WASHINGTON -- In a significant victory for the Bush administration, the Supreme Court yesterday left intact the toughened capital requirements that form the backbone of the savings and loan rescue law.

The court's justices declined to hear an appeal by Franklin Federal Savings Bank, which was challenging provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Among other things, the law limits the use of accounting gimmicks to bolster capital.

Franklin filed suit against the Office of Thrift Supervision because the agency would not honor an agreement reached with the office's predecessor, the Federal Home Loan Bank Board. Under that agreement, the thrift, located in Morristown, Tenn., was allowed to account for the negative net worth of a thrift in acquired over a 25-year period.

Franklin received permission in 1989 from the now-defunct bank board as part of an agreement to salvage Morristown Federal Savings & Loan Association, which was located in the same city. As part of the deal, Franklin agreed to assume Morristown's negative net worth. In return, the bank board agreed to let Franklin carry the deficit net worth as supervisory goodwill on its books.

But later in 1989, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act -- more commonly known as the thrift bailout law -- under which the bank board was disbanded and replaced by the Office of Thrift Supervision and capital requirements for thrifts were strengthened.

That law requires thrifts to maintain core capital at levels "not less than 3% of the savings association's assets," and mandates that supervisory goodwill may account for but a small portion of core capital. In addition, the law mandates that supervisory goodwill included in core capital must be amortized fully in a maximum of 20 years.

Congressional debate over the capital provisions was lively, prompted by the concerns of some lawmakers that individuals and corporations would refuse to continue to negotiate with the federal government if they knew their agreements could be undone by legislation.

Rep. John LaFalce, D-N.Y., in particular expressed concerns that the capital requirements spelled out in the thrift bailout law would prompt a flood of lawsuits against the federal government. But proponents countered that weak capital standards were in large part responsible for the thrift crisis and said the bank board's agreements only made things worse.

Franklin filed suit in the U.S. District Court for the Eastern District of Tennessee to prevent the Office of Thrift Supervision from enforcing the new law against it.

The district court concluded the thrift had a valid contract with the federal government and forbade the Office of Thrift Supervision to abrogate the agreement. On appeal, however, the U.S. Court of Appeals for the Sixth Circuit held that if Franklin had a valid contract with the federal government, provisions of the thrift bailout law superceded it.

The Supreme Court's refusal to review the appeals court's ruling may not end the matter. A host of federal district courts have addressed the goodwill issue, with varying outcomes. Currently, however, only the U.S. courts of appeal for the sixth and eleventh circuits have decided the matter, and both have agreed that the thrift bailout law supercedes any goodwill agreements the Bank Board made with thrifts.

Should another federal appeals court reach a contrary ruling, a conflict would exist in the circuits, inviting Supreme Court review.

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