modified or rescinded except pursuant to a written instrument signed by the party against whom enforcement is sought. 10. Governing Law. This Consulting Agreement and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of Virginia. IN WITNESS WHEREOF, the parties hereto have executed this Consulting Agreement as of the day and year first above written. I am enclosing a signed original of the Consulting Agreement between Hovde Financial, Inc. and LAC. Please sign a copy of this letter on behalf of Hovde Financial, Inc. and return the signed copy to me. EL:ba With kind regards. cc: Spencer Scott Brenda Wooten Herman Rappaport Leff MR. CHAIRMAN, MEMBERS OF THE COMMITTEE, SPECIAL COUNSEL BENNETT AND LADIES AND GENTLEMEN: I come before you, at your invitation, as a witness. I know you will be asking questions today about whether or not certain senators put undue pressure on me in my capacity as head of the Federal Home Loan Bank Board. In order to answer that question, I believe you must know something about the political situation in which I found myself in April, 1987. The savings and loan system was created in the early 1930s under federal statutes to encourage personal saving and home ownership. As part of these statutes, Congress insisted that home mortgages be made at long-term, fixed rates of interest. In the early '80s, when interest rates climbed to unprecedented levels, hundreds of S&Ls failed because what they earned from their fixedrate mortgages was less than what it cost them to attract and retain savings deposits. The federal government chose to respond by further deregulating the thrift industry in 1982. With enactment of the Garn-St Germain Act in the fall of 1982, Congress allowed federally chartered S&Ls to move far more heavily into commercial lending, especially commercial real estate. California and other states, especially across the sunbelt, went much further with their liberalization. California, for example, enacted a law authorizing its S&Ls to go into any kind of business they wished. California and other states went beyond the federal law and gave their S&Ls the right to use federally insured deposits to play the stock market or to buy and run any type of enterprise the mind can conceive of, including real estate speculation. These especially liberal sunbelt state laws for statechartered thrifts attracted a new breed to the S&L business. These so-called entrepreneurs had the mentality of the venture capitalist. While the temperament may be legitimate, it also can be very dangerous in the absence of a strong commitment to fiduciary responsibility by the operator of a publicly chartered thrift. Almost all of the capital these new S&L entrepreneurs were putting up for these ventures was not their own. It was other peoples' money, and the government stood to make up the loss if their endeavors failed. Their venture capital was, almost completely, federally insured deposits. If their S&L enterprises succeeded, these thrift operators would be rewarded handsomely. If their ventures failed, the Federal Savings and Loan Insurance Corporation that is to say, the taxpayers would be required to pay all losses. In other words, heads they would win. Tails, the taxpayers would lose. Moreover, two years before the Garn-St Germain Act, the government had decided to increase its insurance coverage to $100,000 per account. This move greatly raised the taxpayers' ultimate exposure to the risk of loss, and to actual - - When I arrived to become chief thrift regulator in May, 1983, a burgeoning new industry that of the money brokers was pouring new money, which were called brokered deposits, into the newly deregulated thrift system. The brokered deposits were federally insured if the venture capitalists' projects crashed. Much of this money was going to the thrifts paying the highest These high-interest S&Ls, not surprisingly, were interest rates. often run by the new breed of thrift operators, particularly those who didn't want to stick to making home mortgages. The brokered deposits often went to weak thrifts which couldn't really afford to pay the high rates the money brokers were asking. Weak thrifts took the money anyway: After all, the deposits were federally insured. Almost as quickly as the money arrived, it was lent and invested in often very speculative endeavors, many of which went bad. When Congress and the various states deregulated thrifts, nothing was done to strengthen the regulators' ability to keep tabs on how all this federally insured money would now be used. California reduced its professional regulatory staff to a few dozen in number, notwithstanding the fact that it had given its thrifts the most liberal banking law in history. The Garn-St Germain Act the federal thrift deregulation law made no - |