Crackdown on S&L; Due 3 Years Earlier, Regulator Testifies
An audit showed that Lincoln Savings & Loan Assn. was in such poor condition that it warranted an immediate crackdown more than three years before the government seized the institution, a federal regulator said today.
L. William Seidman, chairman of the Federal Deposit Insurance Corp., said the March 12, 1986, audit by the San Francisco branch of the Federal Home Loan Bank Board found that Lincoln had violated rules limiting risky direct investments in commercial ventures, was not in compliance with accounting standards, had substantial loan losses, had inadequate and missing records and was speculating in options trading.
The FDIC, which insures bank and S&L; deposits, took control of Lincoln, of Irvine, Calif., last April after S&L; regulators at the bank board declared it insolvent.
Seidman, in sworn testimony to the House Banking Committee, estimated that the failure of Lincoln will eventually cost taxpayers between $1.5 billion and $2 billion, making it the costliest S&L; collapse in the nation’s history.
Had the FDIC been in charge of supervising Lincoln in 1986, it would have moved to stop the abuses, Seidman said. “My staff indicated that had we made such findings in one of our own institutions, we would have sought an immediate cease-and-desist order to stop the hazardous operations,” he said.
Fraud-Racketeering Suit
The FDIC, under orders from President Bush, began taking over insolvent S&Ls; in February, removing them from the jurisdiction of the now-defunct bank board, headed by M. Danny Wall.
Since the Lincoln takeover, the government has filed a $1.1-billion fraud and racketeering suit against Phoenix millionaire Charles H. Keating Jr., chairman of Lincoln’s parent, American Continental Corp. It charges that Keating, his family and associates diverted funds from Lincoln’s depositors for their personal use.
A key question of the hearings is why the bank board under Wall, after meeting with Keating, transferred the task of regulating Lincoln to Washington from the agency’s San Francisco office.
The San Francisco-based regulators recommended in the spring of 1987 that Lincoln be seized. However, after Keating complained that he was being treated unfairly, Wall ordered another examination by regulators in Washington, delaying action against Lincoln until this year.
“The sad fact about this failure is that the warning signs were there and the stop signs posted in time to prevent much of the loss to the insurance fund,” said Rep. Henry B. Gonzalez (D-Tex.), Banking Committee chairman.
‘Let It Continue Racing’
“But the Federal Home Loan Bank Board, instead, waved the institution through the stop signals and let it continue racing down the fast land until it crashed.”
“Institutions like Lincoln Savings & Loan should never be allowed to poison our financial system,” said Rep. Chalmers P. Wylie of Ohio, senior Republican on the Banking Committee. “Lincoln was a rogue elephant. . . . The fact that this institution was federally insured is frightening.”
Because of congressional protocol, the House committee is unlikely to deeply explore the role of five senators who received campaign contributions from Keating. Sens. Alan Cranston (D-Calif.), Dennis DeConcini (D-Ariz.), John McCain (R-Ariz.), John Glenn (D-Ohio) and Donald W. Riegle Jr. (D-Mich.) met with regulators in April, 1987, to question them about Lincoln.
