The nation's former chief savings and loan regulator testified today that four senators asked him in a closed-door meeting in 1987 to drop a proposed regulation that would have curtailed risky investments by Lincoln Savings & Loan Assn.
Edwin J. Gray, former chairman of the Federal Home Loan Bank Board, told the House Banking Committee that the request was made by Sens. Dennis DeConcini (D-Ariz.), John Glenn (D-Ohio), Alan Cranston (D-Calif.) and John McCain (R-Ariz.) at an April 2, 1987, meeting in DeConcini's office.
"Sen. DeConcini . . . said he and the other senators were there on behalf of their friend at Lincoln Savings. . . .," Gray said. "He said that if I withdraw the regulation . . . they would get their friend to make more home loans.
"It sounded like a quid pro quo. It was a quid pro quo. I told Sen. DeConcini I would not withdraw the regulation."
The four senators have acknowledged that they received more than $1.1 million in political contributions raised by Phoenix millionaire Charles H. Keating Jr., chairman of American Continental Corp., parent company of Irvine, Calif.-based Lincoln.
The regulation, which was put into effect last summer as part of a $157-billion taxpayer bailout of the S&L; industry, would have curtailed Lincoln from continuing to invest federally insured deposits in risky real estate ventures.
As the result of those investments that later turned sour, the government last April seized control of Lincoln at an estimated cost of up to $2 billion to taxpayers for repaying savers whose federally insured deposits were lost.
"Sens. Cranston, DeConcini, Glenn and McCain had evidently bought off on the scheme when they met with me," Gray testified. "The receipt of very substantial gifts from Charles Keating and his associates had long since put them in the right frame of mind to . . . embrace the notion that there was somehow a vendetta against Lincoln" by regulators.
"When enough money flows, it's apparently easier to be gullible," Gray said.
He recalled that Keating had also hired Alan Greenspan, now chairman of the Federal Reserve Board and then a private economist, to press his case that Lincoln's investments were sound and to argue against the need for the regulation.
Gray also outlined how former Treasury Secretary and White House chief of staff Donald T. Regan orchestrated then-President Ronald Reagan's appointment of Lee Henkel, a business associate of Keating, to the bank board.
"Charles Keating had finally achieved his wish," Gray said. "Mr. Keating had gotten this far because of his political influence--translate that as money--all the way to and through the White House. . . . And with friends like Sens. DeConcini, McCain, Glenn and Cranston, what was to stop him?"
Keating had been scheduled to also testify today, but his new attorney Monday asked that his appearance be postponed for two weeks. Today's hearing was the fourth held by the Banking Committee on why Lincoln was allowed to keep operating for two years after federal examiners said it was posing a threat to the government's deposit insurance funds.
Bank board officials in California recommended on May 1, 1987, that the government seize Lincoln because of its mounting losses. Gray, whose term expired two months later, passed the problem on to his successor, M. Danny Wall, now director of the new Office of Thrift Supervision in the Treasury Department.
Lincoln was seized by the bank board in April, nearly two years after federal examiners first recommended taking it over.
The Resolution Trust Corp., the agency created by Congress to clean up the thrift mess, filed a $1.1-billion suit in September against Lincoln, American Continental, Keating and his relatives alleging fraud and racketeering.
Wall has acknowledged that he met with Keating after taking office and said he subsequently rejected the recommendation of the board's regional office in San Francisco to take Lincoln over.
He has defended the action, saying the San Francisco officials had enough information to restrict some of Lincoln's activities but not enough to warrant taking it over without first going through a lengthy court battle.