Banking Law

Buried in the back pages of the trade press last Friday, while the meltdown of Bear Stearns and the usual Congressional posturing in advance of its "Spring Break" occupied the attention of reporters inside and outside the banking biz, was the announcement of yet another in a long line of Winstar decisions. This one was in favor of Washington Mutual and holders of "litigation tacking warrants" (LTWs) issued by the former Dime Bancorp, which Wamu acquired. Dime had acquired the former Anchor Savings in a transaction that  involved "supervisory goodwill." As regular readers know, I've been involved in past litigation against the bank regulators (and later, against the U.S. Government) arising out of the breach by the government of assistance agreements entered into with acquirers of insolvent thrifts in the 1980s.

Dime was granted "supervisory forbearance" that allowed it to include in regulatory capital, as "supervisory goodwill," the negative net worth of Anchor Savings when Dime acquired Anchor. When FIRREA was enacted in August 1989, supervisory goodwill was no longer allowed to be counted in capital, and institutions like Dime sued the government for damages for breach of contract. Dime issued LTWs to shareholders to allow them to share in any recovery obtained as a result of the litigation (the LTWs are convertible into Dime stock). Wamu assumed the litigation and the LTWs when it purchased Dime (the LTWs are now convertible into Wamu stock).

In Wamu's case, the thrift won a whopping $382 million from the Court of Federal Claims. That's a mere drop in the bucket for a government that thinks that honoring its contractual obligations is an option, not a duty. For Wamu, it's a nice dollop of cash that (assuming that the award is upheld on appeal) will come in handy.

When we commented on a similar case in October 2005, a number of "experts" opined that the decision might be the "tipping point" that would result in a government decision to settle these cases. We demurred. I think that we were correct. We quoted attorney Charles Cooper at the time as being "spot-on" when he observed:

I would not anticipate that it would have any impact on the government's own now 15-year litigation strategy of resisting every case and every issue within every case no matter how many times they have litigated and lost every issue. If anything it will probably only cause the government lawyers on these cases to dig in harder.   

Make that a "now 18-year litigation strategy."

People express concern, even outrage, that the government is creating a "moral hazard" by "bailing out" outfits like Bear Stearns and, perhaps, other financial institutions, that created the current mortgage and wider credit mess in which we find ourselves. I have to laugh at the prospect that anyone would think that the concept of "morality" even enters into the heads of government bureaucrats. The U.S. government often acts like an organized criminal enterprise, not only internationally, but domestically, as well. You don't have to be a crazed wing nut in the lunatic fringe of the blogosphere to hold that opinion. Plenty of conservative businessmen have been on the receiving end of actions by the government that are simply reprehensible. The old bromide that "a deal's a deal" is a joke to the U.S. government.

Watching the HBO series on John Adams last night brought home to me again how wise were the flawed human beings who founded this system of checks and balances. They understood well the profound corrupting nature of political power, and the absolute necessity for an independent, strong judiciary that could ensure that the hacks who populate the halls of Congress and the federal bureaucracy have at least one barrier to absolute tyranny. Of course, it also helps if a litigant has plenty of cash to afford expensive litigators. The government will throw the resources of the American taxpayer at the plaintiff, and we all know what an inexhaustible well the taxpayer has proved to be.

What's another $382 million of taxpayer funds? As noted in the previous post, that's the exact amount that Citigroup won on a similar Winstar claim. $382 million here, $382 million there, another $96.8 million elsewhere, and pretty soon, it starts adding up to real money.