WASHINGTON — Federal Reserve Chairman Alan Greenspan, looking back on his work for Lincoln Savings & Loan Assn., said he does not believe that he could have foreseen the thrift's failure, expected to be the costliest in the nation's history.
Nearly five years ago, Greenspan testified before Congress as a private consultant and lobbied regulators on behalf of Lincoln and its owner, Phoenix millionaire Charles H. Keating Jr.
Keating objected to federal regulations restricting thrift institutions' direct investments in real estate development. Greenspan, a conservative economist generally opposed to government's meddling in business, supported him.
In an interview last week, Greenspan said he was surprised and distressed by Lincoln's eventual failure because of sour real estate deals. But he said he still supports short-term direct investments when thrifts are exposed to interest rate risks.
Supporters of direct investments have long argued that they can benefit S&Ls struggling with a portfolio of long-term mortgages.
"I look back and I say to myself, 'Was there something I should have seen and didn't see?' and the answer is, 'There was nothing visible--at least to me,' " Greenspan said.
In early 1985, Irvine, Calif.-based Lincoln was a fast-growing institution under aggressive managers who eschewed traditional home mortgage lending. Greenspan was a private economist with impressive political credentials as President Gerald R. Ford's chief economic adviser a decade earlier.
Now, Lincoln is insolvent and under government control. Regulators say it will cost taxpayers $2 billion to protect its depositors.
In a Feb. 13, 1985, letter to the Federal Home Loan Bank of San Francisco, Greenspan argued that Lincoln deserved an exemption from regulations limiting to 10% thrifts' direct investment in real estate and other commercial ventures.
Lincoln's management, he said, was "seasoned and expert in selecting and making direct investments" with "a long and continuous track record of outstanding success." The institution itself was "financially strong," in a "vibrant and healthy state" and presented "no foreseeable risk to the Federal Savings and Loan Insurance Corp.," he said.
Two weeks later, on Feb. 27, 1985, Greenspan told the House Government Operations subcommittee on consumer, commerce and monetary affairs that direct investments, while undoubtedly risky, were essential for thrifts to diversify their holdings.
Traditional S&Ls, which took in short-term deposits and made long-term mortgage loans, were vulnerable to a sharp rise in interest rates and direct investments were a valuable alternative, he said.
He also endorsed a study by economist George Bentsen that cited the success of 17 S&Ls in direct investments. Fifteen of the 17 have since failed.
"It was my view then, as it is now, that interest rate risk was the crucial problem confronting S&Ls--the problem of long-term assets financed by short-term deposits. In that particular context, at that particular time, direct investment would reduce risk," he said.
Greenspan still believes that Bentsen took a "rather sensible statistical approach" but he points out that most of the 17 S&Ls cited in his study were in Texas, later the center of the oil and real estate bust.
The central bank chairman's views have been cited as one of the reasons why a petition, calling on S&L regulators to postpone direct investment limits, attracted 225 signatures in the House in early 1985.
It is also being cited as a reason why, two years later, five senators decided to intervene with S&L regulators after Keating complained about their efforts to examine Lincoln's finances.
The five--Alan Cranston (D-Calif.), Dennis DeConcini (D-Ariz.), Donald W. Riegle Jr. (D-Mich.), John Glenn (D-Ohio) and John McCain (R-Ariz.)--met with the regulators in April, 1987.
Two of them--Cranston and McCain--said Greenspan's views on Lincoln's health heavily influenced their thinking.
"The problem, as conveyed to me at the time, not only by Mr. Keating but also by Mr. Greenspan and Arthur Young & Co. (an accounting firm) was that federal examiners bore substantial responsibility for creating a most destructive and irrational state of limbo for this institution," Cranston told the Senate Ethics Committee in a Nov. 16 letter.
Greenspan said he does not understand why some senators cite his opinion as a reason for actions taken so long after it was given.
"You do not rely on a 2 1/2-year-old letter unless you call the guy who wrote it. No one ever called me," he said.