regulatory program along with a group of individuals who were bent on exploiting these excesses, all to the detriment and ultimate demise of Lincoln. It is abundantly clear that Lincoln was in an unsafe and unsound condition to transact business and that plaintiffs did in fact engage in numerous unsafe and unsound banking practices. Accordingly, this Court concludes that the Bank Board acted properly in placing Lincoln first in conservatorship and then in receivership.
Before examining the specific transactions that were the subject of the evidentiary hearing, some background discussion is necessary. It is quite clear that the thrift industry has had a number of problems over the past two decades. In the 1970s, the limits that were placed on both the borrowing and investing activities of thrifts drove a number of savings and loan associations into financial difficulty. First, because of limits on the amount of interest thrifts could pay to investors, savings and loans became noncompetitive with other financial institutions. This resulted in Congress' removing the interest rate ceiling that limited the rate that thrifts could pay to the savings public. Later when Congress learned that the thrifts continued to face severe financial problems, it enacted certain deregulatory measures to provide additional investment opportunities for thrifts, aside from the traditional one of financing the purchase of single family homes. With the number of thrifts facing financial difficulties, Congress believed that it could stave off bailing out the thrift industry of its financial problems by deregulating it and thereby inducing investors to pour private funds into sick thrifts. Congress chose this tack to avoid having to bail out the industry with taxpayers' money. By thus privatizing the S & L problem, Congress thought it had solved the thrift problem with this quick fix. This scheme was devised when industry losses were of an "X" magnitude. As will later be seen by what happened with Lincoln, the privatization gambit failed miserably and today instead of an "X" factor problem, the magnitude of the S & L debacle is probably 5 to 10X and possibly more. Moreover, when the privatization effort failed, the problem then became one that had to be underwritten by taxpayers funds, because at that point there were no other "off the books" solutions available.
Charles Keating, Jr., ("Keating"), the chairman and chief executive officer of ACC, was one of those entrepreneurs who was willing to enter the S & L industry once Congress lessened the regulatory restrictions. Keating had been affiliated with the Lindner Family in Cincinnati, Ohio, for many years, holding several senior positions with American Financial Corporation ("AFC"). It was during his tenure with AFC that Keating gained his first exposure to the S & L industry. AFC was a diversified holding company and it owned approximately three to four savings and loans. Keating remained with AFC until 1976 when Carl Lindner decided to take the corporation private. At that time, Keating decided that he no longer wanted to remain in the organization. In 1976, he arranged with Mr. Lindner to acquire a subsidiary of AFC known as American Continental Homes, this company eventually became American Continental Corporation ("ACC"). Keating moved the company to Phoenix, Arizona and continued to focus its operations on single-family home construction and development. When Keating first took over the company, it was in a loss posture. Over the years, Keating was able to turn it around to where it was moderately successful. In the late 1970s and early 1980s, ACC became very active in building large single-family housing developments in Phoenix and Denver. In addition to the actual construction of homes, ACC started a mortgage company in 1978 to assist home buyers with financing. Building on this experience, in 1981, ACC created a system for packaging and selling groups of single family home mortgages -- the investment instrument became known as mortgaged backed securities.
With the passage of the Depository Institutions Deregulation Act of 1980, Pub. L. No. 96-221, 94 Stat. 142 (1980), and the Garn-St. Germaine Depository Institutions Act of 1982, Pub. L. No. 97-320, 96 Stat. 1469 (1982),
Keating decided to look for a savings and loan association to add to his real estate empire. After analyzing various thrifts that were for sale, Keating decided to see if Lincoln Savings & Loan could be acquired. Keating was attracted to Lincoln for three primary reasons 1) he was impressed with its fine reputation in the industry; 2) the controlling block of Lincoln's stock was owned by one family; and 3) Lincoln was a California chartered savings and loan. According to Keating's testimony, this accumulation of stock in the hands of one family would make Lincoln easier to acquire if the family was interested in selling. The fact that Lincoln had a California State Charter attracted Keating because the California legislature had embarked on a course aimed at deregulating the state's thrift industry in 1982 with the passage of the Nolan Act, 1982 Cal. Stat. c 300.
By removing restrictions that had previously been in place, the Nolan Act further broadened the field of direct investments that California savings and loans would be permitted to make.
Although Lincoln had not been formally offered for sale, it had been losing money and the principal owners agreed to entertain an offer from ACC. After a short negotiating period, ACC agreed to acquire Lincoln for $ 51 million, which represented a premium of some $ 17 million over the institutions net worth of $ 34 million. ACC closed the Lincoln acquisition on February 24, 1984. The financing was provided through the issuance and sale in December of 1983 of approximately $ 55 million in exchangeable preferred stock. This preferred stock issue was underwritten by Drexel, Burnham, Lambert, which had previously underwritten for ACC a high yield debt offering of $ 125 million in August of 1983.
At the time Lincoln was acquired, it was conducting a traditional savings and loan business. It was largely in the business of lending money to purchasers of single family dwelling units in Southern California. While its business was conservative, it was not thriving financially. At the time of the acquisition, Lincoln had assets of approximately $ 1 billion and a net worth of $ 34 million. When ACC took over, it was required to and did obtain approval of both the California and Federal thrift regulators. In the change of control application that ACC filed with the federal regulators prior to its acquisition of Lincoln, it stated that "While it is anticipated that the current officers of the Holding Company and the Institution [Lincoln] will remain upon consummation of the proposed transaction, the Applicant [ACC] intends to augment this management team." Change of Control Application, at 49 (Oct. 13, 1983), Def. Ex. 50. ACC also reaffirmed its commitment to maintain Lincoln's current level of community lending:
In accordance with the provisions of the Community Reinvestment Act of 1977 ("CRA"), no changes are expected in the performance by the Institution [Lincoln] after the proposed acquisition in helping to meet the credit needs of its entire service area or the communities affected by the service area, including low- and moderate-income neighborhoods. It is not expected that there will be any effect of the proposed acquisitions [sic] which will either increase or decrease the availability of credit and savings services in the communities served by the Institution. The Applicant [ACC] does not anticipate at this time an amendment to the CRA statement currently used by the institution which is incorporated by reference herein and enclosed herewith as Exhibit 20.