be considered an unsafe and unsound practice that would result in a Lufisir valorship. A brief discussion then arose as to whether Scattic should formally present a list of what they would put in any such document, and there were several (including me) that were curious about seeing such a list, but Darrel and George thought it would be unnecessary at this time.

OE then presented its case, and Rosemary stated that she did not think that transferring Districts would be a bad precedent, given the extraordinarily 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 examination 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 an 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 delaying 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. Hershkowitz stated that the association will fight to the death unless they have a regulator they think they can trust to allow them enough room to run a profitable institution. Both Seattle and I jumped on that, with Seattle saying that they were not satisfied by Yeating s explanation 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 misrepresentations were "carefully worded" 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 (after, 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.

I see a budding consensus building that some sort of a two-by-four 15

S

necessary. The only question is what find. I suspect there is growing frustration over the Pace of negotiations. snu Barclay comment about eventually standing up to these people indicates we may finally just say enough is enough, and present them with & 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&D, 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 approved 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, pursuant to the changes already recommended. The only reason I still see the possibility that an MOU could be approved is that there was 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. Bank 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 a transfer, given its concerns about San Francisco's supervision, the unprecedented leaks, and its desire to get a comprehensive examination of the association underway 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 association does not change its ways. The two basic issues of who is going to examine and supervise the association, as well as what 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 Conservatorship 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. Why Chairman Wall? If it was by anyone else, by Darrel, Cirona or Faulstich, the association would just gripe about that person being unfair and go over their heads. Chairman Wall s signature on such a letter would be the two-by-four, the sign that if the association does not start cleaning up its act, that they will be

taken over. Without such a cover letter, the association will likely consider an Ma victory, and continue their merry way.

b. t a letter signed by the Chairman suggesting a Conservatorship would be a sobering development that would weigh on their minds. I'm reminded on an old stunt that Leo, OE and I agreed upon for an association that we had recommended a C & D on for violating an Agreement, and the association suggested an amended agreement that gave the SA (me at the time) the right to direct the board of directors to remove the CEO and CFO in the event of a material violation. Obviously, the personalities and histories are different, but I remember Leo's line about the clause. He did not think it was enforcable, but its presence meant that "every now and then, when the president is thinking about doing something funny, he will likely go into his desk, reread the passage in the agreement, and have lots of second thoughts." In effect, that is the effect that I believe a bluntly worded letter from the Chairman would have on the association. Whenever they were thinking of pulling something over on us, or engage in something funny, the presence of that letter would likely force them to have rather sobering second thoughts.

For the sake of discussion, I'll draft up something appropriately blunt over the next few days and send it to you for comment.

I spoke with Bruce Ericson earlier today. After reviewing
Mr. Luke's recommendation to the Bank Board he was quite
discourage both by the tone of the document (referring to
the negative comments made against this office) and the
overall lack of good options. Because of the negative
perceptions about this office, we would have to be extremely
careful about any response, lest we look even more confrontational.
He believes that MP has to make a decision as to whether we
make our preference to the Bank Board for the record, which

FILE: FILE432 OUTPUT C1 F.H.L.B. OF S.F VM/SP4 CMS

I'm sure we all would agree. I mentioned that there is one danger
of NOT responding; IF supervisory and examination functions are
returned to us, we would want total authority to do what is
necessary--without restrictions from ORPOS like we currently
have. If the Bank Board makes this decision to return these
functions we certainly would not want it restricted in any way.
Bruce agreed that if we feel that Lincoln is going to go down the
tubes in the near future, we would not want the blame put on
us if the Bank Board never gave us the appropriate authority.

Commissioner Crawford also called. He was told by T. Mar that James Grogan went to Washington last week. Grogan told Tommy that Lincoln "got everything they wanted from the Bank Board." Tommy is trying to reach Grogan to verify this. I told the Commissioner that we do not have any knowledge that this is true. I outlined J. Luke's proposal for the Commissioner and told him that it was our understanding that Lincoln's MOU would not be used as a settlement.

cc. casagjfa

Cc: CMSSUSLR--HBSF

www Lincoln

OTS-D11-0553847

I know that with the world falling apart and with the FCA activities you. been dealing with, you haven't had a chance to give me a call on Lincoln following your discussion with the Chm. as we had previously agreed. I was disturbed, however, to hear that you have scheduled a meeting with Lincol and Litigation to which neither I nor anyone on my staff have been invited My understanding of this whole exercise was that ORPOS was undertaking an independent review of our findings on Lincoln in response to Lincoln's apparent assertion that they were being harrassed by us. You reported to that you were satisified that we were correct in our assessment of the ri posed by Lincoln and that you were pleased that our people didn't fit the image of irresponsibility being portrayed by Lincoln. I understand, on the basis of Al's call to Richard Sanchez, that you have informed the Chm. of findings and that he is supportive of corrective supervisory action.

It seems to me that, having put to rest Lincoln's unfounded claims of bias our part, you would inform them of your findings and the case would be returned

to us for decisions on what kind of supervisory action was appropriate ar for execution of that decision. In fact, you previously informed me that case would be turned back over to us at the conclusion of your review. I . understand that you intend not only to tell Lincoln of the conclusions at review, but to proceed to decide and negotiate the corrective action you t appropriate. If my understanding is correct, I object to this approach in strongest possible terms. Neither you nor OE knows this case nearly as we as we. Neither you nor OE is a better supervisor than we. Neither you nor (to the best of my knowledge today) will have ongoing responsibility for Lincoln after the present storm has blown over. Plain and simply, you shou inform Lincoln of the results of your independent review and get out of tr case. We will not lose sight of the sensitivity of the case, nor will we + to keep you informed every step of the way. In fact, I will invite you to one of your staff join our team and participate in all discussions with Lincoln. But we, not you, should be running this case.

This matter is important as a matter of principle. It is important for our credibility as supervisors of institutions in this district.