Mr. BLACK. Martin goes to Cirona and says what I've testified to earlier today. Our supervisors, Darrell Dochow, our bosses in a sense on the regulatory side, tell us that Martin has such a file. That's the first time we learn of it. This is February 3, 1988, OK? It's apparently been received January 7.
So it's almost a month later that we first hear that Martin has gotten this file. Darrell Dochow tells us he doesn't know what's in the file. That's at the beginning of the meeting. About an hour and a half into the meeting, he tells us the file has just arrived from Board member Martin. We have lunch. We start a new meeting in Larry White's office. He, Darrell Dochow, didn't tell us what was in it at that juncture because he didn't know.
Mr. LEHMAN. And that's your only involvement with this, with that file?
Mr. LEHMAN. That's your only involvement with that file?
Mr. BLACK. No. Subsequently, they don't give us the file. So we follow up. I follow up in a phone call that I have notes of, and we follow up in writing and we say when they tell us that they have returned the file, we demand to know what was in it. We get differ- ing stories about what was in it and we demand that they get it back from Lincoln Savings, that it's not good enough to ship it back.
They can obviously-the Bank Board can obviously get it from Lincoln and they'd better do so, and we tell them what Martin has said to Cirona and we say it is obvious that this file has been criti- cal to the decisionmaking of Roger Martin. If we're going to be able to respond effectively to one of the key three votes, we've got to know what convinced this man, that he said it was so significant that he would have to vote Lincoln's way to avoid losing a lawsuit. It was critical that we get this file.
Mr. LEHMAN. And the indication-
Mr. BLACK. And may have personal smear stuff in it as well, de- pending on which story Martin was telling at which time.
Mr. LEHMAN. Uh-huh. But the feeling you got, I guess, is that- or what appears to me is that the Bank Board, these officials anyway, were in complicity with Lincoln in attempting to use that to intimidate you; is that-I mean was that how you felt?
Mr. BLACK. Well, i didn't know if it was to intimidate or simply ex parte, what lawyers call ex parte somebody. I mean which is go in and I'm the only one that gets to talk to you. You only hear my side of the story and boom, let's do the deal. I'm going to win most discussions that occur that way.
What troubled us in particular is when we went to the October 1987 meeting with the supervisory people, after they had conducted their review of our findings and said you're right, you got it right. This place is in an unsafe and unsound condition. Your exam re- sults are correct, OK? They went on to say but we're not going to go for receivership or conservatorship.
First, even asking for receivership or conservatorship is viewed as evidence that you guys are too aggressive, OK? So if you keep asking for conservatorship or receivership, that will be a black mark against you. Then they say a second thing. Martin has said that he will never vote to put Lincoln into conservatorship.
So I mean if you put that along with the fact that Martin could not stand San Francisco because Martin was the one who was most connected with the Southwest plan deals and such, and we were the big internal critics against the Southwest plans, and we were the ones who were leading among the Federal Home Loan Banks, the "we will not take FSLIC notes and stuff."
Martin was tremendously hostile to Cirona. So we didn't know what was coming on. I mean again, Martin-we were told that Dorothy Nichols affirmatively ask for this file from Lincoln, and then they seemed to be using this as this Sword of Damocles that was there but you could not deal with.
Mr. LEHMAN. You couldn't see it; you just were told there was something there.
Mr. LEHMAN. Yes, well I just think your characterization of that as contemptible is mild. I mean it-I mean that is an undermining of the whole system. Whether or not there was a file or anything in it or whatever, to be put in that position by the people you're working for and with is unbelievable and I'm sure we'll hear a lot more about that.
Let me ask one other question. Mr. Schumer had a question I'll submit in writing, I guess, but I had one other question. Lincoln Savings today is run under your direction? Under whose direction? Mr. BLACK. The Resolution Trust Corp.
Mr. LEHMAN. OK, the Resolution Trust Corp. Mr. Keating is gone from Lincoln?
Mr. BLACK. From Lincoln currently yes. They still, they being the holding company Keating owns, want to assert control over all of the subsidiaries of Lincoln. They have lost initially in the courts on that, but they have not given up. They would like to take every- thing that's below Lincoln and that's most everything, and take it up into the holding company, put it into the bankruptcy proceed. ings where the Government couldn't get to it.
The CHAIRMAN. Also, he has a management contract with the-
Mr. BLACK. Oh, the Phoenician. I'm sorry. I am reminded that Mr. Keating is still in control of the Phoenician and is apparently still operating as the manager. That's a $300 million facility.
Mr. LEHMAN. OK, and the Phoenician is owned by outside inves tors, separate from all of this and American Continental? What's its relationship?
Mr. BLACK. Well, it's owned by 55 percent by American--well, it's owned 55 percent by Lincoln really-
Mr. BLACK. Well, yes at this point. As I said. ACC is trying to contest that, but yes at this point. Then it is 45 percent owned pur- portedly by a Kuwaiti interest.
Mr. BLACK. But we don't know that the Kuwaiti interest really is independent, you must understand. I mean it's rather curious that someone would still be letting Mr. Keating run this place.
Mr. LEHMAN. OK, now. The public feels pretty ripped off here, $2 billion possibly. What's Mr Keating's financial condition then? Has he lost everything in bankruptcy with his S&Ls stripped from him?
Mr. BLACK. No, no. He is not in bankruptcy.
Mr. LEHMAN. American Continental is, I assume?
Mr. BLACK. Just American Continental. He has received, I think this is in my testimony-do we have the insiders-he and the family have done very well for themselves over the last couple of years.
The CHAIRMAN. Oh. He's living on the hog in Phoenix.
Mr. LEHMAN. I want to get this on the record. While the ship has gone down, his star has been rising? Is that-I mean he's been doing OK?
Mr. BLACK. Well, his salary was slashed as head of ACC because of the bankruptcy to a mere $500,000 a year, which is apparently the rewards of running it into bankruptcy.
Mr. LEIMAN. And that's what he's getting now?
Mr. BLACK. That's what he gets now for that. Mr. Seidman's folks were asked whether he's getting a separate fee for running the Phoenician. They did not have evidence that he is receiving a separate fee for that. But we don't know what the cash flow is. We are not in control of the Phoenician.
Now I say "we" in the broader governmental sense, so we don't know what's happening to the cash flow at that place.
Mr. LEHMAN. But he and his family have taken a lot of money out of this institution over the past 5 years; is that correct? Mr. BLACK. Many, many millions.
Mr. LEHMAN. In closing, Mr. Chairman, it's very interesting here "fascinating" is the word I used earlier-we have a very elaborate, sophisticated, integrated scheme of controlling the play- ing field, and events, and manipulating the regulatory process, and all the other systems involved here. I mean, obviously some pretty shrewd operators.
On the other hand, a guy like Mr. Patriarca looks at this and tells the regulators, "They're going to go bankrupt. I guarantee it" I think are your words.
If you could see that, obviously, they knew where they were headed, and obviously, that wasn't too important, and I guess the reason is because they were taking all this cash out in the mean time. Is that a fair characterization?
Mr. BLACK. Time is money when you're drawing down a salary of $2.5 million a year.
Mr. LEHMAN. And with the insurance fund behind everything, it was just that much more incentive to be--
Mr. BLACK. That's right.
Mr. LEHMAN. They had a much more time.
Mr. BLACK. Yes. And in my testimony. I described the ponzinature of the opation, and you're right, the key is deposit insur
ance. If you can keep growing even as you're place goes into, you know, truly massive failure, you can keep reporting record income.
Mr. LEHMAN. And the only break on that is the regulator telling them they can't do it; stopping them at the window.
Mr. BLACK. Well, there are two potential brakes--one is the ne countant, and the other is the regulator. As we've testified, the ac countant overwhelmingly did not provide any brake, and as your GEO study that you requested, I believe--
The CHAIRMAN. That's right. It was.
Mr. BLACK. Shows, it isn't just us that thinks that.
The CHAIRMAN. There was no question, you had total corruption in the high levels of the Government, in the regulatory agency, and you had corruption in the private regulatory audit and examining the system or private accounting firms. I think there's no doubt about that, but we must proceed and recognize Mr. Ridge. Mr. RIDGE. Thank you very much, Mr. Chairman.
I suspect, after 8 hours, you may want to have something strong. er than water when you leave, Mr. Patriarca. [Laughter.) There are some of us that may want to join you. (Laughter.) I'm curious as to the professional information you had available to you prior to assuming the responsibilities in San Francisco about the Lincoln situation. Was it known-did the Washington office give you any bells, or were there any red flags that they raised at the time of your appointment, or did anybody say. "Watch Lincoln. There's something out there that troubles us"? I mean, when you walked into that job, had anybody forewarned you, or recommend- ed that you pay real close attention to this operation?
Mr. PATRIARCA, No. In my case, I walked in cold. A relatively rude awakening. I can assure you.
Mr. RIDGE. Apparently, it was. Apparently, it was. And it's my understanding, if I get the chronology right, that you walked in cold, conducted your own investigation and examination, and from that position, recommended immediately a receivership.
Mr. PATRIARCA. The examination had begun several months prior to my arrival, but within the first week-1 started on Monday-on Tuesday, I got on a plane and came to Washington for a meeting about this examination, and on the plane. I read an early version of this thing, and it was not a boring plane ride at all.
But I paid quite a bit of attention, especially in light of all the allegations, and how big a deal this was, and how serious it was, I paid pretty close attention to this, and close enough attention to have formed a carefully, factually based opinion that this thing had to be taken over.
Mr. Black, you inferred something, and I think quite correctly, about the use of accounting professionals to advance the interest of a client, perhaps in spite of information that might be available to that accountant that would suggest that, professionally, he render a different position. You basically said that Arthur Young report was conducted by a hired gun. That's not fair to categorize your statement. You didn't say it was done by a hired gun, but when you find out that the person who submits the report ends up on the Lincoln's savings payroll-wes it a million--n fairly large--
Mr. RIDGE. It's a fairly expensive gun. The inference, again, is correct, I think.
What I'm wondering, however, because the public generally as cribes to the major accounting firms' tremendous professional credibility for the uninitiated, for someone who does not deal with accounting firms generally-I want to get it outside of your profes- sion-were there signals in that report, was there something in that report, that would lead someone to conclude, upon a perusal, that this just doesn't jive with the facts, that there's more than just an honest disagreement among professionals?
Mr. BLACK. Well, I think there are a couple of things. First, there is the Atchison letter. We're talking about Mr. Atchison.
Mr. RIDGE. Yes, sir, that's correct.
Mr. BLACK. The Atchison letter to the Senators. The Atchison letter to the Senator is not like any letter I have seen from an ac countant ever about an audit of an institution. It is clearly an ad- vocacy piece. It goes well beyond accounting issues into things, you know, totally beyond his ken about how an examination should be run by Federal authorities. Something was going on beyond honest disagreement or professional accounting when that was written, in our view.
Second, yes, there-again, the sad fact is, overwhelmingly, by far, the majority of the failed institutions get clean audit opinions before they go. There is a generic problem, and there was particu- larly during this time period, with regard to these acquisition de- velopment and construction loans.
The Washington supervisory staff of the Bank Board wrote- quite correctly, we think-that $400 million of Lincoln's claimed income was self-funded. That means no cash really was coming in. When you get into a situation like that, where there is no economic substance going on, then accountants must look toward reality, and clearly that was not done, not just at this institution, but at many, many, many more.
Mr. RIDGE. It certainly wasn't reflected in that letter. Mr. BLACK. The letter is an advocacy piece.
Mr. RIDGE. OK. Once that meeting concluded, you having dropped that information on their lap, having dropped that infor mation or bomb on their lap, was there any follow-up by any of those five, any further contact?
The CHAIRMAN. Mr. Ridge, I'm going to ask by consent that we close the hearing by about 6:33 because the witnesses have been here all afternoon, all day long. We all have questions, and I wanted Mr. Roth to have at least 2 minutes, and then Ms. Pelosi 2 minutes.
Mr. RIDGE. Mr. Chairman, if I might just have 30 seconds, a unanimous consent for 30 seconds, one, to apologize for my col- league and friend from San Francisco. It was an inference that I misunderstood about Senator McCain's involvement.
I explained to my friend and colleague afterward what that in- ference was, and let her know that that relationship between Sena- tor McCain's wife and Mr. Keating has been on his financial disclo sure forms for 3 years, and I apologize to my colleague publicly for
Just for the record, I would like unanimous consent to include the comprehensive notes, unless they're an exhibit, from that April meeting in the record. Are they in your exhibits?
The CHAIRMAN. I believe they are, but without objection, we will. in the event they're not.
Mr. RIDGE. I thank the Chairman.
The CHAIRMAN. Mr. Roth.
Mr. BLACK. Exhibit 32.
The CHAIRMAN. I thought it was there.
Mr. RIDGE. I had a hunch it was there. I haven't gotten through them all. Thank you.
The CHAIRMAN. Mr. Roth.
Mr. ROTH. Thank you, Mr. Chairman.
In my minute and a half, I just want to say, Mr. Chairman, that at the appropriate time, I will introduce a resolution to the com- mittee so that the Senators will be allowed to appear before this committee and be allowed to give us their testimony.
The CHAIRMAN. Well, by the time you do that, you might want to add Dr. Greenspan.
Mr. ROTH. I hope, Mr. Chairman, we won't have to add too many people to that list, but I intend to do that to make sure that they have a chance to respond.
Mr. ROTH. We hear words like "unbelievable," "mind-boggling." "incredible," in the more than 8 hours of testimony we've had, and I want to compliment these five gentlemen here. These are people that are doing a good job for our country and for the taxpayer, and had the regulators listened to you, maybe we wouldn't be owing bil- lions of taxpayers' dollars.
It seems to me that Lincoln started out as a savings and loan, and then became a quasi-criminal enterprise. Mr. Black, is that a fair assessment?
Mr. BLACK. Well, we believe there were crimes committed. That's why we make criminal referrals. We think that there was a plan from the beginning, as opposed to any great change. Immediately after acquiring it, they completely changed their operations, and completely changed from what they had promised they were going to do.
Mr. ROTH. I can only conclude that the Mafia could have learned something from Lincoln..
Who set up the meeting with the Senators? Did one of you five mention that Danny Wall set that up? Is that correct, Mr. Patriarca?
Mr. PATRIARCA. No. We were asked by then-Chairman Gray to go and meet with the Senators.
Thank you very much, Mr. Chairman. I appreciate you holding these hearings. They are most informative. And I can see why the American people are dripping with cynicism when you see what went on in the Federal Home Loan Bank Board, and when we see what went on with HUD and the like. I think we need a real housecleaning from top to bottom, Mr. Chairman, and I appreciate you holding these hearings because I think that we have to contin- ue with this process and clean up the Government.
The CHAIRMAN. Thank you, Mr. Roth. Ms. Pelosi.
Ms. PELOSI. Thank you, Mr. Chairman. I just wanted to refer to Mr. Ridge's remark. No apology is necessary, but I'm glad that you made the statement because of the high regard in which I hold you, Mr. Ridge. Thank you so much.
Mr. Chairman, I thank you to for holding this hearing. I thought that the San Francisco Federal Home Loan Bank was vindicated in San Francisco. I'm glad that we could revisit some of these issues in Washington, DC, so that a larger universe could hear the testi- mony of Mr. Patriarca and Mr. Black, and we look forward to Mr. Cirona. I assume he is coming soon.
I'd just like to make a couple brief points. First of all, I'm still baffled about the gag in San Francisco. I thought that was highly inappropriate. And although you say it is in keeping with practice, at the time of the meeting. Mr. Black said, in answer to "Is there a legal right for the Bank Board to instruct the San Francisco Bank that they are forbidden to answer the committee's questions in a public hearing?", at that time, Mr. Black said, "No, there is not anything in the statute that allows that." And then we were told- we focused on the fact that this testimony had been taken by Mr. Dingell's committee previously, so it had been testified to publicly before.
So it's curious to me that in that timeframe, which was a couple of months before the proposed sale-and maybe those two events are unrelated-that that gag order was in effect when there was no statute which said that you could be directed not to answer ques tions. I wanted to just make that as a comment.
My other point is that one subject we didn't get around to today but we spent some in San Francisco on was appraisals, that how can these schemes and scams work when people know that the value is not there in the land if it's improved. And perhaps, in the course of these hearings, we will focus on that, but in the interest of time I will close by thanking each and every one of you for your testimony today.
Mr. Crawford, I know if you were there during the tenure that Mr. Taggart served, we wouldn't be in the fix we are in today.
Thank you for your testimony and for your fine service, Mr. Davis. It's good to see you, but thank you for your testimony, too.
Mr. Patriarca and Mr. Black, thank you. You are in my prayers. Mr. PATRIARCA. That's ominous. [Laughter.]
Mr. BLACK. I think Mr. Davis would agree. Mr. DAVIS. True.
The CHAIRMAN. I want to add my voice to Ms. Pelosi's and thank you profoundly and sincerely, express our admiration, say that if, in any event, after this hearing, any attempt is made by anybody, either superiors or some external individual, to try in some way to exact some kind of a price for your testimony, that I would urge you to notify us immediately. I believe that you would do so, but I just want you to know that you have the full backing of this com- mittee, and I'm sure this House of Representatives.
Today, we've heard this evidence of great contempt for the regu- latory processes. We've seen the heroic behavior, the redemption of the integrity of the regulatory processes that you have upheld, Mr. Crawford and Mr. Davis on the State level, against even greater odds, because you even have a State law that militates against you. But, at this point, we really are profoundly grateful for your ex- treme patience, and your understanding of our dilemmas here, and your cooperation and testimony.
With that, the committee will stand adjourned until next Tues day at 10 a.m. in this hearing room.
[Whereupon, at 6:37 p.m., the hearing adjourned, to reconvene at 10 a.m., on Tuesday, October 31, 1989.].
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