Completing its current term Monday with a financial bombshell, the Supreme Court issued a ruling that could cost the nation’s taxpayers billions of dollars for the government’s broken promises to more than 100 savings-and-loan institutions.
By a 7-2 vote, the justices said congressional passage of an S&L; reform measure seven years ago reneged on earlier governmental promises to the thrifts, driving many of them into fiscal despair.
The eventual cost of the government’s breach-of-contract liability is uncertain. Estimates vary widely, with the Clinton administration saying the payout could reach $10 billion and some Wall Street analysts saying the price could be as high as $18 billion.
The justices, affirming lower court decisions, rejected all of the government’s defenses to claims that the passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 changed accounting rules and broke the government’s earlier promises, at enormous cost to the thrifts.
Chief Justice William H. Rehnquist, joined by Justice Ruth Bader Ginsburg, complained in a dissenting opinion that the court had generally weakened the government’s ability to protect the Treasury and the taxpayers “from possible improvidence on the part of the countless government officials who must be authorized to enter into contracts for the government.”
The claims of the thrifts arose from the government’s plan to stem the savings-and-loan crisis of the 1980s and save tax money by encouraging healthy S&Ls; to take over insolvent thrifts.
Government regulators told healthy thrifts that such an acquisition would enable them to count the resulting “good will” as an asset toward meeting federal requirements for S&L; reserves for as long as 40 years.
Good will is an accounting term that represents the difference between the price paid for the acquisition and the actual value of the acquired firm’s assets.
For example, the profitable Glendale Federal Bank of California could not have afforded to merge with the insolvent First Federal Savings & Loan Association of Broward County, Fla., had it not been granted a right to count hundreds of millions of dollars of good will as capital for 40 years.
But the 1989 act, aimed at preventing the collapse of the industry and restoring public confidence, forbade thrifts from counting good will in computing its reserves., Glendale, the Winstar Corp. and the Statesman Group, all of which had acquired failed thrifts before the 1989 law was passed, filed suit. Federal regulators, in fact, seized the Winstar and Statesman thrifts for failing to meet the new capital requirements.
Justice David H. Souter, writing the main opinion, said nothing in the government’s agreements with the thrifts barred the government from changing the rules. In contracts in regulated industries, he said, “the risk that legal change will prevent the bargained-for performance is always lurking in the shadows.”
But he read the agreements to shift the risk of that change to the government, and said the government’s defenses did not apply.
Federal lawyers, raised, for example, an “unmistakability defense,” which says that the government is not responsible for regulatory changes unless it says so in unmistakable terms in the contract.
“It would, indeed, have been madness for the (thrifts) to have engaged in these transactions with no more protection than the government’s reading would have given them,” Souter observed.
Otherwise, he said, “the very existence of their institutions would then have been in jeopardy from the moment their agreements were signed.”