The settlement, announced by Federal Deposit Insurance Corp officials on Tuesday, is part of efforts by the agency to sue former banking executives to recover funds from a rash of bank closures.
But the Washington Mutual settlement will largely be paid out of the company's remaining professional liability insurance, not out of the executives' own pockets.
The three executives -- former Chief Executive Kerry Killinger, former Chief Operating Officer Stephen Rotella and the company's former home lending chief, David Schneider -- were sued by the government's deposit insurer last March. The FDIC had originally sought $900 million.
A source close to the settlement said the personal contribution from the three defendants, who collected $95 million in compensation between 2005 and 2008, would be "a meaningless amount."
The three are each giving up some of their claims in the continuing Washington Mutual bankruptcy. Killinger, for example, will surrender his retirement claims, and the other two will forgo claims for "golden parachute" payments, according to a senior FDIC official who asked not to be identified because the settlement is not yet final.
Attorneys for Killinger, Rotella and Schneider did not immediately return calls seeking comment. The three former executives have denied wrongdoing.
Washington Mutual's banking business was seized by regulators in September 2008, at the height of the global financial crisis. The bank was immediately sold to JPMorgan Chase & Co for $1.88 billion, with no cost to the FDIC for covering deposits.
The bank's holding company filed for bankruptcy the day after the bank seizure.
On Monday, the holding company reached an agreement with shareholders that could clear the way for it to end its three-year stay in Chapter 11 and begin distributing $7 billion to creditors.
RECOVERY FOR RECEIVERSHIP
With the settlement, the FDIC will have recovered $189 million to repay creditors of the failed bank.
"We're not going to bring claims and spend a lot of money and wind up at the end of the day without a whole lot in the receivership," a senior FDIC official said. "The purpose is to recover as much as we can for the receivership."
An investigation by the U.S. Senate found that Washington Mutual contributed to the U.S. housing and financial crisis by adopting a compensation policy that encouraged its employees to ignore safety controls and crank out shoddy home loans.
Those loans were packaged into bonds and sold as top-notch securities. When U.S. housing market collapsed, those bonds plummeted in value and spread financial losses around the globe.
The FDIC brought its case in federal court in Washington state, accusing the three former executives of gross negligence and reckless disregard for the long-term safety of the bank.
The lawsuit was unusual in that it also named the spouses of Killinger and Rotella as defendants and accused them of helping their husbands hide assets, such as homes, from creditors. The claims against the spouses will be dropped and they will not contribute to the settlement, a source close to the talks said.
The FDIC said in June it was nearing a settlement in the case. In July the defense team said those talks had ended.
The FDIC said that as of December 8 it had authorized $7.6 billion of lawsuits against 373 former directors and officers at failed banks and thrifts.
So far it has filed 17 lawsuits against 135 officials, including from WaMu. The WaMu agreement is just the third settlement among those lawsuits.
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 Dave Clarke in Washington; Editing by John Wallace and Richard Chang)