Glenfed says it's open to half-price deal with U.S.; it's willing to settle breach lawsuit for $700 million.

Glenfed Inc. is willing to settle its case against the U.S. government for $700 million -- half of the $1.34 billion in damages it estimates were incurred by the government's alleged breach of contract, the attorney for the Glendale-based thrift said last week.

Joe Hollingsworth, lead attorney for Glenfed Inc., parent of the Glendale Federal Bank, said he hopes the Clinton administration will be more willing to settle the case than were Bush administration officials, who refused to discuss a possible settlement.

If the case is not settled soon, there is a "possible scenario" that Glendale Federal would be seized by regulators while the case is still wending its way through the courts, Hollingsworth said.

In July 1992, a federal court judge in Washington ruled that the U.S. government breached a contract with Glenfed when it stopped allowing Glendale Federal Bank to count "goodwill" towards its capital ratios.

Before 1989, institutions received goodwill, an intangible asset, when they bought failed savings and loans from the U.S. government. In the 1980s, Glenfed was allowed to count $734 million in goodwill towards its capital base after taking over a Florida savings and loan.

But in 1989 Congress passed the Financial Institutions Reform, Recovery and Enforcement Act, which began phasing out goodwill. As of Dec. 31, $550 million of Glenfed's goodwill had been phased out and the thrift did not meet the capital requirement for risk-based capital.

The thrift is under orders by the Office of Thrift Supervision to raise $450 million in capital by June 30, 1993.

In a claim document filed in federal court in Washington Jan. 19, Glenfed contends that the new law's rule damaged Glendale Federal Bank in the amount of $1.38 billion.

That figure is "simply the difference between what Glendale Federal would have earned had the government not breached the contract and what Glendale earns today having hundreds of millions of dollars of capital stripped from them," Hollingsworth said.

Glendale Federal has lost large deposits because deposits over $100,000 are not insured by the Federal Deposit Insurance Corp., Hollingsworth said. Glendale Federal also has been forced by the OTS to sell assets to raise capital, he said.

But Hollingsworth said the bank is willing to settle for $700 million. "We thought that would be a reasonable settlement," he said.

Talks with the U.S. Department of Justice about a settlement have been fruitless since Glenfed won the case in July, Hollingsworth said.

Attorneys for the government contend that if the U.S. settles this case, it must settle all the 40 pending cases in which financial institutions are suing the U.S. over the goodwill issue. Instead of settling the Glenfed case, the government has filed an appeal.

Hollingsworth contends that the U.S. could settle all the cases brought by savings and loans which are still operating for $3 billion to $5 billion. He contends the U.S. would ultimately pay less in settlements than in court-ordered damages.

Hollingsworth and Stephen J. Trafton, Glenfed's chairman and chief executive officer, contend that it will cost U.S. taxpayers $3 billion to $4 billion if Glendale Federal, with $17 billion in assets, is seized.

If the government agreed to settle for $450 million or more, Glenfed would be able to attain all the capital requirements it must meet by June 30 under its agreement with the OTS, Hollingsworth said. If the thrift can't raise capital some other way, it could be seized, he said.

"The irony of our situation is that without a settlement, taxpayers could be hit with a one-two punch," Trafton said. "First, (taxpayers would be) burdened with the substantial and unnecessary costs of a government takeover of the bank and then faced with the cost of Glendale Federal's full claim for recovery of damages."

Attempts to reach the U.S. Department of Justice for comment were unsuccessful.

"God bless them if they get it (the $700 million)," said Joe Jolson, a savings and loan analyst with Montgomery Securities in San Francisco. "If they get $700 million, it would be unbelievably unexpected. I think they'll settle for considerably less."