For Golden State, Supervisory Goodwill Investors, Wait Is Over
Washington, April 8 (Bloomberg) -- The long wait is almost over for the owners of securities tied to $30 billion in ''supervisory goodwill'' lawsuits, which claim the U.S. government broke promises of special regulatory treatment made to thrifts and their owners.
By 6:00 p.m. Washington time Friday, U.S. Claims Court Judge Loren Smith will release his decision on how much the government owes Golden State Bancorp Inc.'s Glendale Federal Bank in its $2 billion claim, a test case for more than 100 suits stemming from the 1980s' S&L crisis.
If the award is large enough, it likely will spur shares of Meritor Savings Bank and AmBase Corp. -- which have virtually no assets other than their lawsuits -- and certificates connected to Golden State and Coast Federal Bank claims. Those securities have languished in recent months, as delays in Smith's ruling added to investor frustrations after a decade of litigation.
''People have been disappointed for so long that many have given up hope,'' said Allan Bortel, manager of California-based Inverness Management, which holds securities tied to the litigation. ''That's what creates opportunities in markets.''
A big award also could boost thrifts such as Dime Bancorp Inc., Washington Mutual Inc. and Astoria Financial Corp., which have similar claims.
The lawsuits claim the government breached promises that induced healthy savings and loans to acquire failing thrifts. Thrifts say they saved taxpayers the cost of seizing the troubled institutions and paying off depositors.
Among other things, regulators told thrifts they could create a paper asset called supervisory goodwill, count it toward U.S. capital requirements and write it off over decades. Congress reversed that stance in 1989, passing a law that mandated a quick phase-out of supervisory goodwill -- and sending many thrifts into insolvency.
First of Kind
The Golden State award will be the first of its kind. Buoyed by pro-company comments and preliminary rulings from Smith, many investors and analysts have high expectations.
''I think what people are looking for is in the $1.5-to-$1.6 billion range,'' said Charlotte Chamberlain, an analyst with Jefferies & Co. in Los Angeles.
The Golden State award primarily will benefit holders of Golden State Bancorp Litigation Tracking Warrants, who will get 85 percent of the net, after-tax proceeds. Golden State, a Glendale, California-based company controlled by financier Ronald Perelman and Texas banker Gerald Ford, will receive the rest.
It's been a long time coming for Golden State, now the nation's second-largest thrift. The dispute dates back to 1981 when the thrift, then known as Glendale, acquired First Federal Savings & Loan of Broward County, Florida. At the time, the Florida S&L's debts exceeded its assets by $798 million.
Regulators said Glendale could offset Broward's bad loans on its balance sheets with an equal amount of supervisory goodwill. The 1989 law wiped out that asset, forcing Glendale to shrink to comply with capital requirements.
Glendale sued in 1990. The dispute slowly made its way to the Supreme Court, which in 1996 said the government was liable and sent the case back to Smith to determine damages. Smith's ruling will come more than two years after he began hearing evidence on that issue.
Golden State is pressing three theories. Federal law allows several methods of damage calculation, and successful litigants generally are entitled to choose the largest amount.
The Justice Department says that, under any of those theories, Golden State deserves no more than $28 million.
2 Billion Theory
Golden State asked Smith for more $2 billion in ''restitution,'' a legal theory that would force the government to return benefits it received when Glendale took over Broward.
Golden State says the starting point under that theory is the almost $800 million the government would have spent to liquidate Broward had it not been acquired.
A key question is whether Smith also will allow a form of interest -- the investment earnings that $800 million allegedly garnered for the government. If he does, his ruling could give Golden State almost the full $2 billion. If not, the company almost certainly will receive less than $1 billion in restitution.
''That could be the big disappointment or the big win,'' said Rich Macary, a consultant who advises hedge funds on goodwill securities.
Restitution is a ''universal'' theory that's important in almost every case, Macary said. A large ruling would be especially helpful to defunct thrifts such as Meritor and Ambase, which rely heavily on that measure of damages.
Lost Profits
Golden State, alternatively, is seeking $1.6 billion in ''expectation damages,'' a tool designed to give the wronged party the benefits it would have received had the other party not breached the contract.
That amount includes $777 million for profits Glendale says it has lost since 1989, largely because the thrift had to shore up its capital reserves after losing the benefit of supervisory goodwill. Glendale also seeks more than $400 million in future lost profits.
Those are controversial items, even though Smith ruled in December 1996 that thrifts could recover at least some lost profits. The Justice Department says the loss of the supervisory goodwill didn't prevent Glendale from taking advantage of any opportunities to earn money.
A big ruling for Glendale on expectation damages is key for holders of certificates tied to Coast Federal Bank's suit because Coast's claim doesn't rely on the restitution theory, analysts say.
''If there's no expectation damages, Coast is toast,'' Chamberlain said.
Golden State's final theory is ''reliance damages,'' under which litigants seek the return of money they spent in dependence on promises that were later broken. Under that theory, Golden State says it's entitled to $863 million.
Appeal Expected
However Smith rules, an appeal to the Washington-based U.S. Court of Appeals for the Federal Circuit is almost certain. That court will have to resolve disagreements between Smith and another claims court judge who has sided with the Justice Department on key preliminary issues in a separate lawsuit also involving Golden State.
Smith's legal reasoning is crucial, both to set a precedent for other cases at the trial court level and to persuade the appeals court, analysts say.
''The nuances are so important,' Chamberlain said. ''It's more than the numbers. It's the law that he cites, and it's what theories of damages he believes hold water.'' |
