Glenfed, regulators ordered by judge to develop rescue plan.

The outcome of court-ordered negotiations to save troubled Glendale Federal Bank from government seizure should be revealed in a Washington, D.C., courtroom this week, according to the lawyer for GlenFed Inc., the thrift's parent.

Glenfed needs $450 million by June 30 to prevent the Office of Thrift Supervision from seizing its Glendale Federal Bank. Glenfed has won a lawsuit against the government and could receive damages well above the $450 million it needs, but that relief could come too late to save the bank, attorneys for Glenfed say.

Lawyers from the U.S. Department of Justice and GlenFed met Feb. 9, said Joe Krovisky, spokesman with the Department of Justice. He said he couldn't "discuss the nature of the discussions" and didn't know of any plans to meet again before the two sides appear in court Feb. 17.

On Feb. 4 U.S. Federal Court Judge Loren A. Smith had ordered lawyers for GlenFed, the Department of Justice and the Office of Thrift Supervision to meet by Feb. 12. The attorneys were ordered to either hammer out a possible settlement of damages or explore another type agreement to let the thrift escape government takeover.

In the order, Smith instructed GlenFed and the government agencies to bring experts such as "accountants, economists, management consultants, etc." to the meetings. The parties were also ordered to present the results of the meetings to Smith Feb. 17.

That session "is going to be a very significant hearing," said Jerry Stouck, an attorney for GlenFed Inc. "I think it's when people will hear what's going on."

GlenFed won a case in July 1992 against the U.S. government when Smith ruled that the feds breached a contract with GlenFed when they stopped allowing Glendale Federal Bank to count "goodwill" towards its capital ratios.

Before 1989, financial institutions were able to accumulate goodwill, an intangible asset, when they bought another failed institution from the government.

But the Financial Institutions Reform and Recovery Act of 1989 phased out goodwill and GlenFed, which has $734 million in goodwill, was no longer able to count this as an asset on its books. As of Dec. 31, GlenFed lost $550 million in goodwill and as a result, GlenFed fell below federal capital standards.

GlenFed is seeking $1.38 billion in damages, which the company claims it incurred when the government breached its contract. However, lawyers and GlenFed officials have stated they would be willing to settle the suit for $700 million.

GlenFed currently does not meet two of three federal capital requirements and needs $450 million of new capital by June 30 to meet an agreement it signed with the OTS, the agency which regulates thrifts.

In the order issued Feb. 4, Judge Smith said GlenFed's contention that Glendale Federal could be placed into receivership by the OTS and liquidated by the Resolution Trust Corp. before the case might be resolved was a "unique and serious concern."

GlenFed attorneys contend the government could spend $4 billion resolving the thrift if it is seized and then pay another $1 billion or more in court ordered damages.

Smith wrote, "If the plaintiff's view is ultimately held to be correct, the consequence of post June 30 legal relief would be a historic legal irony of unparalleled cost and waste."

Smith said that he could "solve the problem" by issuing an injunction that would prevent the OTS from seizing the bank but said his "injunctive powers are inadequate" to do so.

In a telephone interview on Feb. 10, Stouck declined to discuss what occurred at the Feb. 9 meeting and in fact declined to confirm that a meeting had occurred between GlenFed and the U.S. government, saying he did not want to jeopardize any possible agreement with government.

He said, however, that the court hearing on Feb. 17 would be "significant" whether the sides met or not and declined to explain further.

An OTS spokesman declined to comment on the meeting.

Stouck said there is a possibility that the government would ultimately "win the case" by taking over Glendale Federal Bank and then, once it was in government possession, dropping the lawsuit. If that happened, Stouck said his firm would represent shareholders of GlenFed Inc., but "there's a legal question as to whether shareholders can pursue (the lawsuit)."

Meanwhile, a group of GlenFed bondholders, which is owed a $4.6 million interest payment on March 15, has begun to negotiate with GlenFed officials.

GlenFed announced in late January that it did not have sufficient funds to make the payment.

Equitable Cos., parent of Equitable Life Insurance Co. and Equitable Capital Life Insurance Co., holds the principal stake, $15 million of the $75 million worth of bonds, an Equitable spokeswoman confirmed.

Equitable Life Insurance holds "a small portion" of the $15 million and the rest is held by third party clients, such as pension funds, of Equitable Capital, the spokeswoman said. "Because we do have a large stake in GlenFed, we are active in negotiations," she said.

The bondholders have chosen the Los Angeles-based investment banking firm of Houlihan Lokey Howard & Zukin to assist them in negotiations, according to Roseanne O'Brien, spokeswoman for GlenFed.

That same firm recently negotiated a deal in which bondholders swapped $150 million worth of bonds of CalFed Inc., parent of California Federal Bank, for a 79 percent ownership stake in that company.