In a spinoff that may be unique in corporate history, California Federal Bank plans to give shareholders a direct stake in a massive lawsuit against Uncle Sam arising from the savings and loan bailout law of 1989.
The move creates the potential for Wall Street to speculate on the outcome of a string of related breach-of-contract suits that the chairman of the Federal Deposit Insurance Corp. believes could ultimately cost the government as much as $4.9 billion.
CalFed, the nation's sixth-largest savings and loan, said it filed a registration statement Tuesday with the U.S. Office of Thrift Supervision to issue 5.1 million "participation certificates" to its shareholders, representing an aggregate 25% interest in the proceeds--if any--from the litigation.
The certificates--for which stockholders will pay nothing--are to be freely transferable, and CalFed has asked to have them admitted for trading in the over-the-counter market. Thus CalFed stockholders could sell their certificates to other investors immediately instead of waiting for a verdict or settlement in the case, which may be years away.
Analysts were at a loss Tuesday to estimate what the unusual securities might trade for.
"You can securitize just about anything, and this proves it," said savings and loan analyst Martin Friedman of the Arlington, Va., firm Friedman, Billings, Ramsey & Co.
"In our view, it's a creative way to allow our shareholders to recognize the value of a potentially favorable outcome of the case," said James F. Hurley, executive vice president of Los Angeles-based CalFed.
Analysts said the offering is also a way for CalFed to call attention to some potential value in the company that it thinks investors might be overlooking. Once the market puts a price on the certificates, it will be placing an implied value on the 75% interest in the lawsuit still held by CalFed.
CalFed shares rose 50 cents to $10.875 on Tuesday on the New York Stock Exchange, but the stock has recently been bumping along near its 52-week low of $9.25. It traded as high as $23.875 in 1993.
Hurley said CalFed's top executives arrived at the idea in a series of brainstorming sessions in recent weeks.
CalFed's lawsuit, filed in 1992 in the U.S. Court of Claims in Washington, accuses the government of reneging on a promise it made in the early 1980s.
When CalFed agreed to take over six failing savings and loans, grateful regulators allowed it to record an intangible asset, known as goodwill, on its books for up to 40 years as if it were capital--a financial institution's cushion against losses.
The CalFed deal mirrored many others nationwide. Although critics decried the use of such "funny money" in place of tangible capital, the ploy helped regulators persuade the private sector to take many ailing thrifts off the government's hands, avoiding taxpayer-financed bailouts.
But in the landmark savings and loan bailout legislation of 1989, Congress overruled the regulators and decreed that S&Ls; must write off the goodwill by Jan. 1, 1995.
With $485 million in goodwill on its books, CalFed sued, as did about 40 other savings and loans, including Glendale Federal Bank. FDIC Chairman Rikki Tigert Helfer testified to a Senate panel last week that the potential cost to taxpayers from pending cases could be $1.2 billion to $4.9 billion but that total losses could be several times that if new claims are filed.
In fact, the value of the CalFed participation certificates may be more immediately influenced by rival GlenFed's litigation than by CalFed's own. GlenFed's $1.4-billion claim--tried more than a year ago before a U.S. appeals court--is apparently the closest to resolution of the pending cases.
Given the difficulty of estimating damages, analysts said it would be hard to predict the price at which the certificates will begin trading. But because the claims are similar, a victory for GlenFed would undoubtedly boost the certificates' value, they said.
Although there have been cases in which plaintiffs have solicited private investors to finance litigation and share in any monetary verdict, analysts and securities lawyers said CalFed apparently would be the first company to directly convert an interest in a lawsuit into tradable securities.