CalFed Suing to Reverse Change in Capital Rules

CalFed Inc. on Monday contested an accounting change in the 1989 federal thrift bailout law that puts it and several other large savings and loans in danger of being seized by regulators.

At issue in a lawsuit filed in U.S. Claims Court in Washington is whether the government can renege--without compensating a thrift--on liberal accounting agreements forged in the early 1980s. The accounting rules allowed thrifts to use an intangible asset called “goodwill” to boost their capital, the financial cushion against losses.

The case of Los Angeles-based CalFed and other thrifts received a boost last month when a Claims Court judge said thrifts are entitled to compensation even though the government can legally renege on its promise.

Government regulators in the early 1980s allowed thrifts to count hundreds of millions of dollars in goodwill--which includes the value of such things as an institution’s customer base and reputation--as part of their capital levels as an incentive to take over failing thrifts. In CalFed’s case, the goodwill was computed using the negative net worth of the failed thrifts that were acquired.

Critics of the government’s policies then argued that goodwill is phantom money with no real value. Thrifts argued that requiring thrifts to phase out the goodwill--which must be done by 1995 under the bailout law--is a breach of contract by the government.

CalFed, the nation’s fifth-largest thrift, had to phase out $86.6 million worth of goodwill from its books last Jan. 1 stemming from the acquisition of six ailing savings and loans in the early 1980s. As a result, CalFed, parent of California Federal Bank, expects to have trouble meeting tougher government standards and has been forced to file a plan with regulators detailing how it expects to bolster its financial condition.

Similar cases are pending, including one filed by Glenfed Inc., parent of Glendale Federal Bank.