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Directors at too big to fail institutions should be liable

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  • John Friedland

Abstract

Too big to fail banks pose a threat of another meltdown that may cost the taxpayer hundreds of billions of dollars despite Dodd Frank’s orderly liquidation provisions. The FDIC has brought more than 1000 cases against directors and officer of smaller banks but none against too big to fail institutions (TFTI). This can be attributed to the fact that state law in many states has a lower standard for negligence than Delaware where TFTI instutions are located. FIRREA trumps state law and establishes a gross negligence standard that trumps Delaware law, where gross negligence alone is insufficient as a cause of action. This raises the question of why no actions have been brought. Popular theories which placed the likelihood of financial meltdown as many deviations from the norm have meant that financial meltdown could not be predicted; however, banking practices in the mortgage backed securities market including liar loans indicated that a meltdown was predicted, and Boards of Directors and CEO’s were grossly negligent in not being informed of the quality of such mortgage backed securities either as a result of their own ineptitude or the failure of gatekeepers including lawyers and accountants who failed to bring shortcoming in this market to their attention.

Suggested Citation

  • John Friedland, 2016. "Directors at too big to fail institutions should be liable," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 13(3), pages 195-203, August.
    • Handle: RePEc:pal:ijodag:v:13:y:2016:i:3:d:10.1057_jdg.2016.4
    DOI: 10.1057/jdg.2016.4
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    References listed on IDEAS

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