The CHAIRMAN. I'd like to point out to my colleagues that the
committee had hearings, and we had the accounting firms in-
volved, for instance, Vernon Savings in Texas, and if the gentle-
man will refer to the transcript of those hearings, he will see a
dreary, dismal; a sad picture of the failure of the most highly
ranked and prestigious accounting firms. Mr. Keating treated them
like he does his lawyers. He went through four different account-
ing firms in 4 years.

So, I think we next go to Mr. Schumer.

Mr. SCHUMER. Thank you very much, Mr. Chairman. And I've
now sat here for 41⁄2 hours, and I have to tell you gentlemen that
this is one of the more amazing days I've had in my 15 years as a
public official. The things you've said, the things you've document-
ed are really just appalling.

If you took any one of maybe the 20 or 25 actions of Keating that
you've documented, you might say, "Well, maybe there's an expla-
nation for it." But when you add them all up, every single time he
had the opportunity to pervert or destroy the system, to take ad-
vantage of people, to maximize his profits regardless of the law, he
did it. And, you know, he ends up being-he just angers me, I
guess. He's a financial pirate. You could call him the black beard
of finance. And I just hope that he's brought to justice because the
fact that he hasn't been, the fact that he still is able to run certain
parts of that empire can make one's blood boil.
We also would like to say to each of you that you really are heroes,
that it's sad that by doing your job, and just by doing your job, you
became heroes. It's a sad commentary on the banking system, the
thrift regulation system, in the previous decade.

But I feel, I bet just about everyone in this room-with the ex-
ception of those, I guess, who are retainer for Mr. Keating-I shud-
der to think how many there are-would like to stand up and ap-
plaud you for the work you have done and the grief you have un-
dergone to do what you did.

I'd like to turn to the particular-I think the turning point in
this case really occurred in the summer of 1987, and as I under-
stand it-and I just want to underscore it-that immediately, when
a new chief of staff, Jim Boland, a new general counsel, Jordan
Luke, came in, within a few weeks after they came in, that these
officials decided that there ought to be an independent review of
the Home Loan Bank of San Francisco's findings. That was in Sep-
tember 1987 that they did that.

Now, were any of you or your staff ever asked to brief or provide
any information either Mr. Luke or Mr. Boland? And that ques
tion, I guess, is directed at either Mr. Patriarca or Mr. Black.

Did they ever ask for the other side of the story prior to the meeting?

Mr. PATRIARCA. Well, the examination that we had planned for September 1987 was halted after a meeting between Lincoln officials and Mr. Boland and Mr. Luke, and it was halted before we

were asked why we were doing it or whether it should be halted. Your question though was were we ever given the opportunity.

Although Mr. Boland was not a member of the Enforcement Review Committee, Mr. Luke is the chairman of that committee

Mr. SCHUMER. What's the committee? Say that again?

Mr. PATRIARCA. It's called the Enforcement Review Committee.
Mr. SCHUMER. Right. The committee of five.

Mr. PATRIARCA. Yes. Three voting members, plus two.
Mr. SCHUMER. Yes.

Mr. PATRIARCA. We were given the opportunity to make a pres-
entation.

Mr. SCHUMER. That was a year after the decision was made.
Mr. PATRIARCA. It was in 1988.

Mr. SCHUMER. Prior to the decision, they never even asked for
your side of the story; is that fair to say?

Mr. SCHUMER. Kills it, delays it, doesn't look at it and then says it's stale.

Mr. BLACK. Then he says it's inaction and he doesn't know about that. Somebody will also have to tell him about it and he's the guy at the meeting with the Keating representatives.

Mr. SCHUMER. It's appalling. There was not even a pretense of trying to learn the facts in making a decision on the merits; is that fair to state?

Mr. BLACK. They were simply threatened with a lawsuit, and
they caved immediately.

Mr. SCHUMER. OK. It's also my understanding that the new Di-
rector of Regulatory Affairs for the Bank Board also-he was
newly-appointed that summer, Mr. Dochow-is that how you say
the name?

Mr. SCHUMER. Dochow, OK. I didn't intend the pun. I don't joke about those things-did not assume his post until late in July. At any point prior to this decision was Mr. Dochow briefed on the Lincoln situation?

Mr. BLACK. We were told by Mr. Dochow's staff last week that he was briefed only after the September 2 meeting.

Mr. SCHUMER. This is Alice in Wonderland. The verdict first, the
trial second, OK. Now at this meeting, the decision was made to
cancel the field visit and to demand another review of the findings
in the 1986 exam report. That field visit was to provide further
backup to the cease and desist actions recommended by San Fran-
cisco and the Washington staff.

Would you agree that that was a critical decision, that that's
what sort of started turning everything downhill, Mr. Patriarca?

Mr. PATRIARCA. I think that is the-I think that's the first criti-
cal decision, because from the standpoint of what we were able to
do with regard to Lincoln, from the time we were notified not to
examine Lincoln, we were effectively out of the institution from

Mr. PATRIARCA. And it wasn't until July 1988 that anyone from
the Federal regulator was back in Lincoln.

Mr. BLACK. I just want to clarify. Our receivership for receiver-
ship-our recommendation was for receivership or conservatorship,
and that was the ORPOS recommendation at the time as well. It
was only if the Bank Board would fail to act on it that we would go
to cease and desist order. This thing, after September 2, 1987, was
in a deep, deep black hole where nobody was examining Lincoln
Savings.

Mr. SCHUMER. Even you knew that-you knew at that point and
everyone knew that the bank was doing bad things, even though
you knew that they were resisting any attempt to get further infor-
mation from them. After that crucial time, there was no one who
could lay a glove on Keating for at least a year period.

Mr. BLACK. Right, and by then of course, there was a catch-22.
Mr. SCHUMER. Right.

Mr. BLACK. Because we have not looked at the facts, and because
we have not acted, by definition the information must be stale and
because it's stale therefore we must not act.

Mr. SCHUMER. Right. Alice in Wonderland again. Just to make it
clear, this was not some kind of minor decision. This was-I mean
to put Lincoln in conservatorship would be a very major decision.
It was not the kind of thing that a regulator like Mr. Dochow or
Messrs. Boland and Luke would do everyday or every week; isn't
that correct.

Mr. SCHUMER. OK. So the real decision to remove San Francisco
from jurisdiction was ironically made in 1987. It was only really
formalized a year later.

Mr. BLACK. Effectively we lost all power over the institution on
September 2, 1987.

Mr. SCHUMER. Right, and that decision was made-the decision-
makers didn't seek, didn't want and didn't have the facts?

Mr. BLACK. That's true. Well, they had whatever facts Lincoln gave them.

Mr. SCHUMER. Right, and they didn't want the facts from their
own staff, their own independent staff? Well, it's amazing. Just ut-
terly amazing. The other question I have here is about Ms. Stew-
art. It's my understanding that the Bank Board of Enforcement
that she headed did not take a single action against Lincoln
throughout the 5-year period up to and including a date when the
conservator was appointed.

There were-however, some disciplinary actions were taken
against Lincoln. For instance, dividends were suspended and subor
dinated and debt authority was approved subject to substantial con-
ditions which Lincoln declined to abide by. But is that statement
correct, that the Bank Board Office of Enforcement didn't in the 5-
year tenure of Ms. Stewart make a single decision against Lincoln?
Mr. BLACK. That's true. In fairness, I would say that it was in
December 1986 that the Office of Enforcement was first given what
we call 407 authority. That means the authority to take deposi-
tions. Thereafter, the Office of Enforcement did not use that au-
thority. Mr. Patriarca, with his enforcement background, talked to
me and said he thought this was a disaster, because the examiners
had found the evidence of file stuffing and perhaps backdating of
documents.

It is critical in those circumstances that you immediately depose
people, before they get their stories straight.

Mr. SCHUMER. That's my last question. We have all sorts of alle
gations of backdating of documents that are now 3 or 4 years old.
Some of them were done in 1986 and 1985 even, as I understand it,
when Lincoln was trying to grow and trying to overcome that 10
percent order on direct investment.

How quickly were those turned over to criminal authorities? I
take it it is a crime to either backdate or change the--

Mr. BLACK. Well, they were turned over quickly, but here's why.
To begin, Mr. Patriarca talks to me in early January 1987. I go
back and talk with the Enforcement attorney, Rosemary's deputy
Steve Hershkowitz, about when he's going to depose these people.
He says he's not. I was rather stunned, and he says well, Lincoln
isn't a priority because it's not insolvent.

I said well, we try to keep them from getting to insolvency actu-
ally. He said he was not going to depose any witnesses until the
examination was completely finished, the report went out, supervi
sory letter, got a response back from the institution, et cetera, et
cetera.

Mr. SCHUMER. But what I'm trying to get

Mr. BLACK. As a result-I'm trying to answer it directly. The

result

Mr. SCHUMER. I don't mean to hurry you. It's just we have a

vote.

Mr. BLACK. [continuing] Is that Ann Sobol, a very experienced at-
torney, was detailed from the Litigation Division to the Office of
Enforcement to actually conduct this investigation. For next ball
park 4 to 5 months, there was a vigorous investigation of the file
stuffing and the backdating, which did prompt criminal referrals.
At that time-

Mr. SCHUMER. When was that?

Mr. BLACK. The referrals are in June or May of-April, sorry. April 1987.

Mr. SCHUMER. To the U.S. attorney for I think Los Angeles? Mr. BLACK. No.

Mr. SCHUMER. To the Justice Department?

Mr. BLACK. To the Justice Department, yes, and to the appropri ate regional authority.

Mr. SCHUMER. Have we heard anything? Have they closed the case? I mean it's 2 years

Mr. BLACK. Well, I don't-I prefer not to talk about that in open session.

Mr. SCHUMER. Are you-let me ask you this question, which I think you can answer. Are you convinced that that investigation is and has gone forward with full and deliberate speed?

Mr. BLACK. Now the Justice Department has it as very vigorous
action.

Mr. SCHUMER. What about previously? I'm chairman of the
Criminal Justice Committee, which has jurisdiction over this, so
I'm particularly interested.

Mr. BLACK. I don't think originally it was-the magnitude was
understood.

The CHAIRMAN. We have about 5 minutes, maybe less to go
record our votes, so we must interrupt again. However, in all fair-
ness to the witnesses, if you're hungry or thirsty or something, why
don't we give you a 20-minute break for that purpose. Down on the
B level you'll find our cafeteria, and we'll be back-we'll stand in
recess for 20 minutes.

The CHAIRMAN. The committee will please come to order. Mr.
Leach?
ausur chb

Mr. LEACH. Mr. Chairman, just for a brief unanimous consent re-
quest, many of us have many questions, and is it the chairman's
intent that we submit these in writing at the end of the day--
The CHAIRMAN. Oh yes.

Mr. LEACH. And that under the subpoena, the witnesses will be
required to answer as part of the record?

The CHAIRMAN. Oh yes, even in fact as we do regularly, every
member-we usually ask the unanimous consent to have every
member submit questions in writing to the witnesses, in time for
them to reply when they receive the transcript of the hearing.
Thank you very much, Mr. Leach. I had neglected to do that. Mr.
Ridge, you're next in line.

Mr. RIDGE. Thank you, Mr. Chairman. I don't know if you had
the opportunity to grab a bite to eat, when the chairman was kind
enough to give you 15 or 20 minutes to go downstairs. It reminded
me of a drill sergeant who told me to swallow it now and chew it
later. So welcome back. I do have a few questions for you, and
many more to follow in writing because of the time restraints.

Mr. Crawford, I was intrigued by your testimony involving the
California direct investment rule, and the fact that only two of the
legislators voted against it. What is your recollection as to the posi-
tion of the regulators in California vis-a-vis that piece of legisla-

tion? Was it passed over their opposition, with their encouragement, or did they remain neutral in that effort?

Mr. CRAWFORD. I wasn't there and I'm not sure whether it was
under Commissioner Linda Yung or whether it was under Larry
Taggart, but I believe it was under Yung and I can't tell you.

Mr. RIDGE. Is anyone familiar enough with the situation to com-
ment? OK, I understand. I'll find out some other way. I want to
commend you. I think, Mr. Black, you're responsible for this very
comprehensive, voluminous, well-referenced testimony.

Mr. RIDGE. I will tell you, hopefully not to be disappointed, I
didn't read it prior to this hearing, but I do expect to have some
questions after reviewing it in the future. But I want to thank you
for it. It's a very important document.

I'm interested in the internal decisionmaking process concerning
the change of jurisdiction from San Francisco to Washington. How
is it normally done? Were the standard procedures followed in this
case? Are you given specific written instructions to do so? Would
you care to comment?

Mr. PATRIARCA. There aren't any procedures for doing it, because
it's never been done before. In this instance, there was after the
review of our examination findings by the Office of Regulatory Ac-
tivities and after their staff found that-I think it was-they
agreed it was in excess of 90 percent of our findings, we were told
that we were going to proceed with the cease and desist proceeding,
and that we were going to resume our supervision of Lincoln Sav-
ings after having been stopped for the 1987 examination.

But at that time, Lincoln came in and in meetings with the Bank
Board made it clear that there was not going to be a peaceful reso-
lution of this dispute if they had to have anything to do with San
Francisco. It was they who demanded that we be replaced and
that's eventually what happened.

But there isn't a standard for how it was done or how it should
be done, because it's never been done. It's the only case that I am
aware of.

Mr. RIDGE. All right. I know the answer to this question, but I
want it on the record because your testimony has been lengthy and
provocative, but I think it's important for you to be able to answer
this. There have been allegations of influence in a myriad of differ-
ent areas. I think based on your testimony I can conclude that at
no time, in spite of any of the meetings, letters, protestations, en-
couragements or anything that you might have thought improper,
did you ever violate what you consider to be your professional regu-
latory responsibility within the Federal Government. Is that a fair
statement?

Mr. PATRIARCA. That is fair and accurate.
Mr. RIDGE. Mr. Black.

be transferred back or were you alerted to that responsibility 1
day? Did you fight about it? Did you say what are you taking juris-
diction away from us for?

Mr. PATRIARCA. There was a major-and I can't emphasize the
word strongly enough-dispute within the whole agency. Naturally
we in San Francisco, whose jurisdiction was in question, were the
principal folks saying that this is nuts. I mean this is fundamental-
ly absurd as a way to run a regulatory agency.

But one of the proposals was to transfer jurisdiction not to Wash-
ington but to transfer it to another district, and the district in
question that was approached was the Seattle district. The Seattle
district agents met with Lincoln management. They reviewed our
examination findings and then they came to the Enforcement
Review Committee and presented their assessment.

If you'll give me a second, I will read you in essence what it boils
down to. The Federal Home Loan Bank of Seattle opposes the
posed transfer of the supervisory and examination functions of Lin-
coln Savings to the 12th district. We are also opposed at this time
to the acquisition by Lincoln of a distressed 12th district institution
as a means of legitimizing this move.

We feel such an acquisition is unwarranted, in view of the con-
cerns raised in conjunction with the March 1986 examination, the
financial condition of Lincoln, the lack of management capability
at Lincoln and its holding company, and the complete rejection of
the regulatory authority of the Federal Home Loan Bank System
by Lincoln Savings.

Our opinion results from our review of the substantial documen-
tation provided this office. The fact that ORPOS has concurred
with almost all the findings of the March 1986 examination leads
us to conclude that the findings were substantially accurate. As a
result, we do not believe a new examination led by this office
would result in materially different findings or come to a different
conclusion than the San Francisco bank.

Therefore, from our perspective, allowing the transfer of supervi-
sory and examination efforts only buys the association time and
may unnecessarily be increasing the risk to the FSLIC.

Mr. RIDGE. The date of that communication?

Mr. PATRIARCA. The date of that communication-I'll have to provide it to you.

Mr. RIDGE. I'm sure it's in the record.

Mr. PATRIARCA. This is a presentation by Jim Faulstich, the prin-
ciple supervisory agent in Seattle to the Enforcement Review Com-
mittee. That would have been some time in early 1988.

Mr. RIDGE. All right. It's pretty clear that the only person or the
few persons that knew of this massive scheme was Mr. Keating and
one or two obviously close associates, that over a period of years
not only with restructuring his holding company and subsidiaries
but all the other-the contacts he was developing, they were going
on in a continuous course of conduct independently of one another,
so that the chances are pretty good that the whole scheme was
known to a few people and that what was going on outside any-
body's particular environment was unknown to them.

You have done a marvelous job of putting all those little pieces of the puzzle together, and I just want to ask a simple question in

terms of how long it took you, taking a look at this maze and this
mess, to be able to put such a comprehensive and I think potential-
ly very helpful document together.

Mr. BLACK. Well, we've been working on it for years in one sense,
from the examiners, from the sense of actually putting it together
given the earthquake. We put it together in 2 days.

Mr. RIDGE. Well, you did a marvelous job. My sense is, is that the
earthquake that San Francisco experienced a week or so ago, a nat
ural disaster, taxpayers are generally comfortable in trying to help
out. The earlier earthquake around Keating, the costs are almost
the same potentially, and with the posture that he's taken and the
manipulation that he's-for which he is responsible is going to cost
us almost the same. I don't think the taxpayers are quite as happy
about bailing this one out.

I do reserve the right to ask those questions, Mr. Chairman, and
thank you for the time.

Mr. PATRIARCA. Mr. Chairman, if I could provide the date for Mr.
Ridge. That's a March 11, 1988 memo from Jim Faulstich to the
Enforcement Review Committee.

Mr. RIDGE. Thank you.

The CHAIRMAN. Thank you. Mr. Lehman.

Mr. LEHMAN. Thank you very much Mr. Chairman and let me
begin by welcoming my fellow Californians to the land of stability.
I've been here a long time, Mr. Chairman, and I have been fasci-
nated on the one hand and maybe terrified on the other about
what I've heard today. I know as I get back on that airplane to-
night, a lot of other questions are going to cross my mind as I sort
this out, and I'm sure that will be the case with other members too.
I'm glad to be able to have the opportunity to submit those in writ-
ing.

I do have a few questions I'd like to ask and I'll direct them to
one person, but if anybody has anything to add of value, please
jump in. Really I'm moving to a subject that we really haven't
touched on yet, and I'll start with Mr. Crawford.

When and by whom was the decision made to allow American
Continental to sell its own subordinated debt in the branch offices
of its own S&L?

Mr. CRAWFORD. Except for the lease, the approval of selling sub-
ordinated debt is in the prerogative of the corporation commission-
er's office, and only the lease was provided for in the California
statute. We do not have to approve subordinated debt, particularly
of the holding company. So the lease-ACC and Lincolns attorneys
didn't think they needed our approval.

So they got permission from the Corporation Commissioner to
sell the subdebt, and they were selling the sub-debt in Lincoln Sav-
ings offices, and one of our examiners saw the ad in the paper, I
believe in December 1985.

Mr. LEHMAN. Do you have a copy of that ad?
Mr. DAVIS. Yes, we do.

Mr. LEHMAN. Could we have one for the record?

Mr. CRAWFORD. And in January, we notified them they needed
the Department of Savings & Loan approval. They said they didn't
need an approval; it was called a "de minimis" lease, and that they
used the Federal regulation; it was just desk space, and they

thought they didn't need our approval. And they had expert lawyers, you know, and they quoted different things, so we said, "Oh, no, there's no provided for an exception." So we made them get Department of Savings & Loan approval, and they checked it, and they approved the sublease that-it was already in use.

It was then that we got into it, when we got to the office, and we immediately sent out shoppers to shop them, to make sure that they weren't using any Lincoln personnel, that everybody was given the prospectus by the representative of American Continental. We found out they were handling it in a proper manner, that there was not contact between the Lincoln personnel and the customer, it was all done by American Continental.

So it was not until December 1988 that we got a protest from-I think I'll let Mr. Davis handle this part because he handled this thing.

o Thousands of people, not all of whom are in California, lost mil-
lions of dollars here, and for some of them, it was their life savings.
The CHAIRMAN. There were about 23,000, and we have, as wit-
nesses, some of them coming before us, plus some of the others that
we have subpoenaed as of today that will enlarge on that issue.
Mr. LEHMAN. It's just clear to me when was this done, again?
When was the permission given to sell that debt?

Mr. DAVIS. Beginning in December 1986.

Mr. LEHMAN. In December 1986, and it sold until '88? I mean, it just seems to clear to me that at early points here, from the testimony given by the Federal regulators, and by you, Mr. Crawford,