(MONEY Magazine) – Herein is a potentially profitable tale of a wealthy Little Rock investor, legions of failed S&Ls and a 1989 government bailout that could be a hidden bonanza for shareholders in at least one of the surviving institutions. No, this isn't the latest dish on the Clintons' Whitewater debacle. It's a story focused on Coast Savings, an unheralded $8 billion (in assets) thrift based in Los Angeles that I think has a compelling rationale to double or even triple from its $16 share price in a year or so without much risk.

Coast (symbol CSA on the New York Stock Exchange) pays no dividend. But it's priced cheaply enough, at 19% below its $19.71 tangible book value per share, to entice tightwads like me to own the stock. I bought 2,000 shares at $15 in February. It also has lured big-time bargain hunters such as John Neff, manager of Vanguard's $11 billion Windsor Fund. Indeed, Windsor and Neff's investment firm, $80 billion Wellington Management, together own a 12% block valued today at $35 million. "We figure Coast's attractive franchise of 92 branches across California is worth around $36 a share as a business," says Windsor analyst Jim Averill. "And that value could quickly approach $50 if we get lucky." Here's why I agree:

Merger mania will finally engulf California S&Ls. Thanks to the state's three-year recession, its 26 publicly traded thrifts were shunned during the highly rewarding bank consolidation that swept the rest of the country. In less than two years, deposit-hungry acquirers have swallowed 30% of the nation's 180 publicly held S&Ls with market values exceeding $40 million, notes Jim Marks at Hancock Institutional in San Francisco. Moreover, he believes this buy-out binge will soon spread to California now that the state's $672 billion economy is again growing. Last year about 100,000 new jobs were created, a convincing reversal for the state after losing 500,000 jobs since 1990, says economist Mark Zandi of Regional Financial Associates in Westchester, Pa.

Confidence in Coast is temporarily shaken. Despite California's prospects, Coast's stock, earnings and image on Wall Street still haven't recovered from recent natural disasters led by Los Angeles' killer Northridge earthquake in '94 ($21 billion in damages). Shares in the company, which lost $6.5 million (35¢ per share) in '94, are down 19% from a $19 high in September. What many investors overlook is that Coast also buttressed its balance sheet last year. It slashed problem loans an awesome 36% to $142 million, permitting a 29% reduction in profit-crimping reserves. Assuming Mother Nature gives the state a break, Coast could earn $1 a share this year and $2.50 to $3 next. Such an impressive rebound could catch the eye of a corporate acquirer.

If Glendale wins, Coast is a gold mine. Wall Street long ago lost patience with the glacial progress of a landmark lawsuit, spearheaded by California S&L Glendale Federal, seeking $1.4 billion in damages from the U.S. Government for breach of contract. (Similar suits by Coast and about 50 other S&Ls have been shelved pending a ruling by the U.S. Court of Appeals, which heard Glendale's case in early 1994 and is expected to announce its decision soon.) So buyers of Coast pay nothing for the strong possibility that Glendale could win, as it did in a lower court in 1992. And a victory could create a precedent, motivating the government to settle with other claimants, including Coast.

Here's the crux of these cases. In the 1980s, the plaintiffs agreed at the government's urging to rescue depositors of failed thrifts via so-called supervisory mergers. These permitted the acquirer to recognize intangible assets created by the union (known as good will) as regulatory capital and to write off good will over as many as 40 years. Alas, Congress reneged on the deal to ensure passage of the 1989 S&L bailout bill. The law restricted recognition of good will as capital and demanded faster write-offs, placing many of the rescuers in danger of violating capital requirements. The acquirer's survival often depended on Hail Mary maneuvers--slashing loan portfolios and raising capital by selling new stock at distressed prices--that compounded shareholders' pain and ultimately triggered the S&Ls' claims for damages.

What's so special about Coast? The analysts I've interviewed believe its case is a slam dunk even if Glendale loses. That's seconded by company chairman Ray Martin. He structured Coast's 1987 takeover of $1.5 billion Central Savings of San Diego with a contract that explicitly referred to a subsequently contested $299 million cash infusion as a regulatory capital credit that is not amortized (written off). "The government later ruled that the capital was really good will," says Martin, 59. "It amounted to seizure of our shareholders' property." If Coast got awarded the entire $299 million, that sum would work out to $16.20 for each $16 share (not counting other punitive damages claimed). Adding the $16 to the stock's projected $36 takeover price gives you $52. That's triple today's trading price-and a big incentive for any corporate buyer out there to bid for Coast now rather than later.

The wealthy Little Rock investor is lining up suitors. Alex Lieblong, head of Paine Webber's Little Rock office, invests about $300 million primarily in the banking sector, a specialty that's made him rich if not famous. Lieblong, 44, personally owns a 1.5% Coast stake worth $4.2 million, and his clients' holdings add up to more than 5%. The attraction? "Coast is bound to be one of the first targets of S&L consolidation in California," predicts Lieblong. He too expects an offer of at least $36 a share. And he's already shopping for suitable bidders. Lieblong recently was a middleman in the sale of $3.5 billion Worthen Banking in Little Rock to $32 billion Boatmen's Bancshares in St. Louis. (Worthen, the banker for Clinton's '92 campaign, was subpoenaed for documents germane to the Whitewater probe.) "It took us five years to pull off the sale," says Lieblong, "during which our Worthen stake multiplied in value sixfold." What about Coast? He's betting a serious merger proposal could surface in 12 months or sooner.