Top Regulator Blocked S&L; Seizure, Panel Told : Hearings: Pair say the delay let Lincoln Savings run up huge debts. The firm may have bugged state auditors.

Two federal officials from California charged Thursday that M. Danny Wall, the nation’s chief savings and loan regulator, “shot them in the back” and blocked a timely takeover of Lincoln Savings & Loan that could have saved taxpayers much of the estimated $2 billion in cleanup costs.

In separate testimony, state officials disclosed that an electronic listening device was discovered in Lincoln’s offices in Irvine that could have been used to monitor conversations of state examiners as they called superiors about their audit of the troubled S&L.;

The two federal regulators, who had raised red flags about Lincoln two years before the government finally acted, told the House Banking, Finance and Urban Affairs Committee that a similar financial disaster could occur again “because the same folks are still in charge of regulating thrifts.”

Committee Chairman Henry B. Gonzalez (D-Tex.) immediately suggested that Wall step down or take temporary leave from his position as director of the Office of Thrift Supervision until the hearings into the Lincoln case are concluded.

After the hearing, Wall’s agency issued a statement saying that Thursday’s session presented a one-sided story because two witnesses from its Washington office did not get a chance to testify.

“Therefore, it is inappropriate for members of the committee to request . . . Wall to step aside permanently or until the hearings are completed,” the statement said.

Leonard Bickwit, a Washington lawyer for Lincoln’s parent company, American Continental Corp., said that the panel’s hearings were “riddled from the start with factual inaccuracies.” But Bickwit provided no specific denials to the allegations presented Thursday.

The testimony of Michael Patriarca, director of the Office of Thrift Supervision’s district office in San Francisco, and William K. Black, the district counsel, provided additional evidence that regional regulators had been stymied in their efforts to call attention to Lincoln’s financial problems.

Lincoln was seized by federal regulators on April 14, 1989, the day after its parent company filed for bankruptcy. The cost of cleaning up the institution has been put at as high as $2 billion, making it the most expensive thrift failure in history.

In addition to the losses to the government’s thrift deposit insurance fund, which ultimately will be absorbed by taxpayers, an estimated 22,000 individuals are expected to lose more than $200 million that they had invested in bonds issued by Lincoln’s parent company.

Wall, who was chairman of the Federal Home Loan Bank Board before it was replaced by the Office of Thrift Supervision, and Charles H. Keating Jr., the flamboyant owner of Lincoln’s parent company, have been subpoenaed to appear Nov. 7 before the House committee.

The committee is investigating the two-year delay that preceded the government’s seizure of Lincoln and the actions of five U.S. senators, including Alan Cranston (D-Calif.), who intervened with federal regulators on behalf of the institution.

Wall rejected a recommendation by the regional regulators that the government seize Lincoln in 1987, and he stripped the San Francisco office of its supervisory responsibility for the savings and loan.

The allegations made by Patriarca and Black, the San Francisco regulators, were underscored at Thursday’s hearing by H. Joe Selby, former director of regulatory affairs at the bank board’s Dallas office.

“The problems (at Lincoln) were loud and clear as early as 1986,” Selby testified. “Supervisory control should have been in place by late 1987.”

Black and Patriarca said that Lincoln used political influence with the five senators and got Wall’s agency to make a series of “inexplicable” concessions that staved off appointment of a receiver to safeguard Lincoln’s assets until last April.

Wall, who has acknowledged having a series of meetings with Keating while the investigation was under way, had previously challenged the competence and objectivity of his agency’s San Francisco office.

In their first public reply, Black and Patriarca accused Wall and others in the bank board’s Washington office of undercutting enforcement actions despite strong evidence of Lincoln’s misconduct and unusually risky investments.

“Chairman Wall’s instructions . . . to achieve a ‘peaceful’ resolution with Lincoln assured the outcome,” Black said. “All that remained was to negotiate the terms of the bank board’s surrender.”

Black said that Lincoln was given effective veto power over which government official would be named to negotiate with the savings and loan, which government accountants would audit its books and which officials would supervise its day-to-day activities.

A May 20, 1988, “memorandum of understanding” between the bank board and Lincoln was drafted by Lincoln’s attorneys in cooperation with Rosemary Stewart, head of the bank board’s enforcement office in Washington, Black said.

It was ridiculed by regional regulators as “Rosemary’s Baby” because it allowed Lincoln to increase its high-risk investments and violate other thrift regulations during the year before the firm finally was seized, Black contended.

In addition, Stewart signed a secret letter to Lincoln stating that the bank board would not refer anything found during its investigation to other government agencies for possible prosecution or enforcement actions.

Wall demoted William Robertson, a career bank board official who had recommended that the government place Lincoln in receivership in July, 1987, and blocked a field examination of Lincoln by the San Francisco office in September, 1987, the California regulators said.

Patriarca charged that Keating tried to pack the bank board with his hand-picked agents. He said that Keating was able to obtain a temporary appointment for Lee Henkel, who had borrowed $60 million from Lincoln.

Shortly after he was named to the bank board in November, 1986, with the support of Sen. John McCain (R-Ariz.) and then-White House Chief of Staff Donald T. Regan, Henkel proposed a rule that would have directly benefited Lincoln, Patriarca said.

Henkel resigned after the Office of Government Ethics referred the entire matter to the Justice Department for investigation, the committee was told.

The discovery of the listening device at Lincoln’s offices in Irvine was disclosed to the committee by California Savings and Loan Commissioner William J. Crawford and his deputy, William Davis.

The state regulators reported that the device was found after the government seized control of the institution in April. They said they did not know for certain if it was used to monitor telephone conversations by state examiners who were poring over Lincoln’s records.

Long before the device was discovered, the regulators said, they had suspected that Lincoln was gathering intelligence on the audit, and they had cautioned their examiners to use a pay telephone if they had any confidential material to discuss.

Bickwit, the American Continental attorney, said that the company never authorized or took part in any bugging activity. “There’s no reason to suspect any involvement of American Continental or its executives,” he said.

Staff writer James S. Granelli in Orange County contributed to this story.