Magazine article American Banker

Court Decision Negating Goodwill Gives Government License to Renege

Magazine article American Banker

Court Decision Negating Goodwill Gives Government License to Renege

Article excerpt

In the latest decision arising out of Winstar Corp. v. United States, the Federal Court of Appeals for the Ninth Circuit ruled that the government is essentially free to legislate or regulate away its obligations.

If this decision stands, any private party doing business with the government will try to charge the government a hefty premium for that privilege - a premium U.S. taxpayers cannot afford.

Thanks to the Winstar decision, every time an individual or private enterprise enters into a commercial arrangement with the government, it cannot be certain if it is contracting with Dr. Jekyll or Mr. Hyde.

Changing the Rules

On one hand, the government seeks to have the private party rely on the government's integrity as a buyer or seller; on the other, the deal struck between the parties is vulnerable to the government's regulatory or legislative powers.

In Winstar, the ninth circuit concluded that when the government contracts with a private party, the relationship is somewhat similar to an agreement between private parties in which each accepts the risk of a change in law - as if a private party has the same ability as the government to control those changes!

As an example of the consequences of this decision, imagine that the government is selling used cars. To induce you to purchase a fleet of used cars, the government relaxes emission standards.

Then, after you purchase the fleet, the government enacts higher emissions standards and prohibits you from using the cars. Naturally, seeing this as a simple case of breach of contract, you sue the government and expect to win.

Briefly, the case involves the acquisitions by Winstar Corp., Statesman Savings Holding Corp., and their partners, and Glendale Federal Bank of failed savings and loan institutions during the 1980s.

To induce these purchasers to acquire the failing S&Ls, the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corp. agreed to permit each purchaser to include in its capital base certain intangible assets known as "supervisory goodwill."

In return for this accounting treatment, each purchaser contributed millions of dollars of its own resources to the failed thrifts, and assumed millions more in liabilities.

Had the government not permitted the use of supervisory goodwill, it would have been forced to take over the failed S&Ls and assume all of their outstanding obligations, at a significantly higher cost to taxpayers.

Goodwill Eliminated

In 1989, several years after each of these deals was consummated, Congress - in an effort to deflect criticism regarding its involvement in a mounting S&L crisis- passed the Financial Institutions Reform, Recovery, and Enforcement Act.

In addition to launching a clumsy and perilous effort to upgrade the quality of the thrifts' assets, the law also effectively eliminated supervisory goodwill. …

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