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the agency, these practices had been in place for over a decade. The Regional Banks would routinely pay part of the expenses incurred by bank board officials, including myself, when we attended out-of-town conferences of the regional banks. These practices had been approved by Bank Board counsel on more than one occasion and were known to the Congress.

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questions raised in the news stories were not unreasonable, and that the public perceptions created by the news stories were not only hurting me but would, even if I survived in office, destroy any chance I might have at reforming the thrift system. I therefore reviewed these practices, revised them and, without being required or asked to do so, paid back certain challenged expenses. I also reimbursed the cost of an airplane charter arranged for me by Regional Bank officials on the occasion of a medical emergency in my family. The total amount of the reimbursements was approximately $27,000. This matter was thoroughly investigated by the Office of Government Ethics, the Department of Justice, and the Bank Board's Inspector General, none of whom recommended any remedial action against me. These attacks were part of a pattern of pressures meant to discredit me and derail the effort to achieve S&L reform. Senator Cranston's opening statement signaled that some would like this issue to play

In mid-1986, the terms of my two Bank Board colleagues, Mary Grigsby and Donald Hovde, were due to expire. News reports speculated, as early as August, 1986, that two Keating associates Professor George Benston of the University of Rochester, a paid consultant to Lincoln since 1984, and Lee Henkel, a Keating lawyer and close associate who also was a major borrower of Lincoln's were being seriously considered by the White House to fill the Grigsby and Hovde seats on the Bank Board. Henkel was indeed given a recess appointment for the Republican slot on the Bank Board in late October, 1986. This sent a very strong signal to me and the Bank Board staff that Mr. Keating had especially heavy political clout and that he intended to use it.

The pressures during those years came from the Hill as well as the executive branch and the media, and the congressional pressures were heaviest of all. Beginning in 1985, I had been asking Congress for a major recapitalization of FSLIC. Finally, in the fall of 1986, we had a recapitalization bill moving through Congress when suddenly it stopped. Incoming Speaker Wright had been told that our regulators were being too tough on Texas S&LS owned by his constituents and contributors, and he, personally, was putting a "hold" on the bill until he could get some satisfaction.

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The delay was critical. It also impressed on all of us at the Bank Board, if we had not known it before, that congressional consent was the key to stopping the hemorrhage.

Board member Henkel, in his first open meeting of the Bank

Board, proposed an alternative regulation for our direct investment rule, which was due to expire. His version would have forgiven thrifts for certain massive violations of the grandfathering clause of the extant regulation. We believed then, and I believe today, that Mr. Henkel's regulation was specifically intended to benefit Lincoln, and only Lincoln, Savings. Newly appointed Board member Larry White and I voted against Henkel's regulation and for renewing our direct investment rule. Later, at the end of February, 1987, Mr. White and I voted to strengthen the direct investment regulation very substantially by tying a thrift's ability to make such equity investments to the level of tangible net worth on the books of the institution. Lincoln Savings thereupon sued the Bank Board on the grounds that we had exceeded our statutory authority.

On April 2, 1987, this issue of the direct investment rule came up in my meeting with Senators DeConcini, McCain, Cranston and Glenn, as to which I have already testified in deposition.

Today, as we look back, it is clear many times over that

the lion's share of the staggering losses the taxpayers will have to pay for are the result of overly rapid deposit growth, fueled in large part by money brokers, which went into equity invest

projects. Charles Keating's losses from direct investments and high risk land loans demonstrate beyond doubt that our regulatory concerns, warnings and actions were correct.

Charles Keating's purpose for Lincoln Savings was to use the institution as a source of funds for enterprises that had nothing to do with making home mortgages available. But there were many other thrift managements which, to a lesser or greater extent, were operating their thrifts for similar ends. Lincoln was not at all unique. These people played their political cards like masters in order to keep the regulators at bay. All the time, the stakes for the taxpayers continued to go up. The technique did not intimidate me or my regulators. But it visited a crushing burden on both the taxpayers and those depositors and bondholders who had placed their trust in our regulatory system.

I hope this account makes clear that when I met in 1987 with the five senators now before this Committee, we were not discussing a normal regulatory issue to be addressed through the normal kinds of pressure, negotiation and compromise. This was a matter of clear and present danger to the nation and demanded a more sober treatment. We have heard a lot in these hearings about the responsibility of senators to represent constituent interests, but I have always assumed that we also send our senators to Washington because we think they will have the sense to know when

narrow constituent demands must take a back seat to the safety of their constituents as a whole.

I hope this recounting of events also makes clear that when I met with the five senators, it was not in the midst of a normal political climate. These meetings capped years of private threats and public vilification designed not just to change particular decisions by the Bank Board but to render us unable to carry out our central responsibilities. No one in Washington with the slightest knowledge of this issue can have been ignorant of this situation or the effect it would have on the way the regulators received and interpreted messages from senators and congress

men.

Finally, I hope my experience makes clear that the savings and loan problem was not merely a problem of personal ethics among five senators. There were hundreds of players in this political drama, each of whom had some sort of interest in preserving the existing system rather than changing it. This is the classic problem of a democracy: The private interests fit together so closely and operate so powerfully that the public interest never gets served. Perhaps this crisis will encourage us to build more safeguards against that danger.

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