March 27, 2007 in Business

Sterling is fighting for principal – and principle

Bert Caldwell The Spokesman-Review
 

A U.S. Court of Federal Claims judge will journey to Spokane in June to preside over a trial pitting Sterling Financial Corp. against the United States of America.

By the time Judge Thomas Wheeler enters the courtroom, the case will be more than 16 years old. He will be the fourth Court of Claims judge to preside over the matter. He may not be the last.

No matter how Wheeler rules after what is expected to be at least a three-week proceeding, appeals are likely. Neither Sterling nor the U.S. Department of Justice concedes a point in a test of wills that has nothing to do with probate.

And, so far, little to do with justice.

Sterling took on the government when the Federal Deposit Insurance Corp., Office of Thrift Supervision, and other agencies were starting the cleanup of grossly under-capitalized and failing thrifts. The effort eventually cost taxpayers more than $200 billion.

Sterling was supposed to be one of the good guys. Between 1985 and 1988, regulators had unloaded three derelict thrifts on Sterling in order to cut the federal government’s losses. Though only a few years old, the Spokane thrift already had a reputation for sound management.

In return for Sterling’s help, regulators had allowed the thrift to count the negative worth of its new holdings as “goodwill capital” on its balance sheet. But Congress, in the 1989 legislation authorizing the taxpayer bailout, wiped out those allowances, which together with other inducements were worth about $25 million to Sterling.

Suddenly, Sterling was among the under-capitalized thrifts. Federal officials were poised to lock the doors when in July 1990 Sterling convinced U.S. District Court Judge Justin Quackenbush to block the seizure. That was the first of several legal victories that will finally give Sterling its day in court.

The reprieve gave Sterling time to recapitalize and continue growing.

Sterling wants the federal government to pay damages for violating the contracts that led to its takeover of the sick thrifts. The court will not permit Sterling Chief Financial Officer Dan Byrne to discuss the potential damage sums, but he notes that in 1996, the claim was worth an estimated $90 million. A ruling — subject to appeal — disallowed a claim related to the largest takeover. But with the passage of time, the value of the remaining amount has continued to increase, at least from Sterling’s point of view.

“We believe it’s a substantial amount,” Byrne says.

Dozens of thrifts — or the shareholders of failed thrifts — filed claims against regulators for contract violations or other alleged misdeeds. What set Sterling apart from most was its profitability. The thrift, now a bank, had never had a losing quarter. Officers rightly feel Sterling should be made whole for not just the capital wiped out by Congress, but for the profits it might have earned on that capital in the succeeding years.

And what years those have been. Sterling, founded in 1983 with just $2.3 million in capital, had grown to $691 million in assets by 1990. Now, after almost 20 mergers and acquisitions, assets exceed $9.8 billion, putting Sterling among the largest Northwest-based financial institutions.

The 500,000 shares outstanding in 1990 have multiplied to 50 million. A claim worth perhaps $10 to $15 per share at the outset of the litigation will amount to pennies per share if Wheeler, his successors, or a higher court ultimately grant Sterling the compensation it has so doggedly pursued.

Byrne says diminution of the claim has not discouraged Sterling officials. Quoting Chairman Harold Gilkey, he says, “We were suing over the principal; now we’re suing over the principle.”

Neither side is talking settlement. This has become a grudge match between two legal teams that have remained largely intact since the litigation began.

Court of Claims judges seldom venture outside Washington, D.C. The proceedings before Wheeler will give Spokane a window on one of the most expensive financial disasters in U.S. history. And it will give him the opportunity to walk just a few blocks down Riverside Avenue from the Thomas S. Foley U.S. Courthouse to Sterling’s headquarters.

He will see for himself what Gilkey, Byrne and others built of bricks, mortar and enterprise while the regulators were pushing paper.


Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email