Keating Says Regulators Cut Lincoln’s Value to Seize It

To justify seizing Lincoln Savings & Loan Assn., regulators arbitrarily wrote down the value of its $1.4-billion loan portfolio as 50% less and slashed the worth of its extensive land, hotel and stock holdings by 75%, the thrift’s former owner said Wednesday.

“Without any analysis, they took the entire loan portfolio and said it was non-performing,” Phoenix financier Charles H. Keating Jr. testified in his fifth day on the witness stand in his suit seeking to recover the Irvine-based thrift.

Reading from a Federal Home Loan Bank Board analysis of Lincoln’s loan and equity portfolios prepared a week after the government imposed a conservatorship April 14, 1989, Keating called the numbers “absurd.”

The analysis, in the form of an April 21, 1989, memo from regulators in charge of the Lincoln case to bank board officials in Washington, is the first government document specifying regulators’ estimate that alleged losses of federally insured deposits by the thrift could cost taxpayers $2 billion.

The document estimated that the thrift’s assets were worth only $2 billion to $2.5 billion, or $1.85 billion to $2.2 billion less than what they were listed on Lincoln’s books at the time.

For nearly a year, Keating has asserted that he ran Lincoln soundly, and that regulators could show the thrift was insolvent only by placing a lower value on its assets.

Comparing the figures from the regulators’ analysis with those provided by American Continental’s chief financial officer, he testified Wednesday that only 3% of Lincoln’s $1.4-billion mortage-loan portfolio was more than 60 days in default.

All of the loans, Keating testified, were fully secured, with the borrowers putting up an average 20% down payment on the property.

The regulators, however, listed the value of those loans at only $703 million, accounting for a third of the losses they claim that Lincoln suffered.

Robert Wurzelbacher, Keating’s son-in-law who headed Lincoln’s real estate investments, likened the analysis to a family buying a $100,000 home with a $20,000 down payment and an $80,000 loan.

Then a regulator comes in and says the value of the home and the loan on it is worth only $40,000, even though the monthly payments are still being made, he said.

James Murphy, an attorney representing the Treasury Department’s Office of Thrift Supervision, repeatedly objected to Keating comparing the numbers from the regulators’ April 21 analysis and Keating’s own figures on the status of Lincoln’s loans and equity holdings as of Dec. 31, 1988.

“This is not by any stretch of the imagination the last word on the implementation of the receivership” four months later, Murphy said.

The Office of Thrift Supervision succeeded the Federal Home Loan Bank Board as the industry’s chief regulator under the $50-billion savings and loan bailout passed last year by Congress.

The government seized control of Lincoln in April last year under the conservatorship, claiming that it was being grossly mismanaged but making no assertion at the time that it was insolvent.

It wasn’t until August that the regulators asserted that Lincoln’s alleged losses actually exceeded the value of its assets and imposed a receivership that took ownership of the thrift from Keating.

U.S. District Judge Stanley Sporkin overruled Murphy’s objections, but said he wanted testimony from Keating’s chief financial officer in addition to hearing from regulators on their justifications for the writedowns.

“You don’t write down 50% on a mortgage portfolio,” said Sporkin, who is a former accountant and was at one time the chief enforcement officer for the Securities and Exchange Commission.

Keating’s attorneys also introduced documents showing that regulators were unhappy with the performance of the consultant they hired at an annual salary of $300,000 to run Lincoln after seizing control from Keating.

In a July 19, 1989, memo to the bank board’s top officials in Washington, Mark Randall, the government official in charge of managing the conservatorship, said the consultant, Roger Clark, failed to address Lincoln’s major problems.

“Roger Clark’s inaction, questionable judgment and lack of participation establish his inability to function as a CEO (chief executive officer) of Lincoln,” Randall’s memo read.

Keating said that Clark still holds titles as both the CEO and chief financial officer of Lincoln under a contract that requires the government to pay him a $100,000 termination fee, but that other officials are actually running the thrift under the receivership.