High Court Lets Stand Curb on S&L Goodwill

WASHINGTON -- Federal thrift regulators won a significant victory on Monday as the Supreme Court left intact the toughened capital requirements that form the backbone of the savings and loan rescue effort.

The justices declined to review an appeal by Franklin Federal Savings Bank of Morristown, Tenn., which had sought to overturn a policy that prevented it from counting goodwill as capital.

The Supreme Court took its action without comment, which had the effect of letting stand the previous appeals court decision that went against Franklin Federal.

Government lawyers saw the action as a vindication of the Office of Thrift Supervision's enforcement powers and a sign that other, similar lawsuits - some filed by thrifts much larger than the $100 million-asset Franklin - are in danger of failing.

Triggered by Accounting Rule

The suits were prompted by a change in accounting rules that followed passage of the 1989 thrift-bailout law. It no longer permitted supervisory goodwill, an intangible asset accumulated by institutions that acquired failing thrifts, to be counted as capital.

The affected thrifts complained that the government should not have been allowed to renege on the earlier commitments defining supervisory goodwill. The earlier agreements were forged by the Federal Home Loan Bank Board, which was phased out by the bailout law and replaced by the OTS.

"Congress has set what can be included in capital, and so far the courts have ruled" that OTS may enforce the new capital rules regardless of earlier agreements, a senior attorney for OTS said.

Discouraging for Investors

The Supreme Court's refusal to hear the case "certainly is not helpful to S&Ls," said Eric W. Bloom, an attorney for investors who pumped $5 million into Franklin under an agreement signed nine months before the thrift law took effect.

The thrift investors contend that if they lose these cases, the government's costs will rise even more in the long run.

Mr. Bloom said the Supreme Court's refusal to review the Franklin case, the first on the goodwill issue to reach it, could prompt other investors to abandon the appeals process. They might sue to recover their money and hand the insolvent thrifts they acquired back to the government, he said.

OTS director Timothy Ryan recently told Congress, however, that the agency will not shut down profitable thrifts, but will allow investors to replace the goodwill with other assets.

A half dozen similar suits, including challenges by such larger thrifts as Carteret Savings Bank, Morristown, N.J., and Trans-Ohio Savings Bank, Cleveland, are pending at the circuit court level.

Under its agreement with the Bank Board in 1989, Franklin of Tennessee was allowed to account for the negative net worth of a thrift it acquired -- Morristown Federal Savings & Loan Association - as supervisory goodwill over a 25-year period.

Tougher Side of FIRREA

In the Financial Institutions Reform, Recovery, and Enforcement Act later in 1989, Congress strengthened thrifts' capital requirements. Core capital could not be less than 3% of assets and could include only a minimal amount of supervisory goodwill.

Franklin initially won its suit against the OTS in the U.S. District Court for the Eastern District of Tennessee.

The U.S. Court of Appeals for the Sixth Circuit reversed the ruling.

Meanwhile, several other lower courts have weighed in on the matter, with varying outcomes. The only two appeals circuits to hear such cases - the Sixth and Eighth - have agreed that the 1989 law takes precedence.

Should another federal appeals court reach a contrary ruling, the Supreme Court might have to resolve the conflict, lawyers said.

The high court last month refused to hear the case of First Federal Savings Bank of Pontiac, Mich. But the lawyers said in that case, the court declined to review a procedural decision by the circuit level.

Geoffrey A. Campbell of The Bond Buyer, a sister publication of American Banker, contributed to this report.

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