Loans debacle could cost White House $10bn

The Savings and Loans debacle of the 1980s returned to haunt Washington yesterday after a ruling from the US Supreme Court upheld claims for damages against the government from three S&L institutions.

The ruling was a defeat for the US administration which may now face paying an additional $10bn (pounds 6.4bn) in damages. The US government has already paid an estimated $130bn to disentangle the S&L affair.

Encouraged by relaxed regulations introduced by the Reagan administration, large numbers of the S&Ls, broadly akin to British building societies, fell over the precipice in the mid-1980s after promising higher-than-usual interest rates on deposits before being hit by tides of loans that went sour.

At issue was a 1989 law that sought to rescue the industry by tightening some of the rules applied to it. Previously, S&Ls that took over insolvent ones had been allowed to count the insolvent S&L's losses as "goodwill" assets. To help them satisfy minimum capital requirements, they were also permitted to double count as "capital credit" government funds provided to help them take over the defunct banks.

The court ruled that by using the 1989 law to eliminate these financial incentives, the government had broken its contracts with three S&Ls which had each taken over ailing competitors and thereby driven them into financial difficulties.

Two, Winstar Corp of Minnesota and Statesman Savings of Iowa, went to the wall, while the third, Glendale Federal Bank of California, was obliged to raise an additional $450m to satisfy the capital requirement rules.

The White House may now be liable in about 100 similar cases from S&Ls pending against it, which could lead to a final damages bill of $10bn. Glendale Federal alone may now receive damages exceeding $1.5bn from the government. The precise level of the damages to be paid by Washington is to be determined later this year by a lower court.

Paying more money to clean up the S&L mess will not be appreciated by the electorate, though President Clinton, who is struggling to keep his promise to cut government spending and reduce the deficit, will be able, at least, to blame the debacle on past Republican administrations.