In the spring of 1989, during the congressional debate overwhat would become the Financial Institutions Reform, Recovery, and Enforcement Act, the financial press coined a term for thrifts with high dollar amounts of so-called supervisory goodwill on their balance sheets: "goodwill junkies."

These institutions were derided for their resistance to the legislation's capital approach, which required supervisory goodwill to be deducted from capital in measuring the adequacy of an institution's capital.

Eventually Congress enacted the measure and adopted a strict tangible- capital rule. The result was turmoil in the industry, forced closures, severe contractions, and an avalanche of litigation that is just now being resolved.

Much has been written about the merits of the plaintiffs' contract claims in the ongoing goodwill litigation. But little attention has been paid to the origin of the supervisory goodwill that is the basis of these claims.

The thrift crisis of the 1980s and early 1990s had its origins well before the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act.

Indeed, the industry's capital shortage dated from the high interest rate environment of the late 1970s and early 1980s. Institutions long dedicated to financing homeownership saw their cost of funds shoot upward, while the prepayment rates on their long-term, low-rate mortgage portfolios slowed. The result for many institutions was a growing string of losses and insolvencies.

Despite record levels of Federal Savings and Loan Insurance Corp. resolutions, starting in 1980, 415 thrifts with $220 billion of assets were insolvent by the end of 1982.

Faced with this growing crisis, the Federal Home Loan Bank Board and FSLIC tried to stanch the bleeding by forcing the takeover of weaker institutions by stronger ones. This became known as the "merger program.".

The Home Loan bank board encouraged healthy thrifts and other investors to take over ailing institutions without FSLIC financial assistance, if possible, or with the insurance agency's cash, forbearances, and goodwill when needed.

Initially, these mergers required some form of cash contribution from FSLIC. But the thrift capital shortages continued to grow, and the financial resources of the deposit insurance agency were quickly used up.

The remedy to this problem: crediting supervisory goodwill generated in the acquisition.

Well-managed and well-capitalized thrifts were induced to buy ailing or failing institutions with the promise that the resultant supervisory goodwill could be used as regulatory capital and amortized over an extended period without any reduction in the stated amount of the buyer's capital.

Brent Beasley, then FSLIC's director, said: "We will do all we can to facilitate the merger .... We believe the merger process is especially useful. The wise use of purchase accounting (goodwill) is facilitating mergers."

As a result, 769 institutions were merged in 1981 and 1982.

For the government, it meant that a problem institution was resolved with little, if any, financial contribution. At the same timeacquirers obtained a larger, deposit-taking platform and an extended period within which to replace the assumed goodwill with earning assets.

The merger program - not some accounting trick, as was argued during the debate over the Financial Institutions Reform, Recovery, and Enforcement Act - was the source of supervisory goodwill so loudly condemned at the time.

Put another way, the merger program did not let institutions grow without capital. Instead, it spread existing capital at well-run institutions over ailing thrifts, thereby avoiding countless failures.

When extreme measures such as the merger program are adopted to address an emergency, it is unfair to condemn the institutions, entities, and persons involved in resolving a past crisis.

A closer look might reveal, as it does in the case of the "goodwill junkies," that they were heroes willing to act in a time of crisis. This perhaps is a good lesson not only for life in general but also for the legislative process in particular.

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