In 1989, members of Congress who were supporting an amendment to the proposed Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") wore this pin while lobbying their colleagues. Their amendment, sponsored by U.S. Rep. Henry Hyde (R-IL), would have reaffirmed contracts the government had made in the early 1980s with over 100 banks and thrifts pursuant to which the financial institutions agreed to assume the responsibility to pay over $20 billion in debt which otherwise would have become the government's responsibility. However, after the U.S. Department of Justice (DOJ) issued a legal opinion to Congress advising that the banks and thrifts had never had valid contracts in the first place, the Hyde Amendment was defeated. Seven years later, the U.S. Supreme Court, in a lopsided 7-2 vote, found in favor of the thrifts, ruling that DOJ's legal opinion was incorrect and that FIRREA breached the thrifts' contracts. Despite the high court's eight-year-old ruling, the U.S. government -- which has had the use of $20 billion of other people's money for almost 25 years now, has yet to pay any meaningful compensation for its wrongful conduct.
FIVE REASONS WHY THE GOVERNMENT DOESN'T SETTLE THE GOODWILL LITIGATION
There are a number of reasons why the government has allowed the goodwill cases to drag on for so long. For starters, it has been estimated that the government saves $5.14 million per day
in interest, or $1.875 billion
per year. For another, there is an institutional bias on the part of the U.S. Department of Justice (DOJ), which was instrumental in causing the problem in the first place by issuing a flawed legal opinion
to Congress in 1989. (Also, according to the New York Times
of Nov. 22, 1998, DOJ relies on the goodwill lawsuits to keep at least 40 of its lawyers "and a support staff of dozens more" gainfully employed; indeed, nearly half
of the Civil Division's budget would vanish were the goodwill litigation to come to an end, assuming, of course, that another Microsoft-type case didn't come along to fill the gap). Then there is also the great fear
of career bureaucrats and politicians worldwide, the fear of sticking your neck out, making a decision, and then having it chopped off -- no matter that your decision was the right one. As the late President Kennedy said in his introduction to "Profiles in Courage", "the path of the conscientious insurgent must frequently be a lonely one".
1. A Leadership Vacuum
The previous comment highlights the most important reason why the government refuses to come to terms with the thrifts, notwithstanding that it has been four years since the highest court in the land determined, and quite emphatically, that insofar as the fundamental breach of contract issue is concerned, the government is in the wrong. Simply put, there has been a total lack of political leadership.
Indeed, the people who are charged with the responsibility of overseeing, monitoring and, yes, policing
the activities of the various government departments which are spearheading the government's defense, such as the FDIC and DOJ, have deliberately chosen to close their eyes and look the other way. From a President who is terrified that if he so much as picks up the phone to merely have a discussion
with the Attorney General about the meritworthiness of the government's position, he will immediately be accused by the Wall Street Journal
of trying to put the "fix" in on behalf of wealthy campaign contributors; to individual Congressmen and Senators who don't want their next opponent blaming them for whatever the cost to settle the cases might turn out to be (or, worse, accuse them -- as were the so-called "Keating Five" -- of trying to help out "S&L crooks"), there seems to be a universal attitude on the part of elected officialdom to "let the other guy do it".
By the "other guy", it turns out, the politicians mean none other than the U.S. Supreme Court, whose members don't have to worry about having to face tough questions at "candidate nights" and/or otherwise dirty their hands with the politics of re-election. Rather than face up to the issue squarely . . . and with courage
. . . (no matter that doing so would likely result in settlements at far less cost to the taxpayer than might ultimately be awarded by the courts), the Administration and the Congress have completely abdicated their authority over the FDIC and DOJ, despite the pointed criticism already leveled at them by the very branch of government onto which they now seek to "shove off" the problem. As Chief Judge Smith of the U.S. Court of Federal Claims put it in a December, 1997 ruling in the CalFed cas
" . . . if the arguments put forth here are the strongest the United States can muster against liability, then the government has a moral obligation to seek a fair and equitable settlement from the parties whose contracts were breached. If this cannot be achieved then the court is here to resolve these cases. However, the court is a tool of last resort. Where the government has violated rights it should first attempt to do justice without judicial prompting". (Emphasis added).
Especially in this (2000), an election year, Democrats don't want to be accused of giving money which could have gone to Head Start or Medicare to what it erroneously perceives to be nothing more than a bunch of Republican bankers. Republicans, on the other hand, don't want to embarrass President George H.W. Bush by reminding people at this most sensitive time that it was his and President Reagan's economic policies, including 1989's passage of FIRREA (with its elimination of supervisory goodwill) -- as well as earlier legislation which a Presidential commission later determined planted the seeds of the S&L crisis -- which caused the 1990-92 recession. (As one political commentator recently put it, "it's hard to believe, but it was only eight years ago that we were in the midst of the so-called 'George Bush recession'. People tend to forget these things in good times".)
In the absence of direction from those who were elected to lead, DOJ is left with no choice but to do its job which, in this instance, means defending the public treasury against the goodwill lawsuits. And being the honorable, hard-working and dedicated government employees that they are (and while we have our differences with them, we mean that sincerely), they are doing their jobs as they should be doing them, to the very best of their ability, using whatever tools they can find to advance their employer's position and stall (if not completely eliminate) the day of reckoning. Nonetheless, the same cannot be said for the Department's leadership, who know well that the "just following orders" mentality which may apply to their subordinates is no safe harbor for themselves. Indeed, as Chief Judge Smith further admonished (in vain) nearly three years ago:
" . . . Maybe these ideas (i.e., that the government has a 'moral obligation' and that 'where the government has violated rights it should first attempt to do justice without judicial prompting') are old-fashioned, but they strike the court as particularly applicable to a department that bears the sacred name of 'Justice'. It takes courage to make decisions that may require the government to pay huge sums of money to injured parties. The Civil Division is led by attorneys who have both courage and honor. The history of our law is written in the heroic actions of attorneys who cared more for justice than advantage. It is the court's hope that following this decision, the Winstar cases are either settled or litigated on a serious level."
So to sum up this part of our discussion, the goodwill lawsuits have become the bipartisan "tar baby" of Washington politicians. As a result, the situation has been left in the hands of unsupervised career bureaucrats who have been given blank checks and who personally have absolutely no incentive to do the right thing. To the contrary, many would be forced into the private sector were the goodwill litigation to come to an end.
2. The Justice Department's Embarrassment
When originally considering the legislation which became FIRREA, there were those in Congress who were prophetic enough to suspect that the clause eliminating supervisory goodwill would most likely result in massive lawsuits against the government for breach of contract. Led by U.S. Representative Henry Hyde (R-IL) and former Congressman Thomas B. Evans, Jr. (a former chairman of the Republican National Committee who by then headed an influential Washington lobbying firm), an amendment was introduced which would have effectively "grandfathered" the thrifts which had come to the government's assistance back in 1982. Specifically, those thrifts which had received supervisory goodwill from the regulators in exchange for taking on the liabilities of failing thrifts during those dark economic days would have their original contracts honored and the goodwill would continue to be counted towards their minimum capital ratios. However, on June 12, 1989, a legal opinion from DOJ arrived in the office of U.S. Rep. Chalmers P. Wylie (R-OH), then the ranking minority member of the House Banking Committee. DOJ, then under the control of President George Bush, advised Congress that the thrifts had never had valid contracts in the first place, so there was no need to worry about FIRREA's being a breach of contract. That being the case, the letter continued, there was no need for Congressman Hyde's amendment. And even if there were "well-founded contractual claims against the government" (which the legal opinion emphatically repeated there were not), the federal courts were always available to resolve any "constitutional and contractual claims presented by adversely affected thrifts”, (assuming, of course, that the "adversely affected thrifts" had not been seized by the regulators first -- which, in fact, many were). Shortly thereafter, the Hyde amendment went down to defeat, with even the Republican leadership (then in the minority), voting with their Democratic colleagues to kill it .
In retrospect, it is hard to understand how DOJ, in what appears to have been a hastily put together and poorly drafted legal opinion, expected that it could successfully second-guess the hundreds of attorneys, accountants, and investment bankers who had worked on the original goodwill deals some seven years earlier. There were well over 100 such transactions, involving everyone from Solomon Brothers to Sullivan & Cromwell, the whitest of Wall Street's "white shoe" law firms. As Meritor chairman Roger Hillas, who, in 1982, was chairman of Provident National Bank (Philadelphia's largest), later put it, "the thought that all of those high-paid professionals had somehow gotten it wrong, that the deals they had worked on for weeks and weeks on end really weren't valid contracts; why that's just crazy."
Perhaps because that's exactly what DOJ advised Congress at the time explains why its 1989 legal opinion has become the quintessential example of the old adage, “success has many fathers but a mistake is an orphan”. Questioned about it in early 1998, the assistant attorney general who signed the opinion flatly denied having anything to do with it, explaining that her signature was a mere formality. (She now serves on the World Trade Commission).
For its part, DOJ admits that the opinion was actually written by its Office of Legal Counsel, but it steadfastly refuses to disclose the identities of anyone involved in its preparation because "it's just not our policy.” No one apparently wants to admit having anything to do with legal advice given to Congress which was not only rejected by whopping 7-2 and 9-2 votes by the Supreme Court and the Court of Appeals, but which also laid the cornerstone for what is arguably the most colossal governmental financial blunder in the history of our country.
3. Fear of Congressional hearings
As stated earlier, there are many good people in government, including DOJ, and they are be commended for giving up more lucrative career opportunities in the private sector in order to serve the public. However, many have a genuine fear that their careers will be ruined or severely curtailed were they to "do the right thing". A very real fear of many, were they to recommend settling the goodwill lawsuits, is that they will be hauled before Congressional committees, broadcast live on CNN (with their families watching), and grilled by publicity-seeking members of Congress as to why "they" cost the taxpayers billions. (Why Congress, which the Supreme Court has already ruled caused the problem in the first place by breaching the thrifts' goodwill contracts, would want to draw attention to itself by holding hearings is another question). But the reality is that ever since the televised McCarthy hearings of the early 1950s, career U.S. government employees live in trepidation that they may become the target of a Congressional hearing. As an attorney for the FDIC recently commented, no one in the government wants to offer the first major settlement of a goodwill lawsuit for fear of "setting the market" for the other 120 lawsuits, frankly admitting that "we need to have some guidance from the courts . . . because without it, there will be hearings . . . "
4. Fear of giving "fat-cats" a windfall
Among the S&L investors who came to the government's assistance in 1982 were a handful of well-known names, such as the late Secretary of the Treasury William Simon; Revlon Chairman Ronald Perelman, Hyatt Hotels chief Jay Pritzger, and the Bass Brothers of Texas. Invariably, when the press takes up the goodwill story, it often highlights that they will be among the prime beneficiaries of any payments to the thrifts which the government might have to make as a result of its breach of contract. (See, for instance, the Nov. 22, 1998 edition of the New York Times, "The Debacle that Buried Washington"). Needless to say, no career government employee is eager to hand people like that a check for several hundred million or more -- not with the press watching over his or her shoulder.
There are two points to be made here. The first is that insofar as the government ends up "buying back" the goodwill by exchanging it for cash, all the thrifts would be getting is their money back
. The customers who were owed the $20 billion back in 1982 have long since gotten their money -- with interest -- from the thrifts who assumed their deposits. Reimbursing them now for what they've already paid out is hardly a "windfall". (We are not, of course, talking about any "expectancy" damages which the thrifts might also be seeking; that is another matter entirely).
More important, however, is the fact that for every Ron Perelman or Robert Bass, there are literally thousands of small shareholders who are also being harmed by the government's refusal to, as Judge Smith diplomatically put it, "do justice without judicial prompting". For instance, Security Investments Group was the parent company of Security Savings, a thrift which served a largely rural population in southern New Jersey and which was the oldest in that state. The thrift, which was its parent company's sole asset, was seized on December 4, 1992 (just one week prior to Meritor). In 1998, after its remaining directors scrounged up the money to pay for proxy materials and other SEC-required costs by personally co-signing a bank loan, the parent company held its first annual meeting in seven years. Like Meritor, its only remaining asset is a goodwill lawsuit against the government and Paul Ricci, its 84-year-old chairman (who owns the local Hallmark Card Shop), is determined to see justice done before he dies. The sole purpose of the meeting was to bring Security's shareholders up-to-date on the status of the goodwill lawsuits and to "pass the hat" for funds with which to pay the company's rapidly mounting legal bills. Held in a fire hall in Vineland, New Jersey (pop. 54,780) the crowd in attendance were largely farmers and merchants, including the local State Farm agent and the manager of the J.C. Penney store. (Not exactly what most people would call "fat-cats").
Like Security Savings, Meritor's shares are also widely held. As of January 1, 2000, Meritor had over 6,000 individual shareholders (not including those who hold their shares in "street" name and who are thus unidentifiable; hence this web site). A review of the shareholder list indicates that with few exceptions, they are largely people of modest means, most of whom appear to have been PSFS depositors who obtained their shares when the bank converted from a mutual savings bank to a publicly-owned company in the early 1980's. As with all of the banks involved with lawsuits against the government, there are undoubtedly some large, institutional, opportunistic shareholders as well, but for every such investor, there are hundreds if not thousands of small shareholders who have been waiting many years for their government to pay heed to Judge Smith's 1997 admonition to "do justice without judicial prompting".
5. Some people still don't get it.
Finally, there are still a lot of people in (and out of) government who just don't understand what "supervisory" goodwill really is. They have made a huge "disconnect" between the $20 billion on the left-hand side of the thrifts' collective balance sheets (which its detractors love to call a "worthless asse
t") and the very real matching liability
on the right-hand side. When the $20 billion on the asset side was wiped out by FIRREA in 1989, the $20 billion liability remained, an obligation which the thrifts ultimately paid in full -- with interest. (The government's recent arguments that the thrifts have never paid out this money is just silly). To be sure, many who feel this way sincerely believe that the government had
to do what it did because it was in the best interest of the country and its financial system. Nonetheless, the U.S. Supreme Court has ruled otherwise, finding in no uncertain terms that not FIRREA itself, but the specific clause eliminating goodwill
was a breach of contract. Having lost that battle, they now argue that the thrifts suffered no harm. (Again, it is a silly argument as there is absolutely no question but that the thrifts paid out billions). In short, people who still honestly believe such things need to proceed directly to "Just what is 'supervisory goodwill', anyway?
6. Conclusion: Nothing wrong here that a little "LHC" wouldn't cure.
In effect, what happened here was a $20 billion dollar bait-and-switch by the government -- albeit, perhaps, an uninformed and well-intentioned one. Only leadership from those who were elected (and paid) to provide such leadership; honesty -- in terms of finally admitting that what the government did was wrong -- and courage (in terms of formulating a fair and equitable solution) will settle these lawsuits short of a second order of the Supreme Court. In a free society which prides itself on the "rule of law" (and which sanctimoniously preaches as much to the rest of the world), it should not have to come to that extreme. As Judge Smith admonished nearly three years ago, "it takes courage to make decisions that may require the government to pay huge sums of money to injured parties". (A fancy way of saying "do the right thing").