Courts Remove Barrier to S&L; Bailout Program : Thrifts: Olympia S&L; in Illinois had challenged the government’s authority to take it over. The Justice Department, meanwhile, said assets of firms and their officers will be seized.
The federal courts have removed a troubling legal obstacle to the government’s savings and loan bailout through two separate rulings involving an insolvent thrift that had challenged the government’s constitutional authority to seize and close it.
Meanwhile, the Justice Department announced Tuesday that the government plans to freeze and seize assets of both thrifts and their executives in cases involving fraud.
Olympic Federal Savings & Loan of Berwyn, Ill., had asked the courts to delay an impending takeover by the Office of Thrift Supervision. The thrift’s primary argument was that the takeover was unconstitutional because neither M. Danny Wall nor his temporary replacement, Salvatore R. Martoche, were confirmed by the Senate as OTS director. The thrift also challenged the takeover on technical grounds involving OTS procedures.
Although U.S. District Judge Royce C. Lamberth last month had blocked the takeover as long as no properly appointed OTS director was in office, Olympic knew the order might be reversed as soon as a new OTS director was confirmed.
On Monday, a three-judge panel of the Federal Court of Appeals ruled that the District Court order was terminated by the swearing in of a new OTS director, T. Timothy Ryan Jr. Ryan was confirmed last week and sworn into office this week.
On Tuesday, Olympic lost its last bid to avoid a takeover when Judge Lamberth ruled on the thrift’s secondary challenge involving OTS procedures.
In his ruling last month, Lamberth had declined to consider those secondary arguments, because he had already blocked Olympic’s seizure as long as OTS was not headed by an officer appointed by the President and confirmed by the Senate.
But on Tuesday, Lamberth denied Olympic’s plea for a further delay so that it could pursue its secondary arguments.
Analysts of the tangled S&L; issue were scarcely surprised by the rulings.
“While there was temporary turmoil, it was clear it would be moot as soon as somebody was confirmed,” said Bert Ely, who heads a financial institution consulting firm in Alexandria, Va. “The only surprise was that they got Ryan through faster than expected.”
Ely called Olympic’s efforts to prolong the case a legal farce. “Olympic is broke, and what you have is management trying to hold onto their jobs by fighting the government with taxpayer money,” he said. “There’s a question if that’s a legitimate use of taxpayer money.”
Added Robert Litan, a banking industry specialist at the Brookings Institution: “This is a waste of money. Olympic had to know that if they won on the constitutional appointment theory, the Administration and Congress would eventually appoint somebody. It’s just wasteful litigation.”
Regarding the announcement that the government plans to freeze and seize assets in cases involving fraud, Justice Department spokesman David Runkel explained that in criminal S&L; investigations so far, the pattern has been that “the assets are not there following the convictions.” The new effort will try to “prevent assets from being dissipated,” he said.
Authority to freeze and seize the assets was contained in the bailout package approved by Congress last year. In the Justice procedure announced Tuesday, the assets to be targeted could be either those of the S&Ls; or of the individuals involved, Runkel said. “It’s a device to freeze assets that are derived from savings and loan wrongdoing.”
The government has recovered about $12.5 million, while the taxpayers have spent “hundreds of millions of dollars” to cover the costs of the illegal actions, Runkel said. The General Accounting Office has recently estimated that the total taxpayer cost of bailing out the thrifts and their depositors will run at least $325 billion over the next 30 to 40 years, and more likely $400 billion or higher--with much of the cost coming in the next 10 years.