Seized S&L; Sues Over Regulators’ Accounting Rules

In yet another legal challenge to the government’s bailout of the ailing thrift industry, a Kansas savings and loan has charged in a lawsuit that regulators are using their own methods instead of generally accepted accounting rules in determining whether to seize the institutions.

The industry is now closely awaiting the outcome of a suit filed by former directors of Franklin Savings Assn. of Ottawa, Kan., which was taken over in February.

A hearing and possible judgment by a federal court in Kansas on the matter is scheduled for Friday.

Franklin gained a national reputation for its innovative management of mortgage-backed securities, a type of security backed by a mortgage on real estate.

Unlike other seized thrifts, Franklin did not run into troubles because of bad land deals or mismanagement, thrift insiders say.

The quandary over Franklin is how to account for its trading in mortgage-securities futures, which Franklin engaged in to protect itself from fluctuating interest rates.

Under generally accepted accounting rules, the losses from the trading could be paid off over a long period of time. However, regulators said Franklin had to immediately put the $119 million in trading losses on its books.