Share-Price Reaction to Supervisory Goodwill Litigation: The Cal Fed Case
by John Z. Smith (May 1999; Revised Feb. 2000)
More than 100 savings and loans are currently involved in supervisory goodwill litigation against the federal government, with total claims approach fifty billion dollars. These claims arise from a provision in the 1989 Financial Institutions Reform Recovery and Enforcement Act (FIRREA) that phased out the use of supervisory goodwill to satisfy bank capital requirements. California-based savings and loans such as Glendale Federal and California Federal sought damage awards of two billion dollars each. This paper uses a standard event-study analysis framework to estimate the abnormal returns to litigation interests issued by California Federal. Unlike equity shares in publicly-traded firms, the value of these litigation interests is determined solely by the damage award in the California Federal supervisory goodwill litigation. California Federal’s secondary litigation interests, which represent residual claims on the damage award, exhibit statistically significant abnormal returns in response to seven announcements affecting the expected final damage award in the litigation.