S&L; Investors Awarded $94 Million
Investors who saved a failed Beverly Hills savings and loan during the 1980s S&L; crisis have won $94 million in a breach-of-contract lawsuit against the U.S. government, which encouraged such acquisitions by granting accounting breaks that it later reversed.
In its decision late last week, the U.S. Federal Court of Claims in Washington ruled that the government must pay damages to investors in Southern California Federal Savings & Loan Assn., a thrift known as SoCal.
Their suit is among 120 similar legal actions dating to the early 1990s that accuse the United States of costing investors billions of dollars by reneging on deals designed to bail out the floundering thrift industry.
Only one of those cases, involving a small Louisiana institution, has been resolved, according to Rosemary Stewart, a Washington attorney for SoCal and its former shareholders. The other suits -- including actions on behalf of such former California S&L; giants as Glendale Federal Bank, California Federal Bank, Home Savings of America and Coast Federal Bank -- remain tied up in appeals.
Charles Miller, a Justice Department spokesman, said the government hasn’t decided whether to appeal the latest award, whose beneficiaries include former Federal Reserve Vice Chairman Preston Martin and the estate of the late William Simon. a former U.S. Treasury secretary.
Martin and Simon were part of a group that took over SoCal in 1987 at the behest of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corp., which had taken over SoCal and its $1 billion in assets and didn’t want to have to liquidate the thrift at a loss.
SoCal later became People’s Bank of California, which was acquired in late 2000 by FBOP Corp. of Oak Brook, Ill., and now is part of Los Angeles-based California National Bank, one of several banks owned by FBOP.
Stewart and California National Chief Executive Greg Mitchell said they expected the government to appeal the award, as it has done in every other such case.
“The government has dragged out every possible defense in these cases,” Stewart said, estimating that the appeals would take at least a year.
“We’re not expecting to see a check anytime soon,” Mitchell said.
The dispute is rooted in desperate -- and ultimately unsuccessful -- efforts in the 1980s to avert a mass failure of the nation’s S&Ls.; To induce healthy S&Ls; and investors to take over sick thrifts, the government devised an arcane accounting provision: The negative net worth of the acquired S&L; would be offset on the acquirer’s balance sheet by a matching intangible asset called goodwill.
The goodwill assets, which were to be written off over 40 years, were counted as capital in order for the thrifts to meet regulatory requirements that otherwise would cause the government to seize them.
But in a 1989 thrift bailout law, Congress disallowed counting goodwill as capital, stripping hundreds of millions of dollars from the balance sheets of thrifts that as a result became insolvent or sustained massive losses. Ruling on the resulting lawsuits, the U.S. Supreme Court held that the government had a right to change the rules but also was liable for resulting damages.
SoCal had a negative net worth of $160.7 million and was losing an additional $500,000 a month before the investors took it over. As an inducement, the government granted the new company $79.6 million in regulatory goodwill that later was wiped out.
In a 65-page ruling, Claims Court Judge Lawrence M. Baskir awarded nearly $29 million to Martin, to Simon’s estate and to other original investors. Baskir awarded SoCal and its holding company $65.4 million, 95% of which would go to shareholders who kept it alive after the change in accounting rules. The shareholders were institutional investors, including the Bishop Estate in Honolulu and an Australian hedge fund, Mitchell said.
