GOVERNMENT MUST PAY FOR CHANGING RULES

When the federal government breaks a promise, it should have to pay a penalty. And a federal judge has ordered the federal government to pay a California savings and loan nearly $1 billion for a rule change that threatened the stability of many S&Ls in the 1980s and caused several to go belly up. As a result of the S&L fiasco, the government already has spent nearly $200 billion in bailouts. Based on last week's penalty decision, the government may face spending billions more for not keeping its word.

In the 1980s, a sizable number of thrifts were already in financial trouble because of shaky loans and other problems. To encourage healthy S&Ls to take over failing operations, the government instituted an accounting rule in 1981 that allowed stronger institutions to count the losses of failed thrifts as goodwill assets.

But in 1989, the accounting rule was changed, and those goodwill assets disappeared. This left many going concerns desperately trying to shore up their assets to meet the minimum federal requirements. Many didn't succeed.

Glendale Federal Bank, in California, took over an ailing S&L in Florida under the 1981 rule but ran into financial quicksand when the rule was changed in 1989. Although it didn't fail, it was subsequently merged into California Federal Bank.

Glendale Federal -- and some 125 other thrifts -- sued the government seeking penalties for the havoc created by the rule change. The U.S. Supreme Court ruled in 1996 that the government broke its contract by changing the rule. It was up to a federal judge to decide what the penalty should be. Last week, the judge ordered the government to pay Glendale Federal $909 million.

Some of the other 125 financial institution that have filed damage claims already have settled. Many of the others will now ask a federal judge to set penalties, particularly in light of the hefty amount assessed in the Glendale Federal case.

The government's liability may extend beyond the thrift industry. The 1996 Supreme Court ruling may be used by electric utilities and low-income housing developers in instances where other rule changes by the feds have had an adverse impact.

When it's all over, the government will likely face billions of dollars in penalties for changing its rules without regard for the financial consequences. Sadly, whenever the government screws up, the bill is handed to taxpayers.