House Panel Assails Wall’s Policy to ‘Trust Keating’

Only days before Lincoln Savings & Loan was seized in April, M. Danny Wall, the nation’s chief savings and loan regulator, was expressing confidence in the owner of the Irvine thrift and advocating alternatives to a federal takeover, according to documents released Tuesday.

The previously confidential material was made public by Rep. Henry B. Gonzales (D-Tex.), chairman of the House Banking, Finance and Urban Affairs Committee, who cited it as evidence that Wall--who testified before the committee Tuesday--and other regulators never fully grasped the magnitude of the alleged fraud and mismanagement carried out by Lincoln owner Charles H. Keating Jr. before the federal seizure on April 14.

Keating, meanwhile, refused to answer questions put to him under subpoena by the committee Tuesday, invoking the Fifth Amendment’s protection against self-incrimination. His brief appearance provided a theatrical climax to the committee’s six-week investigation of what is expected to be the biggest savings and loan failure in U.S. history.

Gonzalez made it clear that he blames Wall and other federal regulators for failing to recognize that Keating and other officers of American Continental Corp., Lincoln’s parent company, allegedly were looting the savings and loan on a systematic basis--turning it into what Gonzalez called their own personal “cash machine.”

Handwritten notes made by Federal Home Loan Bank Board member Roger Martin during a board meeting last April 5 indicate that Wall was still pursuing what Gonzalez characterized as a “trust Keating” strategy only nine days before the government seized Lincoln.

The notes show that Wall said a seizure of Lincoln was “not the only alternative” open to federal regulators. He added that Keating was “skilled enough” to find someone to purchase the thrift so that a federal takeover could be avoided, the notes state.

Even so, however, Wall did nothing to stop the board from proceeding with the legal efforts that ultimately culminated with the April 14 seizure.

Gonzalez said that Martin’s notes, among others obtained by the committee during its investigation of the Lincoln affair, constitute “evidence that the Washington regulators didn’t truly sense who they were dealing with in Charlie Keating.”

Rep. Jim Leach (R-Iowa) said that the notes showed Wall to be “the Neville Chamberlain of financial regulation,” referring to the British prime minister who negotiated a nonaggression pact with Adolf Hitler before World War II.

Yet the regulators were clearly not the only officials in Washington who retained confidence in Keating until the government stepped in.

Wall testified Tuesday that on the day Lincoln was seized, he called Sen. Alan Cranston (D-Calif.) and other senators who previously had intervened with regulators on Keating’s behalf. He said that Cranston replied “he hoped it was not a mistake.”

Although the official minutes of the April 5 meeting do not reflect the comments recorded by bank board member Martin, Wall did not deny them during his long-delayed testimony before the committee.

Wall took over as chairman of the bank board in July, 1987, shortly after regional thrift regulators in San Francisco made the first recommendation that the government seize Lincoln.

Wall, who now heads the Office of Thrift Supervision, the bank board’s successor agency, staunchly defended his decision to reject that recommendation on grounds that federal seizure of Lincoln in 1987 could not have been justified legally.

“We did not have a solid case in the fall of 1987 to take strong action against Lincoln Savings,” Wall said.

But he stated publicly for the first time that he had made some mistakes.

“I acknowledge that if we had known then what we know now about this savings and loan, I for one would have done things differently--even through it appeared to be a solvent and well-capitalized institution at the time,” he said.

Wall also denied that his failure to move sooner against Lincoln was the result of political pressure from Keating, with whom he had met personally three times during the bank board’s investigation of Lincoln.

He also denied that he was swayed by Cranston and Sens. John McCain (R-Ariz.), Dennis DeConcini (D-Ariz.), John Glenn (D-Ohio) and Donald W. Riegle Jr. (D-Mich.), who had received large campaign contributions from Keating.

Gonzalez, a long-time critic of Wall, released a six-inch stack of documents, many of which suggested that the bank board chairman had looked favorably upon Lincoln during the two-year period that he oversaw the investigation of the thrift.

A memo written by bank board counsel Jordan Luke on Nov. 11, 1987, reported that Wall had told another staff member, Darrel W. Dochow, to dispose of a pending matter involving Lincoln “because the chairman doesn’t want anything to do with (Lincoln) to go to the board.”

Dochow, who was placed in charge of the Lincoln investigation by Wall in 1987, gave a similar account in testimony Tuesday. “I had a sense--I had a feeling that the three bank board members wanted (the Lincoln case) resolved on a friendly basis,” he said.

Likewise, Wall and his hand-picked assistants at the board all expressed confidence in Keating during a May 5, 1988, meeting, according to Martin’s handwritten notes.

“Keating is no Don Dixon,” Wall is reported to have said at that meeting. Dixon was the owner of another high-flying thrift, Vernon Savings & Loan in Texas, that will cost the government $1 billion to clean up.

Gonzalez said that the attitude of Wall and his assistants was particularly difficult to understand since Keating had made no secret of his intention to use Lincoln’s assets to make risky investments in long-shot land development deals and junk bonds.

“This was jet-age banking up against horse-and-buggy regulation,” he said.

Tuesday’s testimony by Wall, Dachow and Rosemary Stewart, the chief of enforcement at the Office of Thrift Supervision, was criticized by some committee members.

Rep. Jim Bunning (R-Ky.) summed up Wall’s testimony as follows: “Poor Danny Wall, I’m too busy to do the job I was assigned to do.”

Rep. Marge Roukema (R-N.J.) said the testimony demonstrated that throughout the two years that Wall and his associates investigated the Lincoln case, “there was always another rationalization why Lincoln cannot be closed down.”

Under lengthy questioning, Wall, Dachow and Stewart defended their decision in early 1988 to enter into a “memorandum of understanding” with Lincoln that permitted the thrift to continue in business despite evidence of wrongdoing.

Wall said the agreement gave bank board examiners access to Lincoln’s books, eventually leading to government action against Lincoln earlier this year.

But the board continued to look favorably on Lincoln, Wall acknowledged, until California Savings and Loan Commissioner William Crawford notified federal regulators that American Continental was looting Lincoln by collecting advance taxes from the thrift. Those taxes were never forwarded to the government.

At that point, Wall said, “we knew we were dealing with bad people.”

Wall also insisted that the state of California and the Securities and Exchange Commission share responsibility with the bank board for allowing American Continental to sell junk bonds in the lobbies of Lincoln branch offices. More than 24,000 investors bought the now-worthless bonds, many thinking they were insured by the government.

“Indeed, we all are at fault in that situation,” he said.

In his appearance before the committee, Keating declared: “I have no testimony to give today. . . . On the advice of counsel, I respectfully exercise my constitutional prerogative and privilege and refuse to answer questions here today.”

Keating, who refused to allow cameras to record him as he invoked the Fifth Amendment, later issued a statement saying that he might reconsider his refusal to testify “with the passage of time and the resolution of various investigations.”

Lincoln’s collapse, which will cost the government an estimated $2 billion, also is being investigated by the Justice Department, the Securities and Exchange Commission and a committee of the California Assembly.

Before invoking the Fifth Amendment, Keating tried without success to persuade the committee to close its proceedings to the press. When it became apparent that the committee intended to debate the matter at length, he withdrew the request.

Times staff writer James S. Granelli in Orange County contributed to this report.

BOND SALES PROBED--California opened a criminal investigation into allegations that unlicensed salesmen sold bonds at Lincoln Savings. D1