THE LINCOLN FALLOUT: A YEAR LATER

Trish!” a dapper Charles H. Keating Jr. shouted out to a former employee he recognized recently at Phoenix Sky Harbor International Airport.

A startled Patricia Johnson, the one-time aide whom he had unceremoniously fired a year earlier, looked up and saw her former boss. She shook hands with him, but not a word was spoken, not a smile flashed on either face.

With the greeting made, she turned and walked away.

The chance meeting nearly a year after the collapse of Keating’s American Continental Corp. and its Lincoln Savings & Loan unit brought a rush of ambivalent memories to Johnson. She liked Keating, she said, but the thrift’s seizure last April 14 has made her life hell.

It is a hell shared by other former employees, by Keating himself and his remaining aides, by thrift regulators and former regulators and, perhaps most strikingly, by thousands of small investors who lost more than $200 million in the collapse.

Irvine-based Lincoln, which lost $1 billion last year, is expected to become one of the costliest thrift failures in history, costing taxpayers more than $2 billion.

Keating, chairman of American Continental, used his Phoenix home-building company to buy Lincoln in early 1984 for $51 million. The S&L; grew to a $5.4-billion enterprise with much of its deposits invested in real estate developments and high-yield, high-risk junk bonds.

The collapse of Keating’s empire has hurt a wide range of people.

Nearly 22,000 small investors, who bought what many believed were federally insured American Continental bonds sold in Lincoln branches, have filed 17 lawsuits in state and federal courts against Keating, his aides and the lawyers and accountants who advised him. The investors now hold worthless paper.

The political careers of five U.S. senators, including Alan Cranston (D-Calif.), are in jeopardy because they helped Lincoln while they were getting more than $1.3 million in campaign contributions and donations to pet projects from Keating and some 75 family members, associates and employees. The bulk of the money, nearly $900,000, went to Cranston and three nonpartisan voter-registration groups he supported.

While former American Continental and Lincoln employees have found it tough getting work, some of those who sold bonds at Lincoln branches are still working there and must face the anguish of the elderly bondholders who come in daily. Some Lincoln borrowers also were dragged down, forced into bankruptcy from a combination of debt, canceled deals with Lincoln and Arizona’s depressed real estate market.

Lincoln’s collapse has taken a toll on regulators. Last fall, federal regulators in Washington and San Francisco went to war against each other as the West Coast officials charged in House Banking Committee hearings that the headquarters office dragged its feet for two years on recommendations to seize Lincoln. In December, beleaguered M. Danny Wall, the nation’s top thrift regulator, announced he was resigning. He left last month.

Keating himself has become the lightning rod for criticism of all the ills in the thrift industry. Arrogant and defiant in his battles, he has been a convenient whipping boy of regulators and legislators who berate the abuses they see of industry deregulation, which they brought to life in 1982. Last fall, regulators filed a $1.1-billion civil racketeering action against him and his top aides. He could eventually face criminal charges from pending state and federal probes.

The stories of eight people whose lives were touched by the Lincoln scandal give a glimpse of the past year in turmoil.

The Publicist

Patricia Johnson was Arizona’s “Outstanding Young Democrat” in 1985 and, she thought, her liberal bent was the antithesis of Keating and his politics. She surprised herself in accepting Keating’s offer of a job to handle American Continental’s public relations.

“Charlie was personable, charming, passionate about his company,” she said, in explaining why she joined his firm. She said he was “well-centered politically,” even though he often is wrongly characterized as a conservative.

Last April, a few days before American Continental’s bankruptcy, Keating told her he had to let her go--no vacation or severance pay, though others had received generous parachutes. Her dismissal, she thought then, was dictated by regulators. It wasn’t, she learned later.

“A little panic set in,” Johnson said. “How was I going to pay for groceries? I had just spent $400 over the weekend on flowers, plants, grass seed, fertilizer for the repossessed house I had bought. I wondered if I could take the flowers and grass back.”

Carrying a letter of recommendation that she wrote and Keating signed, she started an immediate job hunt. A well-known figure locally, Johnson found that doors normally open to her were now closed.

When she did get in, she didn’t get far. One banker ripped up the Keating letter in front of her and advised her not to show it to other prospective employers, she said.

“I don’t mind being rejected for professional reasons, but not to have an opportunity to interview because of my association with American Continental, that hurt,” she said.

She started her own business as a consultant, but the accounts she could get were infrequent ones. “I felt like I had so much knowledge to offer and no work to use it on,” she said.

Eventually, Johnson went on unemployment. She borrowed money on her credit card and from her family. Her parents often bought her groceries. But mini-disasters hit regularly: She broke arm and leg bones in a bike accident, the roof on her home caved in after a rainstorm and her car broke down on the way to a job interview.

All the while, her stint at American Continental haunted her. Last fall, Security and Exchange Commission documents revealed that Keating and his aides blamed her for an erroneous press release in March, 1989, about the then-pending sale of Lincoln. But she had proof of her innocence--Keating’s own handwritten instructions on a draft of the press release.

Two weeks ago, shortly after her bank account hit zero, Johnson, 36, started a new job with the Arizona Center for Law in the Public Interest. Still, she said, it will take “quite a while” to pay off her debts.

The Bondholder

Clifford H. Hammer became one of California’s suddenly wealthy when he and his wife, Thelma, sold their Palos Verdes Estates home a little over two years ago and put a down payment on a smaller residence in Carlsbad.

A retiree from Southern California Edison Co., Hammer figured they could live comfortably on his pension and the $260,000 equity from the sale of their home. They even began to travel around the country, something they had always promised themselves they would do.

Now, at 73 and recovering from a recent back operation, Hammer has gone back to work. And it’s not by choice.

Like thousands of Lincoln depositors who were persuaded by thrift tellers and American Continental salespeople, Hammer put all of his savings into the parent company’s debt securities.

He received $2,600 a month, and retirement was grand. At least until last April when the company filed for bankruptcy. Now the Hammers hold worthless paper.

“My wife came down with shingles last May,” he said. “It was caused by nerves, worrying about our loss. She was in the hospital about three days, and she still has it to some extent.”

Hammer said his back hurt, but he “had to go back into real estate” last May, something he had dabbled in part time before he retired 11 years ago.

“There was no other way to get out of it,” he said. “We’ve got a house payment and an insurance payment, and we were going into the red.”

But his back grew worse and he could hardly walk. So he underwent surgery three weeks ago to remove calcium deposits on his spine. Though he hasn’t made a sale this year, he plans to return to work in four weeks. The alternative, he said, is to sell his retirement house.

The Developer

Ernest C. Garcia finds it hard to keep quiet. He usually is open and glib. The Phoenix real estate developer likes to tell reporters what’s on his mind.

But the whiz-kid entrepreneur--he became a multimillionaire before he was 30--has largely avoided discussing his entanglements with Lincoln. He invoked his Fifth Amendment privilege against self-incrimination last month when subpoenaed to testify about those dealings before the House Banking Committee.

“In my wildest imagination, I never dreamed I would plead the Fifth to anything,” Garcia, 32, said last week. “When is this nightmare going to end?”

It appears no time soon. The Midas-touch businessman, who could seemingly do no wrong, is now fighting off creditors. He put his firm, E.C. Garcia & Co., into a Chapter 11 bankruptcy reorganization last week.

Starting out as a stockbroker, Garcia founded his own firm in 1982. But he switched quickly to the booming Arizona real estate market and quickly made a fortune.

He sold 80% of his firm in 1986 to an Arizona utility, but a year later decided he wanted it back. He turned to Keating for a $20-million loan to buy the stock. The deal came with strings attached.

Regulators contend those strings--purchases of raw land and securities owned by Lincoln--made Garcia a puppet of Keating’s. In essence, Garcia was a straw borrower and a straw purchaser used by Keating to pump up Lincoln earnings, they claim in a pending federal lawsuit.

Garcia, who has cooperated with the alphabet soup of federal investigators, including the FBI and the SEC, said he was nobody’s dupe.

“Everything we did made perfect business sense,” he said. “Nobody tried to hide any deal from anybody.”

Still, two weeks ago, bondholders added his company to their pending lawsuits against Keating and others. Garcia said the unknown liability from that litigation, along with heavy debts incurred in his deals with Lincoln, forced him to turn to bankruptcy proceedings.

“In spite of all this, I’m as enthusiastic as ever and extremely confident in our abilities to succeed again,” Garcia said. “But I won’t look back at any time in the future and laugh about this. It’s been brutal.”

The Caretaker

Mark C. Randall was in Alaska a year ago working on a troubled bank for the Federal Deposit Insurance Corp. when he got a telephone call from his boss. He was told to prepare to operate Lincoln, which regulators were planning to seize.

“I went from Anchorage, which had its coldest winter ever, to Phoenix, which had the hottest summer on record,” he said. (Though based in Irvine, Lincoln has administrative offices and duplicate records in Phoenix--a few steps away from American Continental’s headquarters.)

Randall has been in the hot seat ever since, embarking on his stint as the FDIC’s managing agent of Lincoln, a thrift with more than $5 billion in assets invested in junk bonds, speculative real estate and other risky ventures.

“Certainly, Lincoln’s size was scary, and its assets were so unusual, both in size and in their nature,” he said. “But I don’t work in a vacuum. I’m part of a team, and the upper FDIC management and advisory board and the huge employee base here has helped.”

Randall, 39, who commutes most weekends to his home in San Francisco, has worked on troubled loans as an executive at two banks, the last as chief executive of a small Illinois bank, before joining the FDIC seven years ago.

Working seven days a week after the takeover of Lincoln, getting “some sleep when we could,” he said, regulators had a lot of fires to put out.

Depositors withdrew more than $100 million in the first week. Secured creditors foreclosed on Lincoln assets, taking away profitable ventures. Agents of American Founders Life Insurance Co., a Lincoln subsidiary, had to be reassured that the takeover of Lincoln and bankruptcy of American Continental wouldn’t affect some $300 million in assets and the unit’s policies.

Keating’s move to put 11 of Lincoln’s subsidiaries in bankruptcy, along with American Continental, also changed the way regulators operated, Randall said. Getting court approval for its actions is something the FDIC hasn’t had to do before, he said.

“It took a month before we could take weekends off,” he said. “The adrenaline flowed. There is a positive thrill to handling crises as they came up. We’ve made a lot of progress.”

The Loyalist

Danby Housel, 29, has worked for American Continental and Lincoln in Phoenix for 4 1/2 years. She has no plans to work anywhere else. The secretary said she will stick with Keating and American Continental through the coming battles with lawyers and regulators.

Starting out in the company’s tax department, she fit the Keating employee look and demeanor--young, well-scrubbed, good-looking people willing to work long hours. She liked the “very positive, very fast-paced” operation. “We always felt like a major part of the community in Phoenix,” she said. “And there was such a camaraderie here.”

Though working mainly for Lincoln last year, she was handling a job for American Continental when the company filed for bankruptcy and regulators seized the S&L.;

“It was a big shock. Everybody was totally bewildered,” Housel said. “American Continental was big, then everything was wiped away. It took months to sink in.”

Though regulators offered her a job at Lincoln, she quit to work at a law firm. Two months later, she rejoined American Continental because she liked the company and was familiar with the work. She also returned, she said, because “I wanted to put my two cents in with the fight.”

Many of her friends were still working at Lincoln in offices a few steps away from American Continental’s headquarters. Many also had left both operations, and both two-story, white stucco buildings are now half-filled with employees.

She remains fervently loyal to Keating.

“Some of my friends thought Keating was the biggest crook of all time. Others thought he was getting the short end of the stick,” Housel said. “There have been a few battles (with friends). So we either call a truce or decide to stop seeing each other.”

In August, she got a taste of Keating’s fights when she was subpoenaed to bring corporate records to the federal grand jury in Los Angeles, which is conducting a criminal probe of Lincoln’s failure. Though merely a custodian of the records, she said she was grilled for 45 minutes about her job.

“I didn’t like it whatsoever,” she said. “The problem with going through the grand jury is that you don’t know what to expect, and you can’t prepare for the emotional ups and downs. They ask you the same questions different ways, forcefully, to try to catch you off guard. And they’re going fast at an intense level.”

The Lawyer

Michael Manning does not consider himself an easy mark. But when federal regulators went looking for someone to investigate wrongdoing at Lincoln and American Continental, they said the choice of who could pursue such a complex case was easy.

Last April 10, Manning, a Kansas City lawyer based in Washington, had just completed five years of work on the massive brokered deposit fraud perpetrated on 153 financial institutions by Mario Renda of New York. Manning was planning a vacation when an FDIC lawyer called to ask him to take charge of the Lincoln investigation after the planned seizure later that week.

Figuring he would go to Phoenix for a few days and then oversee the case from his Washington office where he was managing partner, Manning agreed. He hasn’t left Phoenix yet, and he no longer plans to. Thus Manning enlisted in the army of lawyers whose lives now revolve around Lincoln and American Continental.

His firm has opened an office in Phoenix, and he has moved his family into town. The change has been a tough adjustment on his wife and three children. His second child, a 4-year-old daughter, complains she “wants to go back to her own country,” Manning said. His wife was not thrilled with the notion of moving to Phoenix, but now likes it, he said.

“In Washington, I would come home at 10:30 at night and be asked to go to the store, and I’d be standing in a long line at the checkout counter,” he said. “Here, I could come home at 8, go out to pick up some groceries and have the store to myself. It’s like my own private store.”

In poring through Lincoln records, Manning, 40, said he saw many of the same kinds of transactions--such as loans to straw borrowers who had no intention of repaying the debts--that he saw in the Renda and other bank fraud cases.

He and other lawyers in his firm worked nonstop through most of the summer to put together a 167-page, $1.1-billion civil lawsuit accusing Keating and others of racketeering, bank fraud and other wrongdoing. The case was filed in September in U.S. District Court in Phoenix.

“Certainly, this is a large and complex case,” he said. “And the allegations don’t center on a single bank fraud technique as they usually do in other cases.”

Manning will probably amend the suit soon to add more defendants and more allegations. Trial is tentatively set for the summer of 1991.

The Regulator

After spending 28 years in public service, M. Danny Wall is now private citizen Dan Wall. Former aide to Sen. Jake Garn (R-Utah), Wall took over as chairman of the Federal Home Loan Bank Board in July, 1987, with the hope of saving the struggling thrift industry.

Instead, his career was consumed by the Lincoln scandal.

He resigned in December under fire as director of the bank board’s successor agency, the Office of Thrift Supervision. His departure followed House Banking Committee hearings on Lincoln that sharply criticized him for failing to close down the S&L; in 1987, as his regional staff had recommended.

“It became very clear that no matter what we said to the committee, we had no way of providing a response,” Wall said in a telephone interview from New York where he was interviewing for a job--most likely out of the banking industry. “The drumbeat of accusations from the partisan exercise had been growing for too long.”

A confirmed workaholic used to long hours and little sleep, the bearded, graying Wall, 51, believes the frustrations and the accusations are behind him. He said regulators in closed-door sessions now praise his work and have copied some of his plans.

Besides his actions on Lincoln, Wall was criticized for sales of failed S&Ls; in the final months of 1988 to well-heeled investors such as Robert Bass and Ronald Perelman. He said it is now clear the deals were not federal giveaways. Independent estimates now suggest that the deals saved the government more than $6 billion, he said.

“I’ve been talking to a lot of people who understood what was going on,” Wall said, “and I’m seeing an unbelievable amount of goodwill. There is no one who believes that there was any wrongdoing on my part.”

Two and three years ago, he said, nobody could have foreseen the trouble that Lincoln wreaked on the industry and on others. Subsequent events, especially Keating’s tenacious court fights, have proven one thing, he said.

“What in hindsight was painted by politicians as clear is, in an evidentiary sense, not so clear,” Wall said, pointing to the drawn-out hearings before a federal judge on whether regulators had sufficient evidence to seize Lincoln last year.

Summing up the last year in office is difficult for Wall.

“I don’t know how to describe what was going on, except to say that decisions were based on the best information available at the time,” he said.

The Kingfish

Charles H. Keating Jr. publicly has been painted as the villain, the man in the black hat who allegedly masterminded a scam that led to the collapse of Lincoln. Thousands of bondholders believe it; government regulators believe it; even some former employees believe it.

But Keating sees himself as a victim.

“History is replete with good people ruined by governments,” he said with characteristic defiance.

And Keating puts on an upbeat face--whether testifying in federal court about how regulators ruined Lincoln by wrongfully seizing it or cheerfully chatting with reporters on Capitol Hill after refusing to testify before the House Banking Committee. He refuses to let his long battles with regulators get him down. He believes totally that he will be vindicated. And he expects to get some Lincoln assets back so he can rebuild his company and pay off bondholders.

Keating is often described as “beleaguered” because his empire collapsed amid acrimonious relations with regulators and because he is the subject of numerous civil and criminal investigations. He is a defendant in a few dozen lawsuits.

“I’m not despondent or despairing,” said the 67-year-old chairman of American Continental. “It’s a challenge, like the rest of life, that we intend to meet. It’s not easy, but I’m not going to let it get me down.”

Keating anticipated the takeover of Lincoln last April 14. He braced for it, saying he already had “spent four years in living hell with regulators” in constant battle over Lincoln’s operations.

Always quick with rhetoric to blast regulators, Keating said his wife and children are strong people who are coping well because they know what regulators have done. “They understand vermin when they see it,” he said.

Keating said his net worth is zero. His Paradise Valley, Ariz., home is “mortgaged for way more than it’s worth,” but his creditors have given him a moratorium until this summer to start making payments.

A practicing lawyer before he got involved in the business of finance and real estate in Ohio in the early 1970s, Keating said he is going back to the law. He plans to open an office in Phoenix next month with some of his family members and longtime American Continental associates.

“I expect to practice in federal courts around the nation,” he said. “I’ve got an office set up to practice business law, particularly for cases related to government affairs. I’ll represent those who are similarly harassed by the government. I think it will do quite well.”

CHRONOLOGY: THE FALLOUT FROM LINCOLN’S COLLAPSE

April, 1989

Lincoln’s parent, American Continental Corp. in Phoenix, files for Chapter 11 bankruptcy April 13.

Federal regulators seize Lincoln on April 14. Civil and criminal investigations begin.

American Continental Chairman Charles H. Keating Jr. attacks regulators for destroying Lincoln. Says his contributions to politicians were designed to win their influence.

The Federal Reserve Board advances $70 million to Lincoln to help stem the run on deposits. The run takes more than $100 million out of Lincoln.

American Continental bondholders file the first of a series of civil fraud lawsuits against Keating and other executives.

May, 1989

American Continental sues regulators to regain control of Lincoln.

Edwin J. Gray, former chairman of the Federal Home Loan Bank Board, contends that five U.S. senators--including Alan Cranston (D-Calif.)--tried to “make a deal” on behalf of Keating and Lincoln in private meetings in 1987.

Cranston denies Gray’s claims, saying he tried to get Gray to end a long audit of Lincoln by bringing charges or leaving the S&L; alone.

Campaign records reveal that Keating and his relatives, associates and employees gave more than $700,000 in campaign contributions to three dozen politicians.

June, 1989

American Continental files an outline of its reorganization plan in U.S. Bankruptcy Court.

The company files two more lawsuits against regulators seeking a total of $768 million.

A Federal Deposit Insurance Corp. executive running Lincoln says the S&L; is insolvent.

Cranston calls for a General Accounting Office probe of government liability in Lincoln collapse. The GAO later decides it shouldn’t act.

July, 1989

Gov. George Deukmejian defends his appointees who are under fire for approving the sale of American Continental bonds.

Cranston, a beneficiary of Keating fund-raising efforts, says he also solicited $850,000 from American Continental for three voter registration groups he supported.

Regulators say Lincoln lost $847 million in the first six months of 1989.

August, 1989

Regulators place Lincoln in receivership, which paves the way for future liquidation. They accuse Keating and his auditors of using “accounting gimmickry” in financial statements.

Internal documents show that the state Department of Corporations’ own staff warned agency executives in 1988 that American Continental couldn’t repay a proposed debt offering.

September, 1989

Federal regulators file a civil racketeering and bank fraud

lawsuit against Keating and others. The suit seeks $1.1 billion in damages.

October, 1989

The House Banking Committee starts taking public testimony in its investigation of the collapse of Lincoln.

Federal regulators in the San Francisco regional office blame M. Danny Wall, Gray’s replacement, for blocking their efforts to seize Lincoln in 1987.

November, 1989

Wall denies hindering action against Lincoln, saying San Francisco regulators didn’t have enough evidence to justify a takeover in 1987.

Senate Ethics Committee unanimously votes to review charges that Cranston and four other senators improperly intervened with federal regulators on Lincoln’s behalf.

Keating refuses to testify before the House committee, citing his Fifth Amendment privilege against self-incrimination.

December, 1989

Testimony begins in a federal court in Washington on American Continental’s claim that regulators lacked sufficient grounds to seize Lincoln.

Wall resigns after senior assistants to President Bush say the regulator has lost all support at the White House. He agrees to stay on until Bush names a replacement.

January, 1990

Keating testifies in Washington court that he never engaged in sham transactions at Lincoln.

Cranston introduces legislation to allow bondholders to sue the government for their losses once they have exhausted other remedies.

March, 1990

Formation of a special state grand jury is approved to look into possible criminal wrongdoing in the sale of American Continental bonds.

The state Department of Corporations sues Keating and two executives for the return of $200 million to bondholders.

Wall leaves office as Salvatore R. Martoche replaces him on interim basis.

Regulators report that Lincoln lost more than $1 billion last year.

Source: The Los Angeles Times files