Senators, Ex-Regulator Waging War of Letters : Ethics: Lincoln S&L; case generates acerbic correspondence. At issue: Was a deal offered?

They have not yet attained the notoriety of the Pentagon Papers or the Nixon tapes, but the ethics investigation of five U.S. senators tainted by the nation’s biggest savings and loan failure may be influenced by the Lincoln letters.

In a series of heated written exchanges, three U.S. senators and the government’s former top thrift regulator disagreed over what they had discussed during a key 1987 meeting involving the future of troubled Lincoln Savings & Loan of Irvine, Calif.

Edwin J. Gray, the former regulator, maintained that the senators who met with him on April 2, 1987, proposed a deal in which Lincoln would make more traditional home loans if Gray would withdraw a proposed investment rule opposed by Lincoln’s owner, Charles H. Keating Jr.

The senators have denied Gray’s charge, and, in a more recent series of letters, Sens. Alan Cranston (D-Calif.), John McCain (R-Ariz.) and Dennis DeConcini (D-Ariz.) argued with Gray over his version of that meeting.

The letters were among a series of exhibits that Gray provided to the House Banking Committee before he testified at a hearing Tuesday on Lincoln’s collapse.

On May 25, 1989, McCain sent a letter to Gray that was conciliatory in tone, reminding the former regulator that McCain had said at the meeting that he did not want to do anything improper. He asked Gray to tell him if “any of my comments or actions in that meeting were improper.”

Gray responded on May 30 with a five-page, single-spaced letter detailing his recollection of the meeting and reasserting his belief that the senators had sought a “quid pro quo” for Keating.

“I had never been asked until this meeting with you and your colleagues--by any United States senator--to withdraw a regulation for any reason, particularly on behalf of a friend, and especially in the privacy of a senatorial office,” Gray wrote.

McCain, who said he had checked with the other senators, wrote back three days later to say he recalled no deal or quid pro quo. “I regret that we disagree on the events of this meeting, but we do disagree,” McCain wrote.

On the same day, DeConcini wrote a blistering message to Gray:

“There is little relationship between the meeting you describe and the one we held. Your recollection of the meeting is so distorted as to bear no resemblance to fact. . . . Your new allegations of ‘a deal’ are simply false. I am surprised and disappointed that a former high Administration official would stoop to this kind of duplicity.”

Gray’s response was swift. On June 5, he sent DeConcini a one-page letter accusing him of using a “selective memory” to recall the events.

“The fact that what was said in that meeting is now emanantly (sic) embarrassing to you, Senator, does not mean that it did not occur,” Gray wrote. “You cannot simply shred it because you are a United States Senator and are somehow above criticism . . . . Senatorial status does not immunize you from truthful disclosure.”

On June 7, Cranston wrote to Gray, saying that he was “astonished” by Gray’s version of the events and that the discussion did not “even remotely” resemble Gray’s account.

“If Charles Keating had broken any laws, bring charges,” Cranston wrote about his recollection of what he had said. “But, if a case could not be made against Lincoln, then bring a halt to what appeared to be the harassment to which Lincoln was being subjected by your regulators. Don’t keep Keating twisting in the limbo of your bureaucrats’ malicious indecision.”

Gray, responding in a June 15 letter, again said that his memory was accurate. Gray said also that he resented Cranston’s reference to regulators as “malicious” or harassing, and he contended that “history now clearly shows” that Lincoln Savings was harassing regulators.

“Your continuing efforts to, yes, intervene with regulators in behalf of Lincoln has occurred at the expense of the taxpayers and perhaps even at the expense of thousands of debt holders. I would hope that in the future, the taxpayers’ interests--rather than political contributors--would be given the priority,” Gray concluded.

About a week later, Cranston called for a government inquiry to determine if regulators botched the Lincoln case and if federal deposit insurance funds should be used to pay back American Continental’s debt holders. The General Accounting Office investigation is pending.