A Costly Lesson for Washington
The Supreme Court ruling that the federal government broke a contract when it changed an accounting practice may add billions to the cleanup tab for the savings and loan debacle of the 1980s but it was a good decision on playing by the rules--and a lesson for Washington.
At issue was an arcane accounting principle known as “supervisory goodwill,” which was conceived by regulators in the 1980s to induce healthy savings and loans to acquire the failing ones. Healthy S&Ls; were allowed to offset the negative net worth of the failing thrifts they acquired with an intangible asset called goodwill. That goodwill, in each case assigned a monetary value, was added to the acquiring institution’s balance sheet and was to be written off over 40 years.
But in 1989, President George Bush signed the Financial Institutions Reform and Recovery Act, which disallowed supervisory goodwill as capital. As a result, hundreds of millions of dollars came off the balance sheets of S&Ls; at a time when they were required to meet new capital requirements. The institutions sold off assets and closed offices, and many were forced to shut down. Of the three S&Ls; that brought the case before the high court, only Glendale Federal, which agreed to take over a failing Florida thrift in 1981, survives today. GlenFed was able to raise new cash.
In the 7-2 decision the court ruled that the shift in rules harmed the thrifts. Justice David Souter said “It would, indeed, have been madness” for the healthy S&Ls; to acquire the ailing ones if they had known the government could then rewrite the rules that enticed them in the first place. The Supreme Court sent the case to the lower court to determine the amount of damages.
Major California thrifts with similar cases awaiting the outcome of the GlenFed suit include California Federal Bank, Coast Federal Bank and Home Savings of America. Seven other current or former thrifts based in California and about 100 more across the nation also have suits pending. Damages could total $10 billion to $15 billion, which would come from a permanent judgment fund at the Treasury.
The federal government has already spent $130 billion to bail out the industry. The mistake in this chapter of the S&L; controversy was the government’s. Souter wrote that because policy was changed after the fact, the risk rested with Washington, not the thrifts that made agreements with the federal agencies. That’s only fair.
