Houston Chron - FDIC made its bed and can lie in it

FDIC made its bed and can lie in it
By LOREN STEFFY
Copyright 2005 Houston Chronicle Aug. 28, 2005, 1:36AM

I don't envy the Federal Deposit Insurance Corp.

Having botched the case against Charles Hurwitz at almost every turn, facing rare and hefty sanctions of as much as $72 million, the FDIC's board must now decide what to do next.

For most of last week, the FDIC has said it will appeal U.S. District Judge Lynn Hughes' ruling, issued Tuesday, awarding the sanctions to Hurwitz and Maxxam, the holding company he controls.

I pressed spokesman David Barr on that point. He acknowledged no final decision has been made.

"We're definitely leaning in that direction," he said.

Meaning that the FDIC staff, the same hapless band that has been wrong time after time in this case, now wants to keep it alive.

It leaves the FDIC in a deep hole of its own digging.

It can appeal the verdict and risk that an appeals court will smack down the claims as two judges already have, or it can pay the sanctions and set a dangerous precedent by admitting it overstepped its authority. The sanctions came after more than a decade of legal wrangling with Hurwitz and Maxxam over the collapse of Houston's United Savings, which cost taxpayers about $1.6 billion.

No proof

Even setting aside Hurwitz's claims of a government conspiracy to get redwood trees owned by Maxxam's Pacific Lumber unit — which the FDIC denies — the agency has failed to make its case.

The gist of its claims is that Hurwitz and Maxxam had a requirement to pump additional capital into the thrift. Hurwitz said there was no such requirement, and the FDIC has been unable to prove otherwise in court.

It filed suit in 1995. A congressional investigation later uncovered an internal memo that found the FDIC's own lawyers predicted that there was a 70 percent chance the agency would lose.

Barr says the FDIC can't discuss the issue because the related documents are under seal. At the FDIC's prodding, the Office of Thrift Supervision filed an administrative proceeding. The case went before an administrative law judge, who threw out the claims.

Facing appeal, Hurwitz agreed to settle by paying $200,000 and promising he wouldn't sit on the board of a bank. Barr says the FDIC decided to drop its case because justice had been served.

Scathing findings

It's a loser's revision of logic.

After seven years in court, the FDIC tried to walk away, but Hurwitz wouldn't allow it. He sued the FDIC for sanctions. Last week, Hughes issued his blistering decision. The ruling is startling in its word choice and scathing in its findings. It compares the FDIC to organized crime, and it faults the government for its "betrayal of the public trust" and "its vindictive political assault."

The FDIC wants to dismiss Hughes as something of a crank. He is, after all, known for ruling against government agencies. But Hughes didn't just dash off the opinion over a weekend. He took more than a year to come to his decision, which outlines a systemic abuse of power by the FDIC.

What emanates from the pages is an exasperation, a sense that Hughes believes the case should never have been filed in the first place.

"We strongly disagree with the ruling," Barr says. "It's not supported by the facts of the case." Those facts have been presented twice, before two judges who both found them lacking.

Upholding fairness

Hurwitz, as I've said before, is not a sympathetic victim. He is a wealthy man, a corporate raider whose buying sprees were financed with junk bonds from Michael Milken. He used surpluses from a workers' pension fund to help finance his acquisition of Pacific Lumber and has battled environmental regulations. But there has never been any evidence he committed a crime. Sympathy isn't a prerequisite for justice. Our system rests on fairness and truth.

The FDIC has been unable to prove its claims, and its pursuit of a case it knew from the start it was unlikely to win has now landed it exactly where it predicted: in defeat.

The current FDIC board inherited this case and must now decide what to do. It has become a blood feud of sorts, one that the staff doesn't want to relinquish.

With two strikes already against it, the agency has an unenviable choice: try again and risk further humiliation, or own up to its past sins.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays.