A Victory for Thrifts
The U.S. Supreme Court handed the savings and loan industry a huge legal victory that could force the federal government to pay as much as $15 billion to settle numerous lawsuits. The court said the government can be held responsible for a 1989 law that resulted in financial disaster and failure for many savings institutions.
What the decision means:
* S&Ls.; An estimated 100 savings and loans will be able to pursue lawsuits seeking billions of dollars in damages from the federal government. Healthier thrifts might use the money to finance acquisitions, but the money could be a long time in coming. Glendale Federal alone is seeking $1.5 billion.
* Taxpayers. The Treasury might have to pay as much as $15 billion to settle the suits. The Senate Budget Committee has set aside $9 billion to compensate the thrifts in fiscal 1997.
* Consumers. Consumers should see little change unless thrifts use settlement money to help spark mergers and takeovers.
* Shareholders. S&L; stocks jumped Monday in response to the court’s decision, making shareholders the most immediate beneficiaries of the ruling. Stocks could keep rising if merger speculation continues.
Chronology:
* 1981: Federal regulators encourage healthy thrifts to buy troubled rivals through a change in accounting rules. The buyers were able to offset the potential liability of a troubled S&L; by being allowed to record an asset--called supervisory goodwill--on their books. The asset would be amortized or written off over 40 years, minimizing the financial damage. (S&Ls; eventually record an estimated $25 billion in supervisory goodwill over the years.)
* November 1981: Glendale Federal agrees to purchase an ailing Florida-based thrift. In return, GlenFed is allowed to amortize $783 million of supervisory goodwill--equal to the value of potential liability on the Florida institution’s books--over 40 years.
* August 1989: President Bush signs into law a savings and loan bailout bill that scraps supervisory goodwill as part of an effort to boost industrywide financial requirements. Instead of 40 years, savings and loans must amortize supervisory goodwill within five years, resulting in massive losses for many institutions.
* August 1990: Glendale Federal files suit seeking $1.5 billion in damages from the federal government for revoking supervisory goodwill. An estimated 100 institutions--including California Federal, Home Savings and Coast Federal--also file suits.
* July 1992: The U.S. Court of Federal Claims rules in favor of Glendale Federal in its lawsuit. The government appeals the decision.
* May 1993: In a temporary setback, a three-member panel of the U.S. Court of Appeals for the strikes down the lower court’s ruling on the GlenFed suit. The S&L; files an appeal.
* August 1995: The appeals court unanimously reverses the 1993 decision, upholding the lower court’s ruling in favor of Glendale Federal. The federal government appeals to the Supreme Court.
* July 1996: The government loses its case before the high court. S&Ls; are free to continue individual lawsuits or seek industrywide settlements with the government.
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How S&L; Stocks Fared
Most major California thrift stocks rose Monday after the Supreme Court decision. Butso far this year, most of the stocks have been poor performers, largely because of rising interest rates. The big exception: The special California Federal stock the firm created specifically to share in any federal damage awards.
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Mon. Mon. % change Stock close change since Jan. 1 CalFed special $12.63 +$3.88 +155.7% CalFed 19.00 +0.75 +20.6 Glendale Federal 19.63 +1.50 +11.3 H.F. Ahmanson 27.38 +0.38 +3.3 Golden West Fin. 56.69 +0.69 +2.6 Coast Savings 35.13 +2.38 +1.4 Downey Financial 22.00 +0.13 +1.1 Great Western Fin. 24.38 +0.50 -3.9
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Note: All stocks trade on NYSE except CalFed special (Nasdaq).
Source: Bloomberg Business News
