A Win for Big Thrifts : GlenFed Ruling Could Set Precedent for Pending S & L Cases

Four of California’s largest thrift institutions are the big winners under the U.S. Supreme Court’s ruling Monday in favor of Glendale Federal Bank in its breach of contract lawsuit against the federal government.

The ruling came in a suit by Glendale Federal Bank, which is claiming $1.5 billion in damages. Three other major state thrifts have similar cases awaiting the outcome of GlenFed’s suit, including California Federal Bank, Coast Federal Bank and Home Savings of America.

Seven other current or former thrifts based in California, and about 100 nationally, still have suits pending, according to the Office of Thrift Supervision.

If the thrifts prevail, the big loser will be the federal government--and, by extension, taxpayers. Total damages could amount to $10 billion to $15 billion, analysts said.

Final judgments could take years. GlenFed’s case, however, has been put on a fast track; bank executives expect the damages portion of the trial to begin in the fall.

“It’s a little premature” to celebrate because the thrift still has the burden of proving its damages, said Richard A. Fink, the GlenFed executive who oversaw the case.

The stock markets applauded the ruling by sending GlenFed shares up by $1.50 to $19.63. CalFed went up 75 cents to $19; shares of Home Savings parent H.F. Ahmanson & Co. rose 38 cents to $27.38, and Coast Savings shares soared $2.38 to $35.13. “For shareholders who are buying into the stock today, this may be a windfall,” said James M. Marks, an analyst at Hancock Institutional Equity Services. “For those who have hung on, they just recapture past losses.”

At issue is an arcane accounting principle called “supervisory goodwill,” a concept born in the 1980s during the industry’s dark years.

It was an accounting provision used as an inducement to healthy savings and loans to acquire failing thrifts. The failing thrifts’ negative net worth was offset by an intangible asset called goodwill, which was added to the acquiring institution’s balance sheet. It was to be written off over 40 years.

“The use of supervisory goodwill was an expedient . . . a way to enable strong institutions to acquire their weaker sisters without decimating their own capital,” said Paul A. Schosberg, president of America’s Community Bankers, a Washington-based thrift industry group.

But in the 1989 savings and loan industry bailout legislation, known as the Financial Institutions Reform and Recovery Act, Congress and President Bush disallowed the use of supervisory goodwill as capital, stripping hundreds of millions of dollars from the balance sheets of thrifts.

To meet their new reserve requirements, institutions sold off assets, closed offices and in many cases were forced to recapitalize or shut down. Their stocks plummeted.

GlenFed and dozens of other thrifts sued for breach of contract. GlenFed’s claim, in conjunction with the owners of two failed thrifts, was upheld Monday by the Supreme Court. The case was sent back to a lower court to determine the amount of damages.

GlenFed, which agreed to take over a failing Florida thrift in 1981, had $565 million in goodwill before the 1989 law. “The government very nearly destroyed this institution,” spokesman Jeffrey Minsakian said.

A successful recapitalization has returned the institution to financial health, and its stock price has climbed from a low of less than $2 a share.

Similarly, California Federal had $485 million in goodwill capital before the law changed. CalFed had acquired six failing thrifts around the country.

The law and the state’s recession forced the thrift to recapitalize and write off more than $1 billion in assets in a restructuring that was completed only last year. The thrift is again profitable.

CalFed is also suing the federal government but has not set an amount for damages above and beyond its lost goodwill.

In an unusual move, CalFed last year issued certificates to its shareholders to allow them to share in 25% of any favorable judgment in its suit.

Those certificates are now traded on Nasdaq, and on Monday, they rose $3.83 to $12.63 on news of the Supreme Court’s decision.

Home Savings was not thrown into as much financial turmoil as the other two thrifts but still lost $575 million in supervisory goodwill under the 1989 law. It had taken over about 18 failing thrifts around the country. Home Savings also has a suit pending for unspecified damages and losses.

Coast Savings lost $300 million in goodwill. The thrift has yet to set a final damage claim figure but is pursuing its suit.

Times staff writers Patrice Apodaca and Martha Groves contributed to this report.

* MAIN STORY: A1

* BATTLE TO REMEMBER

Glendale Federal’s chief executive says the fight against the government was “one of the tougher struggles of my life.” D14