Regulators’ Action to Be Focus of Lincoln S&L; Hearing Today : Thrift: The House Banking Committee chairman is expected to roast Reagan appointees he blames for thrift’s collapse.
A controversial decision made 2 1/2 years ago by federal thrift regulators in Washington will emerge as a focal point of House Banking Committee hearings that begin today into the failure of Lincoln Savings & Loan in Irvine.
The hearings before the 51-member committee are loaded with political overtones. Committee Chairman Henry B. Gonzalez (D-Tex.) is expected to come out swinging at top regulatory executives appointed by former President Ronald Reagan, who he feels are responsible for Lincoln’s collapse, perhaps the costliest in the nation’s history.
The proceedings also are likely to raise more questions about the actions of five U.S. senators, including Sen. Alan Cranston (D-Calif.), on behalf of Lincoln officials. All five met with regulators concerning Lincoln and received campaign contributions from Phoenix businessman Charles H. Keating Jr., whose company owned Lincoln, and his family and associates.
“Our intent is to make this a full record, a major case history, of what went wrong,” said Joseph C. (Jake) Lewis, spokesman for the Banking Committee.
The only witness today will be L. William Seidman, chairman of the Federal Deposit Insurance Corp., which has managed Lincoln since its takeover. Seidman is expected to play the role of coroner, analyzing the S&L;’s financial condition and explaining its demise.
But the committee is clearly taking aim at another regulator--M. Danny Wall, director of the Office of Thrift Supervision and chairman of its predecessor agency, the Federal Home Loan Bank Board. As head of the thrift industry’s regulatory body, Wall decided to ignore the recommendations of the board’s regional office in California regarding Lincoln.
Federal regulators in San Francisco had decided by May, 1, 1987, that they needed to seize Lincoln or otherwise gain control of the thrift’s activities. But since Wall and another appointee of the three-member board were to start their board terms on July 1, no action was taken.
It wasn’t until almost two years later that regulators took over Lincoln, a day after its parent company, American Continental Corp. in Phoenix, had filed for bankruptcy protection. By then, some 22,000 people, mostly elderly Southern Californians, had bought about $200 million in American Continental bonds, which now may be worthless.
Why regulators waited so long before finally seizing Lincoln is what the committee hopes to determine in the hearings, which will involve four sessions over three weeks.
“That May, 1987, date was a key one because it was the first time there was a flat finding by regulators” of cause to take action against Lincoln, Lewis said.
Since that date, he said, “there’s been great curiosity” about why the recommendations of the San Francisco regional regulators were never followed, why they were removed from supervising Lincoln, and why their unusually long examination of the S&L;’s financial health was thrown out and a new one ordered.
“The committee wants to know what this delay meant ultimately to the (deposit insurance) fund.” Lewis said.
Gonzalez has blamed Wall for “gross mishandling” of the Lincoln case and for unprecedented actions in removing the San Francisco regulators. The delay, he claimed, could cost taxpayers more than $2 billion. Wall has put the cost of Lincoln’s failure at $1.1 billion to $1.5 billion.
A key provision of President Bush’s thrift bailout law was whether Wall would be allowed to continue as the nation’s top thrift regulator. The new law allowed him to remain, much to the dismay of Gonzalez.
“They’re going to fry Wall,” a regulatory official in San Francisco said about the committee hearing. “If Gonzalez doesn’t get him on Lincoln, he’ll get him for all the deals that were done at the end of last year.”
Lawmakers have repeatedly charged that in the so-called December deals, the bank board sold 75 insolvent institutions at fire-sale prices and committed the federal government to honoring $16 billion in insurance fund obligations without proper authority.
Wall said recently that he expects tough questions but that good reasons existed for the actions that the bank board took.
Some analysts think that Wall’s predecessor, former bank board chairman Edwin Gray, should share the blame.
“Gray ought to get beaten up just as much as Danny has been,” said Bert Ely, an Alexandria, Va., industry consultant. “Gray had the ball and didn’t make the hard decision that he should have, and left it instead to his successor. Ed has since been amazingly successful at rewriting history.”
Gray was once the target of congressional criticism for his seeming inability to stem the flow of S&L; disasters. But Gray defends himself, contending that his calls for tougher regulations at the time were ignored by Congress.
Contacted in France, where he is vacationing, Gray said the recommendation to take down Lincoln didn’t reach his desk until about week before he left office on June 30. At that time, he said, it was too late to complete the procedures for seizing Lincoln before his term was up, and the three-member bank board was a member short already.
Besides, he said, taking control of Lincoln then would have provided Keating with the “perfect fodder” for accusing regulators of having a vendetta against Lincoln’s operators, a claim that Keating has voiced.
The new board, however, should have been able to take action within two months, Gray said.
Instead, the board under Wall listened to Keating’s longstanding complaints, found that regulators had leaked information that had damaged Lincoln, suspected that the San Francisco regulators had exacerbated the fractious regulatory relationship with Keating, and decided in May, 1988, to remove Lincoln from San Francisco’s supervision and to initiate a new audit with a blue-ribbon panel of experienced examiners.
Regulators in Washington have said previously that the first audit was incomplete and even wrong on some points, though they also conceded that their own conclusions led to the same result: Lincoln’s seizure.
Bondholders, trying to get back their $200 million, are willing to believe in their lawsuits against Keating and professionals who advised him that regulators were fooled as much as they were.
Keating, once a practicing lawyer, has shown himself as a tenacious fighter who wasted little time getting into hot water with savings and loan regulators after his American Continental bought Lincoln in late February, 1984.
Despite what regulators say were promises to the contrary, Keating quickly dismissed Lincoln’s executives, brought in his own people and transformed the Irvine thrift from a traditional, single-family mortgage lending operation into a fast-growing S&L; that made major loans to developers and took direct ownership stakes in massive real estate projects.
He enlisted the aid of top accountants and accounting firms, some of the best corporate and Wall Street lawyers, five U.S. senators, including Cranston, and a few well-respected economists, including Alan Greenspan, who since has become chairman of the Federal Reserve Board.
They aided Keating’s relentless opposition to regulatory policies and his uncanny ability to keep Lincoln operating long after San Francisco regulators were calling for a halt to business strategies that were sapping the S&L;’s financial strength.
Bank board records show that officials of one major accounting firm, Arthur Young & Co., said their relationship with American Continental deteriorated to the point where they couldn’t unravel complex transactions unless their auditors asked “perfect” questions to get to the truth.
The accounting firms and Keating’s accounting procedures for his complex transactions also will come under the scrutiny of the Banking Committee, according to Gary Bowser, a committee staff aide.
MAJOR PLAYERS IN LINCOLN SAVINGS INVESTIGATION
Rep. Henry B. Gonzalez
As chairman of the House Banking Committee, the Texas Democrat has sharply criticized chief thrift regulator M. Danny Wall for “gross mishandling” of the Lincoln case.
M. Danny Wall
As chairman of the Federal Home Loan Bank Board (now director of the Office of Thrift Supervision), he favored a new regulatory audit of Lincoln by examiners outside of the San Francisco regional office.
Edwin J. Gray
As chairman of the Federal Home Loan Bank Board until June 30, 1987, he had openly feuded with Lincoln’s boss, Charles H. Keating Jr., and had passed his staff’s request to seize the S&L; on to his successor, M. Danny Wall.
Charles H. Keating Jr.
As chairman of American Continental Corp. in Phoenix, he initiated drastic changes in Lincoln’s operations shortly after his company bought the S&L; in 1984. In a lawsuit, regulators have accused Keating of racketeering.
