The Supreme Court ruled Monday that the government must pay for rescinding favorable accounting rules granted to acquirers of troubled thrifts in the 1980s.
The 7-2 ruling, addressing one of the most contentious issues of the thrift crisis, was a big victory for more than 100 companies that bought ailing savings and loans only to see the accounting treatment vanish. Those companies have been seeking more than $10 billion in damages for the change.
The decision applied to a change in the accounting for an intangible asset called supervisory goodwill. The ruling applied directly to Glendale Federal Bank, Winstar Corp., and Statesman Group.
"When the government shifts regulatory policy, it is not entitled to shift that cost to contract holders," Justice David Souter said in announcing the decision Monday.
Chief Justice William H. Rehnquist and Justice Ruth Bader Ginsburg dissented.
The Justice Department had argued that the government has the right to change the terms of a contract. The justices rejected that notion, saying it would have been "madness" for any of the thrifts to risk their future without a binding agreement.
The cases now return the U.S. Court of Federal Claims, which must hear each thrift's claim individually. The first damage awards are expected in the fourth quarter.
The news sent the stock prices of institutions with goodwill up on heavy volume. Glendale Federal Bank's stock rose $1.50, to $19.625; Dime Bancorp climbed 12.5 cents, to $13.375; and H.F. Ahmanson & Co. rose 37.5 cents, to $27.375. Also, Long Island Bancorp saw its stock price increase $1.562, to $32.125, and Cal Fed Bancorp gained 75 cents, to $19.
Thomas O'Donnell, an analyst at Smith Barney Inc. in New York, said he expects near-term increases of between 10% and 15% in the stock prices of affected thrifts. The gains could be even bigger if the claims court awards substantial damages, he said. "This is the end of the first half of the game," he said. "The second half has yet to be played."
Glendale Federal chairman Stephen J. Trafton declared victory. The $16 billion asset thrift will now ask the claims court to grant it more than $1.5 billion in damages. A settlement with the Justice Department is highly unlikely, he said. "The government has set the course for this litigation and it must face the consequences," he said.
Charles J. Cooper, who represented Winstar and Statesman - holding companies that owned thrifts which failed - praised the decision. "This means the government, like everyone else, is bound by its contractual promises," said Mr. Cooper, a partner at the Washington law firm of Shaw, Pittman, Potts & Trowbridge.
The Justice Department, which would not comment on the ruling, has previously questioned whether any of these thrifts actually suffered from the loss of goodwill, saying most would have failed or suffered economic trouble anyway.
The dispute dates back to the 1980s, when a nearly broke Federal Savings and Loan Insurance Corp. enticed healthy thrifts to take over their ailing peers. In exchange, the now-defunct insurer agreed to let thrifts count as capital for 40 years the difference between the failing institution's assets and liabilities.
Congress, however, had second thoughts about this accounting scheme. In the 1989 thrift bailout law, it ordered these institutions to eliminate goodwill within five years. The change caused scores of thrifts to fail and led shareholders to file more than 100 breach of contract suits against the government.
Glendale, Statesman, and Winstar won at the U.S. Court of Federal Claims and at the U.S. Court of Appeals for the Federal Circuit.
In the opinion Monday, the justices focused on the unmistakability doctrine, which says the government can cancel contracts that prevent it from passing new laws.
Four justices, led by Justice Souter, said the unmistakability doctrine does not apply because the contracts did not impede the government's ability to regulate thrifts. Instead, the justices concluded, the contracts simply required the government to compensate the thrifts for the losses incurred by the new policy. Two separate concurring opinions reached the same conclusion as Justice Souter's group, but relied on a different legal analysis.
In their dissenting opinion, Chief Justice Rehnquist and Justice Ginsburg dissented, saying the government has the right to void any deal unless it explicitly gives up that authority in writing.'