The Federal Deposit Insurance Corp. is preparing to sue the government for billions of dollars on behalf of about 50 failed thrifts with goodwill claims.
If the FDIC wins, the money could be used to resolve the thrift fund crisis without huge sums from the banking industry, legal experts said Thursday.
The goodwill cases already exist; the FDIC is merely stepping in as the receiver for these failed institutions. The agency entered the first two cases Wednesday and is expected to join the remaining cases on July 30.
The FDIC could recoup as much as $8 billion. That money would be transferred to the FSLIC Resolution Fund, created in 1989 to wind up the operations of the failed Federal Savings and Loan Insurance Corp.
What the FSLIC Resolution Fund would do with this windfall is in doubt.
The FDIC refused to comment, however sources said the agency believes it would have to transfer these funds back to the U.S. Treasury to compensate taxpayers for the billions spent to bail out the savings and loan industry.
But banking lawyers disagree. Four lawyers with goodwill cases said the FDIC would have to use these funds to pay off the Financing Corp. bonds, which were floated in the 1980s to begin the S&L cleanup.
The 1987 law creating the Financing Corp. requires money in the FSLIC Resolution Fund to pay off the Fico bonds. However, the FDIC can tap the fund if it believes the Savings Association Insurance Fund's revenues are insufficient to pay interest due on the bonds.
The lawyers noted FDIC Chairman Ricki Helfer has repeatedly argued that the thrift fund may default on the bonds without a legislative rescue.
"This is clearly a strong argument," said Thomas Vartanian, a partner at the Washington law firm Fried, Frank, Harris, Shriver & Jacobson. "From a policy standpoint, using the goodwill awards for Fico would be the best answer given the problems with the bank and thrift insurance funds."
The FDIC's decision to step into the goodwill cases comes just as the House Banking Committee is considering a thrift fund bailout plan that would require banks to pay a big chunk of the Fico interest payments. (See related story on page 3.)
C. Dawn Causey, general counsel at America's Community Banker, said legislators should not use the FDIC's lawsuits as an excuse to delay action on the fund fix. "SAIF has got to be resolved now," she said.
But James McLaughlin, director of regulatory and trust affairs at the American Bankers Association, said the FDIC's legal maneuvers could change the dynamic of the debate. "It is a very interesting argument, and it holds out some hope," he said. "But the question is: Can the courts decide it in time?"
But this could all be moot as lawyers for investors of the failed thrifts are claiming the FDIC has no right to the money. "It is our position that they are not entitled to any of it, and we are prepared to resist their claim," said Charles Cooper, a partner at the Washington firm of Shaw, Pittman, Potts & Trowbridge.
"They will have to explain to the court where they have been all this time," said Frank Eisenhart, a partner at the Washington law firm of Dechert, Price & Rhoads, noting the first goodwill case was filed in 1990.
FSLIC, in an effort to avoid bankruptcy, enticed healthy thrifts in the 1980s to acquire their ailing peers. In exchange, it said the thrifts could count the difference between the sick institution's assets and liabilities as capital.
Congress, however, banned this accounting treatment, known as regulatory goodwill, in 1989, in a move that set off a wave of failures. That prompted more than 100 breach-of-contract suits. The Supreme Court ruled this month that the government was liable for damages in three of the cases.
