U.S. Loses Ruling in Challenge by S&L;

The U.S. government lost a round Monday in a long-running battle over whether it must pay damages to certain savings and loans that lost billions of dollars after Congress abruptly changed S&L; accounting rules in 1989.

The U.S. Court of Appeals for the Federal Circuit in Washington upheld $381 million in “wounded bank” damages to Glendale Federal Savings, a former Southern California thrift that now is part of Citigroup Inc.

The case stems from GlenFed’s 1981 takeover of a troubled Florida thrift, First Federal Savings of Broward County, after regulators began inducing healthy S&Ls; to take over sick ones by granting them unusual accounting breaks.

Dozens of thrifts are still battling the government over billions of dollars they lost when Congress reversed the balance-sheet gimmick in 1989 as part of a massive bailout of the industry.

The government took GlenFed and two other thrifts to the U.S. Supreme Court in 1996, unsuccessfully arguing that it had no liability for the losses; since then the battles have been over the size of the damages.

In upholding the amount granted to GlenFed by Senior Federal Claims Judge Loren Smith -- an award that had been pared from $909 million -- the Court of Appeals tossed a barb at lawyers for the government and more than 50 other thrifts with pending claims. The court suggested they settle the cases out of court or take them to trial on narrow grounds.

“It would benefit the thrifts and the government ... for both to stop arguing extreme positions and promptly resolve these cases in a fair and even-handed manner,” the panel wrote.

Despite those words, attorneys for GlenFed said they weren’t expecting a quick settlement of the suit, filed in 1990. The government is likely to appeal the case to the full Federal Circuit appeals court because it isn’t required to pay interest on the damages while doing so, said Carter J. Phillips, a Washington attorney representing the thrift.

“They don’t have any incentive to sit down and write us a check,” Phillips said.

The government has 45 days to decide whether to make such an appeal.

The GlenFed case is one of the most prominent in a series of lawsuits stemming from regulators’ efforts in the 1980s to keep from having to seize undercapitalized S&Ls.;

The regulators offered healthy thrifts a deal: If they’d take over their wounded brethren, the regulators would let them record an asset on their balance sheets equal to the capital deficiency at the sick thrift. That asset, known as supervisory goodwill, could be gradually written off over 40 years.

“They were basically trying to keep the problem swept under the rug,” said veteran banking consultant Bert Ely.

When Congress finally faced up to the ballooning problems in the industry in 1989, the resulting thrift bailout bill did away with the supervisory goodwill, requiring thrifts to reduce it to no more than 1.5% of their assets by the start of 1991 and to purge it entirely over the next three years. The action caused thrifts to record billions of dollars in losses.

In the early 1990s, the acquiring thrifts filed a total of 122 lawsuits against the government, seeking as much as $30 billion on behalf of the institutions and their owners. The Supreme Court later ruled that Congress had not exceeded its authority in passing the 1989 law, but said the S&Ls; could sue the government for breach of contract.

A Justice Department spokesman said 55 of those lawsuits have yet to be decided. They include pending appeals of a $134-million damage award to Home Savings of America and its parent, H.F. Ahmanson & Co., now part of Washington Mutual Inc.; and a $23-million award to California Federal Bank, which like GlenFed has since become part of Citigroup.

Several institutions, including former GlenFed parent Golden State Bancorp, sought to reduce the risk involved in the lawsuits by selling securities whose value depends on the outcome of the legal actions. Holders of securities tied to the GlenFed case would get 85% of the after-tax proceeds, with the company getting the rest.

Those securities jumped 52 cents to $1.35 on Nasdaq.