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A Takeover That Need Not Take Place

May 27, 1993

If President Clinton wants to do something for California, he ought to have Atty. Gen. Janet Reno review a case involving Glendale Federal Bank. The nation's fifth-largest thrift suffered a major setback the other day that could cost taxpayers $3 billion to $4 billion if Uncle Sam has to bail out the company. And it would be an utterly unnecessary bailout.

It all began in 1981 when the federal government was searching for some alternative to a costly taxpayer takeover of a failing Florida savings and loan. Glenfed agreed to absorb the institution--but only with the understanding that the government would allow special accounting practices so that Glenfed could take on the bad debt from the Florida thrift. But in 1989 Congress passed the Financial Institutions Reform, Recovery and Enforcement Act. This was an across-the-board measure that, in effect, revoked the very accounting practices previously allowed. The consequences for Glenfed were catastrophic: The bank dropped below required capital levels and is now staring at raising $350 million by June 30 to stay afloat.

Glenfed sued the government for breach of contract. It won one case but on Tuesday, in the U.S. Court of Appeals, lost another.

Unless Washington somehow intervenes, the bank could be forced into federal receivership. That would be absurd: Though badly battered by the severe downturn in real estate valuation, Glenfed is a viable institution that plays a huge role in this area's economy. The Clinton Administration should step in.

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