In recent years, customers who visited branches of the Lincoln Savings and Loan Association in Southern California were often offered hard-to-resist investments that paid considerably higher rates than the S&L’s own certificates of deposit. That attractive investment was a type of junk bond issued by Lincoln’s parent company, American Continental Corp., of Phoenix. More than 2,500 Lincoln depositors now face the possibility that these American Continental investments may be just junk. Yesterday Lincoln, which is based in Irvine, Calif., was placed under the control of a government-appointed conservator after the Federal Home Loan Bank Board concluded that the institution’s assets had been “substantially dissipated and that it was operating in an unsafe and unsound condition.” On the eve of the bank board’s unanimous vote for conservatorship, American Continental filed for protection under bankruptcy laws. Yesterday, a American Continental spokesman declined to answer questions. Unlike S&L deposits, the bonds — called subordinated debentures — are not federally insured. And although that fact was disclosed, regulators are concerned that some customers didn’t heed the warning because the debentures were being sold inside the S&L, whose CDs are insured. According to government sources, ACC had sold a total of $213 million in subordinated debentures (or subdebt). On Friday, bank board employees at Lincoln branches fielded phone calls from distraught bond-holders. “Chances are nobody is going to get a nickel back,” said one high-level regulator, noting that holders of such subordinated debentures have a low-priority claim on the corporation’s assets. Lincoln depositors were attracted to the debentures by rates up to 12 percent for five years at a time when CDs were averaging just over 8 percent. “I don’t think they understood it,” said a second regulator. “I think you are going to find a lot of disgruntled people.” Subdebt is used widely throughout the savings and loan industry as a vehicle for generating relatively cheap capital. Lincoln’s sale of subdebt has drawn close regulatory scrutiny over the years because of the way it is sold and because of the precarious condition of the thrift. Confidential Federal Home Loan Bank Board documents reveal that as far back as May 30, 1986 examiners were warning about Lincoln’s speculative style of investment. One memo from Everett W. Fenton, senior real estate specialist, warns: “There is, in my estimation, a real risk of a major financial disaster in the making… . I am becoming increasingly concerned and apprehensive as I review the appraisals at Lincoln Savings… . ” More than six months later — as hundreds more purchased Lincoln’s paper — bank board examiners intensified their criticism. Although depositors were never warned, the bank board privately concluded that Lincoln was “a threat to its insurer … teetering on the brink of financial difficulty.” Lincoln has consistently challenged examiners’ findings about its financial condition and its officials will hold a news conference on Monday. Last July, California’s savings and loan commissioner William Crawford told Lincoln that ACC employees could not use Lincoln’s lobbies to sell the ACC debentures, because of his concern that customers might not realize the debentures were not federally insured, sources said. Lincoln agreed and American complied. Later, five state examiners — posing as potential customers — called various Lincoln branches to inquire about CD rates, sources said. After being given the information, the examiners were astonished to hear Lincoln employees tout the American Continental debentures as a way to obtain higher interest rates, according to sources. No action was taken on this information, sources said.
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