S&Ls face added danger after buying failed thrifts.

Some thrifts sue the feds charging breach of contract

Los Angeles-based savings and loans, especially those that took over failed institutions in the 1980s, may be in jeopardy of being taken over themselves because of new federal regulations coming into effect this year.

S&Ls that acquired failed institutions formerly could count intangible assets of those institutions, such as customer base, as part of their assets, an arrangement known as "good will," explained Glenn Tasky, financial analyst with the Office of Thrift Supervision in San Francisco. On Jan. 1, the amount of good will an institution could count as part of tangible assets declined from 1.5 percent to 1 percent, Tasky said.

Since the first of the year, one savings and loan has been forced to file a recapitalization plan with the San Francisco Office of Thrift Supervision, which regulates thrifts on the West Coast, said Laurie Lavaroni, agency spokeswoman. Lavaroni would not identify the institution, saying that doing so is against OTS policy.

Los Angeles-based California Federal Bank, the fourth largest savings and loan in Los Angeles County, may not meet capital requirements on Mar. 31, because of the reduction of good will, said Rhanda Kahawaii Dunn, first vice president of investor relations.

Meanwhile, Los Angeles-based Coast Federal Bank is one of a growing number of thrifts nationwide suing government regulators for what it says is a breach of contract. Coast would never have bought the failed Central Savings of San Diego in 1987 if the government had not promised to allow Coast to count good will as part of its capital calculations in the future, said Norman Raiden, executive vice president of the S&L.

"What we're seeking is to have the government abide by its agreements and the government's position is it doesn't have to," Raiden said. Coast is not in danger of failing capital requirements because of the good will phase-out, but has been forced to shrink to meet the new standard, according to Raiden.

At Los Angeles-based California Federal Bank, the savings and loan may or may not currently be in capital compliance, but it has not filed a capital plan with the OTS, Dunn said.

Dunn explained the reason CalFed is not sure if it is currently in compliance is because the last time savings and loans were required to make capital calculations was on Dec. 31, the day before the good will limitation went into effect, she said. Calculations on the thrift's capital have not been made since good will was limited on Jan. 1, Dunn said, so thrift officials don't know if they are currently meeting requirements.

"As of Dec. 31, we were in compliance of all three (capital) ratios," Dunn said. "If you were to apply the phase out of good will on Dec. 31, we would not be in compliance," she said.

On Jan. 1, the law phased out $86.6 million that CalFed will not be able to count as tangible assets, she said. It is not known if CalFed will be required to file a capital plan the next time the savings and loans are required to make an official capital calculation, on March 31, she said.

The U.S. Supreme Court will probably decide the issue of good will by 1993, predicts Robert Cynkar, partner in the Washington, D.C., law firm of Shaw Pittman Potts & Trowbridge, and an attorney for Coast Savings and a number of other savings and loans suing the government.

"The amount of money that is involved here when you look at it nationwide is so huge it is very likely that the Supreme Court will have to resolve these issues one way or another," Cynkar said. There are dozens of cases in high federal courts currently and "there are other cases that are going to hit the Supreme Court before Coast's does," he added.

In virtually all the cases, the savings and loans are alleging that the government's phase-out of good will constitutes a breach of contract and that the limits are in violation of the Fifth Amendment, which prohibits the government from taking property without compensation.

Coast, prodded by regulators, has been forced to shrink its assets by more than $4 billion last year, in order to comply with the supervisory good will provision, Cynkar said. Coast's assets were at about $13 billion in May 1989 and at about $9 billion in June 1991, Cynkar said.

Many other thrifts nationwide have similarly been forced to sell off assets to meet the requirements, he said. For other thrifts which bought failed institutions, "there is a concern with them being taken into receivership," because they will not be able to meet the capital requirements without the good will, Cynkar said.

Cynkar added his savings and loan clients feel that they have been duped by government regulators. Savings and loans helped the U.S. government out by buying the failed institutions, and are now being penalized, he said.

Raiden explained that Coast buying Central Savings was like one company buying another company with $10 in assets and $8 in liabilities. Even though the company is only really worth $2, the acquiring company may pay $3 for intangible assets.

In the case of Coast, the thrift got the intangible asset of acquiring two new market areas, that of San Diego and the San Joaquin Valley, Raiden said.

The Jan. 1 phase out of good will is only one of a number of limits and tighter standards that will be imposed on savings and loans in the next couple of years, under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Tasky said.

Notably, all good will is going to be phased out by 1995, and the required percentage of risk-based capital a thrift must have on the balance sheet will increase from 7.2 percent to 8 percent on Dec. 31, Tasky noted.

The OTS has been watching over institutions that might fail and has been, in fact, helping to arrange mergers of thrifts to avoid takeovers. For example, in 1989, the OTS helped arrange the merger of Los Angeles-based Century City Savings and San Francisco-based Hamilton Savings into what is now known as Oakland-based American Liberty Savings.

But Coast's Raiden, who declined to say if Coast was currently engaged in merger talks, indicated that mergers of troubled thrifts may not be a good idea.

"I think they (government regulators) feel the country is overbanked, but this is a time of extreme capital scarcity and whether there is enough capital for mergers is another question," Raiden said. "I think they're objective would be to create larger, stronger institutions with more capital. But if you put two institutions together, you don't necessarily get more capital if they were capital-short in the first place," he said.