Lincoln's success in real estate was largely attributable to its management's acumen, experience and reputation in the areas in which it invested. Lincoln's careful and experienced analysis of site selection and anticipation of market trends in Arizona allowed it to make land purchases at lower costs and realize considerably increased property values through subsequent rezoning, annexation and development. While Lincoln had focused much of its attention on Arizona through direct investments and through loans secured by Arizona land, it had never sold land in its Arizona master-planned communities at a loss. Moreover, Arizona's then-healthy and diversified economy had sustained growth for years and its growth was expected to continue into the future.607 ACC's experience as a builder and developer in Arizona, both promoting growth and profiting from it, had created an intimate relationship with that market, and management thus far had been able to anticipate and take advantage of real estate trends. Lincoln's development skill, its proven record of rapid absorption of its investments and its financial success supported a conclusion that its real estate investments were liquid, safe, and in the best interests of its depositors and the FSLIC. Even the market studies employed by the FHLBB failed to consider Lincoln's historical performance and were themselves so internally flawed in their methodology, data and calculations as to render them unreliable. Indeed, in a conference call among members of the FHLBB and FHLB-SF, on February 16, 1988 Dochow commented that the California Commissioner, William Crawford, said he had looked at Lincoln's projects and property and said Lincoln management may be the only ones who can make them work. They seem to know their business very well.-617 Lincoln requested its own report and Mountain West Research prepared market studies for Lincoln with respect to Arizona's potential for growth, entitled Growth and Development in Arizona: An Analysis of Economic, Demographic, and Housing Trends in Phoenix and Tucson, Arizona, analyzing the economy and population of Phoenix and Tucson and the impact these factors had played and 607 61/ At that time, of course, no one could anticipate either the devastating effect on Arizona land values of the FHLBB's seizure of Arizona savings and loan associations and threats of subsequent "fire sales of properties seized during the last two years or the major changes in United States income tax legislation. See, Memorandum of Conference Call Meeting, February 16, 1988, 4:05 p.m. (PST) at page 4, filed as in exhibit to the testimony of William K. Black before the House Banking Committee on October 26, 1989. 63 would play on the housing market. The Mountain West study reported that Arizona was the second fastest growing state with population growth of 71.5% and employment growth of 221% from 1970 to 1985.62/ Lincoln's management prudently underwrote its real estate portfolio and engaged in extensive risk assessment with regard to its investments. However, the 1986 Report confused Lincoln's failure to document its decision-making process with the failure to underwrite; nevertheless, a description of such underwriting analysis with respect to each of its loans was presented to examiners during the extensive 1986 examination. The conclusion that Lincoln's real estate investments were inherently unsafe and unsound was unfair, erroneous and without any basis. The FHLBB was concerned that Lincoln's lending activities with respect to unimproved land were inherently risky since vacant land produces little or no income. 637 This concern was misplaced since loan portfolio risk depends principally upon the lender's expertise and underwriting, the competence of the borrower, the location and quality of the land in question and diversification of the loan portfolio. Lincoln's loans were well-diversified among excellent parcels of land in rapidly developing markets and were not overly concentrated in any geographic area. Lincoln had originated a substantial number of Loans to high quality borrowers, secured by property in prime locations. To further diversify, Lincoln originated loans in other geographic regions but with the same prudent standards. It should be noted that, like its other investments, real estate lending represented a relatively small percentage, approximately 11, of Lincoln's substantial, diversified portfolio. 627 63/ Mountain West also prepared subregional analyses, dated April 27, 1987, Develorment in the Southwest Valley, and Growth and Development in North Tucson; these studies confirmed that supply and demand were roughly in balance in these regions, where the bulk of Lincoln's investments in real estate was located. It is ironic that Gray's PHLBB examiners flatly criticized real estate development loans by Lincoln since the institution of which Gray is now president is engaging in some activities that appear to undermine its conservative image with its loans including financing for strip centers, hotels and self-storage warehouse facilities . . . [and] speculative housing developments. 'To me, any kind of loan is a good loan if you follow basic principles of good underwriting,' he says. " Lubove, S. Practicing What He Preached, Žlorida Trend, October 1989 at 50. Contrary to the 1986 Report, Lincoln's real estate policies were not inherently risky, but instead were consistently prudent, sound and profitable. The return on Lincoln's real estate loans had been consistently high since ACC's acquisition of Lincoln. Lincoln had successfully utilized its competitive advantage in Arizona land development and its ability to evaluate and mitigate risks associated with lending in Arizona. Lincoln had minimized risk and avoided almost entirely the problem of defaults. Due to the prime locations of land secured by Lincoln's loans, Lincoln could easily market or otherwise dispose of property, if a default were to occur. Lincoln also took significant steps to limit its credit exposure by requiring independent appraisers, with a review of such appraisals by its qualified MAI staff. Lincoln's financial performance prior to the 1986 examination clearly demonstrated that its practices were neither unsafe nor so inherently risky that the financial soundness of the institution was jeopardized. XI. Attempts To Resolve The Never-Ending Examination Although it initially appeared that the 1986 examination would follow routine procedures (as had been the case with the 1984 examination), the 1986 examination grew to an unprecedented duration and generated extreme hostility. The FHLBB had disclosed confidential information concerning the value of a substantial Lincoln asset to an executive of another California savings and loan association. Lincoln informed the FHLBB of this unlawful disclosure, orally and by letter dated September 9, 1986. On December 24 and 28, 1986, while the "second phase of the 1986 examination proceeded, articles appeared in The Wall Street Journal647 and Mesa (Azizonal Tribune,657 disclosing highly confidential, misleading, and inaccurate information about Lincoln's financial condition and the preliminary 1986 examination results, which at that time were unknown to Lincoln and were solely within the knowledge of employees and representatives of PHLBB. Indeed, The Wall Street Journal article specifically identified the information as having come from FHLLBB sources.66/ 647 65/ 66/ Byans, J. Bank Board's Henkel Proposed a Rule That Would Roberts, B. American Continental: Mixing Big Bucks, Politics." Mesa (Azizonal Tribung, December 28, 1986 at 81. In testimony before the House Banking Committee on 65 The FHLBB and FHLB-SF also failed to respond to a letter dated December 31, 1986 from Lincoln's counsel complaining of these public disclosures of confidential information. With the 1986 examination moving into its thirteenth month, ACC and Lincoln management became frustrated with the apparent disorganization and indecision of the examiners and with the FHLBB's unlawful public disclosures of confidential and misleading examination information. Substantially all of ACC's and Lincoln's transactional documents and corporate records, representing millions of pages, had been repeatedly made available to and copied by the FHLBB, exit interviews had been scheduled and cancelled, and the examination appeared to have no prospect for conclusion. ACC had tried, on several occasions, to meet with James Cirona, Lincoln's Principal Supervisory Agent at the PHLB-SF, to address the unexplained and extraordinary length of the examination only to have scheduled meetings cancelled by Cirona. ACC and Lincoln became increasingly concerned about the disabling effect of the examination process and unlawful disclosures on Lincoln's operations. The mere length of what was to be a routine examination led to inferences of Lincoln's wrongdoing drawn by those with whom Lincoln did business resulting in strained and irretrievably damaged relationships. The presence of the examiners demanded extraordinary time and attention by management and ordinary business operations were greatly .disrupted. In light of the obvious damage to Lincoln's operations resulting from the examination, with no end in sight, and after Cirona's refusals to meet with Lincoln, ACC and Lincoln saw only two alternatives available. They could have filed a lawsuit and incurred the additional expense, disruption, and uncertainty associated with any litigation, and exacerbated an already hostile relationship with the powerful regulators who governed Lincoln. With litigation an obviously undesirable alternative, ACC and Lincoln concluded that their only real option was to turn to their elected representatives for help. In particular, ACC and Lincoln sought assistance to ascertain the motives and justification for the prolonged examination and if, as ACC and Lincoln perceived, the examination was the product of undue regulatory zeal, to bring perspective to the process by suggesting that the PHLBB either charge violations or complete and conclude the examination. ACC and Lincoln management had been visiting members of Congress since 1984 to urge rejection of the 're-regulation of the savings and loan industry represented by the Direct Investment Regulation. Senator Donald W. Riegle (D-Mich.) listened to ACC's story, conducted his own inquiry and agreed to contact FHLBB Chairman Edwin J. Gray to arrange for the Chairman to meet in April 1987 District at Chairman Gray's direction, with a bipartisan group of senators who represented ACC's state of organization, Ohio (Sen. John Glenn, D-Ohio), ACC's principal place of business, Arizona (Sen. Dennis DeConcini, D-Arizona and Sen. John McCain, R-Arizona), and Lincoln's place of charter and principal place of business, California (Sen. Alan Cranston, D-Calif.). ACC and Lincoln sought (and certainly received) no special favors in connection with or as a result of these meetings. Indeed, as described below, the primary effect of these meetings appears to have been to intensify the wrath of the FHLB-SF and to proliferate unfounded public attacks on the integrity of these Senators. On April 20, 1987, Lincoln received the confidential results of the 1986 FHLBB 13-month examination. Lincoln's response, dated June 26, 1987, pointed out numerous factual and accounting errors. FHLB-SF's only reply was to propose to continue the examination, with a new accounting firm brought in to reanalyze the FHLB-SF's thirteen months of work. Shortly thereafter, an article appeared in the July 1987 issue of Regardie's, 677' a national publication, which disclosed the contents of the preliminary 1986 Report, including confidential information concerning Lincoln and certain of its customers. The article stated that the Bank Board has secretly concluded that "Lincoln is unsafe" and "a threat to its insurer." This article expressly acknowledged its sources to be the preliminary FHLBB 1986 Report and other confidential internal documents and revealed that the author's six-month investigation included access to more than 300 pages of secret reports, memoranda, correspondence and other documents from the FHLBB.68/ 677 68/ Binstein, M. "Renegade vs. Regulator; An Exclusive Look at an The article states, "What follows is a rare look into the inner workings of a federally insured financial institution. The window is the most sensitive and secret variety of information produced by Federal regulators: The bank examiners reports. These reports are never shared with the public; indeed, only sanitized versions of them are shown to a financial institution's top management. This article was written after a six-month investigation, during which Regardie's gained access to more than 300 pages of secret reports, memos, correspondence, and other documents from the Federal Home Loan Bank Board." Id. at 48. Other information was obtained from interviews with more than a dozen sources. Id. at 48 (emphasis added). 67 |