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Big Thrifts Are Winners in Court Decision

Banking: The ruling favoring GlenFed could set a precedent for pending S & L cases.


Four of California's largest thrift institutions are the big winners under the U.S. Supreme Court's ruling Monday in favor of Glendale Federal Bank in its a breach of contract lawsuit against the federal government.

The ruling came in a suit by Glendale Federal Bank, which is claiming $1.5 billion in damages. Three other major state thrifts have similar cases pending the outcome of GlenFed's suit, including California Federal Bank, Coast Federal Bank and Home Savings of America.

Seven other current or former thrifts based in California, and about 100 nationally, still have suits pending, according to the Office of Thrift Supervision.

If the thrifts prevail, the big loser will be the federal government--and by extension taxpayers. Total damages could amount to $10 billion to $15 billion, analysts said.

For the Record
Los Angeles Times Wednesday July 3, 1996 Home Edition Business Part D Page 2 Financial Desk 1 inches; 29 words Type of Material: Correction
Glendale Federal--In a story in Tuesday's editions about the effect of the U.S. Supreme Court's ruling in the Glendale Federal Bank lawsuit, the name of GlenFed spokesman Jeffrey Misakian was misspelled.

Final judgments could take years. GlenFed's case, however, has been put on a fast track; bank officials expect the damages portion of the trial to begin in the fall.

Richard A. Fink, the GlenFed's executive who oversaw the case, said: "it's a little premature" to celebrate because the thrift still has the burden of proving its damages.

The stock markets applauded the ruling by sending GlenFed shares up on Monday by $1.50 to $19.63. CalFed went up 75 cents to $19; shares of Home Savings parent, H.F. Ahmanson & Co., rose 38 cents to $27.38, and Coast Savings shares soared $2.38 to $35.13. "For shareholders who are buying into the stock today, this may be a windfall," said James M. Marks, an analyst at Hancock Institutional Equity Services. "For those who have hung on, they just recapture past losses."

At issue is an arcane accounting principle called "supervisory goodwill"--a concept born in the 1980s during the industry's dark years.

It was an accounting provision used as an inducement to healthy savings and loans to acquire failing thrifts. The failing thrifts' negative net worth was offset by an intangible asset called goodwill, which was added to the acquiring institution's balance sheet. It was to be written off over 40 years.

"The use of supervisory goodwill was an expedient . . . a way to enable strong institutions to acquire their weaker sisters without decimating their own capital," said Paul A. Schosberg, president of America's Community Bankers, a Washington-based thrift industry group.

But in the 1989 savings and loan industry bailout legislation, known as the Financial Institutions Reform and Recovery Act, Congress and President Bush disallowed the use of supervisory goodwill as capital, stripping hundreds of millions of dollars from the balance sheets of thrifts.

To meet their new reserve requirements, institutions sold off assets, closed offices and in many cases were forced to recapitalize or shut down. Their stocks plummeted.

GlenFed and dozens of other thrifts sued for breach of contract. GlenFed's claim, in conjunction with the owners of two failed thrifts, was upheld Monday by the Supreme Court. The case was sent back to a lower court to determine the amount of damages.

GlenFed, which agreed to take over a failing Florida thrift in 1981, had $565 million in goodwill before the 1989 law. "The government very nearly destroyed this institution," said spokesman Jeffrey Minsakian.

A successful recapitalization has returned the institution to financial health, and its stock price has climbed from a low of less than $2 a share.

Similarly, California Federal had $485 million in goodwill capital before the law changed. CalFed had acquired six failing thrifts around the country.

The law and the state's recession forced the thrift to recapitalize and write off more than $1 billion in assets in a restructuring that was completed only last year. The thrift is again profitable.

CalFed is also suing the federal government but has not set an amount for damages above and beyond its lost goodwill.

In an unusual move, CalFed last year issued certificates to its shareholders to allow them to share in 25% of any favorable judgment in its suit.

Those certificates are now traded on the Nasdaq, and on Monday, they rose $3.83 to $12.63 on news of the Supreme Court's decision. Earlier in the day, the certificates rose by as much as $4.25 to $13.

Home Savings was not thrown into as much financial turmoil as the other two thrifts but still lost $575 million in supervisory goodwill under the 1989 law. It had taken over about 18 failing thrifts around the country. Home Savings also has a suit pending for unspecified damages and losses.

Coast Savings lost $300 million in goodwill. The thrift has yet to set a final damage claim figure but is pursuing its suit.

Successful awards will be gravy for the thrifts but an added burden to taxpayers who have already assumed the estimated $130-billion cost of the savings and loan bailout.

It's the latest legacy of the poor decisions that flowed from the savings and loan debacle, critics say. Supervisory goodwill "was poor policy to begin with," said James Schmidt, portfolio manager of the John Hancock Regional Bank Fund. "If the industry had run out of capital, the right solution wasn't to pretend there was capital."

Times Staff Writers Patrice Apodaca and Martha Groves contributed to this story.

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