Former Washington Mutual Inc Chief Executive Kerry Killinger and two of his top lieutenants are nearing a settlement with the Federal Deposit Insurance Corp over the failure of what was the largest U.S. savings and loan.

The parties have exchanged settlement term sheets reflective of a potential settlement in the civil case, and are diligently working to resolve remaining disputes, according to a filing Thursday in federal court in Seattle. An FDIC official said the lawsuit seeks to recover $900 million.

Killinger, former Chief Operating Officer Stephen Rotella and former home lending chief David Schneider were sued on March 16 by the FDIC, in its first lawsuit against officials at a major lender that failed during the financial crisis.

The FDIC accused these executives of gross negligence and reckless disregard for the long-term safety and soundness at the Seattle-based thrift, known as WaMu.

It said they pushed risky home loans to fuel short-term profit and boost their pay, which totaled more than $95 million from 2005 to 2008, and ignoring the basics of proper risk management.

The FDIC also sued Killinger's wife, Linda, saying her husband transferred homes in California and Washington to her to keep them out of the hands of creditors. The agency sued Rotella's wife, Esther, over a separate asset transfer.

Lawyers for the FDIC and the defendants were not immediately available for comment. Killinger has called the FDIC allegations baseless.

Founded in 1889, WaMu is the largest banking failure in U.S. history, with $307 billion of assets, $188 billion of deposits and more than 2,000 branches.

Regulators seized the thrift on September 25, 2008, and JPMorgan Chase & Co bought its banking operations for $1.9 billion. The holding company filed for Chapter 11 bankruptcy protection the next day.


The FDIC said WaMu had $177 billion of home loans on its books when it failed. More than half were home equity loans or option adjustable-rate mortgages, which left many homeowners owing far more than their homes were worth.

According to the complaint, the executives' fixation on short-term profits fueled a myopic focus on adding mortgages to the thrift's portfolio, despite their knowledge of signs that the nation's housing bubble might burst.

The FDIC said it had as of June 14 authorized $6.8 billion of lawsuits against 238 former directors and officers at banks and thrifts that failed during the financial crisis.

So far it has filed seven such lawsuits against 52 officials, including from WaMu. One of these lawsuits, concerning the 2009 failure of Illinois' Corn Belt Bank and Trust Co, was settled for $700,000, the FDIC official said.

Killinger and the other defendants had been expected by Friday to ask U.S. District Judge Marsha Pechman to dismiss the FDIC lawsuit.

She granted a two-week extension after the parties agreed it would be counterproductive to settlement talks to file such a request now.

The WaMu holding company is battling with creditors over its plan to distribute $7 billion under a reorganization plan. Talks to resolve shareholders' objections recently broke down, people familiar with the matter said.

The case is FDIC v. Killinger et al, U.S. District Court, Western District of Washington, No. 11-00459.

(Reporting by Tom Hals in Wilmington, Delaware and Jonathan Stempel in New York; Additional reporting by Dave Clarke in Washington; Editing by Dave Zimmerman, Steve Orlofsky and Tim Dobbyn)