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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 Sav

ings 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 investments, particularly those involving speculative real estate

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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 sinilar 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 systen.

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 regula

tors received and interpreted messages from senators and congress


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

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Guest Observer

By Former Sen. William Proxmire
Take the Pledge:
No More Special

Interest Money
I reoendy suggested to a group of Mem Der contributions to members of
bers of Congress that they refuse campaign comminges with. jarisdiccion ever_the.
contributions that come from the special contributor's industry are brides, Duce sad
interests over which their comminces have simp

Keep in mind I did not a Member of Now keep in mind that bocane of their Congress to give up all campaign contribecommince membersaip, these legislators tions. They could still accepi contributions have unique power to push legislation from persons who did not work in industhrough Congress that will bring, for en tries over which the Members' commince ample, millions of dollars of benefits w assignment had given them special power. banks, savings and louns, real estate firms, Why can't intelligent, moral Membersd and housing developers

Congress understand how wrong it is to These legislators are not evil. They are accept many contributions! Imagine the not crooks. They are among ihe most echin you're watching a World Series baseball cal and honorable poople in public life. game. The pitcher walks over the umpire They are, like the great majority of Mem- before the game begins. The pitcher pollsa bers of Congress, people I would trust to wad of $100 bills out of his pocka and protect my family or my worldly goods counts out 100 of them, $10,000, and hands

So what was their seaction? You would the whole fat wad to the plate urnpire think I had just insulied their mothers. It The ampire jams the bills imo his pocka, was "What do you take us for?" and "Do warmly thanks the pitcher and seules down you think I would set out my office for a locall that same pitcher's bulis and strikes lousy $1.000 contribucion or even to some What would be the reaction of the other guy who could deliver $100,000 by rising scam? Of the fans? The media? All would money from his industry

be furious. The game had obviously been The legislators said I was playing to the fued. Far fetched? Not a bil How does this wild public prejudice that all Members of differ from what the lobbyists for banks, Congress are on the take. Was I serious? realtors, S&ls, and security dealers do

when they contribute mega dollars to the I am convinced that

Members of Congress who have prime

power to call the balls and strikes in their good moral people are industry?

Yes, the game is fixed. Here is why you sincerely, honestly

as i consuma a taxpayer con't have a hypnotized by


What can we do about it? Pleaty. I am system of thinly

convinced that if enough voters became concealed bribery.

aware of this system and let their Senators
and Representatives know they wouldn't
sland for it, we could stop il

But isn't Congressional campaign re-
You bena believe I was serious. Here is

forma proceeding? Sure it is Honoraria the hean d the problem: After serving 31

have already been banned for House years in the Senate, every day of the time

Members and in two or three years will be on the Senate Banking Committee, cight

on the way out in the Settat Political years as chairmar., I am convinced that

action comminoes PACs) may also be good moral people serve on that commit

diminished 100.

But as long as Members of Congress feel I am also convinced they ve sincerely, free to accept contributions from those who honestly hypnotized by a system of thinly have a direct, material interest in the com

conccaled bribery the not only buy their mittee on whách uhbec Meuben werve, attention but Prequently buys their vote. special interests will continac bo bribe their The special interests that make dicee

way to public ripolls contributions Know cunctly what they are i are convinced that you and I us voters doing. They know just what changa way

2. win thise paigon ny simply challengwan w ukene, for chemchem 3 free stara

new paurrond Representatives from restrictions designed to keep insured bo take the pledges bank deposits from being used la disky

I will accept no contributions from m javestment

individual or group with a material interest A lime change can make it possible for in the legislation that comes before the them to me tore milions while the

conniuces al Congress on which I serve." Lipayer makc pothing but can Tone

Lui's garaaned
The Tal ad beat lobbyists brow the Foriner Sen. William Protnico 10 Wie)
Here is precisely why they mise millions of served u chaluman of the Senate Banking
dollars for campaign contributions. Any 19 to 1941. Copyright 1996, inhed her

Committee from 1975 to 1800, and from
Scantons a House Members who believe

ture Syndicate, ne they we getting this big money because the lobbyist admires their character or person ality are willing themselves.

Gray Exhibit 2

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In the Matter of the

) Investigation of Senators Cranston, DeConcini, Glenn, ) McCain, and Reigle


I, Edwin J. Gray, being duly sworn, hereby depose and say:


I have testified previously in this matter by deposi

tion and during the public hearings on November 26 through 29, 1990. Since I was excused as a witness, I have tried to keep informed about the proceedings by watching them on videotapes recorded from C-Span. I know the Committee has a large body of

evidence, and I regret adding further to it.

But I strongly

believe the record of these proceedings should not be closed with any possibility of confusion on the points discussed below, and

therefore I respectfully request that this affidavit be made a

part of that record.


On January 14, 1991, I sent the Committee's Chairman

and Vice Chairman a letter to clear up any misimpressions that might have been created by Senator Riegle's testimony concerning

my contacts with him after April 9,


(The point of the let

ter was to make clear that I had no knowledge of Senator Riegle's

relationship with Charles Keating or his companies until the last

week in February, 1988 when so 'informed by a reporter.)

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