Ex-Regulator Scrutinized for Ties to Maverick S

So far, he has been only a bit player in the Lincoln Savings & Loan drama as it unfolds on the national stage. But without Lawrence W. Taggart, Lincoln would not be what it is today--a $2-billion debacle expected to rank as the most expensive thrift failure ever.

As California’s top thrift regulator in 1983 and 1984, it was Taggart who waved through Charles H. Keating Jr.’s application to acquire Lincoln, seemingly unaware of an earlier run-in between Keating and the Securities and Exchange Commission.

And in his last month on the state payroll, it was Taggart who let Keating move $800 million of Lincoln’s assets into speculative real estate ventures and other unorthodox investments only three days before a restrictive federal rule took effect.

Less than two months after leaving his state position, Taggart was working for a firm partly owned by Lincoln. The Irvine thrift later paid Taggart’s new employer $200,000 to use him as a consultant. In that capacity, Taggart urged a powerful assemblyman to fight an industry-sponsored regulation that would have restricted Lincoln’s risky investments.

“He’s not the one who robbed the bank, but he’s indispensable in the crucial role he played as the regulator,” said Rep. Richard H. Lehman (D-Sanger), a member of the House Banking Committee, which is investigating the collapse of Lincoln.

Nearly five years have passed since Larry Taggart left office. Had it not been for Lincoln’s collapse, his tenure of less than two years would likely be a footnote in the history of savings and loan regulation.

But as the Lincoln scandal grows, Taggart is finding it necessary to defend his actions as commissioner, including the ease with which he let new operators into California’s thrift business and his apparent coziness with industry mavericks. Questions also are being raised about his financial ties to other high-flying thrifts, including Vernon Savings & Loan of Texas.

Taggart, in interviews and congressional testimony, has denied any wrongdoing, and there are no indications that he is the subject of any law enforcement investigations. He contends his decision allowing Lincoln expanded investment powers is unrelated to his decision to join a company that Lincoln later backed financially. And he denies ever taking part in improper transactions with Vernon Savings.

Taggart’s supporters believe his character is being unfairly questioned.

Rick Butler, a Stockton mortgage executive and Taggart’s friend, said some industry rogues were naturally drawn to Taggart “because of his background and reputation. He’s a good, clean, stand-up business guy.”

Taggart’s wife, Sherry, calls him “a fine, outstanding and honest Christian man.”

The portrait of Taggart that emerges from interviews with friends, regulators, business associates and thrift experts is of a regulator who was enamored of the mavericks of the savings and loan business and who longed to be a player himself. But for all his connections and experience, Taggart, as one friend put it, “doesn’t set himself up well.”

Taggart’s critics argue that recent revelations about his ties to Lincoln and other renegade thrifts show an appalling lack of judgment by a former government official who should have known better. They also contend that Taggart was the best friend that maverick thrifts ever had in California. Indeed, Taggart is one of the few voices still blaming overzealous regulators for Lincoln’s collapse.

“Birds of a feather flock together, and they were birds of a feather: Larry and the high-flyers. He was easily the worst financial regulator California has ever had,” said former Federal Home Loan Bank Board Chairman Edwin J. Gray.

Taggart, 47, virtually grew up in the savings and loan business. His father, William, was senior vice president and director of public affairs for what is now HomeFed Bank, a large San Diego thrift.

Taggart worked as an executive at Great American, another large San Diego savings and loan that enjoyed close ties to the Republican Party. A lawyer, Taggart was picked by Gov. George Deukmejian to be savings and loan commissioner in 1983.

At the time he took over the job, the once-sleepy savings and loan industry was in flux. The “3-6-3” rule (borrow money at 3%, loan it to home buyers at 6% and be on the golf course by 3 p.m.) no longer applied. Forced to pay depositors high, short-term interest rates on the one hand and burdened with 30-year, low-interest mortgages on the other, many thrifts found it tough to stay in business.

Lawmakers in Washington and Sacramento rushed to deregulate the industry, freeing thrift operators to invest some assets in real estate projects, junk bonds and other non-traditional investments. The new rules attracted new players, especially real estate developers eager to tap the taxpayer-insured deposits they could control.

Taggart, as the top regulator in the state with the most liberal investment rules, championed the new breed against the old guard. In less than two years as commissioner, he approved more than 200 new savings and loan applications--roughly one for every two days he was in office--although some never opened because they could not obtain federal deposit insurance.

“He was pushing laissez faire to the outer limits,” said Joseph F. Humphrey, former chief economist for the Federal Home Loan Bank Board of San Francisco.

Taggart’s critics contend he also was too cozy with industry mavericks.

State financial-disclosure forms show he accepted a $114 plane ticket to attend a reception in Bakersfield in May, 1983, for Butterfield Savings, an Orange County thrift that later got into trouble through bad real estate deals and such non-traditional investments as fast-food franchises and restaurants.

Taggart accepted $81 in air fare and transportation in 1984 from San Francisco to Los Angeles from Columbia Savings & Loan, a Beverly Hills thrift well known for its junk bond investments.

In June, 1983, Taggart accepted $179 in round-trip air fare to fly to Dallas to an office opening sponsored by San Francisco financier J. William Oldenburg, the former owner of the Los Angeles Express football team who now is on trial in federal court in San Francisco on charges of defrauding a thrift.

One application that came Taggart’s way in 1984 was from American Continental Corp., a Phoenix home building firm controlled by Keating. It sought Taggart’s permission to acquire Lincoln and its $1 billion in taxpayer-insured deposits for $51 million.

Five years earlier, Keating and Cincinnati financier Carl H. Lindner had been accused by the Securities and Exchange Commission of diverting funds for the benefit of insiders at a Cincinnati financial institution where both men were officers. Keating and Lindner settled the SEC charges without admitting or denying guilt by agreeing to orders that prohibited them from misusing corporate assets.

Keating’s SEC encounter was mentioned in at least four places in American Continental’s application to acquire Lincoln. But in congressional testimony last month, Taggart said he was unaware of Keating’s problem at the time. He said his staff did not bring it to his attention and that he did not have time to look at every page of every application. Had he known, Taggart said, he “probably would have taken another careful look” at the application.

Should Taggart have been aware? His critics concede that the department was short-handed at the time and that federal officials also failed to take note of the SEC problem as they reviewed the acquisition. Even so, they argue, Taggart should have known about such a serious problem.

“I don’t know which is worse. If he was aware and didn’t do anything about it, or if he wasn’t aware when he should have been. Either scenario is damaging,” Rep. Lehman said.

In the later incident involving Lincoln’s investments, Taggart clearly knew what was at stake.

On Dec. 7, 1984, Taggart let Lincoln transfer $800 million of its assets to several of its subsidiaries, effectively allowing it to put the money into risky investments. The move occurred just three days before the effective date of a new federal rule, which Lincoln had spent millions of dollars fighting, limiting such investments after Dec. 10, 1984.

During recent testimony before the House Banking Committee, Taggart acknowledged that he approved the move to beat the looming deadline. Risky investments largely in real estate ultimately were major contributors to Lincoln’s collapse.

At the time of the decision, Taggart had announced he was leaving office. The following Jan. 1, he started work at an annual salary of $90,000 heading a consulting division for a San Diego financial services firm, TCS Financial. At the time he made the Lincoln decision, Taggart had already been named a TCS director.

Taggart said he introduced Keating to his new employer, San Diego financier Thomas C. Stickel, a top fund-raiser for Gov. Deukmejian, after joining TCS. Three weeks after Taggart joined TCS, Lincoln bought nearly 20% of the company for $2.9 million.

William K. Black, a top lawyer for the federal Office of Thrift Supervision in San Francisco, told the House committee he questioned the timing of Taggart’s decision on Lincoln’s asset transfer and Lincoln’s later investment in TCS. Black said the latter transaction amounted to a “bailout” that came at a time when TCS was losing money and was financially “at death’s door.”

Taggart said he had not done any work for TCS at the time he made the Lincoln decision, adding that Lincoln was unaware of any connection between himself and the company.

“They didn’t have the slightest idea I was going with TCS,” he said. “They had not heard of TCS to my knowledge.”

Stickel said TCS was losing money because it was a new company and he “totally, absolutely and irrevocably” denies Black’s allegation that the company needed a financial bailout. Taggart worked for TCS through most of 1985 and is a director of the firm.

Taggart also was a key player in a behind-the-scenes effort in 1985 that killed an industry-backed proposal to limit the kind of risky investments Lincoln was making. Taggart, along with Stickel and Los Angeles attorney Karl M. Samuelian, met with then-Assembly Republican Leader Pat Nolan of Glendale to fight the proposal.

One of the new thrift applications Taggart approved as commissioner was for Shelter Islands Savings, which was being organized in his hometown of San Diego. In 1985, Shelter Island was having trouble raising the money it needed for a successful launch. Taggart, who had just left the commissioner’s job, was brought in to help.

He began lobbying state and federal officials to allow new investors, including himself, to back the thrift. Taggart wanted to buy one-third of the thrift and become Shelter Island’s president and chief executive. Shelter Island never opened because it was unable to get federal deposit insurance.

Taggart’s lobbying of his former department on behalf of a thrift he had approved as commissioner appears to conflict with the state’s “revolving door” policies, which prohibit former administrative officials from representing people in matters in which they participated while working for the state.

Taggart said he did not believe he had approved Shelter Island’s application. But state records show that he granted it on Nov. 7, 1983.

An even bigger problem for Taggart is the later involvement in Shelter Island of scandal-plagued Vernon Savings in Texas.

Closed in 1987 at a cost to taxpayers of $1.3 billion, Vernon has come to epitomize the gluttony and fraud that has contributed to the nation’s massive savings and loan fiasco. More than 90% of Vernon’s loans were bad, and a federal lawsuit accused its top officers of engaging in “systematic looting” of the thrift. Eight Vernon officers or business associates have been convicted or pleaded guilty to committing crimes while running the thrift.

To get Shelter Island off the ground, state records show, Taggart assembled investors including two men with close ties to Vernon: Gordon Browning, a Dallas developer who was a major Vernon borrower, and Frank DeMarco Jr., a Los Angeles lawyer who represented Vernon.

Furthermore, bank records and interviews suggest Vernon tried to skirt regulatory channels by investing money in Shelter Island by using a personal loan to Taggart.

To buy his stake in Shelter Island, Taggart borrowed $600,000 in 1985 from San Diego National Bank, pledging his home as security. The transaction, bank memos show, was arranged by a one-time Vernon unit.

Two other bank memos show that at the time Taggart got the loan, Vernon had arranged to buy the note from the San Diego bank for $626,000. Another memo, written by a former Vernon loan officer in 1986, says the original purpose of the arrangement was “for Mr. Taggart to purchase a savings and loan institution in San Diego on Vernon’s behalf.”

Still another memo suggests that Taggart was asked once to backdate documents to avoid procedures required under a regulatory order placed on Vernon by federal officials in mid-1986.

It seems likely that regulators would have frowned on any involvement by Vernon in a new thrift. Federal officials in Dallas were suspecting problems at Vernon as far back as 1983 and 1984, when they had found unsafe lending practices and conflicts of interest.

Taggart said that he was unaware of the information in the memos and that Vernon did not try to invest through him.

In 1986, Taggart worked as a $10,000-a-month lobbyist for Vernon. One of his actions was to write a seven-page, single-spaced letter to then-White House Chief of Staff Donald T. Regan urging, in effect, that Gray be ousted as head of the bank board at a time when Gray was cracking down on high-flying thrifts.

In the letter, Taggart said Gray’s actions could have a “very adverse impact on the ability of our party to raise much-needed campaign funds in the upcoming elections.”

Taggart now works as a mortgage banker in San Diego. He remains one of the few people who publicly shows any sympathy for Lincoln and other failed thrifts.

Taggart maintains that much of the thrift crisis was not caused by thrift owners but by overzealous regulators, and he makes no apologies for his past actions.