WASHINGTON - Opening the door for thrifts to collect billions of dollars in damages, a federal appeals court Wednesday ruled against the government in a key goodwill case.
The U.S. Court of Appeals for the Federal Circuit said the government is liable for its 1989 decision revoking thrifts' right to count supervisory goodwill as capital.
The decision released Wednesday focuses on Glendale Federal Bank, freeing the Glendale, Calif., thrift to pursue its $1.9 billion damage claim in the U.S. Court of Federal Claims. About 100 other thrifts have similar claims pending.
The plaintiff thrifts agreed in the 1980s to take over weak institutions after the government promised that supervisory goodwill, an intangible asset, could be counted as regulatory capital for up to 40 years. But in the 1989 thrift bailout law, Congress reneged on the deal, forcing acquirers to write off the goodwill by 1994.
Writing for the 9-to-2 majority, Chief Judge Glenn L. Archer Jr. said: "We conclude the government failed to perform its contractual obligations under the plaintiff's contracts."
The appeals court rejected the government's argument that Congress can alter the terms of a contract if it is in the public interest.
"We are very pleased with the Court of Appeals' decision, which holds the government liable for damages sustained by the bank as a result of the government's breach of contract," said Glendale chairman Stephen J. Trafton.
The government has 90 days to appeal to the U.S. Supreme Court. Justice Department and Federal Deposit Insurance Corp. representatives declined to comment.
While there is no precise figure on the government's liability, FDIC chairman Ricki Helfer has pegged the potential cost at $15 billion.
Shares of thrifts, particularly those with goodwill cases pending, soared on the news.
These include, in addition to Glendale Federal, Coast Savings, Long Island Savings Bank, TCF Financial Corp., California Federal Bank, and Sterling Financial. Trading in shares of Coast and Glendale were halted temporarily during the day.
Sterling rose $1.75 to $13.25; TCF was up $2.375 to $56.875; Glendale rose $1.875 to $16.625; Coast was up $3.25 to $27; and Long Island Savings was up $3.125 to $26.375.
CalFed issued a security earlier this year tied to the outcome of its suit. The price of that stock rose $3.125 to $7.375, or 74%.
Mr. Trafton criticized the government for prolonging the litigation, charging federal officials repeatedly spurned the thrift's offer to settle.
"More than two years ago, we proposed to settle this claim," he said. "However, the government consistently rebuffed our efforts to negotiate a rational settlement."
The decision won't affect most thrifts, said Paul A. Schosberg, president of America's Community Bankers. "The overwhelming majority of institutions that would be the natural beneficiaries are no longer around," he said.
"What is left is a lot of institutions that have been paying the price of higher depository premiums for institutions that disappeared because they were demolished by the loss of supervisory goodwill."
Financial analysts were elated. "This is absolutely a homerun," said Campbell Chaney, a bank and thrift analyst with Rodman & Renshaw in San Francisco.
"What this signals is that the government breached the contracts and is liable for compensation, and the ball is now in the court of the government. Are they going to appeal to the Supreme Court or will they settle? Either way, they are liable for billions and billion of dollars."
"This decision is about as positive as the thrifts could have hoped for," said James Marks, a thrift analyst with Hancock Institutional Equity Services.
The current cases sprung from the 1980s savings and loan crisis. The Federal Savings and Loan Insurance Corp., desperate to avoid depleting its deposit insurance fund, enticed healthy thrifts into buying their sick peers.
FSLIC agreed to allow the thrifts to amortize the supervisory goodwill over a 40-year period. Supervisory goodwill is the difference between the fair market value of a failed thrift's liabilities and its assets.
Most the sales would not have occurred without the goodwill pledge. Congress, however, feared these accounting maneuvers and outlawed them in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
The withdrawal of supervisory goodwill caused scores of thrifts to fall below minimum capital requirements, setting off a wave of failures.
Daniel Kaplan in New York contributed to this article.