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.