XV. A. ACC's Attempts to Sell Lincoln Summary of the Acquisition Applications By November 1988, it became clear to ACC that the only way to put an end to the debilitating battle with the FHLBB was for ACC to sell Lincoln. The ensuing efforts culminated in the execution, on December 19, 1988, of an agreement, subject to FHLBB approval, to sell Lincoln to Lincoln Acquisition Corporation ("LAC"), an independent investment group headed by Spencer Scott, a well-known California savings and loan executive. LAC filed its Application H-(e)l for approval of its acquisition of Lincoln ("LAC Application") on January 20, 1989. From that date, LAC engaged in extensive negotiations with the PHLBB, and amended its Application three times in an effort to meet the FHLBB's demands. Despite LAC's efforts, the FHLB8 effectively rejected LAC as a future owner of Lincoln. On March 7, 1989, Lincoln Savings Acquisition Corp. ("LSAC"), a group headed by former Congressman John Rousselot (also`former president of the National Council of Savings Institutions), filed its application ("LSAC Application") and thereafter participated in almost daily meetings and correspondence with FHLBB and ORA officials concerning virtually every aspect of the proposed acquisition. Throughout the course of these negotiations, which continued through mid-April 1989, LSAC filed six amendments to its Application, each representing concessions to concerns and demands of the PHLBB. Although the fifth amendment described a transaction essentially structured by the FHLBB, and markedly different from the application (so different, in fact, that the fifth amendment was presented in the form of an application), the FHLBB, on April 5, 1989, refused to approve the proposed group of investors. On April 12, 1989, Rousselot filed yet another application. This application was designed to meet all of the demands and concerns raised by the FHLBB as of that date. In response to the PHLBB's April 1989 demand that the proposed capital infusion to Lincoln be increased from $50 million (the amount proposed in each Application and amendment previously filed with the ORA since December) to $200 million, LSAC proposed to invest $50 million at the outset, and, as necessary, to raise an additional $150 million over a three-year period. Although Rousselot met with each of the three members of the FELBB on Apríl 13, 1989, the FHLBB refused to withdraw its last minute and completely unreasonable demand that the $200 million capital infusion take place immediately upon the closing of the acquisition. R 000265 The LAC Application filed on January 20, 1989, would have enabled LAC to acquire one hundred percent control of Lincoln, and to operate Lincoln, without any financial assistance from the FHLBB or FSLIC, and, therefore, without any burden on American taxpayers. LAC's Chairman and its President had more than sixtyfive years experience in the management of thrifts. Under the LAC proposed transaction, Lincoln would exchange newly-issued cumulative preferred stock in Lincoln, with a face value of $288,750,000, for all of the preferred stock of Lincoln ($10 million face value) held by ACC and for substantially all of the common stock of Lincoln held by First Lincoln. Additionally, LAC would invest $50 million in preferred stock of Lincoln. LAC would purchase the shares of common stock of Lincoln held by First Lincoln for $100,000. No other capital stock of Lincoln would be issued and outstanding. The proposed acquisition was structured to divest Lincoln of certain assets considered by the FHLBB to be unconventional and non-interest-income-producing to accommodate the FHLBB's expressed concerns about the "risky nature of these assets. For example, ACC would purchase from Lincoln, at book value, all of the stock of CHG and of CRESPIN (collectively, the "Hotel Stock), all of the capital stock of General Oriental Investments Limited ("GOIL") and certain undeveloped residential lots in the vicinity of the Phoenician Resort for an aggregate price of approximately $390 million, payable by promissory notes secured by these assets. The acquisition also was designed to relieve Lincoln of an obligation to a commercial bank that Lincoln had incurred by financing purchases of ACC stock through the ESOP. The preferred stock to be purchased by ACC would provide for a nine percent annual dividend rate would be callable three years after issuance, and would be subject to subordination to up to $50 million in preferred stock or debentures to be purchased by LAC. In the event of default in payment, the dividends payable on the preferred stock to be acquired by ACC were to be subject to offset against the interest payable on the four promissory notes to be made by ACC, and vice versa. LAC intended to operate Lincoln as a traditional savings and loan institution, stressing residential lending and reducing, as quickly as economically feasible, Lincoln's investment in noninterest bearing assets. LAC did not request financial assistance from FSLIC, but to enable LAC to acquire and successfully restructure Lincoln in accordance with the FHLBB desires over a reasonable period of time, it did request regulatory forbearance with respect to the following matters: 95 1. waiver of the loans-to-one-borrower provisions to enable Lincoln to hold the promissory notes from ACC; 2. forbearance from further regulatory valuation of existing assets of Lincoln absent a change of circumstances likely to result in a material change of value; 3. determination, for regulatory purposes, that investment securities owned by Lincoln at the closing were held for purposes of investment, not trading; 4. continued applicability of the MOU; S. rescission of all supervisory agreements and directives issued by the FHLBB with respect to Lincoln; 6. authorization to pay dividends on preferred stock, without notice, so long as dividend pay ents did not reduce Lincoln's regulatory net worth below the required levels; and 7. a determination that the ownership by ACC of preferred stock of Lincoln, after the acquisition, would not make ACC an affiliate of Lincoln for regulatory purposes. Consistent with LAC's proposal to operate Lincoln in a manner conforming to the FHLBB's view of a traditional thrift, financing residential investments, and reducing direct investment in real estate and corporate securities, LAC also planned to manage its investment portfolio to liquidate these securities at a gain, as permitted by market conditions. By 1991, LAC expected to reduce mortgage backed securities holdings from a book value of $1.434 billion to a book value of $792 million. LAC also intended to liquidate Lincoln's equity holdings and United States government and municipal bonds at the earliest opportunity, and to reinvest the proceeds in newly originated and purchased loan assets. LAC intended to develop loan origination capabilities in the branch network with a focus on residential and commercial real estate and non-real estate loans. LAC also proposed to reduce Lincoln's portfolio of real estate holdings as expeditiously as possible, and to convert the proceeds into interest-earning assets. All of LAC's projections reflected the intention that, at the time of the acquisition, the book balances for each of Lincoln's assets would be marked to market through purchase accounting. LAC anticipated net after-tax profits for the first three years of its control of Lincoln to be $32 million, $63 million, and $73 million, respectively. R000267 Given its objectives, LAC expected that there would not be a need for high cost funds, and intended to reduce Lincoln's cost of funds by converting the bulk of Lincoln's brokerage certificates of deposit to branch based deposits. LAC requested authority to close the transaction on February 22, 1989. On that date, LAC proposed to contribute $2.9 million to Lincoln, and to purchase the outstanding common stock of Lincoln from First Lincoln for $100,000. Within thirty days of closing, LAC committed to acquire an additional $22 million and use its best efforts to acquire an additional $25 million of regulatory capital within six months of closing. Even though the FHLBB had encouraged a sale, approval was not forthcoming. Instead, the FHLBB made a series of comments and demands that reflect an unusual level of paranoia.957 LAC responded to the demands and comments of the FHLBB including by (1) confirming that LAC envisioned no further transactions between ACC and Lincoln after the closing; (ii) providing an opinion letter from Touche Ross & Co. that the purchase of Lincoln by LAC would be a sale and would qualify for purchase accounting; (iii) providing a draft of a preliminary opinion letter from Touche Ross & Co. that the notes receivable from ACC would not offset the preferred stock to be acquired by ACC; (iv) clarifying that its request for a determination that ACC would not be a holding company to confirm the conclusion of LAC and Lincoln that ACC's ownership of the Lincoln preferred stock would not provide ACC with the requisite control to render ACC a holding company, which was supported by a legal memorandum from reputable counsel; (v) acceding to FHLBB demands to incorporate in the purchase accounting the proposed write downs, write-offs, and reserves requested by the FHLBB in its 1988 ORA Examination Report; (vi) agreeing to make adjustments for additional write downs or adjustments requested as a result of any subsequent, exam; (vii) confirming that while it did not intend to engage in securities trading, securities held in an investment portfolio could be 957 Little did LAC or ACC know that FHLB-SP was advocating that 97 disposed of prior to maturity in order to maximize gain or minimize loss, that all trading activities were conducted consistent with GAAP and/or FHLBB regulations; and (viii) confirming that LAC did not contemplate incurring additional debt. LAC requested that it be permitted within thirty-six months after acquisition to acquire an association in a district other than the Eleventh District pursuant to the MOU. During that interim, it requested that its audits be conducted by ORA, Washington, D.C. LAC further requested assurances that it would not be forced to revisit issues that were the subject of the 1986 Report since revisiting those issues would only hinder the restructuring of Lincoln. In addition to previously requested forbearances, LAC requested that the capital of Lincoln be grandfathered as to its equity risk investments and goodwill, pursuant to the MOU, so that LAC could operate Lincoln over a reasonable period while restructuring. LAC provided a detailed business plan which included a strategy for managing and accounting for Lincoln's securities portfolio and reducing Lincoln's operating expenditures, described the nature, geographical focus, and fee income of the loans it proposed for Lincoln to issue, and detailed its plans to liquidate real estate owned by Lincoln. LAC complied with FHLBB's demand for 'worst case' projections and for an explanation of how LAC intended to reduce Lincoln's cost of funds. Finally, LAC addressed the concerns expressed by ORA about the individual investors of LAC. On February 10, 1989, LAC submitted its proposal to revise Lincoln's existing operations, procedures and arrangements through (1) orderly liquidation of high risk real estate and securities; (2) inclusion of outside directors on Lincoln's management team; (3) drastic reduction of overhead, including salaries; (4) sale of nonconforming and unconventional assets; (5) continued development as economically reasonable to maximize value of certain real estate; (6) continued marketing efforts with respect to real estate; and (7) establishment of a mortgage broker network; in sum, reconfirming its commitment to residential lending by Lincoln. On or about February 14, 1989, the ORA advised LAC that its application appeared to be materially deficient because of among other matters, a number of accounting and legal problems, to be addressed at a meeting on February 15, 1989, including (1) whether the acquisition would qualify as a sale for accounting purposes and qualify for purchase accounting, with assets and liabilities marked to market; (2) whether, under GAAP, if the notes receivable from ACC were subject to offset against the preferred stock to be |