Culminating a decade of legal wrangling, a federal judge will decide today how much the government owes Glendale Federal Bank for wiping regulatory goodwill off its books.
Expectations are high for a large award-between $1 billion and $2 billion-because Chief Judge Loren A. Smith of the Federal Claims Court said during the trial that Glendale presented "an exceedingly strong" and "convincing" case.
Judge Smith said he would release the Glendale decision at 6 p.m. eastern time. (For updated coverage, visit www.americanbanker.com.)
The closely watched Glendale case is considered the bellwether for more than 100 lawsuits brought in the wake of the 1989 thrift bailout. The government could be on the hook for a slew of payments to thrift owners, who are seeking a collective $20 billion.
The cases center on claims that the government broke its word in 1989 when it forced thrifts to subtract from their capital the value of intangible assets, known as regulatory goodwill.
Many thrifts took on this asset when they bought bankrupt thrifts at the government's behest in the mid-1980s. Stripped of goodwill, the newly merged institutions became woefully undercapitalized, and most failed.
Analysts following the case expect a big payday for Glendale. "They will walk away with a number above $1.3 billion," predicted Richard Macary, managing partner at Collectibles, an investment consulting firm that specializes in hard-to-value assets. "They may even get an amount quite close to what they are asking for."
"The market expects a favorable decision," said Thomas O'Donnell, an analyst at Salomon Smith Barney. "Judge Smith has indicated as much."
Some experts said the Glendale decision could persuade the government to settle the bulk of the remaining cases. One lawyer active in goodwill litigation said the government risks having the appeals court uphold a high damages award, which would vastly increase the cost of resolving the litigation.
"For plaintiffs and the government, litigation is expensive and uncertain," the lawyer said. "The result is, both sides may be willing to settle."
Investors in special warrants issued in May by Glendale will get 85% of any award, after taxes and litigation costs. These warrants closed Thursday at $5.1876, up 15.625 cents from the opening but down significantly from their high of $6.6875, reached the day the warrants hit the market.
Based on the recent price of the warrants, investors expect Judge Smith to award Glendale about $900 million, Mr. O'Donnell said.
Glendale Federal merged with California Federal Bank in September and now operates under the Cal Fed brand. Shares of the parent company, San Francisco-based Golden State Bancorp, closed Thursday at $23.625, up 43.75 cents. It would receive the remainder of the award.
Investors may have to wait several years to be paid. The government is expected to appeal the Glendale case to the U.S. Court of Appeals for the Federal Circuit and to the Supreme Court, even if it settles many of the other goodwill cases.
The claims court should now move swiftly on the remaining cases. The next ruling is expected by summer, in California Federal's separate, $1.6 billion suit, which was heard this winter by claims court Judge Robert H. Hodges Jr.
Lawyers said the Glendale ruling would affect all the damage decisions, though the finding is not binding on other judges. "Judge Smith has lived with this case for a long time," said Ronald Stevens, a partner in Kirkpatrick & Lockhart who represents Golden State Bancorp. "So other judges will be very interested in what he has to say."
Mr. Stevens said he would be concentrating on how Judge Smith resolves the government's contention that the thrift actually benefited from the elimination of goodwill. This occurred because passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 caused thrift stock prices to rise, the government has contended.
"There are a bunch of arguments raised in Glendale that the government is raising in other cases," he said. "It will be important to note how and on what basis the court has resolved those arguments."
During a two-year trial, Glendale advanced three theories on how much the government should pay for breaking its word to let the thrift count regulatory goodwill as capital for up to 40 years.
Glendale's most lucrative argument is for "restitution," a legal term that means the thrift deserves an amount equal to the value of services it provided to the government and the earnings it lost because of the breach of contract. Glendale estimates restitution at $2 billion.
Alternatively, Glendale seeks "expectation" damages, which would require the government to pay an amount equal to the benefits the thrift would have received if the government kept its word. This theory relies heavily on so- called lost profits, which is the amount Glendale could have made if it did not have to divert resources to shore up its capital position. Expectation damages sought total $1.6 billion.
The thrift's third argument holds that Glendale is entitled to the return of all the money it spent in reliance on the government's promise. Glendale says that is $863 million.
Mr. Macary of Collectibles said he expects Judge Smith to rule on all three theories, though Glendale will only collect on whichever argument yields the biggest award.
By ruling on all three theories, Judge Smith would give guidance to other thrifts to raise only one or two of the arguments, Mr. Macary said. This would permit them to estimate the value of their cases and might make them more willing to settle, he said. "We are going to see the logic and the law behind all three theories," he said. "That is the most important thing we will get out of this."
The goodwill debacle started in the 1980s when a nearly broke Federal Savings and Loan Insurance Corp. enticed healthy thrifts to buy their ailing peers by agreeing to let them count the difference between the sick thrift's assets and liabilities as capital for up to 40 years. Glendale earned its goodwill in 1981 when it acquired First Federal Savings and Loan, Broward County, Fla.
Congress, upset with accounting gimmicks, enacted a law in 1989 requiring thrifts to eliminate most regulatory goodwill within five years. This sudden loss of capital caused hundreds of thrifts to become severely undercapitalized. Most failed, though a few such as Glendale managed to raise enough capital to rebuild.
The thrifts sued, charging the government with breach of contract. The Supreme Court agreed with Glendale and two other thrifts in 1996, ruling the government was liable for breaking its word.
It sent that case back to the claims court to determine compensation.