On July 6, 2011, the FDIC filed a civil complaint against Michael Perry, the former chief executive officer of IndyMac Bank, F.S.B. (“IndyMac”).   A copy of the complaint is available here.  The lawsuit is the FDIC’s eighth lawsuit against directors or officers of failed banks in the current economic downturn, and it comes a little more than one year after its first D&O lawsuit (against four senior officers of IndyMac’s home builders division).

In its complaint against Mr. Perry, the FDIC chronicles IndyMac’s meteoric rise as an independent mortgage lender.   For instance, between 2000 and 2006, IndyMac increased its mortgage loan production from approximately $10 billion to almost $92 billion, most of which was sold in the secondary market.  According to the complaint, IndyMac’s principal mortgage product was a high-risk “Alt-A” loan, which was typically marketed to borrowers with less than full documentation, lower credit scores and higher loan-to-value ratios.

The crux of the FDIC’s complaint is that Mr. Perry neglected to comply with his duties as CEO, and that he presided over IndyMac’s aggressive generation of residential loans at a time when he knew the secondary market was volatile and uncertain.  When IndyMac could not profitably sell those loans in the secondary market, it transferred the loans to its internal “Hold for Investment” portfolio.  The mortgage loans generated in the six-month period between April and October 2007 alone resulted in more than $600 million of liquidated losses for the bank.  The FDIC believes that IndyMac suffered additional losses for loans generated in 2008, but it has not determined the amount of those losses just yet.

To support its contention that Mr. Perry knew that the secondary market for residential loans was rapidly deteriorating, the FDIC quotes from dozens of Mr. Perry’s e-mails dating back to 2004.  It also cites several unhelpful admissions that Mr. Perry allegedly made in internal e-mails after the bursting of the real estate bubble (e.g., “we were idiots, absolute idiots to allow ourselves to do 80/20 piggybacks at the tail end of a long run in housing . . .”).

Before its failure, IndyMac grew to be the nation’s second largest mortgage lender and the seventh largest S&L association.  The FDIC seems determined to make many of the key players at IndyMac answer for that very public failure.