Loan Critiques Misunderstood, Thrift Lawyer Says : Court hearing: An attorney for Irvine-based Lincoln Savings & Loan says her letters describing some loan documents as ‘unsafe and unsound’ were not intended to suggest the loans were improper.
A lawyer hired by Lincoln Savings & Loan to review about 90 major loans testified Wednesday that her caustic remarks about the Irvine thrift’s underwriting practices were not meant to indicate that there was anything improper about the loans.
Lois Gordon said she was “trying to act” like a thrift regulator when she told Lincoln executives in four 1988 letters that some loan documents were “ridiculous,” lacked needed information and could be viewed as “unsafe and unsound.”
Her testimony came on the fourth day of a U.S. District Court hearing before Judge Stanley Sporkin, who scheduled the sessions to test the evidence used by federal regulators to justify their April 14 takeover of Lincoln.
The collapse of the Orange County thrift could become the nation’s biggest S&L; disaster, with a potential cost to taxpayers of more than $2 billion.
The court hearing focuses on four transactions that regulators claim typify the failure of Lincoln’s former parent firm, American Continental Corp. in Phoenix, to operate the S&L; safely and soundly and conserve assets.
American Continental filed for bankruptcy protection on April 13, the day before the federal seizure. It sued regulators a week later, claiming that they lacked sufficient evidence to show that Lincoln was being operated unsafely and unsoundly and was dissipating assets.
Sporkin is the first judge to review the merits of the longstanding differences between regulators and former Lincoln operators. Some American Continental executives, including Chairman Charles H. Keating Jr., are expected to take the stand, beginning today.
Gordon, an attorney at a major New York law firm, said comments that she made in the letters to Lincoln officials often involved information that she, not regulators, wanted to see in the loan files.
She disputed a claim by James P. Murphy, a lawyer for the Office of Thrift Supervision, that appraisals, missing in some cases from Lincoln’s loan files, were required for every loan or extension of credit. But she said she liked to see appraisals in the files anyway.
“In many cases, the documents existed. They were just not in the files,” Gordon said. She wanted the documents in the files, she said, because the “files should fully describe the transactions.”
Lawyers for American Continental spent most of Wednesday’s hearing cross-examining Kevin T. O’Connell, an OTS executive. They called attention to a series of documents considered favorable to Lincoln that O’Connell had left out of the administrative file he compiled for the Federal Home Loan Bank Board, the predecessor agency to OTS.
The administrative file contained the basic information that the board used to decide that Lincoln should be seized.
O’Connell testified that he left out the information mainly because he and his staff believed that it did not fit with the conclusions they had reached already. Omitted, for instance, were documents showing that a loan to developer Ernest C. Garcia was used for its intended purpose--to buy his company back.
Regulators maintain that the loan provided Garcia with enough money to allow him to lend part of it to an investment firm that in turn bought Lincoln-owned land. Regulators said the transaction was a sham and contend that Garcia was the real owner.
O’Connell also acknowledged that Lincoln’s huge losses--more than $800 million through the first nine months of 1989--came mainly from writedowns of property values.
But the lower values assigned to the land came from a change in accounting classifications, he said, not from the depressed real estate market in Arizona, where Lincoln had extensive holdings. He said regulators decided to reclassify the land based on market value because they decided to liquidate the property, requiring a $600-million writedown.
