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Tax Payers Will Have To Pay More For S&L Debacle

News & Implications

On July 1, 1996, the U.S. Supreme Court ruled that the government broke its contracts with three savings and loans when it changed an accounting rule in 1989. The government will have to compensate the S&L's for damages because of those changes. What it boils down to is that the S&L debacle will cost tax payers additional money, estimated at $10 billion.

Background

Back in the 1980's, the government encouraged healthy thrifts to take over ailing ones by allowing accounting shortcuts that reduced the amount of cash the banks needed to have on hand. These thrifts were allowed to count the assets of insolvent ones as "goodwill" which could be amortized over as much as 40 years. They were also allowed to double-count as "capital credit" government funds provided to help them take over ailing thrifts.

A 1989 law that sought to restore the troubled thrift industry to health by tightening rules and providing money to close insolvent S&Ls. The law barred thrifts from counting "goodwill" as part of the capital minimum. As a result, Winstar and Statesman were forced into receivership, while Glendale Federal Savings had to raise about $450 million to meet its minimum. There are an estimate of over 100 similar cases pending.

Definition of "Goodwill"

When one company acquires another, the acquiring company's goodwill is the difference between the purchase price and the value of the acquired company’s tangible assets. However, unlike in the ordinary acquisition context, where goodwill may reflect a business's intangible reputation with customers and other "going-concern" value, the goodwill of the defunct S&Ls was merely an accounting device. In effect, the accounting trick was to count the insolvent S&Ls’ liability as an intangible asset.

Damage Estimate

The S&L's have to prove damages because of those changes, but no one is exactly sure of the price tag for this and about 100 similar cases. Estimates range from $5 billion to $20 billion.

The lower courts will decide damages later, but what's clear now is that the government is not exempt from honoring a contract.

Potential Wider Implications

According to CNNfn (April 24, 1996), a wide range of industries, from electronics to aerospace, science laboratories and state universities, have filed briefs with the court. Their concern is that if Congress can break a contract with the S&Ls through impunity, all government contractors would be at risk of losing their money as well.

Where Would The Money Come From?

A senior Clinton administration official was quoted by The Wall Street Journal (July 3, 1996) as saying that "any damage awards would be paid from a permanent judgment fund maintained by the Treasury Department, meaning that, ultimately, taxpayers would foot the bill."

Overall, the S&L cleanup has cost about $200 billion.

By Alex Tajirian