Court Opens Door For Sterling Decision Allows Thrift To Seek $90 Million Damage Claim

A U.S. Supreme Court ruling Monday clears the way for Sterling Financial Corp. of Spokane to seek $90 million in damages from the federal government.

The 7-2 decision by the nation’s highest court in a case involving three other savings and loans could ultimately cost the Treasury as much as $20 billion.

More than 100 thrifts have sued the government for changing the way they could account for assets taken over from failed institutions with the assistance of federal regulators.

In the case of Sterling, said Chairman Harold Gilkey, the company had taken over three thrifts with a …

A U.S. Supreme Court ruling Monday clears the way for Sterling Financial Corp. of Spokane to seek $90 million in damages from the federal government.

The 7-2 decision by the nation’s highest court in a case involving three other savings and loans could ultimately cost the Treasury as much as $20 billion.

More than 100 thrifts have sued the government for changing the way they could account for assets taken over from failed institutions with the assistance of federal regulators.

In the case of Sterling, said Chairman Harold Gilkey, the company had taken over three thrifts with a total negative net worth of $50 million, and another $40 million in troubled loans.

Those transactions occurred in 1985 and 1988. In 1989, as part of legislation cleaning up the monstrous losses created by collapsing thrifts, Congress wiped out so-called “supervisory goodwill” regulators had used as an inducement for healthy thrifts to acquire the sick.

Goodwill allowed the thrifts to take bad loans and other liabilities off their books and charge them off over several years.

“These companies were broke. We took them on,” said Gilkey. “What the government asked us to do was the heavy lifting.”

The exercise almost broke Sterling’s back. Goodwill counted as capital, and its elimination put the thrift below federal minimums.

Although Sterling maintained its profitability throughout the ordeal, regulators threatened to take over the institution before officials obtained an injunction blocking a seizure in 1990.

Sterling subsequently sold stock to rebuild its capital, and has since grown to a $1.6 billion institution with 41 branches and more than 500 employees.

But Gilkey said fighting off regulators not only distracted Sterling officials. “The major loss of earnings is on the capital the government inappropriately withdrew,” he said.

Government lawyers said federal regulators did not have the power to guarantee that future congressional action would not alter the terms of their agreements with the thrifts.

Justice David Souter torpedoed that argument, saying the stakes were too high for thrifts to risk their existence on the possibility their contracts could be changed at will.

The cases resolved Monday were Glendale Federal Bank of California, Winstar Corp. of Minnesota and Statesman Group Inc of Iowa. Of the three, only Glendale survived the change in regulatory treatment of capital.

The Supreme Court’s ruling returns those cases and all others to the U.S. Court of Claims in Washington, D.C., where Gilkey said they will be put on a fast track.

“There will no longer be a dodging of liability by the government,” he said.

Sterling’s case could be heard as early as next January, Gilkey said. Whatever the court awards the thrift can then be submitted to the Treasury as a claim payable from a judgment fund.

The fund does not have enough money to cover all the potential claims, he said, so Congress will have to replenish the reserves.

It may take three years to get paid, he said.

Gilkey said the claims were not a request for bailouts like those that have already cost taxpayers $120 billion.

“This is just payment of a contractor,” he said, suggesting the government would do well to seek settlements in the various cases before the Court of Claims makes its own determinations on damages.

Sterling stock closed Monday at $14.50, down 25 cents.

, DataTimes