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Three ex-executives of failed bank sued; $900 million sought in collapse of WaMu

Federal bank regulators have sued three former top executives of Washington Mutual, the biggest U.S. bank ever to fail, accusing them of negligence in allowing risky mortgage lending and seeking$900 million in damages.

The Federal Deposit Insurance Corp. filed the civil lawsuit Wednesday against Kerry Killinger, former WaMu CEO; Stephen Rotella, the former chief operating officer; and David Schneider, who headed the bank's home loans division. The FDIC also named the wives of Killinger and Rotella in the suit filed in federal court in Seattle.

The FDIC said the three executives pushed for expansion of WaMu's risky lending even though they knew or should have known that its loan standards and controls were inadequate. The bank collapsed in September 2008 and was sold for $1.9 billion to JP-Morgan Chase & Co. in a deal brokered by the FDIC.

Killinger, Rotella and Schneider, "through their gross negligence, breached their duties of care," the FDIC alleged in the suit. The agency said they acted with "reckless disregard." Among other things, they adopted imprudent lending policies and caused the bank to make home loans "with little or no regard for borrowers' ability to repay them," the FDIC said.

The agency also alleged that Killinger and Rotella transferred assets to their wives to keep them out of the reach of current and future creditors. The FDIC asked the court to freeze those assets, which it said were fraudulently transferred.

The suit was the FDIC's most high-profile legal action so far seeking to recover losses from banks that failed during the financial crisis. The agency has shut down 347 banks since January 2008.

Last July the FDIC sued four former executives of failed California-based IndyMac Bank, seeking$300 million in damages.

The FDIC's board has approved civil lawsuits against more than 158 bank executives, employees and directors, seeking to recoup about $2 billion in bank losses that the regulators say were the result of negligence or misconduct. FDIC attorneys have been in settlement talks with many of the executives.

In addition, the FDIC has opened criminal investigations into about 50 executives and directors of collapsed banks around the country.

An investigation by a Senate subcommittee into Seattle-based WaMu's collapse found that its lending operations were rife with misconduct, including fabricated loan documents. It concluded that management failed to stem the deception despite internal probes.

At a hearing by the panel last April, Killinger deflected the criticism and laid blame on the government. He argued that even before the financial crisis struck, the government treated the bank unfairly.

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