Lincoln that the Bank Board did not intend to make referrals
to the Department of Justice or the SEC concerning Lincoln's
violations.
The Agreement and MOU were a virtual cease and
desist order (C&D) against the Bank Board. What tremendous
advantages did the Bank Board obtain from them that would
lead to such an unprecedented "give away" of governmental
power, immunization of improper and unsafe practices, and an
unseemly "wink" as to further criminal and SEC referrals?
None.
First, Lincoln was not required to undo any of its
violations of law (e.g., its more than $600 million viola-
tion of the direct investment rule or its improper affiliate
transactions).
For example, it speculated in foreign currency--and lost
big. The only risky investment even purportedly "frozen" by
the MOU was direct investments. Even there, as I have
explained, the purported restriction contained a loophole
Lincoln could have driven a $3 billion direct investment
through.
Fourth, the Agreement and NOU contained no limit
on overall growth other than the rule all thrifts were
already subject to of not growing at an annual rate greater
than 25 percent. As a result, Lincoln (and PSLIC's losses)
grew rapidly--by Lincoln's calculations, at a 24 percent
rate during the 1988 exam. Unfortunately, the 24 percent
clearly understated Lincoln's growth because the NOU did not
limit off-balance sheet growth. Lincoln grew substantially
through these means and its losses increased.
Second, Lincoln was not required to diminish its
risk exposure that ORPOS had found so grossly excessive
(e.g., Lincoln would not have to reduce its holdings of junk
bonds, ADC loans or direct investments).
Third, the Agreement and HOU permitted Lincoln to
increase its already excessive risks in each of those areas.
Lincoln did so in all three areas. Lincoln also increased
FELIC's losses by increasing holdings of other risky assets.
Pifth, the Agreement and HOU did not require
Lincoln to comply with the Community Reinvestment Act.
Indeed, Lincoln did not promise to do any home lending.
Finally, virtually all of the "restrictions" that
are in the Agreement are ephemeral. I will address them in
order:
Paragraph 1 simply requires Lincoln to comply
with what it already has to comply with--the Bank Board's
minimum regulatory capital rule. The HOU did not add
anything here.
2. Paragraph 2 required Lincoln's parent,
American Continental Corporation ("ACC"), to put $10 million
in cash into Lincola. ACC did so, but within two weeks it
siphoned far more cash from Lincoln, making Lincoln much
worse off.
3. It is outrageous that in Paragraph 3 the Bank
Board encouraged Lincoln to sell more subordinated debt to
the public. Lincoln tried to issue $100 million in subor-
dinated debt pursuant to this clause. This would have
caused $100 million in greater losses to financially unso-
phisticated purchasers, and would have further injured
Lincoln. Lincoln already had a massive negative gap between
its interest earning assets and its interest bearing liabil-
ities. Encouraging it to add $100 million in high cost debt
to the problem was insane. Had the debt been issued,
Lincoln's phony RAP capital would have been increased, and
the Bank Board would have been even more reluctant to act
against its unsafe practices. Fortunately, the California
Department of Savings and Loan would not approve the sale of
Lincoln's subordinated debt.
4. Paragraph 4, read together with the provi-
sions discussed earlier giving Lincoln immunity from the
1986 exam, in effect granted Lincoln permission to reverse
any loss reserves required to be established by the 1986
examination. Lincoln merely had to inform ORPOS of the
reasons it was reversing the losses and, in turn, reporting
increased capital.
Paragraph 4 also requires Lincoln to notify ORPOS
of any "highly material and controversial contemplated
transaction or event, prior to its consummation" and to
inform ORPOS of "any other significantly material transac-
tion ... within five business days after its consumma-
tion." ORPOS was given no power to prohibit such transac-
tions or require that they be unwound. The language is
again undefined as to what "highly material and controver-
sial" means. How much "prior to consummation" must the
notice be? Lincoln interpreted the document as allowing it
to provide oral notice in almost all circumstances, and
Lincoln claimed it had given such oral notice to ORPOS
(which ORPOS denied). This clause was useless.
5. In paragraph 5 Lincoln agrees to create new underwriting manuals, but ORPOS has no power to reject them if they are inadequate and to require that they solve Lincoln's grossly improper underwriting practices. ORPOS
found that Lincoln's underwriting practices remained abysmal
to the end.
6. Similarly, in paragraph 6 Lincoln agrees to
develop a business plan, but ORPOS cannot reject it and
require that Lincoln adopt a prudent business plan.
7. In paragraph 7 there is no special restriction on growth. Lincoln to simply subject to the same
growth rule as other thrifts.
As described previously, the purported
restriction on direct investments in paragraph is actually
the opposite.
Paragraph 9 provides that Lincoln can seek a
waiver to make still greater direct investments.
10. In paragraph 10 there is a restriction on
dividends until December 20, 1900. It merely continues, but
only for seven (7) months, this district's then outstanding
directive restricting dividends.
Until December 20, 1988, Lincoln agrees to
cooperate with the examination and comply with paragraph 4
of the NOU. Lincoln's "cooperation" obligation is
undefined, exists only for seven (7) months, and is already
required by law. Inexplicably, ACC and Lincoln's agents are
not required to cooperate with the exam.
I have now addressed each of the so-called
restrictions on Lincoln in the Agreement. There is, how-
ever, one final clause to the Agreement, and that paragraph
further undercute the already toothless restrictions of the
remainder of the document. Paragraph 12 provides that
enforcement of these provisions can occur "only" pursuant to
the Bank Board's C&D authority (i..., no court enforcement
is permitted). This clause reveals an issue that goes to
the integrity of the entire supervisory process. Remember
that the ERC recommendation memorandum states that seeking a
C&D against Lincoln is not a viable option because it would
take a year to obtain. Why then enter into the Agreement
and MOU with an entity if you cannot enforce it except
through a C&D? The question is particularly apt given the
fact that ORPOS had found that Lincoln's practice was to
make repeated misrepresentations to the Bank Board.
Thus, the Agreement and NOU were useless to
protect FSLIC from loss for two reasons. First, there were
no provisions that protected FBLIC from loss. Lincoln
simply had no need to violate the HOU. Second, even if
Lincoln chose to violate the Agreement, enforcement would
have been limited to a C&D, which in Lincoln's case would
have offered an opportunity for further delay of effective
supervisory action. Similarly, the direct investment and
dividend restrictions of the Agreement lapsed on
December 20, 1988 by their terms. What was ORPOS supposed
to do at that juncture--start a C&D proceeding and wait a
year for new limits?
Two fundamental questions arise. Why did
Lincoln--and only Lincoln--on a record replete with its
misconduct and likely failure, get such an unprecedented
deal?
Subissues include: Why would the Bank board permit
such a thrift to increase its high risk assets? Why would
the Bank Board grant it immunity for its misconduct and
unsafe investments found by the 1906 examination and get an
obviously useless Agreement and MOU in return? The mystery
deepens when the unprecedented, totally unjustified and
extremely harmful element of allowing a regulates to have a
veto right over its regulator is added to the equation.
The second fundamental question goes again to the
integrity of the process. Why were the documents drafted in
the manner they were, and why has the Bank Board represented
that the documents were intended to, and did, freeze the
risk Lincoln posed to the FSLIC. This is not some "gray"
The documents indisputably do not freeze Lincoln's
Lincoln promptly grew rapidly and increased
its high risk assets after signing the documents. Worse,
the documents were plainly crafted to allow Lincoln to
increase its risk exposure. OE and Lincoln drafted the
"except clause of paragraph 8(b) of the Agreement, which
created the loophole to do unlimited development of
Lincoln's massive raw land holdings. This clause was
carefully crafted (and described by the Bank Board publicly)
as if it were a restriction when it actually allowed bil-
lions of dollars of new direct investments that otherwise
would have been prohibited by the direct investment rule.
Why were so many obviously useless clauses put into the
Agreement and MOU and then portrayed publicly by the Bank
Board as comprehensive restrictions? Lincoln was permitted
during the MOU period to grow its risky assets, engage in
sham deals and otherwise increase PSLIC losses without any
enforcement action or even a 407 (m) investigation being
undertaken by Os to protect the FSLIC. OE failed to act
despite repeated requests by ORPOS and other districts.
The same Of attorneys who had the lead in prevent-
ing a meaningful 407 (m) investigation prior to the NOU, who
were the leading apologists for Lincoln within the Bank
Board and the most fervent proponents of preventing the
San Francisco district from examining Lincoln, and who had
the lead in negotiating and drafting the Agreement and NOU,
are in charge of the (barely) ongoing 407 (m)/400 (h) investi-
gations of Lincoln and ACC. They remain in charge at the
express direction of Director Wall. See Exhibit 50 to my
Prepared Statement. The first deposition taken at the
direction of Os occurred this month after these hearings
were announced.
Remember that OE was authorized by the Bank
Board to investigate Lincoln in December 1986--almost three
years and $2.5 billion ago.
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