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Litigation Services Handbook: The Role of the Financial Expert, 5th Edition by David P. Hoffman, Daniel G. Lentz, Roman L. Weil

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Chapter 35

Bank Failures: Regulatory Actions and Litigation*

Abe Chernin Catherine J. Galley Christopher M. James Yesim C. Richardson Joseph T. Schertler

35.1 Introduction

The financial market turmoil of 2007 and 2008 led to the most severe global financial crisis since the Great Depression, causing a sharp increase in U.S. bank failures. During the three and a half years from January 2008 through June 2011, U.S. banking regulators closed 370 banks, compared to only 10 closed, or failed, banks during the preceding five-year period.1 While these bank failures have already led to FDIC investigations—as well as a number of shareholder, investor, and bankruptcy trustee lawsuits—historical experience suggests a coming wave of litigation concerning bank failures. Drawing on lessons from the savings and loan (S&L) crisis of the late 1980s and early 1990s, this chapter focuses on regulatory actions and litigation that will likely arise from bank failures and discusses the role of a financial expert in such matters.

35.2 The Financial Crisis and Its Impact on U.S. Banks

The financial crisis of 2007–2008 originated in the U.S. subprime mortgage market. Over the prior 30 years, especially during the decade from 2000 to 2010, banks sold off their long-term mortgage obligations—including subprime mortgages—by securitizing them (i.e., pooling the mortgages and then splitting the cash flows into tranches, or slices, with differing risks, rewards, and/or maturities). The banks sold the resulting ...

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