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I am writing you in regard to the Board's consideration

of the direct investment regulation.

I am well aware of the controversy surrounding the issue and the possibility of a short extension to accommodate hearings. Some well-capitalized and well-run institutions may have valid concerns which, after careful scrutiny, might lead the FHLBB to modify the rule by granting more flexibility for such institutions. On the other hand, the 10%-of-assets test might prove to be too generous for some institutions. Without question, continued analysis of a direct investment regulation is necessary.

However, it is my considered judgment that a clear majority of the Members of Congress are in favor of extending the limitation on direct investments. As a general rule, if the Congress acts on an issue, it becomes a more permanent decision. Such a result would limit the flexibility of the FHLBB to implement modifications to the rule now and/or in the future.

Therefore, I strongly recommend that the Bank Board extend the direct investment regulation for at least one year, making only those modifications, if any, that it believes are currently justifiable.

Sincerely,

Jake Garn

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Thank you very much for your letter of July 29. I read it with great interest. It reflected a good deal of thought on your part and brought into focus very constructively the problems faced over the last two years by the Federal Home Loan Bank Board.

In my experience on the Banking Committee, particularly
since assuming the Chairmanship, I have found that the
members of Congress are keenly aware of the sensitive posi-
tions of the Federal deposit insurance agencies, including
the FSLIC. We recognize the obligation of the Federal govern-
ment with respect to the funds. More importantly, we are
cognizant of the public's demonstrated faith in the funds and
the crucial importance of our maintaining that confidence.

I believe that the Federal Home Loan Bank Board under
Chairman Gray has also been mindful of its responsibility to
protect the FSLIC and has carried out its duties courageously.
You point out the extraordinary atmosphere in which your
industry and the Bank Board have had to operate these past
few years, and I could not agree more that this environment
has presented major challenges to everyone.

I have not agreed with each and every action of the
board; I doubt that any member of Congress could say that
he endorses any Federal agency 100 per cent. But I have
been as aware as any Congressional observer of the operations
of the Board, and overall I rate its performance as superior.

AFFIDAVIT

I, Kevin O'Connell, being duly sworn, do depose and state as follows:

1. I am Deputy Director, Special Cases, Office of Thrift Supervision. My business address is 1700 G Street, NW,

Washington, DC, 20552. I was hired by the Federal Home Loan Bank of Chicago in 1984 as a Senior Supervisory Analyst. I became a Supervisory Agent in 1986. In late April, 1987, I joined the staff of the Office of Regulatory Policy, Oversight and

Supervision in Washington, DC.

2. Upon my arrival at the Office of Regulatory Policy, Oversight and Supervision ("ORPOS") in April 1987, I was assigned to the case of the Lincoln Savings & Loan Association ("Lincoln"). Among other functions, ORPOS was responsible for reviewing regulatory recommendations made by the Federal Home Loan Banks. At that time, Lincoln was being supervised by the Federal Home Loan Bank of San Francisco ("FHLB-SF). When Lincoln was transferred to the supervision of Washington, DC from the FHLB-SF in 1988, I became a Supervisory Agent of Lincoln. I continued in that position until supervision of Lincoln was transferred back to the FHLB-SF after Lincoln was placed in conservatorship on April 14, 1989.

SPECIAL COUNSEL

3. During the summer of 1987, I was the ORPOS staff member responsible for reviewing Lincoln's appeal of the FHLB-SF's denial of Lincoln's application to purchase some branches from another association. I am aware of a memorandum written by Valerie Lithotomos, an FHLBB attorney, in which she states that I told her on November 19, 1987 that "anything to do with Lincoln is politically dangerous" and that FHLBB Chairman Wall told Darrel Dochow that he did not want anything involving Lincoln to go to the Bank Board.

4. I have no recollection of any conversation with Valerie Lithotomos on November 19, 1987 with regard to the Lincoln appeal. I do recall discussing the Lincoln appeal with Kathy Willard of the FHLBB Office of District Banks. I believe I told Ms. Willard that the Lincoln appeal was sensitive and that there were leaks regarding the association, therefore, it was my understanding that FHLBB Chairman Wall wanted as few people as were necessary involved in the case. I believe I told Ms. Willard that it was my understanding that FHLBB Chairman Wall told my supervisor, Darrel Dochow, that Mr. Dochow was to "take care" of this matter. I do not recall saying "nothing is to go to the Board" or using the words "politically dangerous" to describe the Lincoln matter.

Any reference I made to the sensitivity of the case reflected my desire to limit the number of people with access to Lincoln documents in order to prevent leaks, consistent with what I understood to be Chairman Wall's instructions.

5.

In late September 1987, I became aware of the meetings between Senators Cranston, DeConcini, Glenn and McCain and the FHLBB Chairman Gray on April 2, 1987 regarding Lincoln and the April 9, 1987 meeting among those Senators and Senator Riegle and the FHLB-SF regulators when I read the article about the meetings in the National Thrift News. To my knowledge, these meetings between the Senators and the regulators had no effect on the FHLBB's treatment of matters related to Lincoln.

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