Two local lawyers advised U.S. panel

INSIDE VIEW OF S&L SCANDAL

July 29, 1993|By David Conn | David Conn,Staff Writer

It was just this spring, after his conviction, that Charles H. Keating Jr. got the word out that he wanted to tell all.

So Gerard J. Gaeng, a partner at Baltimore's Whiteford, Taylor & Preston, and co-counsel to the national savings and loan commission, flew to Los Angeles to meet the notorious former chairman of the failed Lincoln Savings and Loan of Irvine, Calif. He went to the Los Angeles Detention Center, the first stop during the 12 1/2 -year federal prison term of Keating, who was convicted this year of racketeering and securities violations that ultimately cost taxpayers more than $2.5 billion.

"We got about 10 minutes in," Mr. Gaeng related this week. "I permitted him to make an opening statement, during which he railed against the 'Nazi-like' regulators and blamed them for his problems."

But as soon as Mr. Gaeng's inquiry started, Keating's lawyer told him not to answer any questions about Lincoln, but to stick to the regulators and their moves. "We didn't see any benefit to having Mr. Keating advise the commission on policy issues," Mr. Gaeng said, and he promptly flew home.

That was one of the stranger moments during 11 months of work that Mr. Gaeng, his partner Wilbur D. "Woody" Preston Jr., and Whiteford attorneys Lisa A. Kershner and Timothy F. Cox contributed as lawyers for the National Commission on Financial Institution Reform, Recovery and Enforcement.

On Tuesday, the commission presented its findings to President Clinton and Congress. The 100-page report blames the $150 billion savings and loan debacle on a federal deposit insurance system that encouraged the owners of a bankrupt thrift industry to take tremendous gambles with little or no risk to themselves. Because of nonexistent capital requirements, the risk fell on the backs of the taxpayers who are reimbursing the depositors of the failed thrifts, the report found.

As co-counsel, Mr. Preston and Mr. Gaeng had to untangle the interactions between state and federal banking regulations; research the history of the laws and regulations that drove the S&L scandal; master the myriad regulations of conducting public hearings for the government; and keep the subpoenas coming in order to interview the dozens of witnesses who testified before the commission.

After thousands of hours of work, it's getting tough for Mr. Gaeng and Mr. Preston to maintain a positive attitude about business and government.

First there was the Maryland savings and loan crisis in 1985. As special counsel to the governor, Mr. Preston and several colleagues produced a widely read 457-page report about the scandal that temporarily shut down the state's thrift industry.

"I guess the most amazing thing to me was when we discovered that a lot of this had been going on for seven or eight years, and that the [state] division of savings and loan had been warned" but did nothing, he said last year. Of course, "I was a virgin at that time," he added this week. "I was shocked beyond belief."

This year he and Mr. Gaeng were forced to draw nearly the same conclusions about the U.S. government.

Though his role was different this time -- he did the legal work, not the investigation -- here's what Mr. Preston had to say this week about the savings and loan scandal: "I think the main feeling I would describe is disappointment that our government knew, and had the opportunity to at least reduce these losses for a number of years."

"And at virtually every stage when they had the chance," Mr. Gaeng added, "the government made the wrong policy decisions."

They pointed to a 1983 report from the Federal Home Loan Bank Board, the thrifts' primary regulator, that noted the savings and loans' weak position, their loss of capital and the government-created incentives to grow out of their troubles by taking enormous risks with federally insured deposits.

While the 1983 report recommended regulatory and legal changes that would have controlled the losses and abuses, "the Bank Board proposed no legislation to produce these changes, adopted no regulations to implement its own recommendations, and retained regulatory provisions antithetical to the report," the S&L commission's study says, concluding: "The Bank Board ignored the warnings in its own report . . ."

Equally surprising to the two lawyers was the forthrightness of some of the witnesses, such as former Treasury Secretary Donald Regan. "When asked as to why he hadn't reacted to certain alarms being sounded by [former Chairman Edwin] Gray at the Bank Board, he very candidly said he didn't like Chairman Gray and didn't listen to him," said Mr. Gaeng.

For Mr. Preston, some of the similarities between Maryland's experience and the national debacle were astounding. For one thing, the "Federal Home Loan Bank Board was established to be both the promoter and regulator of the thrift industry," he explained. "And we had the same thing here in Maryland."

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