circumstances surrounding it, to my staff at the Bank Board both before and after the meeting.

6. Second, Senator DeConcini has stated he is angry that I supposedly concealed at the April 2 meeting that there was going to be a criminal referral with respect to Lincoln Savings. He stated that I knew the Bank Board was pursuing possible criminal referrals regarding Lincoln Savings in December, 1986. The truth is I did not know then, or even on April 2, 1987, that a criminal referral was either being pursued or that there would even be a criminal referral. And, as I recall the testimony of Mr. Black and Mr. Patriarca, they did not even decide to make such a referral until April 9.

7. Third, Senator DeConcini suggested in his testimony that I had no reason to feel pressured from the senators on April 2 since the Senate had already passed a FSLIC recapitalization bill by the date of the meeting. This suggestion completely ignores the reality of my efforts throughout this period with respect to FSLIC recapitalization. To be sure, the Senate (but not the House) had passed a 7.5 billion dollar measure before the April 2 meeting, but it was my emphatic public position (and the Bank Board's) that this amount was grossly inadequate, and we were lobbying vigorously to increase it to the 15 billion dollars we had requested. (Our continued lobbying did ultimately produce a

I very much needed the senators' support, and I certainly believed I could not afford to alienate them, under these circumstances.

This

8. Senator DeConcini denied that I and my regulatory colleagues were pressured at the April 2 and 9 meetings. contrasts sharply with Senator DeConcini's views of a year earlier when, at a press conference he called in Phoenix on January 5, 1990, he freely admitted that we, the regulators, were "pressured" in the April 2 and 9 meetings. (I submitted the full text of that press conference to the Committee last February).

The CHAIRMAN. Unless there is some reason why a witness per-
haps having some time problems, it is the Chair's intention to call
you in the order we have listed you. So we would recognize Mr.
William Crawford, the commissioner for the California State De-
partment Savings and Loans, first.

STATEMENT OF WILLIAM CRAWFORD, COMMISSIONER,
der CALIFORNIA STATE DEPARTMENT SAVINGS AND LOANS

Mr. CRAWFORD. Mr. Chairman, Members of the committee, my
name is William J. Crawford. I have been the Savings and Loan
Commissioner for the State of California since February 11, 1985. I
entered this business many years ago in 1948 as a regulator, as an
examiner; went into the industry in 1954; and, in 1984, late 1984,
the Governor asked me how I would like to be Savings and Loan
Commissioner.

So I said fine. I became a regulator again. I hope by next April
that I will end my career, but I started as a regulator, end as a
regulator, but most of my experience is as a regulatee. I gave a 10-
page prepared statement. Attached to the back of that statement
are some schedules. As a former regulatee, I am used to going to a
board of directors and being held accountable on a monthly basis,
and on Thursday you deliver the financial statements. The third
Tuesday was the board meetings.

The Thursday before you had to have the financials and every-
thing and the agenda that was going to come up at the board meet-
ing. So I would like to just, in my short prepared statement here, I
would just like to go through the exhibits I've put on the back. Ba-
sically, you look at an organization to see if they have a consistent
history of success. To figure out if they have a consistent history of
success, you have to look at their peers.

I was always comparing myself to the peers. Here are eight of
eleven top savings and loans in the United States are in California.
The No. 8 is Downey Savings and Loan, that just happens to be
nearly a perfect match for Lincoln with $3.8 billion in assets. In
fact, they are a little smaller. They ranked 67th in the country
compared to Lincoln at 65th.

Now, I know this is an unusual period because we got a new
bookkeeper in Lincoln when we got a conservator, but for the first
6 months of this year, Downey Savings earned $27 million, and
with the new bookkeeper, Lincoln lost $817 million. The California
industry lost $719 million, but if we didn't have Lincoln, the Cali-
fornia industry would have had a positive earnings of $98 million.
California is a large Savings & Loan State where there are many
successful peers. They have $402 billion in assets; 29 percent of the
assets. The California State chartered industry was a very prestigi-
ous industry during the 1960's and historically. In the 1980's when
they permitted conversion to Federal stock companies, we lost our

Patriarca Exhibit 1

three premier institutions. No. 1, 2 and 3 on this list used to be
State charters. But we had some that were not so premier, and
American Savings and Lincoln Savings also were State charters
but were lost through conservatorship.

Downey is the only State charter left. In examining Lincoln and
American Continental, I decided that I could not understand the
company without looking at American Continental. So I sent an ex-
aminer to the library to look up the record clear back to 1973, and
Mr. Keating has said that he ran a successful profitable thrift, a
sound institution. From 1973 to 1982, American Continental in-
creased its liabilities by $81 million and decreased its net worth by
$5 million.

They took it over February 11, 1984. I omitted 1983 because 1983
was a window-dressing year with financing from Drexel Burnham.
Though the company only averaged $800,000 a year in earnings for
the previous 10 years, they made $19 million for that 1 year, but
they also blew up their liabilities, assets and net worth by borrow-
ing.
might mention that Mr. Keating states that he bought a trou-
bled thrift and turned it around. Actually, this was a case as shown
in section C where the little fish swallowed the big fish. American
Continental had $23 million in net worth. He made a decision
sometime during 1983 to buy this company. So I took the December
31, 1982 figures and American Continental had $230 million in
assets while Lincoln had $829 million.121Lincoln had $29 million in
net worth. American Continental had $23 million. Now, he said he
bought a troubled thrift and turned it around. He paid $51 million
for it. That is 1.8 times Lincoln's book at that time. He paid 2.2
times American Continental's book for Lincoln. He said that he
bought the stock of a troubled thrift. Lincoln was trading on the
market and he bought some of the shares at $8 a share.

But for more than 80 percent, about 82 percent of the shares, he
paid $20.83. If you divide that by the $8, he paid 2.6 times market.
You don't pay 2.6 times market for a troubled institution. You see
one that's troubled, it's got $17 a share and the first thing you
know it's a dollar a share or 25 cents a share.

So then we look what happened in the 44 years while they were
still keeping the books, and between February 11, 1984 or the end
of 1983 and September 1988, which was the last time they reported
to their shareholders, they increased their liabilities by $6 billion
and decreased the net worth by $125 million.

Now, all this is with ACC keeping the books and the books were
cooked, so this is a best case scenario. Now we get a new conserva-
tor and bookkeeper and in the 9 months from September 1988 to
June 1989, the tangible net worth went down a minus $948 million.
Actually, they decreased it from a positive $140 million. So it went
down over a billion dollars.

Next page, I show how they compare with 35 and 11 retail type
operations. The 11 retail type are in the 35 and the left hand
column is Lincoln. Lincoln had less than 4 percent of its assets in
consumer type lending. Consumer loans, one to four family units,
and multifamily loans; whereas the best operations, the retail oper-
ations had 74 percent and the entire district of institutions selected
that were publicly traded had 59 percent of this type of thing.

Now, let's go to Lincoln land loans; land and ADC loans. Lincoln
had 27.5 percent of its assets in this. The district average for the 35
was 1.6 percent and the retail operations only had 2 percent. So
that gives you a little profile of their asset mix. Then we go down
to how they ranked in the whole United States. This was the 11th
district. This was the whole United States.

They were 65th in size. They were first in land and ADC loans;
third in legal expense; 11th in professional fees; and 14th in broker
deposits. The Arizona newspaper carried an article of the highest
paid executives in Arizona. The 17 highest paid executives. Eight of
those 17 highest paid executives worked for American Continental
Corp. I believe in the last 3 years this company, the parent itself,
leaving Lincoln out, lost about $25 million each year.

You'll notice the salaries. $7.9 million they paid in 1988 to these
eight executives. And you'll notice the second highest paid execu-
tive only worked-he made $1 million, but he only worked for I
think 8 months. If you analyzed his salary, it would be $1.428 mil-
lion, and that's $119,000 a month.

When we handled the first initial buyer that came through, the
Ernest Leff Group and Spencer Scott, we were told that Charlie
threw them a curve ball. He was going to push down Jack Atchison
from American Continental into Lincoln because he had a 2 year
severance pay in his contract. That's just hearsay, but that's what
they represented.

American Continental, if you look at the structure, this had 54
corporations. The bottom part of this shows that-

The CHAIRMAN. Mr. Crawford, will you yield to me at that point?
Mr. CRAWFORD. Yes.

The CHAIRMAN. This list of individual's salaries that total $7.9
million, do you know whether these are Keating family members?
Mr. CRAWFORD. I think Mr. Wurzebacher is. Of course, Mr. Keat-
ing. Charles Keating, III. Robert Hubbard. Four of them are. Half
of them. That's a good mix.

The CHAIRMAN. Well, he is a family man, you know.

Mr. CRAWFORD. That's right. In the first group here, you'll notice
that they only have first and second tier subsidiaries in American
Continental. But you go down to Lincoln Savings, you get the fifth
tier subsidiaries. That gives you a lot of places to hide the smoking
gun.

If you look at the number of corporations they had when they
acquired the company, they had 17. But in 1984, right after the ac-
quisition, they added another 17 and then they added more than
that, to where they had more than triple the number of
tions they had before.

corpora

This is very difficult to get in and out in 4 months. They want
you to get in and get out in 4 months. If you had a simple institu-
tion, that's fine. I wanted to say a little something about-you
don't have this exhibit, but counting the person that was in place
at the time they took over the institution, they said they were
going to keep it as a traditional thrift and they were going to aug-
ment the staff.

Well, they certainly augmented the staff. They had seven chair-
men, counting that person, and counting John Rousselot, who
became chairman on April 11, 1989. They had six presidents, in-

cluding Roger Clark from the FDIC, which is running the institu-
tion now. So that's quite a turnover. They didn't have any turnover
at the ACC top. I think sometimes the presidents and chairmen of
the board of Lincoln were just errand boys to go back and forth.
I have one other thing. They talked about examinations and
what we do about it. We examined this institution with four regu-
lar exams and two special exams. So that's six since the institution
was acquired. When I came to work in February 1985, we only had
98 employees on staff. Right now, we have 64 examiners, about 16
appraisers, about four attorneys, and the rest are administrative or
clerical.

ACC needed 48 CPAs and 15 attorneys on staff, yet I showed you
where they ranked with Savings & Loans in the United States on
legal and professional fees. So this was a complicated organization,
complicated on purpose to conceal the true nature of the transac-
tions.

[The prepared statement of William Crawford can be found in
the appendix.]

The CHAIRMAN. Thank you very much, Mr. Crawford. The next witness is Mr. Davis.

STATEMENT OF WILLIAM DAVIS, CHIEF DEPUTY COMMISSION-
ER, CALIFORNIA DEPARTMENT OF SAVINGS AND LOAN

Mr. DAVIS. Mr. Chairman, my name is William Davis. I'm the
chief deputy commissioner for the California Department of Sav-
ings and Loan. I was appointed to that position in April, 1985 and
have worked with Commissioner Crawford since then. Prior to that
I was in the savings and loan industry in California since 1962,
about 23 years in the industry as a regulatee.

I really do not have any opening statement today except to say
that we're here to look into the Lincoln insiders and how they pro-
vided the fanciest financial fiction that money could buy. As Mr.
Crawford said, it took 48 CPAs and 15 attorneys on their staff to
keep this fiction believable. It also took the assistance from many
outside, expensive validators and no one will ever know the true
cost of the Lincoln case.

Mr. Keating and others charge that the regulators were endeav-
oring to write down Lincoln's valuable assets and were ruining his
healthy, profitable financial institutions while the regulators did
not originate any of these assets nor any of the other high risk
strategies that produced a $948 million negative tangible net worth
for Lincoln June 30, 1989 and we're just pleased to be here and
pleased to answer your questions. Thank you.

The CHAIRMAN. Thank you very much, Mr. Davis. I wanted to
say that we're very grateful for the voluminous testimony that you
presented in your formal presentation. That will be in the record
intact and therefore we are very grateful for the excellent manner
in which you have summarized and encapsulated your testimony.
Our next witness is Mr. Patriarca.

STATEMENT OF MIKE PATRIARCA

Mr. PATRIARCA. Good morning, Mr. Chairman. My name is Mike Patriarca and at the outset, Mr. Chairman, I would like to express