Conseco unit settles for $39 million Possible turning point in cases against U.S. pending from S&L cleanup

Thrift industry

June 24, 1998|By BLOOMBERG NEWS

WASHINGTON -- The U.S. government agreed to a $39 million settlement with a unit of Conseco Inc. that may mark a turning point in cases involving billions of dollars in claims arising from the savings and loan cleanup in the early 1990s.

The agreement includes a payment of $9 million in cash to Conseco, a Carmel, Ind.-based insurance company. The settlement is designed to fully compensate Conseco for the stock and cash that its Statesman Savings Holding Corp. unit invested when it took over three troubled Iowa thrifts in 1988, Justice Department lawyer David Cohen said. A federal accounting rule change wiped out part of the thrifts' capital, contributing to their failure.

The settlement could buoy hopes of other investor groups, including shareholders in publicly traded Meritor Savings Bank and AmBase Corp., for a large payout of their claims against the government for a rule that wiped out their paper assets known as supervisory goodwill.

"This is small in dollar terms, but it's important because cash is actually going to change hands," said Caren Mayer, an analyst with NationsBanc Montgomery Securities.

That could be important because the Conseco settlement is the first publicly announced payment by the government involving the pending federal claims cases.

About 120 lawsuits in the U.S. Court of Federal Claims in Washington are seeking up to $30 billion in damages from the federal government.

Cohen, who is supervising the government's defense in thrift lawsuits, said he has "tentative agreements" in three other cases, which he wouldn't identify. The Justice Department reached an agreement with Statesman late last Thursday, Cohen said.

Conseco acquired the claims against the government when it bought Des Moines, Iowa-based Statesman Group Inc. in 1994.

In addition to making the $9 million cash payment, the government won't seek redemption of preferred Statesman shares owned by the Federal Deposit Insurance Corp., Cohen said. Those shares were valued at about $30 million in 1994.

Conseco didn't have an immediate comment. Its stock rose $1.3125 to $46.5625 yesterday, and shares of thrifts or their successors with pending breach-of-contract claims also rose. AmBase added 15.125 cents to 3.12. Meritor rose 12.5 cents to $3.125.

In the 1980s, with scores of thrifts failing, the government urged stronger institutions to buy weaker ones. The legal claims of Statesman and other thrifts concern the government's promise to let them count premiums paid in these acquisitions as a form of capital known as supervisory goodwill. In other cases, the government provided cash that could be counted as capital, called capital credits.

In 1989, Congress ordered a quick phase-out of supervisory goodwill, a move that sent dozens of thrifts into insolvency, leading to federal takeovers. Since then, owners of failed thrifts have won a series of court fights, including a 1996 Supreme Court decision that the federal government breached contracts with Golden State Bancorp Inc., Statesman and another thrift.

Statesman originally asked for $135 million in damages. The company had to lower its sights after a federal judge in April sharply restricted its right to recover for "lost profits" -- a measure of the money the thrift says it would have earned had Congress not banned supervisory goodwill.

"This has major implications for all the goodwill suits," said Allan Bortel, manager of California-based Inverness Partners, which holds goodwill-related securities of Golden State Bancorp Inc. and Coast Savings Financial Inc. "The government finally admitted that the institutions were damaged. Both the institutions and their shareholders stand to gain."

Pub Date: 6/24/98

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