Nobody Is Laughing About This Funny Money Now

In the mid-1980s, with many savings and loan associations on the verge of collapse and with the federal insurance fund all but broke, regulators came up with an ingenious rescue device: Healthy S&Ls willing to absorb their sick brethren were given a fictitious boost to their balance sheets--"supervisory goodwill"--that allowed them to meet capital standards. And they could carry this goodwill on their books for 40 years.

Now, this accounting ploy has become a hotly contested legal and political issue that has potentially widespread impact on the thrift industry. The dispute began in 1989, when the government, despite its promise of 40 years, passed the S&L bailout bill, which ordered S&Ls to phase out the goodwill by 1994. Thrifts cried foul. Although they have sometimes won injunctions staying the elimination, they lost attempts to void the law's provision. But recently, they scored a key victory: On Apr. 21, the U.S. Claims Court ruled that the government must pay damages to the acquisitors of a Minnesota S&L that failed after its supervisory goodwill was canceled. What's more, some sympathetic members of Congress want to convert the ersatz goodwill into real money for the thrifts, courtesy of the taxpayers.

One way to understand how this complex mess got started is to look at CalFed Inc., which agreed to take six failing California and Florida S&Ls off regulators' hands in the mid-1980s. The thrifts, though, had roughly $600 million in fegative net worth, which would have wreaked havoc with CalFed's balance sheet. So regulators wiped out the negative net worth by allowing CalFed a similar amount in freshly minted goodwill.

Since then, CalFed's fortunes have changed radically. The 1989 abolition of supervisory goodwill will reduce its capital base by $86.6 million this year and could bring it to the brink of a regulatory takeover. More than 350 thrifts that received supervisory goodwill have also been affected, to the tune of $5 billion to $7.5 billion.

S&Ls that think they have gotten a bum deal from the government are getting support from some House Republicans, notably Representative Bill McCollum (R-Fla.), whose home state includes a number of ailing thrifts. He says there are 53 relatively healthy thrifts that could fail if they can't use their goodwill to meet capital standards. Instead, McCollum wants the Resolution Trust Corp. to give the S&Ls cash in exchange for supervisory goodwill. He contends that the buyback would cost $2.5 billion--vs. $25 billion in potential bailout costs. "These are sound institutions with good core earnings and good management," he says. To press his point, McCollum says he will block any new funding for the thrift bailout until his colleagues agree.

BREACH OF CONTRACT. So far, McCollum hasn't won much support for his position. The Office of Thrift Supervision says only 17 thrifts would be lifted out of danger by a goodwill buyback.

Yet there's a good chance that the S&Ls may get satisfaction in the courts. In the past, appellate panels overruling lower courts have generally argued that Congress has a right to change regulatory policy. But Claims Court Chief Judge Loren A. Smith said in his decision that the abolition of goodwill in 1989 breached the contract that the government made with Winstar Inc., an investor group, when it agreed to purchase a failed Minnesota S&L in 1984. "While Congress' power to regulate is not impaired, the government may be compelled to pay for the results of its actions," Smith wrote.

The Claims Court is expected to move within a month to apply its Winstar ruling to a dozen other S&L breach-of-contract cases that are pending, including CalFed's. If Smith's rulings are upheld when reviewed by the federal appeals court, hundreds of additional cases may flood in. Ultimately, the issue could end up in the Supreme Court.

Compared with the $500 billion that Washington already has committed to the S&L bailout, any damages that thrift acquisitors eventually collect on goodwill claims may seem like small potatoes. Yet the hit to taxpayers' pockets will be one more painful reminder of the folly of trying to save an industry with smoke-and-mirrors bookkeeping.

      THRIFTS Many were allowed by regulators to add fictitious "supervisory 
      goodwill" to their balance sheets during the mid-'80s in return for taking 
      over failing S&Ls. After promising they could use the goodwill for 40 years, 
      the government in 1989 wiped it out. Thrifts say that's not fair. Without the 
      goodwill, supporters say more than 50 thrifts would not meet capital standards 
      and could fail
      GOVERNMENT Regulators and lawmakers argue that such fiscal finagling 
      artificially conceals thrift industry problems. Regulators claim predictions of 
      numerous failures are overblown. Restoring goodwill may affect the fate of only 
      17 S&Ls
      DATA: BW
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