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THE 80'S LIVE ON

August 08, 2003

Like any extreme binge, the savings and loan real estate frenzy of the 1980s produced a wicked hangover - one that still gives the government headaches. The headache throbbed yesterday when the U.S. Court of Federal Claims awarded $55 million in damages to a company that took over six failed Texas thrifts for the government.

The Federal Savings and Loan Insurance Corporation (FSLIC) was the government agency that ended up with the insovent thrift institutions. It worked aggressively to get the failed S&Ls into the hands of solvent owners. The FSLIC struck a deal with Centex corporation to take over six sick institutions. The deal had two two key provisions:

-The FSLIC would reimburse Centex for losses incured on the sale of the assets of the dead thrifts, and

- Centex would deduct the losses on its tax returns, splitting the tax benefit with the FSLIC 50-50.

This deal was, in effect, a "double dip" with respect to the losses; the government made the losses good, but also allowed a tax benefit for half of them.

BUYERS REMORSE

After Centex took over the thrifts, Congress had buyer's remorse on the deals worked out by the FSLIC. Being Congress, it thought it could undo the deals. The "Guarini" legislation retroactively disallowed the deduction. Companies like Centex were not pleased with having their acquisitions unilaterally restructured, so they sued.

The Supreme Court settled the main issue in 1996 when it applied the ancient legal principal known as "a deal's a deal." While the goverment could undo the deals, it breached its contracts when it did so, and it had to reimburse the thrift buyers for damages the federal and state tax savings lost when the deductions were legislated away. Litigation for damages continues.

Fortunately for Centex, an employee named Jeff Mason maintained meticulous tax records. The government hired an expert to challenge Mr. Mason's computations - an expert "whose credibility suffered greatly in the court's eyes both from the quality of his written reports and from his in- court presentation."

What do we learn from the case?

1. There are limits to the goverments ability to undo a bad bargain, and
2. A good internal accountant comes in handy - in this case, $55 million handy.

PDF link: Centex Corporation v. United States

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