Federal S&L; Regulators Leaked Secret Lincoln Data, Memo Says

Federal savings and loan regulators repeatedly leaked confidential information about Lincoln Savings & Loan, damaging the Irvine thrift’s reputation and business, according to a secret memo released Friday by top regulators in Washington.

The memo, written April 30, 1988, was the basis for the Federal Home Loan Bank Board’s unprecedented decision last year to strip regional officials of their supervisory responsibility for Lincoln and to launch a new financial examination of the troubled thrift.

Lincoln was seized by regulators on April 14, 1989, one day after its parent company, American Continental Corp. of Phoenix, filed for protection from creditors in U.S. Bankruptcy Court.

The bank board released the 1988 memo to address claims that regulators had a vendetta against Charles H. Keating Jr., chairman of American Continental, and that the bank board had unjustly removed its San Francisco regulators from their supervision of Lincoln, Karl T. Hoyle, the bank board’s chief spokesman, said.

Keating has long complained that federal regulators have been out to destroy him for his outspoken opposition to bank board rules limiting the amount of money that thrifts could put into non-traditional investments such as real estate projects and corporate securities.

The memo from the bank board’s general counsel to its three-member governing board shows that the bank board examined Keating’s complaints, found some to have merit and took extraordinary actions last year to address his concerns.

Among those actions were the removal of the Federal Home Loan Bank of San Francisco from direct supervision of Lincoln, the rejection of a two-year examination of Lincoln by the San Francisco regulators and the initiation of a new examination directed by the bank board’s Washington office.

“There have been a lot of misconceptions about what went into our decision last year--that we were unfair to Lincoln, that we were unfair to the 11th (San Francisco) District,” Hoyle said.

“People have said we lost confidence in the San Francisco bank, that we were giving in to political pressure from Lincoln and so forth,” he said. “In fact, we heard a lot of different stories from Lincoln’s auditors and our examiners, and we felt the best way to handle this was to start a new examination.”

The memo from Jordan Luke, the bank board’s general counsel, recounts the long history of bitter confrontations between regulators and Lincoln executives, primarily Keating.

After buying Lincoln in 1984, Keating transformed it into a nontraditional thrift dependent on real estate transactions and other direct investments for most of its profits.

The internal bank board document concluded that unusual actions were warranted, based on four factors:

“First, present facts available . . . indicate that Lincoln is not insolvent now and will not necessarily be insolvent in the future. Second, there are many significant disagreements among experienced, competent and thoughtful individuals about the soundness of, and risks involved in, Lincoln’s operations,” the memo states.

“Third, Lincoln and (San Francisco regulators) presently have a seriously adversarial relationship that prevents normal supervisory communications. And, fourth, there have been repeated leaks of confidential bank board information that have damaged Lincoln’s reputation and possibly its business opportunities.”

Based on those conclusions, the document states, the Lincoln matter “is a unique situation that justifies a unique resolution.”

The bank board in June, 1988, signed a memorandum of understanding with Lincoln aimed at ending hostilities between the thrift and the government and setting up the new examination.

That examination, however, ended on a similar note, with regulators demanding that American Continental write down the value of Lincoln’s vast Arizona landholdings and put more cash into the S&L; as a reserve against possible losses.

Keating, instead, tried to sell Lincoln. But regulators demanded conditions that were rejected by Keating, and he put the company in bankruptcy.

A. Melvin McDonald, a lawyer for American Continental, said he was pleased by the acknowledgement that bank board agents had leaked confidential information and that the leaks had hurt Lincoln’s business.

“The only problem, though, is that the leaks have continued unabated,” said McDonald, who has filed criminal complaints with the FBI and the U.S. Justice Department over the leaks.

In other developments, lawyers for American Continental bondholders have filed a claim seeking $250 million from the state Department of Corporations.

About 22,000 people, many of them Lincoln savings-account customers, bought nearly $200 million in subordinated debentures through the S&L;’s 29 Southern California branches. The bonds were approved for sale by the state agency.

The bondholders’ lawyers claim that the agency is liable for the losses because it approved the bond sales “in reckless disregard of warnings” from state S&L; regulators that the debt securities posed “significant risk to investors.”

The bondholders contend that regulators never should have allowed the sale of the debt securities, at least not through Lincoln branches, because the regulators knew that the bonds were too risky and that the parent company was not financially healthy.

The claim, submitted to the state Board of Control last week, is required by state law as a first step before an injured party can file a lawsuit against the state or one of its governmental agencies.

Attorneys representing bondholders already have filed more than a dozen suits accusing Keating and other top American Continental executives, as well as major law firms and accounting firms, of fraud and racketeering in selling the notes through Lincoln branches.

Meanwhile, in Phoenix, a federal agency running Lincoln has asked the U.S. Bankruptcy Court to throw out the bankruptcy petitions that American Continental filed on behalf of 11 Lincoln subsidiaries, along with its own April 13 petition.

The request met with immediate objections from creditors and from American Continental. No hearing has been set yet on the request.

More than $3 billion of Lincoln’s $5.3 billion in assets are in the 11 subsidiaries. The Federal Deposit Insurance Corp., which is managing Lincoln, has control of the subsidiaries but must seek court approval for many of its actions.

The FDIC’s request to dismiss the petitions, if granted, would free the agency to sell assets without court interference and to funnel the proceeds into the insolvent S&L.;

But American Continental believes that the FDIC, while officially a conservator of Lincoln’s assets, is actually liquidating the assets at fire-sale prices. The parent company expects to ask that a bankruptcy trustee be appointed to manage the 11 subsidiaries, according to James J. Feder, American Continental’s bankruptcy lawyer.