WASHINGTON -- A federal appeals court dealt a blow to Glendale Federal Bank on Tuesday, ruling against the big California thrift on a key point in its battle to count supervisory goodwill as capital.

In a 2-to-1 decision, the court ruled that a 1989 law strengthening the industry's capital standards was valid - even if it broke agreements made by regulators with some institutions.

The decision leaves Glendale facing a June 30 deadline to raise its capital levels. If the $17.8 billion-asset thrift does not meet the deadline, it could be subject to regulatory penalties, possibly including seizure. A favorable ruling by the U.S. Court of Appeals for the Federal Circuit could have helped Glendale's case with the regulators.

Shares Slide

Shares of the thrift's parent company, Glenfed Inc., plunged after the ruling. The stock was off$1 in late trading -- surrendering 33% of its already modest value. Volume was heavy, with more than 1.5 million shares changing hands.

Stephen J. Trafton, chairman and chief executive officer of Glenfed Inc., expressed dismay at the ruling and said his company would, appeal.

"It is simply not fair for the government to break its promise with Glendale, he said.

Mr. Trafton noted that ruling is still pending on Glendale's separate claim against the government for damages.

Glendale has been working on a deal to raise $350 million to $400 million in new capital by mid-June. "We believe that the outcome of the goodwill case and the subsequent appeal process will not significantly affect the recapitalization process," Mr. Trafton said Tuesday.

After the ruling, the Office of Thrift Supervision noted it is reviewing a plan submitted by Glenfed for rebuilding its capital. "The plan was never dependent on the goodwill claim," an agency spokesman said. "As a result, this decision will have no bearing on the consideration of the plan."

Glendale and 44 other institutions have had cases pending against the government on supervisory goodwill. Most of the thrifts argue that they made deals with the government to take over failed savings and loans in exchange for the right to include goodwill, an intangible asset, on their books for up to 30 years. Rather than pump cash into the insolvent institutions, the government used the accounting entry goodwill to make up the capital deficiencies.

Claims Court Ruling

Tuesday's decision reverses a July 1992 ruling by the federal claims court. The claims court held that by enacting the 1989 banking law that forced savings and loans to accelerate the write-down of supervisory goodwill, the government had breached its contract with several thrifts, including Glendale.

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