The Treasury Department will use the FSLIC Resolution Fund to pay damages in any of the pending regulatory goodwill cases.
The disclosure was included in the Federal Deposit Insurance Corp.'s midyear earnings report and confirmed Tuesday by a Treasury official. The FDIC said the fund has already spent $104 million settling four cases.
The FSLIC Resolution Fund was created in 1989 to execute the thrift industry bailout. Administered by the FDIC, the fund has about $2.7 billion in cash and appropriated funds available to pay goodwill-related damage claims.
The goodwill litigation stems from the government's decision to let thrifts count goodwill as capital if they acquired ailing peers. Congress voided those deals in 1989, causing scores of thrifts to fail and generating more than 100 breach-of-contract suits. The Supreme Court in 1996 said the government was liable, and a judge is expected to make the first damages award early next year.
A Treasury official said the Justice Department's office of legal counsel, which provides legal opinions to government agencies, ruled last month that the FSLIC fund is responsible for any judgments. The Treasury informed the FDIC of the ruling in late July, the official said.
In its earnings report, the FDIC warned that the FSLIC fund would go broke if forced to pay all goodwill judgments, which could exceed $20 billion. "Congress may need to appropriate additional funds," the FDIC said.
Lawyers involved in goodwill litigation were split on the significance of the decision. Rosemary Stewart, a partner in the Washington office of the Spriggs & Hollingsworth law firm, said claims should be paid from the Justice Department-administered judgment fund. "If any other fund is the source of your payment, there is no guarantee that you will get your money," she said.
But Charles J. Cooper, a partner at the Washington law firm Cooper, Carvin & Rosenthal, said he expects the government to make good on any judgment, no matter where the funds come from.
James Chessen, chief economist at the American Bankers Association, said he is concerned that someday policymakers will want to tap the deposit insurance funds' $38.5 billion in reserves.