“Is This the Moron Who Closed Meritor?”

The savings-and-loan (S&L) crisis cost taxpayers $125 billion. As a result, there was little sympathy for the owners of insolvent banks and S&Ls. However, not all of the owners of failed S&Ls felt they had been irresponsible. Not all of them felt their banks had been mismanaged. In fact, there were some who felt that it was the federal government that had acted irresponsibly. They believed they had a contract with the government and the only reason their banks had been closed was that the government broke that contract. Some of these owners decided to fight back. They did something that isn't for the faint of heart—they sued the federal government.

Gary Hindes was one of those owners and had never imagined that he would find himself in such a position. Hindes started out as an investigative reporter for a small daily newspaper. After a subsequent stint as the assistant to the Speaker of Delaware's House of Representatives, he joined Paine, Webber, Jackson & Curtis, an old-line, white-shoe brokerage firm in Philadelphia.

As a new stockbroker, Hindes began investing in the stocks of bankrupt and distressed companies such as the old Pennsylvania Railroad, International Harvester, and Chrysler. Hindes bought their bonds at deep discounts to their face value, and in many cases was able to sell them at higher prices or cash them in for full value when the bonds matured. His client list grew along with his success and came to include Frank Perdue, who made his fame and fortune as the spokesperson and owner of Perdue Chicken; Jerry and Eileen Ford, co-owners of the New York modeling agency; Bert Lance, the former director of the Office of Management and Budget under President Carter; Luther Hodges, who served as secretary of commerce for President Kennedy and who was then running a Washington, D.C., bank; as well as a few former Delaware governors and both Democratic and Republican members of Delaware's General Assembly.

Hindes also was active in Delaware politics, having run unsuccessfully for Congress in 1978 and lieutenant governor in 1988. He started a five-year stint as Delaware's Democratic state chairman in 1993, the same year that he, along with a number of others, sued the federal government for breach of contract.

As S&Ls became insolvent in the early 1980s, their regulator, the Federal Home Loan Bank Board (FHLBB), looked for other healthier S&Ls to purchase them. At the time, there weren't many healthy S&Ls to be found. Even the healthier thrift institutions were experiencing some financial difficulty due to the sudden rise in interest rates. As a result, they weren't interested in purchasing their insolvent competitors unless they received substantial financial assistance from the federal government.

But the FHLBB did not have enough money to assist potential investors. They did have a deposit insurance fund, the Federal Savings and Loan Insurance Corporation (FSLIC), but it was running out of money. This did not leave the FHLBB with many options. Shutting down insolvent S&L's would be expensive. Given its shortage of funds, the FHLBB resorted to unusual methods to sell insolvent S&Ls.

The FHLBB told the healthier S&Ls that if they purchased a failing institution, instead of receiving cash to compensate them for the losses they would be absorbing, the FHLBB would allow them to offset their losses by counting an equivalent amount of “supervisory goodwill” as capital.

Supervisory goodwill is not the same as cash. Cash is a tangible asset. You can hold cash in your hand and know that it is real. However, supervisory goodwill is an intangible asset. This is a little bit more amorphous. It is an accounting entry. Accountants will tell you it is there, but you can't touch, feel, or see intangible assets.

There are some circumstances, though, where intangible assets can have real value. For example, a company's brand name has value if potential customers view that name positively. Take Walt Disney or Coca-Cola, for example. But insolvent S&Ls didn't have widely known and popular brand names. Brand names for insolvent S&Ls didn't have any real value.

Given that the long-term value associated with supervisory goodwill was dubious, there were limits on how long it could be counted as capital in a bank's accounting records. The FHLBB's rules stated that goodwill had to be reduced or amortized on a bank's records over a 10-year period until it was eliminated. However, that wasn't a long enough period for the healthier S&Ls to view it as an acceptable enough substitute for cash in order to gain their interest. So the FHLBB relaxed its regulatory accounting standards and allowed S&Ls to use a more lenient standard of “no more than 40 years” as the time period they could receive credit for their supervisory goodwill.

That was enough to attract the interest of many of the healthier S&Ls. They began to acquire insolvent institutions from the FHLBB. During the 1980s, there were hundreds of transactions to put weaker institutions into the hands of healthier ones and preserve the FSLIC's cash. The buyers were happy and so was the FHLBB.

One of the banks struggling to survive during the early 1980s was an FDIC-supervised savings bank named Western Savings Fund Society (Western). In March 1982, the FDIC sought proposals from banks interested in purchasing the Philadelphia-based Western. The FDIC was willing to provide financial assistance to facilitate a sale, given that the cost to the FDIC to close Western without a buyer would be about $700 million.

The Philadelphia Savings Fund Society (PSFS), the bank Hindes had invested in, decided that it wanted to purchase Western in order to expand within its local market. PSFS had a long and distinguished history in the Philadelphia area. It was the first savings bank created in the United States, opening for business in 1816. A Philadelphia businessman named Condy Raguet formed a partnership with 11 other local businessmen to organize and open the bank after hearing about the success of similar ventures in Great Britain.

As early as the 1920s, PSFS began programs that encouraged local schoolchildren to save some of their money. Over the years, the bank became a fixture in the Philadelphia area as generations of residents opened accounts at an early age and remained lifelong customers. PSFS prospered and grew into one of the largest savings banks in the country.

After some negotiation, the FDIC and PSFS agreed to a deal. The FDIC agreed to pay PSFS $294 million to help facilitate its purchase of Western. The FDIC, following in the footsteps of the FHLBB, also agreed to credit PSFS with $800 million in supervisory goodwill. Both parties were pleased with the results. PSFS was able to expand within its local market area, and the FDIC saved an estimated $400 million.

Even with its cash-preservation measures, the funds in the thrifts' deposit insurer, the FSLIC, eventually were exhausted, and the FHLBB had to turn to Congress to provide taxpayer funds. Taxpayer money was provided out of necessity, but neither the American people nor Congress were happy about having to do so.

By the late 1980s, Congress looked back at the practices of the FHLBB during the early and mid-1980s with disdain (despite Congress's complicity in, and in some cases active encouragement of, FHLBB practices). Accounting standards, capital standards, and supervisory standards all had been relaxed in order to buy time in the hope that the S&L's financial problems would heal themselves. But conditions worsened, and the cost to taxpayers was much higher than if the FHLBB had asked for money earlier, rather than “cooking the books” and practicing forbearance—a term that became the symbol of everything wrong with financial regulatory and supervisory practices during the 1980s.

In 1989, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). In that legislation, the FHLBB was relieved of its regulatory and supervisory responsibilities. In its place the Office of Thrift Supervision (OTS) was created (an agency that was put out of business by Congress after the 2008 financial crisis). The FSLIC was eliminated as well in 1989, and a new deposit insurance fund, the Savings Association Insurance Fund (SAIF), was created under the FDIC's control.

Many other reform measures were enacted at that time. One of those measures was a legislative requirement that all supervisory goodwill created in or before April 1989 be phased out over the following five years. This change, along with tighter capital requirements, had a dramatically adverse effect on the financial position of many S&Ls, forcing a large number of them into immediate capital insolvency or very close to it.

The healthier S&Ls that had purchased insolvent institutions during the early 1980s, viewed the new legislation as a breach of contract, since there had been a clear understanding that their supervisory goodwill could be counted as capital for up to 40 years. Many viewed the change as threatening the viability of their businesses. “A deal is a deal” became their rallying cry, but bank regulators began closing dozens of the very S&Ls that had come to the government's aid. As a result, their owners found that their investments were now worthless.

One of the banks experiencing financial difficulties was PSFS. In 1984, the bank had changed its name to Meritor Financial Group, and after purchasing Western, it had grown to become a $17 billion bank. But Meritor continued to lose money throughout the 1980s, and the FDIC grew increasingly concerned about its financial condition. In 1988, the FDIC forced Meritor to enter into a memorandum of understanding, an informal agreement, which required the bank to raise its overall capital levels by $200 million. The bank did this by selling off 54 of its best-performing branches, which a court later termed its “crown jewels.”

But the bank's troubles weren't over. Its nonperforming assets continued to grow, and the 1989 legislation that changed the rules for amortizing supervisory goodwill came into effect. The bank needed to raise more capital in order to survive. In 1991, Meritor's bondholders entered into discussions with the bank about exchanging their bonds for new common stock. Such a transaction would give the bank some added capital protection, which could prevent it from becoming insolvent, but it would also expose the bondholders to much greater risk since the bank's shareholders would likely lose all of the money they had invested in the bank if it still needed to be closed.

In the early 1980s, Gary Hindes had purchased some of PSFS's bonds. Now he was serving as the chairman of an ad hoc committee of Meritor's bondholders. While discussions of a possible bond-for-stock exchange were under way between the bank and its bondholders, Hindes and the committee's investment banker, Wilbur Ross, then of Rothschild, Inc., made a special trip to Washington, D.C., to meet with senior FDIC supervisory officials. Their purpose was to confirm that if they exchanged their bonds for stock, the FDIC would not close the bank. Believing that they were given such an assurance and that the government keeps its word, the two men returned to New York and recommended to the full committee that they accept the bank's exchange offer. A whopping 93 percent of the bondholders agreed to the swap, dramatically improving Meritor's financial position.

But the FDIC and the Pennsylvania Banking Department were not satisfied. They formally demanded that Meritor's owners inject more money into the bank. With the country in the throes of a serious recession, the owners could not meet this additional capital requirement.

On December 11, 1992, the Pennsylvania State Banking Department closed the 176-year-old bank and appointed the FDIC as receiver. The State Banking Department and the FDIC said the bank was closed because of continued deterioration in the bank's financial condition that rendered it insolvent, regardless of the treatment of its supervisory goodwill.

Hindes and his fellow shareholders were furious. They believed that Meritor would have survived had it not been forced to write off its supervisory goodwill as quickly as was now required under the new law. They also believed that the FDIC had promised them the bank would not be closed. Hindes believed that the only reason he and his fellow bondholders had lost money was that the federal government reneged on a promise. Not only had the government seized and shuttered the oldest S&L in the country—a beloved Philadelphia institution—but to make matters worse, 400 employees lost their jobs, “just two weeks before Christmas,” Hindes still says with anger in his voice.

In 1993, Hindes and Frank Slattery, a former director of the bank, brought suit against the United States, on behalf of all of Meritor's shareholders, claiming that the FDIC had reneged on its promise to permit supervisory goodwill to be counted as capital, which resulted in the improper closure of the bank. Meritor's shareholders believed they had been cheated out of $800 million.

Owners of insolvent S&Ls also began to sue the federal government for equally staggering amounts of money. These shareholders claimed that one arm of the federal government, Congress, had changed the rules of the game and by doing so had breached the contracts that another arm of the federal government, the FHLBB, had entered into with them. They pointed out that their regulator, the FHLBB, had encouraged them to enter into these deals.

The Department of Justice (DOJ) is responsible for defending the federal government, hence taxpayers, against lawsuits. The staff at DOJ strongly believed that government officials couldn't bind future sessions of Congress. Otherwise, what would be the point of subsequent elections? Every time Congress changes a law, whether it is related to health care, energy policy, environmental protection, financial regulation, or anything else, it is likely to affect private or public contracts. Does this mean that Congress should never change the law? Conversely, should contractors still be entitled to receive everything they otherwise would have received? The exposure to taxpayers would be enormous.

These different perspectives between S&L shareholders and the DOJ suggested that there would be a long and complicated legal struggle before the issues would be resolved. But this wasn't simply going to be litigation between disgruntled shareholders and the federal government. The FDIC got involved as well, and sued the federal government.

How could the FDIC do this, since it is part of the federal government? In its role as receiver, the FDIC is responsible for managing the estates, or the remaining assets, of failed banks and S&Ls. The FDIC's legal responsibility is to maximize the value of those assets in order to return as much money as possible to the creditors of the failed institutions. As part of that duty, the FDIC will sue certain parties for damages if it believes the claims have merit and that they are cost effective. Any recoveries from such lawsuits are returned to the failed institution's creditors.

Under the law, payments are made to creditors in a certain order of priority. Uninsured depositors and other creditors are reimbursed in full before the owners of a failed institution are paid anything. In other words, the failed bank's owners are first in line to lose money when their company goes out of business.

The goodwill lawsuits raised two important concerns at the FDIC. First, if failed-bank shareholders sued the government directly and won, reimbursement would go directly to them rather than to other creditors who had more senior claims. Second, if these shareholders initiated lawsuits that circumvented the statutory priority of claims, what would prevent other failed-bank creditors and shareholders in other situations from doing the same in the future?

Believing the confusion of roles untenable, in November 1996 the FDIC as receiver sued the federal government on behalf of all of the creditors (not just the shareholders), of the failed S&Ls that had goodwill lawsuits. This was less a judgment on the merits of the shareholder lawsuits than it was an effort to protect other creditors and ensure that the legal priority for claims was adhered to in the event the courts determined those claims had merit. At the time, I was the director of the FDIC division that was responsible for managing the receivership process. I fully supported taking this step. My intent was that the FDIC remain a passive litigant, preserving the rights of creditors, without spending a lot of their money.

As you might imagine, having the FDIC enter the proceedings was a complication that neither the DOJ nor the failed S&L shareholders were pleased about. There were now three sets of parties engaged in many of the goodwill lawsuits.

So who were these other creditors that the FDIC sought to protect? Some of them were small businesses that had provided certain services to the failed institution and some others uninsured depositors. The largest single creditor was the federal government itself. Most of the S&Ls that were shut down had been under government control for so long that everyone knew they eventually would be closed. As a result, most uninsured depositors at these institutions had withdrawn their money while these S&Ls were still open. Those who had left their money behind were primarily insured depositors. Even after the S&L deposit insurance fund ran out of money, these insured depositors were protected and, where necessary, reimbursed by the federal government. So to the extent there were recoveries to be made from the estates of failed S&Ls, the federal government was often the creditor standing first in line.

While an important principle regarding the proper priority of payments to creditors could be preserved by the FDIC's actions, the practical reality of the situation was somewhat bizarre. If the FDIC represented all creditors and the supervisory goodwill cases had merit, most of the money obtained from the federal government in settlement of these cases arguably would be used to reimburse the federal government for its losses before shareholders received any money. The shareholder litigants and the DOJ were spending a lot of money to support their respective positions. One possible result was a victory by the DOJ, on behalf of the federal government, in which case no payments would be made. Another possible result was a defeat, in which case the government would be obligated to make most of the payments to itself.

As if the situation weren't complicated enough, the money the DOJ spent defending the federal government came from a taxpayer fund that was managed by the FDIC. Years earlier, Congress had provided the FDIC with sufficient taxpayer funds to cover the government's expected costs associated with the S&L crisis. Congress determined that the costs associated with the supervisory goodwill cases should be paid from those funds. Rather than having to seek explicit approval from Congress for its annual goodwill-related expenses, the DOJ went to the FDIC for the money. The FDIC did not have the authority to tell the DOJ how much it should spend on the goodwill cases, so the FDIC simply paid the bills. This lack of a budgetary control meant that the DOJ had less incentive to control the overall amount of taxpayer money that it spent.

The DOJ took full advantage of this situation to hire talented lawyers and high-dollar experts to provide the taxpayers the best possible defense in each case. The DOJ's lawyers saw this as a wise use of taxpayer money. They viewed such an investment as a small cost to bear compared to the potential taxpayer liability if the government simply conceded the issue and paid off exorbitant claims for damages.

Adding to the entangled interrelationships, financial regulation and bank closings were not the DOJ's areas of expertise, so a lot of the information and some staff expertise would have to come from the FDIC. This added to the bizarre nature of the proceedings, as it put FDIC staff on both sides of the lawsuits. We were forced to set up two legal teams, one to sue the federal government as receiver, and one to provide support to the DOJ. The FDIC also had to manage multiple budgets for these actions, including the taxpayer fund that was used to defend the government, and the various receivership accounts that were used for the money needed to sue the federal government.

Elaborate procedures and barriers were constructed within the FDIC to keep the two groups from sharing information with each other. The only staff person who was allowed to rise above these walls and see what was happening on both sides was the General Counsel, Bill Kroener. American Banker reported in June 1996, “At the FDIC the situation is so sensitive that the agency has segregated the attorneys working at opposite ends of the litigation to avoid any conflicts of interest.”

Gary Hindes's lawsuit had one further twist. Unlike virtually every other goodwill case, Meritor was not an S&L that had been regulated and supervised by the FHLBB. It was a savings bank that had been regulated and supervised by the FDIC. Although savings banks are essentially the same as S&Ls, the fact that the FDIC supervised Meritor posed an added anomaly and potential conflict of interest for the agency. Its bank supervisory division had a role in the closing of Meritor, while its receivership management division had the responsibility to look out for the failed institution's creditors, including its shareholders.

The FDIC's bank supervisors saw the Meritor closing from a very different perspective than did Hindes and his fellow shareholders. They did not see this as a situation where the FDIC had broken its word. They saw this in much the same way as did the DOJ. Congress had changed the law and the FDIC was bound to follow the law. That meant supervisory goodwill was treated less favorably after the 1989 legislation than it had been before. Many S&Ls were strong enough to be able to survive despite the new law. Other institutions, including Meritor, were not so well positioned. Many of these institutions would have failed regardless of the change in the law, and what possible rationale could there be for taxpayers, or the FDIC's deposit insurance fund, to pay for the losses incurred by those investors?

While the litigation was under way, the FDIC continued to manage the receivership estate for Meritor as it did for all of the other banks and S&Ls that had been closed. This meant that as the banks' remaining assets were sold, the proceeds from those sales were tracked and segregated by receivership, as were their expenses. Incrementally, the remaining net proceeds were distributed to the failed banks' creditors.

This duty fell directly into my area of responsibility. I did not know Gary Hindes, but his name became very familiar to me both from documents related to the Meritor lawsuit and from detailed inquiries about the financial statements from the Meritor receivership. Hindes became quite familiar with my name as well, since it was prominently featured in Meritor-related court documents.

Hindes tracked the financial statements of the Meritor receivership because they would determine how much money, if any, Meritor's shareholders would be entitled to receive apart from their litigation. Shareholders do not typically receive anything from the failed bank's estate since they stand last in line in order of priority for payments. In this case, however, Hindes held out hope that money would be left over since he did not believe that Meritor had been insolvent.

The line item in financial statements called “overhead expenses” was a constant concern to Hindes. These expenses were common services that required a separate process to allocate them among all receiverships. Hindes watched as Meritor's overhead expenses mounted and he wanted to know why they were so large.

Hindes's regular inquiries were handled by one of my deputies, Steve Graham. Within the FDIC, Graham was feared, by the lawyers in particular, because of his unpredictable and not infrequent outbursts of temper. Yet he worked closely with Hindes, taking the time to carefully explain the less-than-exciting intricacies of receivership accounting, and they got along well.

Ultimately, if the Meritor estate did return some modest amount of money to the bank's shareholders, it would lend additional credence to their claim that the bank was solvent at the time of its closing. Conversely, it still could be argued that the bank was insolvent and it was the turnaround in the economy after the closing that led to the greater-than-anticipated collections.

While the Meritor litigation was under way, there also were more than 100 other goodwill lawsuits proceeding under the control of the DOJ. These cases had been prioritized within the judicial system. Three prominent S&Ls at the top of that list were Winstar, Statesman, and Glendale. Statesman had acquired four savings institutions in FSLIC-assisted transactions in March 1988. A year and a half later, in August 1989, FIRREA altered their minimum capital requirement. In March 1991, Statesman was closed. That case, as well as the other two, would eventually go before the Supreme Court.

The shareholder litigants did not have an easy road ahead of them and had three hurdles to clear before they could get any of their money back. First, they needed a decision that supported their view that the federal government had breached its contract. Second, they still would need to show that their institution would have remained solvent if the original contract terms had been honored. (Many of these S&Ls likely would have failed regardless of how their goodwill was treated.) Third, they would still need to go through the courts, or through a negotiated settlement process, to determine the appropriate amount they should be paid. Clearing those three hurdles would take years.

The shareholder litigants cleared their most important hurdle on July 1, 1996, when the Supreme Court ruled in a groundbreaking 7–2 decision that the United States government had violated its contractual obligations in the Winstar, Statesman, and Glendale cases. The ruling stated that no one was stopping Congress from changing the law, but that the government had to indemnify the investors in these three particular cases for the breach of valid contracts. Since every contract was different, litigation still was required in each of the other cases. Even in these three cases, additional trials would be needed before any money would be paid to shareholders, but for them this was a major step forward.

The cases moved slowly through the legal system. As of year-end 1998, 120 goodwill cases were pending in the U.S. Court of Federal Appeals, each waiting to be litigated on its own merits. By year-end 2000, there were 103 pending cases. By then, seven cases had been dismissed, and seven others had been settled. The aggregate amount paid for the seven cases that were settled was a relatively modest $175 million.

The small number of settlements and the modest amounts paid out reflected the DOJ's reluctance to engage in settlement discussions unless three conditions were met: it needed to be clear there was a breach of contract in each case, the breach needed to result in damages to shareholders, and shareholders needed to be willing to accept payments on the low end of the range of payments to which they might be entitled. Some shareholder groups were willing to settle given the otherwise long and uncertain road ahead of them. The DOJ was reluctant to settle cases for large amounts of taxpayer money, given that even where the courts had ruled that there was a breach of contract there was a lack of clarity on how payment amounts, if any, should be determined.

There were different ideas about how the amount of damages for shareholders should be determined. Restitution meant that they could get their initial investment back. Lost profits reflected the estimated amount of money shareholders could have earned on their initial investment. No damages was the result when the institution would have failed anyway.

Judges started to take very different positions on the appropriate way to determine damages on otherwise similar cases. In 1999, the U.S. Federal Court of Claims ruled that the federal government should pay Glendale Federal Bank shareholders over $900 million of the roughly $2 billion they were seeking. That same year, in a very similar case, another judge awarded California Federal Bank shareholders only $23 million out of their $1.5 billion in damage claims. Such discrepancies meant that either one side or the other would almost certainly appeal any decision. It subsequently became clear that the lost-profits argument was not going to be supported in court. The DOJ appealed most of the cases it lost in the initial round of litigation, arguing that many institutions had signed consent orders with their regulator in which they assumed the responsibility for any future adverse regulatory developments, including those that resulted from a change in the law. The DOJ won many of these cases on appeal.

The litigation seemed to have no end in sight. I tried to keep the FDIC as a passive participant to preserve the principle that creditors should be paid in accordance with the law. I believed that we did not need to spend much money to fulfill that responsibility.

In late 1999, I became the agency's deputy to the chairman and chief operating officer. In my new role, I saw the FDIC-related goodwill activity from the other side of the FDIC's self-imposed wall. Each year, tens of millions of dollars were being paid to the DOJ from the FDIC-administered taxpayer fund to cover their expenses.

I believed it was time for the government to settle some of these cases. I discussed that possibility with FDIC Chairman Don Powell and General Counsel Bill Kroener. We agreed that the FDIC should encourage the DOJ to settle as many of these cases as possible. In 2001, Chairman Powell made the pitch to the DOJ, but because its attorneys were beginning to win many cases on appeal, it saw no reason to stop pursuing those appeals.

One of the remaining cases was the Meritor lawsuit. In 2002, the Federal Court of Claims ruled that the Pennsylvania State Banking Department and the FDIC were wrong in closing Meritor and that Hindes and his fellow shareholders were entitled to damages. The following year, the court ordered the FDIC to pay $372 million to these shareholders. That award was subsequently reduced to $276 million. The FDIC did not agree and appealed the decision.

The Meritor case finally ended in 2011, when the U.S. Court of Appeals for the Federal Circuit upheld the $276 million judgment and the FDIC decided not to appeal to the U.S. Supreme Court. It had taken Hindes and his fellow shareholders 19 years, but they had finally won. The initial failed-bank transaction, which created the supervisory goodwill that, in turn, gave rise to the Meritor case and the other supervisory goodwill lawsuits, took place nearly 30 years earlier. Most of the affected acquirers, including Philadelphia Savings Fund Society, which had been founded in 1816 during the presidency of James Madison, were shut down close to 20 years earlier while the litigation dragged on.

Hindes and his fellow shareholders were among the fortunate few. Given that each situation and each contract was different, there has been a wide range of outcomes. In many cases, the courts have ruled that the shareholders are not entitled to receive any money. In some cases, the shareholders lost because they had invested in poorly run S&Ls that would have failed anyway. In other cases, shareholders had signed regulatory consent orders at the time they originally purchased a failed S&L from the FHLBB. Under the terms of these consent orders, they assumed liability for the impact of any future regulatory changes.

The FDIC continued as a passive participant in the ongoing litigation. As a result, in cases where there have been settlements, the FDIC has been able to pay other creditors in addition to shareholders.

The supervisory goodwill cases were complex situations that didn't lend themselves to easy solutions. It's easy to look back at the cases, ask how this could happen, and quickly blame one or more of the groups involved. Not every S&L owner was out to loot his or her institution. Some owners were trying to run their banks the right way and found themselves caught in an unfortunate situation. Not every government employee was careless in how he or she spent taxpayer money. The DOJ saved taxpayers an enormous amount of money by not settling cases that were without merit. It's also easy to criticize the FDIC for being on both sides of these lawsuits, but doing so preserved the rights of all of the creditors at these failed institutions.

These cases show that the solutions many believe to be reasonable often result in unintended and unfortunate consequences. The 1989 supervisory goodwill legislative provision was designed to correct a real problem—extensive use of supervisory goodwill as capital weakened overall bank capital standards. Clearly, Congress did not intend to create the massive, expensive, and protracted litigation that ensued.

The supervisory goodwill cases also raise important issues related to trust in government. If Washington is perceived as unreliable and unfair, it will have many fewer business partners to choose from, and transaction costs will rise. This dynamic became acutely clear to me amid the financial crisis of 2008. The federal government looked to form public-private partnerships between the Treasury Department and private-sector investors to purchase some of the troubled assets from weak financial institutions. Such partnerships could have been mutually beneficial. The federal government, already on the hook for fixing a collapsing financial system, could have saved taxpayer money by removing assets from troubled banks and by bringing in the right private-sector expertise to manage and collect on them. The private-sector partners could have benefited financially if they managed the troubled assets well enough to collect more than what they were worth if left in the banking system.

I managed the Public-Private Investment Program for the FDIC during the first few months of 2009. There were many difficulties with the program, which prevented it from ever being utilized as it was originally envisioned. The most significant problem was that prospective buyers and sellers had fundamentally different views on the value of those assets, so it was difficult for them to agree on the right prices. However, many potential private-sector investors also were unwilling to enter into a partnership with the federal government, given the government's negative reputation as a business partner.

Many potential private-sector investors believed that if they partnered with the Treasury Department and made a profit on their investment, Congress would treat those profits as having come at the taxpayer's expense and seek to impose new taxes or other burdens on those investors.

The FDIC subsequently altered the structure of the Public-Private Investment Program by removing any participation by the Treasury Department and going back to utilize two programs that worked well during the S&L crisis. As a result, in addressing the immediate and aftereffects of the 2008 financial crisis, 304 loss-sharing transactions were arranged with healthy banks that purchased failed banks from the FDIC. In these transactions, the buyers managed $216.6 billion of the failed banks' assets on behalf of both the FDIC and themselves. Similarly, 35 equity partnerships were arranged where private-sector investors purchased a portion of the ownership of $26.2 billion in failed-bank assets, managed those assets on behalf of the partnership, and shared the profits with the FDIC.

These partnership arrangements were critically important to the federal government. They quickly put failed-bank assets back into the private sector and aligned the financial incentives between the FDIC and the private-sector participants, which greatly reduced FDIC's failed-bank costs relative to other alternatives.

Yet such partnerships aren't perfect. Private-sector participants sometimes have difficulty accepting the greater transparency, scrutiny, and internal controls that come with partnering with a government agency. The FDIC sometimes has difficulty recognizing that it must uphold its share of the partnership. It can do that by not only ensuring that there are appropriate internal controls in place but by recognizing that it must act as a good business partner and make timely and fair decisions that allow the agency's private-sector partners to increase the likelihood of the joint venture's being financially successful.

My wife, Erica, and I were married in March 2004. In the “It's a small world” category, Erica is close friends with Gary Hindes. She and Gary met 25 years earlier when they were starting their careers. They were regulars on the New York to Washington Amtrak train. Gary got off at Wilmington, Delaware, and Erica in Washington. They remained close friends over the years. When Erica told Gary that she was getting married, he was very happy for her, but when she told him my name, there was silence on the other end of the phone. Eventually, Gary recovered from the shock. He came to our wedding, and the goodwill experienced that evening was far different than what was being fought over in court.

Today, Gary is my friend as well. That is a testament to his humanity, given my responsibilities at the FDIC over the years. At the time, Erica was a deputy general counsel at the FDIC. She had recused herself and had no involvement in the Meritor case, given her friendship with Gary. I, too, removed myself from any involvement in the case.

Not all Meritor shareholders were as magnanimous. A few years later, when Gary asked a fellow investor and friend of his to provide me with some information on a particular issue, the friend, recognizing my name in connection with the Meritor litigation, asked: “Is this the moron who closed Meritor?”