In an action expected to have a significant impact on the price of some thrift shares, the U.S. Supreme Court could rule soon - perhaps today - on supervisory goodwill lawsuits.
If the highest court upholds a U.S. Court of Appeals decision in favor of the thrifts, the federal government might be liable for more than $10 billion in damages.
The cases stem from the government's attempt to rescind favorable accounting rules that were granted to companies that acquired troubled savings and loans in the 1980s.
The lower court ruled that "Congress is free to deem supervisory goodwill a bad idea and legislate it out of existence" but that the government "remains liable in money damages."
Some major thrifts, including H.F. Ahmanson & Co., Dime Bancorp, Long Island Savings Bank, and Glendale Federal Bank, have claims in excess of $300 million apiece. In all, about 100 suits are pending.
A number of analysts have issued reports anticipating a favorable decision by the end of the current court session, June 30, and predicting a sudden jump in the thrifts' share prices.
Claire Fleming of Friedman, Billings, Ramsay & Co., said a favorable decision could boost Glendale's stock past $20, from last Thursday's price of just under $18 a share.
"What's interesting about Glendale is, you have an improving company with a potential huge windfall if they win this case. Glendale being the lead case has an enormous amount to gain from a favorable decision," Ms. Fleming said. "This stock could be up several points on a favorable decision."
Ms. Fleming said anticipation of a favorable decision has already boosted Glendale's price. An unfavorable decision could knock the stock back to $16 to $16.50 a share, she estimated.
Investors have not yet bid up the prices of some smaller thrifts with goodwill claims, such as Commonwealth Bancorp of Valley Forge, Pa., Ms. Fleming pointed out. Its stock could rise "several dollars" from the current price, just above $10 a share.
Ms. Fleming added that claims from Coast Savings Financial for $299 million and Long Island Savings for $500 million are thought to be especially strong.
Analysts cautioned that any payment could be delayed and the damages could fall shy of expectations if the government decides to litigate the final settlement. "It is important to note that the Supreme Court will only rule on the government's liability, not damages," analysts at Advest Inc. advised clients in a June 7 report. "The damages phase will be remanded to the U.S. Court of Claims."
Nor was the prospect of a goodwill windfall enough to convince all analysts that Glenfed stock, for one, is a good buy.
Salomon Brothers Inc. reiterated its "hold" rating on Glendale, saying that the goodwill gain is already "predominantly built into the current valuation" of its stock.
The Salomon report characterized an increase in delinquencies in Glendale's single-family residential loan portfolio as "cause for concern."
The portfolio includes a large component of loans originated in 1989- 1991, just before the California real estate market collapsed. The increase in delinquencies "likely will be a drag on margins and could cause Glendale to raise loan-loss provisions, hindering the company's bottom-line performance," Salomon concluded.
Ms. Fleming, however, noted Glendale Federal's recent progress in attracting inexpensive retail deposits and its internal growth.
