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I've received your September 11 letter recounting our phone
conversation of the previous day. I feel compelled to respond
because I don't recall our conversation us outlined in your
letter.
1. You nentioned that you vere virtually finished putting

together the documents requested La Bahibit I of Richard
Sanchez's August 31 letter. I recall no representation that
Lincoln Wii usk Leye, Scholer to prepare the responses and
no mention of September 23. We are, of course, anxious to
receive the information requested and hope to beve it as soon

as possible.
2. We discussed the scheduling of . neeting mong you, we, and
the Bank Joert

TT G Washington. I stated that I would
not send sesers to Llacolo to perfon the field visit,
scheduled for September 14, until after we had the meeting. I
cannot agree with your letter's statement that: "There vil
be no on-site visit or additional information provided metil
certata Larues regarding the current contation are
resolved." I cannot predict 11 or when you will consider
chose unspecified forces resolved. I stand by sy statement
that the field visit will not take place until after we have

ortunity for the meeting we discussed. 1
the meeting is scheduled to take place on

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Mike

FHLBB-LIN-6932
Michael Patriares
Director, Agency Grace
/co
bce: W. k. Klock, C. A. Doardorff, G. Robinson, R. A. Seaches
Record Copy: N. Patriarca, Agency Group

Cellortowe
mon. to w

n95-011-9473235

SPECIAL COUNSEL

hencea Colonia MON or no

EX. 566

Hmoni cum
TOT, medU8L2--FILIST

09/30/87 09:47:36
To: DOCHOWD -- AIVACIDC
FROM: MICHAEL PATRIARCA, DIRECTOR

AGENCT GROUP FRANCISCO-EXT: 1801 Subject: Llacola As vo proceed to try bacal conclusions on the busis of what we know and identify what wo'ro to reach conclusions on, it has becom. plata that tbor. Li e lacredib bent of Laforustion Lo the files and la people's Loads that should be tail lato consideration. I think you should give sorious consideration to coolas out bor. (or sandlag Kovia) to review the files that practicality provento shipping to Wasblastoa. Moreover, I thlak it's critical to talk to the outsido folks who have been bolping us for a artended tia ca this w. These laclude the attorney from Piilobury, tho sccountants from Loveatbol and, perhapo, cartate of the appraisers who have looked at the moro complex proporties Lovolved. Quito frankly, I don't think cayooo could perfon en Ladependent review and hope to reach a laformed and voll rousoned decision without undertaking those kind of Laquisies. Soparately, I': told that Lincolo delivered to you yesterday another 70 page submission. Al is sxpressing & copy to us. But tho tising of the submission raises serious questions about the conclusion schedule you outlined to re. Additionally, it seems a bit odd that we were instructed not to send axan inorg lato the institution to get needed Information so that the axan could be closed out and, at the same time, the institutioncontinues to prolong the reveiw period by making 11th hour submissions. From my perception, I'. distressed that the extensive time we've afforded the institution to develop replies to our findings is seen as their due and the time it has taken us to review and analyze those responses is characterized us harrassment by drageing

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out the un process. Thero 10 lomy blatory of actions on the part of the
institution that has directly offocted the amount of time tho un bus takaa.
It's simply unfair to bave those actions and our attempts to give the overy
opportunity to toll their side of the story characterized us dollboreto
dolaying on our part. It is not only mots, it's utrus.
While I welcome any enount of scrutiny of our actions during this an (or an
this case generally), that'. not the point of this note. The point is: to do
the independent review you've undertaken, you have to undertake the inquirius
I outlined in the first paragraph. We will make arrangements for you to post
with the outside amprell only give us • dato. Our staft cm bo
availablo any ting
cc: CMSSURAS--FILDSI

Seaches CMSSUCAD--FHLBSF Charles A. Doordos
CHSLGWE -- FHLBSP

TE Black CHSLGGSR--FHLBST Glonda Robinson
CMSSUSLR--FHLBST

Kodeguas
MICHAEL PATRIARCE
AGENCY GROUP - SAN FRANCISCO
s Llacola

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OTS-D11-0547172

FHLBB-LIN-106728

SPECIAL COUNSEL

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We have yet another delay in coming to a decision about Lincoln, though I sense è consensus starting to build in favor of a stronger action than simply a Meirior andum of Understanding.

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The meeting began with Jordan Luke e plaining why Lincoln did got appear today to give their side of the story. Lincoln strenuously objectec to anyone from S. F. being there. In particular, Margery Waxman reported that the officers in Phoenix stated that there had been "run-in" with Richard Sanchez and Charles Keating, and they were not going to appear if Richard was here. George Barclay then took a very hard line, saying that "somewhere down the line we are going to have to stand up to these people, and I think this may as good a time as any to do it." He was clearly irritated at the association's attempt to dictate who the ERC could invite to its meeting. Karl Hoyle seconded that theme, saying that just offering them the chance to make a presentation indicated that we have been more than fair. After some discussion about possible options, Darrel, Jordan and George all approved the idea of Rosemary issuing of polite "take it or leave it" letter. As Secretary of the committee, fosemary would formally invite the association to give a presentation at an ERC meeting on Friday, March 25 at 1:00pm. In the invitation, she would state who would be in attendance, and that would include a representative of the bank, and that list of atteridees would not be open for discussion. However, the ERC would allow the association great leeway on what they would like to say. They can spend their time talking about what a wonderful association they are, or they can attack S. F., or they can do both. The subject matter would be entirely up to the association.

After that discussion, Seattle made its presentation. Effectively, Seattle said that they wanted nothing to do with the association unless the Board told them to take them. I will give you the menu that Seattle presented. In further discussion, Seattle stated that did not believe they could trust the association, and did not See chance that their operations could be turned around. They also stated that if they were asicd to tale them, they would request tire right to "write their own ticket" which would be either a Supervisor. Agreement or å Consent Grder that comunitted the association to Sbtit a business plan that puts them in regulatory compliance within a year period of time, and any material violations from that plari wedi

SPECIAL COUNSEL Les considered an unsafe and sound precio It would result in Lorraior sirip. trict desi11551on tire rose as to whether Scattic should orinally present o list of wist there would put in any such document, and there were several (including me) that were curiouS about secing such a list, but Darrel and George thought it would be unnecessary at this time.

CE then presented its case, and Rosemary stated that she did not think that transferring Districts would be a dat precedent, given the e tröordinarily unique circumstances of the case. In particular, she said that she had never seen the amount of leaks for a solvent association as has occurred with this association, which has damaged the association and poisoned the supervisory relationship between the Bank and the association. However, she also noted that there is no evidence that the Bank was behind any leaks, as the ERC learned that the only clear evidence of a disclosure was an approved disclosure by Mr. Black when he was in Washington. She clearly wanted an new and better er amination report in order to build a case for an Enforcement Action, and was distressed to hear that Seattle did not want to take on the job. She then strongly criticized San Francisco for taking in unnecessarily hard line on just about every issue that came up on this association, and in this light thought an independent analysis would be helpful. Seattle, in response, stated that an independent analysis is all fine and good, but they feared that it would be just a daisying tactic on the part of the association, and they were concerned that 6-9 months down the line they would be in the same boat as S. F., "on trial" for being too harsh in regards to handling the association. Rosemary responded that even if that were true, we would at least have had some time of "peace" to get a quality examination completed and therefore have a more accurate picture of the current condition of the association.

In the followup discussion, the question of trust predominated. Ker'shkowitz stated that the association will fight to the death biriless they have a regulator they think they can trust to allow their enough room to run a profitable institution. Both Seattle and I jupeo on triat, with Seattle saying that they were not satisfied by Heating sexplanation why he has violated prior commitments made in the Change of control application. I noted that even if Steve was right in the sense that the association's mi srepresentations were "carefully wor ded" so as to prevent someone from going to court and saying they are a bunch of liars, that still does not preclude the fact that whether the misrepresentations were legally "actionable" or not, as an SA, I would have been angered by the deception, and would treat the association with appropriate suspicion. That then lead into what it would take to persuade the association to play it straight with whoever winds up supervising them. I finally asked Steve what type of a two-by-four it would take to get their attention (atter, of course, recounting the old story of why did the farmer hit the jackass over the head with the two-by-four, "I first needed to get his attention"), and the discussion then evolved into what would be needed to get the association to play by the rules.

1

see a budding consensus building that solc sort of a two-by-four is necessary. Tii: Onix Question is what kint. I suspect there is growing frustration over the Face Oi regutiationis, sild karcisy content about eventually sleding up to tiiese people indicates womey finally just say enough is enough, and present then with è document, take it or leave it, rather than this idea of suggesting changes, only to have the association fight us and find some more "new" goodies included. But what type of a document? The Bank is saying a Consent C?.0, and Seattle seemed to endorse that, but held open the possibility that if they were getting them, an Agreement may be acceptable.

The way I see it, the only way an MOU is going to be a proved is if 1. It is coupled with something else that would serve as the two-by-four to let the association know that there is to be no more gameplaying, they either play it straight with us or we will take them over, and 2. If we set the terms of the MOU, pur suant to the changes already recommended. The only reason I still see the possibility that an MOU could be approved is that there wes a clear lack of concern among the voting members of the ERC whether the document could be enforcable. There seemed to be a clear agreement that in the event of a material deviation, a Conservator would be appointed, in keeping with Darrel's recommendation,

In summary, the association is being given a chance to make its presentation on March 25, with the s. f. Bant present. Seattle does not want the association, unless told to do so by the Board, and in that event, will want to write its own ticket. OE would favor 1 transfer, given its concerns about San Francisco's supervision, the unprecedented leaks, and its desire to get a comprehensive examination of the association under way as soon as possible. However, OE seemed to be alone in being concerned about the enforcability of any document, as the voting members of the ERC seemed to agree that a conservatorship is the way to go in the event the issociation does not change its ways. The two basic issues of who is going to examine and supervise the association, as well as wriet form of a document should be signed, are still up in the air. However, the tone of the meeting indicated that at least in regards to the content of whatever document is signed, I see a growing consensus for ending the negotiations by setting our terms.

Finally, my own viewpoint. I really could not care less what the document is called as long as the Board signed off on the concept of a Conservator ship in the event the association does not get its act together. Still, I fear an MOU would be an exercise in futility, unless it is coupled with something else, a two-by-four, if you wish. The only way I see an MOU succeeding in preserving the assets of the FSLIC is if it is accompanied by a blunt cover letter signed by Chairman Wall saying that this is the association's last chance, and that if they don't start playing it straight with us, they are history. Wty Chairman Wall? If it was by anyone else, by Darrel, Cirona or Faulstich, the association would just gripe about that per sori being unfair and go over their heads. Chairman Wall's signature on such a letter would be the two-by-four, the sign that the association does not start cleaning up its act, that they will be

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