reminder of the costs of under-regulation.
As described by Bhatt, there are few good guys in this story. Two people, Aleksandr and Galina Kravchenko, face federal fraud, money-laundering and tax-evasion charges for allegedly skimming off Westsound loans. They are international fugitives.
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Few others involved have been held personally accountable. The state and federal regulators largely ignored warnings, and withheld documents when Bhatt asked why. Top executives are now working at other banks and mortgage companies.
The U.S. attorney in Seattle should use any tools available to bring the Kravchenkos to justice, and to work up the bank’s chain of command in a criminal investigation. The surest way to elicit ethical behavior is to throw the bad actors behind bars.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was Congress’ watered-down response to pre-recession financial abuses. Just a third of the new rules, however, have been put in effect since President Obama signed it in July 2010, according to the law firm Davis Polk & Wardwell, which is monitoring implementation. Federal regulators, hamstrung by industry pushback and limited staff, missed nearly 60 percent of the deadlines for new rules.
Dodd-Frank would not have prevented the Westsound debacle, but it could stave off worse.