Though Glendale Federal Bank won less money than expected in its regulatory goodwill case, the federal judge opened the door to hefty awards for dozens of thrifts pressing similar complaints.
"This ruling raises the stakes for the government significantly," said Richard Macary, an analyst at Collectibles LLC, an investment consulting firm in New York.
Mitchell R. Berger, a plaintiff's attorney and partner in the Washington office of the Patton, Boggs law firm, said it will be tough for the government to continue arguing in other cases that thrifts were not harmed by the loss of goodwill.
"This is the second-largest damages award against the government in claims court history," he said. "It has to be a wake-up call to the government that they could not have breached 120 contracts without causing any damages at all."
The Glendale decision Friday was the first damages award in the more than 100 pending regulatory goodwill suits, which stem from the government's 1989 decision to eliminate a favorable accounting treatment granted to acquirers of ailing thrifts. The suits collectively seek more than $20 billion.
Glendale had requested $2 billion in damages, but Judge Loren A. Smith of the U.S. Court of Federal Claims cut that roughly in half by rejecting the thrift's bid for "lost profits," which is the amount it could have made if the government had kept its word.
Though Judge Smith endorsed the lost-profits argument in concept, he said that conflicting statements by Glendale's witnesses and weaknesses in its model of future earnings made its claim "too speculative."
Lawyers involved with goodwill cases were elated because the judge said other thrifts may have valid lost-profit claims.
"Friday was a good day for the good guys," said Charles J. Cooper, a partner in the Washington law firm of Cooper, Carvin & Rosenthal. "The judge was quite clear that lost profits is not only a legitimate theory of damages but the preferable theory of damages."
"This leaves lost-profits damages wide open," said Don S. Willner, a partner in the Portland, Ore., law firm Willner, Keaney & U'Ren.
Only five other cases have progressed very far, including one by California Federal Bank, San Francisco. It is awaiting a ruling in its $1.6 billion goodwill suit, about half of which is for lost profits.
Even assuming thrifts are not compensated for lost profits, the eventual court rulings could result in a significant jump in per-share earnings, said Salomon Smith Barney analyst Thomas O'Donnell.
Using Judge Smith's reasoning to estimate the after-tax per-share value of goodwill claims, Mr. O'Donnell said the two big winners are Astoria Financial Corp. and Dime Bancorp., which are expected to earn an extra $11 and $5 a share, respectively.
The ruling also will benefit the scores of failed thrifts without lost- profits claims, said Rosemary Stewart, a partner in the Washington office of the Spriggs & Hollingsworth law firm. These thrifts are seeking the same type of compensation the judge granted Glendale, she said.
The judge said the government must pay Glendale what the Federal Savings and Loan Insurance Corp. would have spent if it had been forced to rescue First Federal Savings and Loan of Broward County, Fla. The judge also granted Glendale "reliance" damages, which is reimbursement for costs such as higher deposit insurance premiums.
Glendale merged with California Federal last year and now operates under that name. Investors in Glendale goodwill warrants will get 85% of any award, after expenses. The balance will go to the thrift's parent, Golden State Bancorp.
Because Glendale won less than half of what it was seeking, goodwill- related securities fell broadly Monday, the first day of trading since Judge Smith issued his decision. Shares of Golden State closed at $23.25, a $1 decline. The Glendale warrants closed at $3.03125, down $1.90625.
California Federal also issued two types of goodwill warrants. CALGZ securities finished at $10.875, down 75 cents, and CALGL closed at $10.875, a fall of $2.125. Goodwill securities tied to Coastal Bancorp closed at $2.15625, a drop of $3.46875. Dime, which has a goodwill claim, closed at $23.125, down 37.5 cents.
Bucking the trend was Washington Mutual Inc., which closed at $41.5625, up $1.0625, and Charter One Financial Corp., which closed at $28, up 12.5 cents.
Stephen J. Trafton, executive vice president at Golden State and former chief executive officer of Glendale, said it is wrong to portray the case as another example of the government bailing out the savings and loan industry.
"Glendale recapitalized itself at no expense to taxpayers ever," Mr. Trafton said. "We did it entirely on its own. It was the government that breached its contract, and it was Glendale that suffered those damages. It is the government that bears the responsibility to the taxpayers."
Mr. Trafton noted that the government could have ended the dispute in 1992 when Glendale offered to drop the goodwill claim in exchange for a $700 million equity investment in the thrift. That stake would be worth more than $2 billion today, he said.
Judge Smith said Glendale is entitled to $798 million, which is the amount the FSLIC would have spent in 1981 to resolve First Federal. The government also must pay $335.4 million, which is the amount Glendale lost because it became subject to prompt-corrective action rules after the government broke the contract. Glendale also gets $18.2 million in interest rate subsidies, $16 million for higher deposit insurance premiums, and $29 million in miscellaneous other damages. That amount is offset by $288.3 million, which is the amount that Glendale made by acquiring the Florida thrift, the judge said.
The goodwill debacle began in the 1980s when a nearly bankrupt FSLIC enticed healthy thrifts to acquire their failing peers by promising to let them count the difference between the sick thrift's assets and liabilities as capital for up to 40 years. Congress, upset at accounting gimmicks, eliminated goodwill in 1989. This caused Glendale and scores of other thrifts to become woefully undercapitalized, and most failed.
The thrifts sued, and the Supreme Court in July 1996 held the government liable for breaking its word and ordered the claims court to determine damages.
The Justice Department released a statement Friday saying it was "studying" the decision. A spokeswoman on Monday declined to comment further. Most lawyers following the case expect the government to appeal.