Cranston to Seek Relief for Lincoln Bondholders

Sen. Alan Cranston said Monday he will introduce legislation, perhaps as early as today, to allow bondholders hurt by the collapse of Lincoln Savings & Loan and its parent firm to sue the federal government for negligence in approving the sale of the bonds.

The California Democrat, whose political career has been jeopardized by the Lincoln Savings scandal, also released a copy of a letter he sent to the Justice Department last week asking for help in letting bondholders seek relief from the government.

Cranston’s proposed bill is aimed at helping some 22,000 small investors recover nearly $200 million in debt securities in Lincoln’s parent, American Continental Corp. The investors are mostly elderly people who bought their bonds at Lincoln’s 29 Southern California branches. Many mistakenly thought the bonds were insured by the federal government.

“What has happened to these bondholders is one of the most tragic events that have occurred during the time that I have been in the Senate,” Cranston said. “Many of them are now bereft of all their resources. They can’t pay their rent. They can’t pay for decent food. They can’t even heat their homes.”

Meanwhile, in a separate development in Washington, House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) said Monday that the committee will decide today whether to subpoena junk bond financier Michael Milken as part of the continuing investigation of Lincoln and other failed thrifts.

Cranston’s efforts to aid the bondholders comes at a time when polls show that his popularity is at an all-time low because of his involvement in the Lincoln debacle. Bondholders in particular have blamed Cranston and four other senators for intervening with regulators in 1987 during a long audit of the Irvine-based S&L;’s financial condition.

Had regulators taken action against Lincoln then, they maintain, most of them would not now be holding worthless bonds. Instead, regulators seized Lincoln last April 14, a day after American Continental filed for bankruptcy protection. The S&L; failure may become the costliest ever, with a $2-billion bill for taxpayers.

In announcing his proposal Monday, Cranston said that documents he received from the General Accounting Office provide “clear evidence” of negligence on the part of federal thrift regulators and the Securities and Exchange Commission in approving the bonds for sale and in monitoring how the company sold the bonds. He earlier had asked the GAO to determine if taxpayers were liable for the bondholder’s losses.

Cranston’s bill would waive sovereign immunity, which precludes most suits against the federal government. In the Lincoln case, it would allow bondholders to look to the government for any losses they don’t recover in pending litigation against American Continental executives, including its controversial chairman, Charles H. Keating Jr., and the lawyers and accountants who advised them.

In his letter to Atty. Gen. Richard Thornburgh, Cranston asked the Justice Department to waive the immunity provision, which would allow bondholder suits to be filed more quickly. He also asked Thornburgh to apply whatever funds the government recovers in civil judgments or possible criminal action to bondholders first.

Cranston’s office said Congress or the attorney general grants waivers in a dozen or more egregious cases every year.

Bondholders and their lawyers, who have been highly critical of Cranston in the past, were generally appreciative of his help.

“I believe Sen. Cranston is sincere,” said Shirley Lampel, who met with the senator for more than an hour in her home last Thursday. “The idea may be a good one and I’m happy to hear it, but I just don’t know if it’s possible to get done,” she said.

Lawyers for bondholders also welcomed Cranston’s proposal, Bondholder lawyer Ronald Rus of Orange called it a “backstop” proposal that would cover whatever losses remain after pending litigation is completed.

“There are professionals as well as the Keating group who all bear legal responsibility for losses,” said William Lerach, a San Diego bondholders’ lawyer. “Many of them have significant insurance, and it’s in everybody’s interest to go after that and exhaust that before we ask the taxpayers to pay.”

Another lawyer, Richard Greenfield of Philadelphia, said Cranston’s suggestion was “very constructive and will receive serious consideration in the Senate.” But, he said, “a number of people are going to look at Sen. Cranston’s suggestion as self-protective.”

Cranston, the Senate majority whip, is one of five senators under investigation by the Senate Ethics Committee over their 1987 intervention with regulators on behalf of Lincoln and American Continental. Keating had raised more than $1.3 million for the senators’ campaigns and their causes. Cranston got the biggest share, with more than $39,000 in campaign contributions and $850,000 in donations to three nonpartisan voter registration groups he supported.

Cranston cited testimony before the House Banking Committee, which has been looking into Lincoln’s collapse, to show that federal regulators themselves believe they hold “primary responsibility” for approving American Continental’s debt securities, excluding approvals from any other agencies under securities laws.

In Washington, Gonzalez said that the committee would meet today to conduct hearings on the operation of the Resolution Trust Corp., the agency formed last August to oversee the restructuring of the thrift industry.

He also said the committee would consider whether to subpoena Milken and two other individuals connected to Lincoln. Milken, who made a fortune selling junk bonds for corporate takeovers, is under indictment for securities fraud and insider trading.

Gonzalez said the appearance of Milken would signal a new phase in the investigation of thrift failures and “will concentrate on the extent to which trading in junk bonds and subordinated debt contributed to the collapse of Lincoln.