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FDIC Gains Power to Claw Back Failed CEOs’ Pay

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Clawbacks. It sounds like something bears might do to terrified hikers, but actually it’s the newest tool at federal regulators’ disposal to penalize corporate leaders for bad behavior and discourage future executives from doing the same.

Under new rules approved last week by the FDIC, the agency can use clawbacks to force company executives to repay up to two years’ worth of their former salaries if it’s proven that the leaders’ decisions drove the institutions into bankruptcy and federal ownership. The new power comes from the Dodd-Frank financial reform act, which gave the FDIC the added responsibility of untangling big, complicated financial companies after they collapse.

Barney Frank, one of the co-authors of the bill, said the clawbacks are exactly what he intended when crafting the legislation.

“That institution is dissolved. Its shareholders are wiped out. Its executives are fired. And in fact, as the FDIC just made clear, they might well have to pay back some of their last two years of salary,” Frank said in a speech at the National Press Club on Tuesday.

[Related Article: Frank Defends Embattled Financial Reform Law]

But the people who could have their money clawed back see things a little differently. Stephen J. Rotella, former COO of Washington Mutual, faces six counts of fraud and gross negligence in a lawsuit filed by the FDIC over his decision to continue betting on risky subprime mortgages even after interest in the loans from investors and qualified home buyers dried up.

Rotella says the lawsuit and the connected attempt to clawback two years’ worth of his salary are bogus efforts by the FDIC to deflect blame, saying the case “amounts to a pure public relations stunt designed to deflect criticism away from the F.D.I.C., 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,” according to The New York Times.

Rotella’s boss, Kerry K. Killinger, received $65 million in pay in the three years leading up to Washington Mutual’s failure in 2008. The FDIC’s ruling last week may signal that the agency is about to try and clawback some of that money.

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Image by Kai Schreiber

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