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RE

I.

: Carolyn Jordan

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Meeting with James Grogan, Vice President of Lincoln Savings
and Loan Association, Irvine, California on Federal Home Loan
Bank Board proposed regulation to restrict the direct investment
authority of thrifts.

Brief History of the Issue on Direct Investment

On May 16, 1984, the FHLBB published for comment its proposed
regulation limiting to the greater of 10% of assets or twice
net worth the amount an insured thrift institution may invest
in service corporations, real estate and equity securities (stocks).
Comments were due by July 16, 1984 and the role was scheduled to
become final September, 1984. There was a great deal of opposition
to this rule from Congress. Many letters were written asking the
FHLBB to delay the final rule until next year when Congress would
have adequate time to review it and the Federal Insurance system.

This rule would mainly affect State chartered S&L's that have been
given direct real estate investment powers over 10% such as in
Texas, Florida, Ohio and California. However, California seems to
be the target of this regulation. While California State chartered
be the target of this regulation. While California State chartered
thrifts have had 10% investment powers for a number of years, as
of January 1st, this year they were permitted to invest 100% of
their assests in service corporations, real estate, and equity secu-
rities. The FHL88 feels that there powers are a threat to the
safety and soundness of the insurance (FSLIC) fund because they
have concluded that these investments are riskier than making home
loans.

II. Status of the Regulation

Because of the controversy over the proposed regulation the FHLBB
did not proceed in September. On December 10, they published a
modified proposal for comment that requires pre-approval of the
FHL38 before any savings institution could undertake direct
investments greater than 10%. The regulation as currently drafted
in no way reflects their prior view that direct investments are
"unsafe or risky" but will have the same effect as restricting
the activity by pre-approval requirements. The comment period is
30 days on this modified proposal until January 12, 1985. Presuming
that it will take the FHL38 two weeks to review the comments, the

SPECIAL COUNSEL

EX. 560

2.

proposal could become final anywhere between 4 and 6 weeks after January 12, 1985. The original fear of the interested groups was that the Bank Board would proceed to a final regulation while Congress was out of session.

Previous Actions

Attached is a letter from AC to the FHLBB dated July 11, 1984
requesting delay of final action on the original Regulation of
May 10, 1984, until Congress had an opportunity to review this
issue. AC has never taken a substantive position on direct
investments, but only that it is an issue of the nature that
Congress should review.

III. Mr. Grogan and Lincoln S&L

Mr. Grogan, is from Arizona and formerly was a constituent of
Senator DeConcini. His goup recently purchased Lincloin Savings
and Loan Association in California. Lincoln has direct investments
in real estate far exceeding 10% of their assests so their
future growth and viability will be seriously impaired by this
proposed regulation along with most other State Chartered California
thrifts. Mr. Grogin has spent a great deal of money fighting the
FHLB8 on this issue including the Greenspan study to refute the
FHLBB arguments on the need for this regulation. He has also
organized California S&L's who oppose the regulation.

IV. State Charterd thrifts vs Federally Chartered thrifts in California

The Federally chartered S&L's in California originally supported
and pushed Ed Grey of the FHLBB to crack down on the State Chartered
S&L's in California because the State chartered S&L's have broader
powers under State law than Federally S&L's. This has always been
the case under the dual regulatory system.

the case under the dust regulatory system. This is the first time however that a Federal regulator has attempted to directly preempt the state laws of all states to stop activities occuring in four states and basically only in California.

In any event, this issue in the past has separated the California state chartered S&L's who opposed the regulation from the California sace chartered S&L's wno supported the regulation.

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Because re modified rule has just been published, the California
League U.S. League do not have official cosicions as of yet.
i succcate fact that this modified regulation will bermic the
FHL38e:nto the day to day activities of all S&L's may unite

3.

V.

P.S.

the California Federal S&L's with the State chartered California
California S&L's against the FHLBB proposal. Under the rule
all S&L's must seek preapproval from the FHL38 each time an S&L
seeks to invest in real estate, or equities, etc.

Conclusion

1. Mr. Grogan probably wants you to reaffirm your support for
this matter being decided in the Congress. I suggest that
you do so and indicate that you will ask Senator Garn to have
hearings.

2. Congressman Barnard in the house plans to have hearings

early next year on these issues.

3. The FHLB8 backed down from its original proposal to prohibit
all direct investment over 10% because of the letters from
Congress such as yours. I met with the FHLBB staff in November
to be briefed on this regulation along with Senate and House
staffs. Because of the anticipated opposition the FHLBB came
out with a modified approach but in my view it is doubtful that
the FHLBB has the legal authority to preempt or modify state law
without legislation and this is what they are trying to do here.
4. During next week, while I am in Los Angeles, I will be
meeting with Dean Cannon, California League and Ernie Leff the
attorney representing those in opposition to the regulation to
get a better idea of their suggested strategies on this issue
in 1985.

Attached are some of the letters sent to the FHLBB by Congress on this issue and the Greenspan study, refuting the FHLB8's arguments that direct investments in real estate are unsound.

Additionally, you should be aware of the fact that the California S&L Commissioner (Taggart) has resigned, because of the pressure from the FHL38 (Ed Grey) on this issue and the brokered deposit issue.

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