Contracts Written in Stone: An Examination of United States v. Winstar Corp.

Abstract

The United States Supreme Court's decision in United States v. Winstar Corp. sent a resounding message to Washington: The government has to make good on its contracts. At the core of the Winstar case were government contracts created in the 1980s under which solvent thrifts agreed to acquire failed thrifts in exchange for favorable accounting treatment. Without the contracts, the government, as the thrifts' federal deposit insurer, would bear the cost of operating or liquidating the failed thrifts. In 1989, Congress enacted legislation eliminating the favorable accounting treatment, rendering most of the solvent acquiring thrifts insolvent. The government denied any further responsibility, leaving the acquiring thrifts with the cost of continuing operations or, in most cases, liquidation. The United States Supreme Court rejected the government's arguments for leaving the acquiring thrifts with the costs of the bailout, and echoed its century-old pronouncement in the Sinking Fund Cases that "'[t]he United States are as much bound by their contracts as are individuals." This came as good news to most thrifts, but for others the victory was bittersweet.