Mr. BLACK. The referrals are in June or May of-April, sorry. April 1987.
Mr. SCHUMER. To the U.S. attorney for I think Los Angeles? Mr. BLACK. No.
Mr. SCHUMER. To the Justice Department?
Mr. BLACK. To the Justice Department, yes, and to the appropri
The CHAIRMAN. The committee will please come to order. Mr. Leach?
Mr. LEACH. Mr. Chairman, just for a brief unanimous consent re- quest, many of us have many questions, and is it the chairman's intent that we submit these in writing at the end of the day-- The CHAIRMAN. Oh yes.
Mr. LEACH. And that under the subpoena, the witnesses will be required to answer as part of the record? to thyron of
The CHAIRMAN. Oh yes, even in fact as we do regularly, every member-we usually ask the unanimous consent to have every member submit questions in writing to the witnesses, in time for them to reply when they receive the transcript of the hearing. Thank you very much, Mr. Leach. I had neglected to do that. Mr. Ridge, you're next in line.
Mr. RIDGE. Thank you, Mr. Chairman. I don't know if you had the opportunity to grab a bite to eat, when the chairman was kind enough to give you 15 or 20 minutes to go downstairs. It reminded me of a drill sergeant who told me to swallow it now and chew it later. So welcome back. I do have a few questions for you, and many more to follow in writing because of the time restraints.
Mr. Crawford, I was intrigued by your testimony involving the California direct investment rule, and the fact that only two of the legislators voted against it. What is your recollection as to the posi- tion of the regulators in California vis-a-vis that piece of legisla-
tion? Was it passed over their opposition, with their encouragement, or did they remain neutral in that effort?
Mr. CRAWFORD. I wasn't there and I'm not sure whether it was under Commissioner Linda Yung or whether it was under Larry Taggart, but I believe it was under Yung and I can't tell you.
Mr. RIDGE. Is anyone familiar enough with the situation to com- ment? OK, I understand. I'll find out some other way. I want to commend you. I think, Mr. Black, you're responsible for this very comprehensive, voluminous, well-referenced testimony.
Mr. RIDGE. I will tell you, hopefully not to be disappointed, I didn't read it prior to this hearing, but I do expect to have some questions after reviewing it in the future. But I want to thank you for it. It's a very important document.
I'm interested in the internal decisionmaking process concerning the change of jurisdiction from San Francisco to Washington. How is it normally done? Were the standard procedures followed in this case? Are you given specific written instructions to do so? Would you care to comment?
Mr. PATRIARCA. There aren't any procedures for doing it, because it's never been done before. In this instance, there was-after the review of our examination findings by the Office of Regulatory Ac- tivities and after their staff found that-I think it was-they agreed it was in excess of 90 percent of our findings, we were told that we were going to proceed with the cease and desist proceeding, and that we were going to resume our supervision of Lincoln Sav- ings after having been stopped for the 1987 examination.
But at that time, Lincoln came in and in meetings with the Bank Board made it clear that there was not going to be a peaceful reso- lution of this dispute if they had to have anything to do with San Francisco. It was they who demanded that we be replaced and that's eventually what happened.
But there isn't a standard for how it was done or how it should be done, because it's never been done. It's the only case that I am aware of.
Mr. RIDGE. All right. I know the answer to this question, but I want it on the record because your testimony has been lengthy and provocative, but I think it's important for you to be able to answer this. There have been allegations of influence in a myriad of differ- ent areas. I think based on your testimony I can conclude that at no time, in spite of any of the meetings, letters, protestations, en- couragements or anything that you might have thought improper, did you ever violate what you consider to be your professional regu- latory responsibility within the Federal Government. Is that a fair statement?
Mr. PATRIARCA. That is fair and accurate. Mr. RIDGE. Mr. Black.
Mr. RIDGE. OK. The process of changing jurisdictions occurred mid-1987, finalized in September of 1987?
Mr. PATRIARCA. Finalized in May of 1988.
Mr. RIDGE. Finalized in May of 1988, and that evened the internal dispute over that matter? Well, maybe I should back up. Was there any internal dispute as to whether or not jurisdiction should
be transferred back or were you alerted to that responsibility 1 day? Did you fight about it? Did you say what are you taking juris- diction away from us for?
Mr. PATRIARCA. There was a major-and I can't emphasize the word strongly enough-dispute within the whole agency. Naturally we in San Francisco, whose jurisdiction was in question, were the principal folks saying that this is nuts. I mean this is fundamental- ly absurd as a way to run a regulatory agency.
But one of the proposals was to transfer jurisdiction not to Wash- ington but to transfer it to another district, and the district in question that was approached was the Seattle district. The Seattle district agents met with Lincoln management. They reviewed our examination findings and then they came to the Enforcement Review Committee and presented their assessment.
If you'll give me a second, I will read you in essence what it boils down to. The Federal Home Loan Bank of Seattle opposes the pro- posed transfer of the supervisory and examination functions of Lin- coln Savings to the 12th district. We are also opposed at this time to the acquisition by Lincoln of a distressed 12th district institution as a means of legitimizing this move.
We feel such an acquisition is unwarranted, in view of the con- cerns raised in conjunction with the March 1986 examination, the financial condition of Lincoln, the lack of management capability at Lincoln and its holding company, and the complete rejection of the regulatory authority of the Federal Home Loan Bank System by Lincoln Savings.
Our opinion results from our review of the substantial documen- tation provided this office. The fact that ORPOS has concurred with almost all the findings of the March 1986 examination leads us to conclude that the findings were substantially accurate. As a result, we do not believe a new examination led by this office would result in materially different findings or come to a different conclusion than the San Francisco bank.
Therefore, from our perspective, allowing the transfer of supervi- sory and examination efforts only buys the association time and may unnecessarily be increasing the risk to the FSLIC.
Mr. RIDGE. The date of that communication?
Mr. PATRIARCA. The date of that communication-I'll have to provide it to you.woff by projec Mr. RIDGE. I'm sure it's in the record.
Mr. PATRIARCA. This is a presentation by Jim Faulstich, the prin- ciple supervisory agent in Seattle to the Enforcement Review Com- mittee. That would have been some time in early 1988.
Mr. RIDGE. All right. It's pretty clear that the only person or the few persons that knew of this massive scheme was Mr. Keating and one or two obviously close associates, that over a period of years not only with restructuring his holding company and subsidiaries but all the other-the contacts he was developing, they were going on in a continuous course of conduct independently of one another, so that the chances are pretty good that the whole scheme was known to a few people and that what was going on outside any- body's particular environment was unknown to them.
You have done a marvelous job of putting all those little pieces of the puzzle together, and I just want to ask a simple question in
terms of how long it took you, taking a look at this maze and this mess, to be able to put such a comprehensive and I think potential- ly very helpful document together.
Mr. BLACK. Well, we've been working on it for years in one sense, from the examiners, from the sense of actually putting it together given the earthquake. We put it together in 2 days.
Mr. RIDGE. Well, you did a marvelous job. My sense is, is that the earthquake that San Francisco experienced a week or so ago, a nat- ural disaster, taxpayers are generally comfortable in trying to help out. The earlier earthquake around Keating, the costs are almost the same potentially, and with the posture that he's taken and the manipulation that he's-for which he is responsible is going to cost us almost the same. I don't think the taxpayers are quite as happy about bailing this one out.
I do reserve the right to ask those questions, Mr. Chairman, and thank you for the time.
Mr. PATRIARCA. Mr. Chairman, if I could provide the date for Mr. Ridge. That's a March 11, 1988 memo from Jim Faulstich to the Enforcement Review Committee. RE
Mr. RIDGE. Thank you.
The CHAIRMAN. Thank you. Mr. Lehman.
Mr. LEHMAN. Thank you very much Mr. Chairman and let me begin by welcoming my fellow Californians to the land of stability. I've been here a long time, Mr. Chairman, and I have been fasci- nated on the one hand and maybe terrified on the other about what I've heard today. I know as I get back on that airplane to- night, a lot of other questions are going to cross my mind as I sort this out, and I'm sure that will be the case with other members too. I'm glad to be able to have the opportunity to submit those in writ- ing. I do have a few questions I'd like to ask and I'll direct them to one person, but if anybody has anything to add of value, please jump in. Really I'm moving to a subject that we really haven't touched on yet, and I'll start with Mr. Crawford.
When and by whom was the decision made to allow American Continental to sell its own subordinated debt in the branch offices of its own S&L?
Mr. CRAWFORD. Except for the lease, the approval of selling sub- ordinated debt is in the prerogative of the corporation commission- er's office, and only the lease was provided for in the California statute. We do not have to approve subordinated debt, particularly of the holding company. So the lease-ACC and Lincolns attorneys didn't think they needed our approval.
So they got permission from the Corporation Commissioner to sell the subdebt, and they were selling the sub-debt in Lincoln Sav- ings offices, and one of our examiners saw the ad in the paper, I believe in December 1985.
Mr. LEHMAN. Do you have a copy of that ad? Mr. DAVIS. Yes, we do.
Mr. LEHMAN. Could we have one for the record?
Mr. CRAWFORD. And in January, we notified them they needed the Department of Savings & Loan approval. They said they didn't need an approval; it was called a "de minimis" lease, and that they used the Federal regulation; it was just desk space, and they
thought they didn't need our approval. And they had expert lawyers, you know, and they quoted different things, so we said, "Oh, no, there's no provided for an exception." So we made them get Department of Savings & Loan approval, and they checked it, and they approved the sublease that-it was already in use.
Mr. CRAWFORD. It was only sold within the State of California. Mr. LEHMAN. Is this routine in California?
Mr. CRAWFORD. Yes. In fact, the corporation commissioner has to be able-the burden of proof is on him to prove they can't service a sub-debt. If he can't prove that, he has to approve it or go to court. If he turns it down, he winds up in court, and the burden of proof is on him.
Mr. LEHMAN. So an investment banking firm-who was it in this case, do you know?
Mr. CRAWFORD. Well, an investment banking firm isn't involved. Mr. LEHMAN. No, I want to know who packaged the debt for Lin- coln. Maybe I'm asking the wrong panel, but I want to get into this whole issue, because if what I'm hearing is true about the way the rest of the transactions at Lincoln were handled, were they inter- faced with the Government agencies? I have serious questions about how all of this sub-debt was handled and approved for sale. Now, it's not in your department, you're saying, it was in the State department of corporations?
Mr. CRAWFORD. The Department of Corporation has jurisdiction, and we have a jurisdiction to examine and monitor holding compa- nies, but we do not have jurisdiction over their debt. And we don't have a right to approve the subdebt, even of the savings and loan; the only right we have is to approve its inclusion in net worth. They probably wouldn't sell it if they couldn't include it in net worth.
Mr. LEHMAN. And no right to prevent it from being sold on the premise where it could be construed as being backed by the seal on the door or as equivalent to a CD by some unsuspecting investor? Mr. CRAWFORD. I might add that in December 1987-no, no-in February 1988, Mr. Davis and I heard an ad on the radio that said it was available in Lincoln Savings' offices.
It was then that we got into it, when we got to the office, and we immediately sent out shoppers to shop them, to make sure that they weren't using any Lincoln personnel, that everybody was given the prospectus by the representative of American Continental. We found out they were handling it in a proper manner, that there was not contact between the Lincoln personnel and the customer, it was all done by American Continental.
So it was not until December 1988 that we got a protest from-I think I'll let Mr. Davis handle this part because he handled this thing.
Mr. Chairman, I want to alert you to my intent to pursue this further, maybe in talking with your staff. I think we ought to get into the whole arrangement there deeper than we can with these witnesses, what that money was used for, what it was presented that it would be used for, who packaged it, and so forth, because I have serious concerns.
Thousands of people, not all of whom are in California, lost mil- lions of dollars here, and for some of them, it was their life savings. The CHAIRMAN. There were about 23,000, and we have, as wit- nesses, some of them coming before us, plus some of the others that we have subpoenaed as of today that will enlarge on that issue. Mr. LEHMAN. It's just clear to me when was this done, again? When was the permission given to sell that debt?
Mr. DAVIS. Beginning in December 1986.
Mr. LEHMAN. In December 1986, and it sold until '88? I mean, it just seems to clear to me that at early points here, from the testimony given by the Federal regulators, and by you, Mr. Crawford,
there were lights going off, and for this to be going on at the same time, those lights were going off, and not be heeded, is frightening. I just to quickly follow up on one general thing here with Mr. Patriarca and Mr. Black. Mr. Patriarca, you said that what hap- pened at Lincoln, the way it happened, was not atypical of the S&L failures in your jurisdiction. In other words, the same pattern is there of insider abuse, use of these new expanded powers, et cetera,
What is different here is what happened to you when you tried to regulate them or supervise them and force some changes. Isn't that basically the drift?
Mr. LEHMAN. Then am I correct, if you took out the Lincoln ex- perience, which obviously you can't, but just hypothetically, and looked at the breadth of the rest of your experience in dealing with these S&L's, and your superiors at the Federal Home Loan Bank Board and the regulators you report to above you, this was an atypical situation? You wouldn't be complaining about other Lin- colns out there that may just not be as big, but where you still had the same problems?
Mr. PATRIARCA. Is your question was the operation of the Lincoln atypical or was the handling of it internally atypical?
Mr. LEHMAN. Was your relationship with the Bank Board with respect to this institution atypical from what happened when you had other similar problems with other institutions in your jurisdic- tion?
Mr. PATRIARCA. Largely, it was extraordinarily atypical. Howev- er, we have had a continuing dissatisfaction with the support that we've been able to get in the enforcement area out in the field. This is not the only case-you see Mr. Selby nodding his head- where the district has wanted to deal in a more aggressive way in an enforcement situation with a troubled thrift where the support has not been forthcoming from the Office of Enforcement.
Mr. LEHMAN. And in your opinion then, just to finish, has that failure to give that support resulted in more costs and more prob- lems?
Mr. LEHMAN. Thank you very much. And I do have more ques
tions. I will submit them in writing.
Mr. BLACK. To follow up, the sales did not stop in 1988 of subor- dinated debt. The sale continued of subordinated debt. Mr. PATRIARCA. Until March 1989, I think.
Mr. LEHMAN. So they continued up until this March. Thank you, Mr. Chairman. I have other questions. I will submit them in writing.
The CHAIRMAN. But to follow through on that, and leading up to this very moment of this morning's hearing, there is no question that even in preparing your testimony, you had been, I believe, im- properly approached through-I guess the assistents to Mr. Wall, to coordinate.
What our desire has been from the beginning, and it will contin- ue to be, is to elicit freely given independent testimony; that hear- ing that we will have and are having represents the views of the individual witnesses, and that it not be prefabricated or precondi.
tioned by either agency officials or those who, now in power, are dedicating most of their waking hours to try to either cover up or try to defend the actions they took last, year.
The Office of Thrift Supervision was informed of our position. Yet, there has been an apparent attempt to coordinate and to de- velop a single approach on these issues. Frankly, I think these are simply clumsy attempts to attempt to intimidate, to limit, or ob- scure the testimony needed to get to the bottom of this case.
I want to ask each of you gentlemen what approaches were made to you concerning your appearance and your testimony here today. Mr. PATRIARCA. Initially, I had discussions with Mr. Dochow, who is my direct boss, you know, who suggested that we needed to get together and work on testimony by my bringing knowledgeable people from San Francisco into the Washington office. My response was, "All the stuff that we need to prepare our testimony is in San Francisco. We can come in and you can identify what you want us to do, but we need to work there."
A time was set for our coming in for such a session. In between, the committee made its desire known that there not be any coordi- nation of testimony. We did come in for the meeting, and we were informed by the Bank Board's director of litigation at some ex- traordinary length that-I'm sorry-the OTS director of litiga- tion-at extraordinary length that there would be no attempt on the part of anyone at the Office of Thrift Supervision to influence our testimony; that we were free to get up and leave the room at any point in time; and there was very full Miranda-type warnings that nobody was going to tamper with us.
Mr. Chairman, what the committee probably doesn't have a very good perspective on, but I think the people at the Office of Thrift Supervision do, is that, because of our general attitude, Mr. Black and I are reasonably tamper proof-if not tamper proof, certainly tamper resistant. We are not typically the most cooperative folks, and we, I think, are known for speaking our minds.
So, regardless of what the intention was in terms of coordinating testimony, I really don't think there was any realistic expectation that we were going to be susceptible to being intimidated. I think Mr. Black's testimony, at least, bears that out. And I don't think that there was any meaningful attempt to intimidate us or to alter our testimony.
The CHAIRMAN. But there was an attempt to bring you here at a prehearing meeting.
Mr. PATRIARCA. Yes, that's correct.
The CHAIRMAN. And discuss your testimony.
Mr. PATRIARCA. At the meeting that happened, the discussion was not of the testimony, but basically it was an oral chronology of what happened in the course of the handling of the Lincoln case. The CHAIRMAN. Which obviously is disparate because of the out- line we got today as to the chronological course of events and the omission, glaring omissions in it.
Mr. KLECZKA. Mr. Chairman, prior to leaving for the vote, if I could ask just one follow-up question.
Are you saying, Mr. Patriarca, that at one point, the Office of Thrift Supervision wanted to coordinate the testimony, but then they dropped that request later on?
The CHAIRMAN. The committee will come to order, and I believe my colleagues here on this side who have been recognized, will un- derstand if I go to this side and ask Mr. Kleczka if he wishes to question. But I wanted to wrap up where we left off, Mr. Kleczka, because I think you really succinctly stated what I think is deplora- ble, in that I don't think any one of us wants to tolerate it.
It looks like the OTS Director, Mr. Wall, continues the same tac- tics he demonstrated all during the time he was chairman of the Home Loan Bank Board toward Congress in general, some of us in particular, a rather contemptuous attitude towards the processes and especially the congressional responsibility.
I think you gentleman realize that it wasn't until January 6th when we brought Mr. Wall before this committee, that the Con- gress hed received more than just a press handout-it was during a December blizzard-explaining all of the announcements of the deal. I feel strongly that-and I said so at the time that we had the conference, that to allow Mr. Wall to have been grandfathered by the President's bill, by creating a new office that the President is supposed to fill, that in not following what I'm sure are statutory requirements-of course, I haven't had a chance to follow it-Mr. Wall is statutorily not competent to handle it.
But I think that at this point, I'm going to tell my colleagues that it is my considered judgment that-and we shouldn't even have to do that if the man had any self-respect-that given what we have been told here, as the last words given to us by the wit- nesses, that Mr. Wall should be requested to step aside because he's intermeddling-and we're going to have future witnesses that will be directly under his control-in the processes in obviously an improper way, and that as long as the pending hearing is here, we're going to give him a chance. He's one of those we've subpoe naed, and I was perfectly willing to wait.
But in view of the fact that he has anticipated by actually at- tempting to coordinate-actually influence, maybe perhaps not the content, because, as Mr. Patriarca and Mr. Black amply demon- strate, he knew it wasn't going to succeed, but at least an effort was made to kind of set the environment by virtue of which the testimony would be given to this committee.
I just feel that Mr. Wall should step aside pending the outcome hearings and whatever action on other levels outside of the juris- diction of this committee, and perhaps the Congress itself, are taken, and I in fact would even like to ask the President. The President told us, when he sent us the bill-and I have praised him because he and the Secretary were the first to assume any respon- sibility-that he wanted to make sure that never would anything like this happen again, and that those persons responsible in any
manner, shape or form for this would not have anything to do in the future with this activity.
So I was sorely disappointed when I saw the grandfathering of this individual. But I think now I would ask the President to con- sider a request that he ask Mr. Wall to step aside until the resolu- tion and the outcome of these hearings. So now Mr. Kleczka?
Mr. KLECZKA. Mr. Chairman, in response to your renewed cail for Mr. Wall to step aside, as you recall you and I both have re- quested the same in the past to no avail, and I suspect Mr. Wall probably won't heed your advice at this request either. But never- theless I do want to compliment the panel that has testified for about 8 hours before this committee now.
As I look at the various members of the panel, I think the State regulators are in pretty good stead. It seems that the OTC can't come after you folks. And Mr. Selby, unless American or Lincoln or Keating or Wall can get at the Social Security Trust Fund, I think you're in pretty good stead too.
Mr. SELBY. I've thought of that several times.
Mr. KLECZKA. OK, but that leaves two members right in the center there, and if I were sitting in your chair, I personally would be concerned about retribution coming your way from the people who are involved in this scandal and who are currently still serv ing in some capacity or other. If in fact that does occur, I'm assum ing that you will have no hesitation in informing the chairman and the members of this committee of any incident in that regard.
Nevertheless, the few questions I have entail Mr. Black's testimo- ny. On page 49, you indicate that Lincoln used its ties to Don Regan to have Henkel appointed as a Bank member during a con- gressional recess. What ties can you relate to this committee that Don Regan had with Lincoln, and do you have any information or knowledge that Don Regan knew of Mr. Henkel's holdings with American Continental?
Mr. BLACK, Well, certainly the administration knew about his holdings with American Continental. They were discussed and there was-I'm sorry, borrowings from Lincoln Savings. They were discussed and he had to disclose them and you have to go through extensive discussions and checks to ever get to the point of nomina- tion.
Mr. Keating is the one who has stated publicly that he did it through Don Regan. That is a statement in the press, and the loans that Mr. Henkel had were very large and far beyond his credit ca- pacity.
Mr. KLECZKA. So the administration, the past administration, armed with that knowledge still had no problem recommending his appointment as a Bank Board member?
Mr. BLACK. Well not only him, but Lincoln came within-choose whatever cliche for small you want, very close to getting a majority of the Bank Board. Again working through Don Regan apparently, they were able to get Dr. Benston, their consultant, their paid consultant. My memory is all the way to the official intent to nominate letter stage, where he apparently then ran into unrelated political Mr. KLECZKA. Problems?
Mr. BLACK. Difficulties in the Senate.
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