ENFORCEMENT REVIEW COMMITTEE Minutes of Meetings Regarding Lincoln Savings and Loan The first ERC meeting relative to Lincoln S&LA convened at 6:20 p.m. and adjourned at 8:15 p.m. on Tuesday, February 16, 1988 to discuss appropriate supervisory action for Lincoln Savings and Loan Association, Irvine, California. At W. Black's request, the voting members of the committee permitted Pillsbury, Madison & Sutro to attend the meeting by telephone because of their prior support of the FHLBank of San Francisco on this case. J. Luke raised a general question regarding the propriety of the FALBank's use of fee counsel to perform or assist in the performance of agency functions. W. Black asked to tape-record the meeting for the benefit of M. atriarca and J. Cirona, who were unable to attend. After a closed conference on that request, the ERC members refused that request. SPECIAL COUNSEL 2 D. Dochow recommended that the ERC endorse a resolution of the immediate supervisory concerns with a Memorandum of Understanding with Lincoln. Such a document has been offered by Lincoln but D. Dochow believed it may need to be amended in several respects to tighten its provisions, and he was inclined at that time to make a transfer of Lincoln to another FHLBank district subject to the findings of a new examination. He noted that the FELBank of San Francisco supervisory staff believes that a Notice of Charges should be issued. They will have an opportunity to present their views at the next ERC meeting. D. Dochow summarized Lincoln's supervisory history and financial background, set out in detail in his memorandum to the ERC, dated February 16, 1988. In brief, Lincoln has grown rapidly since its acquisition by American Continental Corporation in 1983; it engages in high risk lending and investment and its income is primarily dependent on sales of property and "selffunded" interest on real estate and construction loans. Relations between Lincoln and the FHLBank of San Francisco are very strained. The examination took nearly seven months to complete and reported numerous regulatory violations. Since the examination, there have been several leaks of negative information regarding Lincoln, some of which quote from confidential Bank Board documents. Lincoln alleged that these leaks confirmed its assertion that Supervision is "out to get" Lincoln. It filed a law suit to enjoin further leaks but withdrew the suit after a meeting with Chairman Wall. Lincoln has threatened to revive the As a result of this situation, several months ago, the Chairman charged ORPOS to review Lincoln's situation and recommend appropriate supervisory action. ORPOS factual findings largely confirmed the findings of the examination regarding Lincoln's financial condition: Lincoln's assets are high risk but, at present, its regulatory capital is approximately 5 1/2 %. D. Dochow went on to report that Lincoln met with ORPOS and requested a transfer from the FHLBank of San Francisco to another district, which following additional discussions, became a request to transfer to the FHLBank of Seattle. Lincoln proposed a Memorandum of Understanding that contemplates such a transfer while imposing certain operating restrictions. D. Dochow characterized the Memorandum as a "freeze" on Lincoln and the Bank Board actions pending the results of a new examination. recommended that the ERC endorse the concepts described in the Memorandum of Understanding in this situation; it will prevent Lincoln from increasing its risky assets, enable the Bank Board to examine Lincoln immediately and will forestall litigation on the leaks. However, with respect to the transfer of Lincoln to the FHLBank of Seattle, D. Dochow reported that he was inclined at this time to make such a transfer subject to the findings of the new examination. Should Lincoln violate the Memorandum of He Understanding, D. Dochow stated that he would recommend an immediate convervatorship on the grounds that Lincoln's pattern of conduct is such that no further risk to FSLIC should be entertained. A discussion of the recommendations and their The ERC turned to the question of scheduling the FHLBank of San Francisco's presentation. W. Black stated that the Bank believed that they would make this presentation on Wednesday, February 24th. In order to prepare for the meeting, W. Black requested copies of the Memorandum of Understanding and certain materials Lincoln showed Board Member Martin regarding the "leaks." D. Dochow emphasized that the Memorandum of Understanding was only in preliminary draft form and that the materials regarding the leaks had already been returned to Lincoln and that no copies were retained by the Bank Board. He stated that he looked at the documents only briefly and that they consisted of a chronology of the leaks and a collection of articles related to Lincoln. J. Luke and G. Barclay stated that they had not seen these materials. G. Barclay requested that the next ERC meeting be held on Monday, February 22, 1988, because he would be in D.C. and it would be more convenient, not only for him but for the majority of the attendees. The next ERC meeting was thus scheduled for February 22, and the Lincoln matter was scheduled for 3:00 p.a. February 22, 1988 ERC Meeting The ERC reconvened at 4:00 p.m. February 22, 1988 for the FHLBank of San Francisco's presentation. ERC Members present: Staff Members present: George Barclay, Darrel Dochow, Karl Stephen Hershkowitz, Stan Hecht and FHLBank San Francisco: FBLBank Seattle: FHLBank Dallas: Jim Cirona, Michael Patriarca, Leo Clark and Patricia McJoynt He R. Sanchez summarized the memorandum submitted by the FHLBank of San Francisco, which is in the ERC's files. pointed out that ORPOS' review of the data generally confirmed the FHLBank's findings. He led a general discussion that addressed Lincoln's net worth, investments in junk bonds, equity risk investments, underwriting, general and specific reserves, self-funded income and direct investments. He also covered the institution's supervisory history, noting its breach of promises regarding management and direct investments. He stated that criminal referrals had been made on the "stuffing" of loan and investment files and the back-dating of direct investment documents. He reported that the California Savings and Loan Department examiners reported that Lincoln had recently violated the regulations on transactions with affiliated parties in a loan and sale of stock to its holding company. R. Sanchez and M. Patriarca addressed the leaks of confidential information and denied Lincoln's allegations of harrassment and unfair treatment. R. Stewart summarized what she knew and had heard regarding agressive FHLBB and FHLBank contacts with Lincoln dating back to 1986, as well as the leaks of FHLBB information. W. Black discussed his role in the supervision and |