Markkula Center of Applied Ethics

The Moral Quandaries of a Government Whistleblower

By William K. Black

This article discusses the three times I blew the whistle on wrongdoing by senior government officials. I also discuss the time I didn't blow a whistle at the direction of the heads of my agency (and my decision to follow those directions). I focus; however, on the time I didn't blow a whistle entirely at my own decision.

Blowing the Whistle on Bank Board Member Henkel

I blew the whistle on two separate occasions about the actions of presidential appointees who ran my agency. Both of them resigned in disgrace, and both involved Charles Keating of Lincoln Savings. He was able to convince the Reagan administration to appoint Lee Henkel to be one of the three "Members" of the Federal Home Loan Bank Board in late 1986. Keating was able to convince the Administration to appoint two Bank Board members of his choosing. Reagan replaced one of them because he fell afoul of unrelated political problems at the last moment.

Lincoln Savings was in massive violation (by $600 million) of a rule limiting a type of investment. Henkel's first substantive act was to propose an amendment to the rule, drafted by Keating's lawyers, which would have immunized Lincoln Savings' from sanctions for this rule violation. The amendment was carefully crafted. It did not mention Lincoln Savings by name, it was buried in a long list of amendments and it was in legalese. I was the only one at the Bank Board with the background (I am a lawyer and I knew about Lincoln Savings' violation of the rule) to spot that the amendment was designed to aid Lincoln Savings. I blew the whistle on Henkel and he eventually resigned in disgrace. I was directed by Ed Gray, the Bank Board's Chairman to confirm to the press the extent of Lincoln Savings' violation of the rule. This eventually led to Keating suing me in my individual capacity for $400 million, to Keating making a criminal referral about the agency to the Justice Department, and to Keating hiring private detectives to investigate me.

The criminal referral was particularly amazing. Lincoln Savings had disguised its violation of the direct investment rule by forging and backdating scores, perhaps hundreds, of documents. The Bank Board made a criminal referral to the Justice Department - which sat for well over a year with no action taken. Keating's criminal referral was done through Sidley & Austin; one of the scores of powerful law firms, Lincoln Savings retained. One of the advantages of "control fraud" (fraud by controlling persons) is that the entire assets of the firm can be used to do whatever is most useful to aid the fraud. Sidley & Austin represented both Henkel and Lincoln Savings. One of its partners, Rex Lee, had recently left his position as Solicitor General of the United States, the number three position in the Justice Department. A firm partner contacted William Weld, a senior Justice Department official (later Governor of Massachusetts). The Justice Department began a criminal investigation of the agency within days. FBI agents questioned the Bank Board's field office in San Francisco. They found nothing and reported that to headquarters. Soon, as an amazed FBI agent would later tell one of the agency attorneys in San Francisco, he received a telephone call directly from a top Justice Department official, ordering him to go back in and investigate more. He had never received such a direct call from such a senior Justice Department (not FBI) official in his career. There being nothing to find, the FBI found nothing.

Blowing the Whistle on the Speaker of the House, Jim Wright

The second time I blew the whistle, again at the direction of Bank Board Chairman Gray, was on the Speaker of the House, Jim Wright. The Speaker of the House is the second most powerful elected official in America, and Wright was determined to be the most powerful Speaker in history. Gray ran afoul of Wright for the same reason he upset Keating. Gray, a committed deregulator, had a "Road to Damascus" experience shortly after he became Chairman. He realized that deregulation was causing a disaster an unleashing a wave of control fraud that would cause extraordinary losses to the taxpayers. Gray became a reregulator, and that earned him almost universal hate. The Administration viewed him as a heretic, the industry hated him, the control frauds recognized that he, and his reregulation, was a mortal danger. The control frauds proved exceptionally skillful at gaining the protection of politicians at the highest level. I have explained that the Reagan administration tried to give Keating majority control of the Bank Board - consider how devastating the resultant debacle would have been! Keating, famously, was also able to recruit five U.S. Senators (the "Keating Five") to his cause.

The Texas control frauds targeted Jim Wright (D. TX) and Tony Coelho (D. CA). Tom Gaubert was their leader. He created a special political action committee (PAC) to aid a Democratic candidate in a district near Wright's. For arcane reasons that need not detain us here, the special election at issue was of immense importance to Jim Wright's and Tony Coelho's ambitions. Gaubert's PAC consisted of Texas S&L control frauds. They made large, often illegal, political contributions to the Democratic candidate who, unexpectedly and narrowly, won election. Wright and Coelho rewarded Gaubert by making him finance chairman of the Democratic Congressional Campaign Committee (DCCC), which Coelho ran.

Gray's reregulatory efforts made him vulnerable to congressional pressure. First, they enraged powerful control frauds with unlimited budgets for political contributions and a willingness to make illegal contributions. Second, the Federal Savings and Loan Insurance Corporation (FSLIC), which the Bank Board ran, had to pay depositors when Gray began closing the control frauds. That meant that the Bank Board had to ask Congress for permission to "recapitalize" FSLIC. This recapitalization was flaky because the Administration forbade any use of Treasury funds to stem the S&L crisis. The Reagan administration's overriding priority throughout both terms was covering up the cost of the S&L debacle. FSLIC was to recapitalized by borrowing funds that the industry would (purportedly) repay from future FSLIC insurance premium payments.

The FSLIC "Recap" bill was introduced in Congress in 1986 with seeming bipartisan support. It was killed by a combination of "holds" in the Senate by Cranston (at Keating's behest) and Pryor (upset that too many Arkansas S&Ls were, accurately, considered corrupt by the Bank Board) and by Jim Wright in the House. Gray removed a San Francisco field supervisor's authority over a case to appease Wright. Wright continued to extort special favors for Texas control frauds even after the end of the 1986 legislative session, and Gray gave in. The two most prominent were Tom Gaubert - who looted two S&Ls, and Don Dixon. Dixon controlled Vernon Savings - known to its regulators as "Vermin." Dixon ran the second worst control fraud in America. He provided prostitutes to his (male) board members and the Texas State S&L Commissioner. He had the S&L buy several beach houses in California and a ski chalet in Colorado. He had Vernon buy five jets and a helicopter so he could get to the beach or ski whenever the mood struck. Vernon also purchased the sister ship to the presidential yacht, the Sequoia, and moored it in Washington, D.C. to serve as a lobbying platform for the DCCC. Dixon attained a record - 94 percent of Vermin's loans defaulted.

Wright continued to hold the bill hostage when it was reintroduced in 1987. He used a January hearing to signal his displeasure that Gray had not done even more for Gaubert and Dixon (both of whom were later convicted of a string of felonies). Gaubert went to Wright to have a question asked of Gray. Wright's staff got Representative Barnard to ask the question, which said that unidentified people were upset at the Bank Board's regulation of Independent American (which Gaubert controlled) and Vernon Savings and requiring a response by the Bank Board.

Wright's use of Barnard backfired. The Democrat's most effective issue in the upcoming 1988 election was expected to be the "sleaze factor." This referred to the string of ethically challenged senior Reagan administration officials. The Democrats that the Texas control frauds were manipulating Wright and leading him into a scandal that would make it impossible for the Party to capitalize on the "sleaze factor." In particular, Barnard and Bob Strauss (a Texan who was the Party's "grand old man") were worried about Wright's ties to George Mallick.

Wright's ties with Mallick were improbable and they proved critical to Wright's disgrace. George Mallick became Wright's closest friend, his business partner who saved him from financial ruin, and the employer of Wright's wife. George Mallick was a Texas real estate developer and Texas real estate was entering a severe recession in 1986 brought on by falling oil prices and the control frauds' creation of an enormous glut of real estate. His son was soon to default on a large loan from a failed S&L - a loan that Mallick had personally guaranteed. Mallick worked with Gaubert to determine Wright's view of the Texas S&L industry and his visceral hatred of Gray's reregulation. Wright, the populist Texan, was acting like a fervent deregulator. Political contributions make for strange bedfellows. Wright "appointed" Mallick as his de facto inspector general of the Bank Board and gave him a letter of introduction calling on everyone to aid his inquiries. In a naked display of self-interest, Mallick produced a report calling for a suspension of all foreclosures by Texas S&Ls.

George Mallick and the Speaker's disrespect for the institution of Congress implicit in the appointment of a private inspector general to do Congress' administrative oversight duties horrified Barnard. He also feared that Gaubert and Dixon might taint the Speaker. Barnard immediately arranged a meeting with Gray. Gray had me brief Barnard on Dixon and Gaubert. Barnard started by telling us how he came to ask the questions about Independent American and Vernon Savings and his fears about Wright and the Party. This was rather remarkable; I was the only Democrat among the Bank Board officials at the meeting. I then briefed Barnard on Gaubert and Dixon. One could see from Barnard's reaction that it was far worse than he had feared. Speaker Wright was going to bat for two of the worst S&Ls in America. Barnard asked for copies of the memoranda I was using to brief him on the two S&Ls and I gave them to him. He said he wanted to warn Wright of the way in which Gaubert and Dixon were manipulating him and what they were really up to.

I later prepared much longer formal answers to Barnard's questions to Gray. Barnard's question had required such a response. The answers laid out in considerable detail Gaubert and Dixon's abuses. Gaubert sued Gray and me for a $500 million claiming that we had given Congress information that they did not want. That's certainly true! They did not want to be told that they were going to bat for and taking contributions from frauds. But recall that the reason we were providing the information is that Gaubert caused Wright to ask Barnard to demand the information from Gray. To be sued by Gaubert for doing something at Gaubert's insistence was amazing.

We were feeling much better after talking with Barnard. We had found a way to "back door" the information to Wright - who had never permitted us to give a substantive briefing on the Texas control frauds. Soon, we had even better news. A "peace meeting" had been arranged with the Speaker. (I learned later that Bob Strauss arranged it.) We would have a direct chance to brief the Speaker, after he had received a warning from Barnard. I was made the Bank Board's "point man" on the FSLIC Recap bill in 1987, so I would be in on the effort to make peace with the Speaker.

Unfortunately, we knew as soon as we arrived at the February 10, 1987 peace meeting that things were going wrong. George Mallick and his son were at the meeting, as was a reporter who was writing a book on the Speaker. That meant we could not use confidential information to brief the Speaker. The presence of the Mallicks also signaled that Wright was unresponsive to Barnard and Strauss' warnings of scandal.

Things got far worse once the meeting started. The Speaker made it clear that he was extremely unsatisfied with the Bank Board's response to his efforts to extort special favors on behalf of Dixon and Gaubert. He contrasted Gray's response unfavorably to what Gray had done in removing the San Francisco supervisor's authority over a matter in 1986. Gray's response in that case was to give the DCCC contributor a complete victory. Gray had made concessions to both Dixon and Gaubert, but had not made an unconditional surrender. That was the only basis for "peace" with Wright.

As if that wasn't bad enough, Wright now declared that Gray had lied to him about the concessions he would make to Dixon. Gray had not lied to or misled Wright. Wright, who got his "facts" from Dixon, got his facts wrong. I tried to explain this to the Speaker. He responded by saying that I was also a liar and shouting obscenities at me. I have never failed so utterly in a mission as I failed in my attempt to make peace with the Speaker.

When I returned to the Bank Board I sought to convince Gray that he had to stop giving in to the Speaker's extortion. I argued that Wright read the concessions as evidence of weakness and continuously escalated his demands. He was demanding unprincipled favors for some of the worst S&L control frauds. I argued that we could not surrender to his demands and continue to look at ourselves in a mirror. Gray needed little convincing. He tasked me with talking to the press about Wright's extortion. I met with the editorial board of the Wall Street Journal and papers in Texas and was interviewed by a large number of publications. The resultant publicity was a major factor in Common Causes' call for an ethics investigation of the Speaker and the House ethics committee's decision to approve the investigation.

I had another, indirect, run in with Wright. Representative St Germain chaired the House banking committee. He was embroiled in a series of ethics investigations and his fate depended on Speaker Wright's good will. This made him fully responsive to Wright's direction to put a hold on the bill, add forbearance provisions and investigate the Bank Board's Dallas regulators instead of the Texas control frauds. St Germain make a mistake after his Committee had (barely) gutted the FSLIC Recap bill to please the Speaker. He requested that the Bank Board testify about the problem of fraud involving S&Ls in the Southwest and what should be done about it. This request was one paragraph in a longer letter requesting the Bank Board's testimony on a number of issues related to crime, primarily money laundering. At my urging, we decided to prepare testimony that answered all of the Committee's questions, but featured the role of Texas control frauds and explained how the forbearance provisions were designed to harm our ability to stop the frauds.

We "pre-filed" our testimony with the Committee the day before and showed up to testify. St Germain's senior aide called me up to talk with him and began denouncing me for providing testimony that did not relate to the letter of invitation. I handed him the letter of invitation, showed him the paragraph that had asked for testimony on the subject. This only made him more upset because he was responsible for preventing errors like that in invitation letters. The problem is that it looked like St Germain, or his staff, had set up the Speaker for attack by the Bank Board by crafting a letter of invitation that specifically asked about fraud and how to prevent it. St Germain "disinvited" us to testify - minutes before we were to speak. This, of course, simply compounded the blunder. If there's anything the press likes better than reporting on a scandal it's reporting on efforts by the powerful to cover up a scandal. I went immediately to the press and said, "Would you like to see what St Germain wants the public not to know about?" Stories appeared the next day featuring the substance our testimony, explaining how it had been suppressed and claiming that the Speaker had ordered it suppressed.

One particular story about this event came to Charles Keating's desk around the same time that a story appeared in the Houston Post in which I was identified as criticizing the Speaker's intervention on behalf of the worst S&Ls in Texas. Keating attached both articles to a July 15, 1987 memorandum he wrote to his chief political fixer, Jim Grogan, a former aide to Senator Glenn.



(Capitalization and emphasis in the original)

Wright was enraged. He called me the "red bearded son-of-a-bitch" when a Washington Post reporter interviewed him. He told the Los Angeles Times that I had unleashed "poison arrows" at him because I was a "Reagan official" who was retaliating for Wright's denial of support for the Contras. This was significantly crazy given that I was a Democrat and supported Wright on the Contra issue. He, and his staff, made repeated efforts to get me fired.

The House ethics committee's independent counsel recommended that this effort be charged as an ethics violation, as well as three other broader charges involving the S&L scandal. There was no way the Democrats on that committee would hand the Republicans the S&L issue on a platter. No Committee Democrat voted in favor of any of the proposed ethics charges related to S&Ls. They voted in favor of charges that attacked Jim Wright's personal probity. I can say from personal experience testifying before that Committee that the members of the Committee that heard my testimony (which was most of them) believed it. (Gray and his chief of staff had the same experience; you could see the pain, especially among the Democrats, when we told them what Wright had done.) It made all the members, but particularly the Democratic members of the Committee much more willing to vote in favor of what were relatively technical, and small, acts of personal financial impropriety involving George Mallick and a book deal with lobbyists designed to evade limits on contributions. Speaker Wright resigned rather than be censured by the House.

The "Late Whistle": The "Keating Five"

Lee Henkel's resignation from the Bank Board became public, appropriately, on April Fools' Day 1987. The next day, Senators DeConcini (D. AZ), Cranston (D. CA), Glenn (D. OH) and McCain (R. AZ) met with Bank Board Chairman Gray. They wanted the same thing Henkel had tried to achieve for Keating. They wanted to get Gray to agree not to sanction Lincoln Saving's massive violation of the direct investment rule. Gray said no and told them he wasn't an expert on Lincoln Savings. If they wanted the facts they'd need to talk to the San Francisco supervisors. One week later, February 9, 1987, four of us from the San Francisco field office met with the original four Senators plus Riegle (D. MI). (I had joined the field office but was "detailed" to continue in my role a Deputy Director of FSLIC until the end of Gray's term on June 30, 1987.) The Senators again sought to prevent sanctions against Lincoln Savings. My notes of that meeting, in transcript form, were extraordinarily detailed and accurate. (The benefits of being a high school and college debater.) Indeed, they were so accurate that two of the Senators thought, erroneously, that I had tape-recorded the meeting.

Gray directed that we not discuss the existence of the meeting. I am not sure why he did this. He was plainly extremely upset about the meeting and believed that the Senators had acted in an unprincipled manner at Keating's behest. It is likely that the problem remained the FSLIC Recap bill. Wright had just used surrogates to defeat us in the House Banking Committee by one vote. The FSLIC Recap bill, as amended by Wright's allies, gave FSLIC only a small borrowing authority and mandated "forbearance" provisions drafted by the Texas control frauds for the express purpose of gutting Gray's reregulation and making it difficult to close them. Our only hope was in the Senate. The five U.S. Senators included Cranston, ranking majority member of the Senate Banking Committee and Riegle, widely expected to be the next chairman of that Committee upon Proxmire's retirement. Glenn and McCain, while not on the banking committee, were both prominent within their parties. Keating had told George Gould, the Treasury official who took the lead for the Administration on the FSLIC Recap bill, that he could influence the vote of five Senators who could be very important to the bill's fate. Gray could not afford to humiliate the Keating Five given the critical need to pass FSLIC Recap and defeat the "forbearance" provisions.

The other thing that may have led Gray not to alert the public to the Keating Five meeting was the presence of Riegle. Riegle acted, or posed, as Gray's friend and personal (not policy) supporter. Gray would soon be looking for a job and given how many powerful people he had angered by reregulating the industry that job search was bound to be very difficult. Riegle could be very helpful. Gray sent Riegle a copy of my detailed "transcript" of the meeting, apparently as a "shot across the bow." Riegle was one of the Senators who were sure I had taped him. Riegle had been burned by an earlier episode in which a mistress rightly suspected he was dumping her for his newest conquest and slipped a tape recorder under the bed to capture his unguarded comments. This made front-page news in the Detroit papers.

Gray's successor, Danny Wall, had been Senator Garn's key legislative aide. Wall was the antithesis of Gray. He believed in forbearance and deregulation and assumed that control fraud was a trivial problem. Among his first orders was that I make no further statements to the press. Wall could not fire me in the field without "cause." When Speaker Wright and his aides pressured him to fire me he told them he lacked the power to do so. Wall indicated his displeasure with me to my boss in San Francisco, Jim Cirona, but Cirona refused to fire me. He warned me not to give Wall the ammunition that would provide "cause" to fire me.

Wall succeeded in forcing from office the other regulator that the Speaker wanted fired. Joe Selby was the top supervisor in our Dallas region and had the most prestigious resume of anyone with the agency. This made him the Texas control frauds' worst nightmare and Wright's primary target for firing. Gray refused to fire him. Selby's boss retired and Bank Board Chairman Wall got to approve his replacement. Wall approved George Barclay, a man with no supervisory experience who shared Wall's primary rule - never upset the politically powerful. Barclay, with Wall's express blessing (Wall's story) or at Wall's insistence (Barclay's story) forced Selby to resign. This cost the nation billions of dollars.

The facts of the Keating Five eventually were made public by a trade press a few months into Wall's term after the passage of a (slightly less awful) FSLIC Recap bill in August 1987. My notes of the meeting provided the basis for the story. I do not how this release came about. The remarkable fact is the reaction of Wall and his senior staffers to the meeting. They were not upset at all with the Senator's actions, they were furious at whoever had made public their action. They suspected, probably incorrectly, that the leak must have come from the San Francisco region. Similarly, they were never upset about Henkel's actions, only the fact that Lincoln Savings' violation of the direct investment rule was made public.

But it was too late for Wall to save the Keating Five from embarrassment. The Senators had directed Gray to come to the April 2, 1987 meeting without any aides and they excluded their own aides from the meeting. This was extraordinary in many ways. First, neither the Senators nor their lawyers and the experts they hired could come up with any other case in which four Senators met with the head of an agency to press a contributor's case (much less five Senators a week later). Second, the exclusion of aides is rare.

The clear intent was to intimidate Gray (and later us) and to put Gray in a situation where it would be his word against that of four U.S. Senators. (Actually, the intent was five U.S. Senators. Riegle was supposed to come to the first meeting but ducked it.) Gray was interviewed as soon as the Keating Five meeting became public and Gray was quoted about the quid pro quo that Lincoln Savings offered through the Senators in return for the Bank Board not punishing its violation of the rule. The Senators unanimously, and viciously, denied that any such thing ever occurred and attacked Gray as a liar. Fortunately, my notes showed that they had offered the same quid pro quo and Senators DeConcini and McCain eventually fell out and leaked documents that proved that Keating had provided a script for the Senators that offered precisely the quid pro quo that Gray said they offered. DeConcini ultimately had to admit that he had his staff's summary of this quid pro quo on his lap at the meeting with Gray. The fact that each of the Senators at the April 2 meeting lied about it's content and tried to convince the world that it was Gray who was lying is as revealing about their sense of ethics as the substance of the meeting.

The notes of the Keating Five meeting led to Common Cause requesting an ethics investigation. The Senate ethics committee reluctantly agreed - with several of its members verbally assaulting Common Cause!

I will return to the Senate ethics committee after addressing the next matter that came up in chronological order after my notes of Keating Five meeting were made public. In 1987, the Wall Bank Board began taking unprecedented actions to placate Charles Keating, the worst S&L control fraud. This led to a civil war within the Bank Board, caused the most expensive banking failure in history ($3 billion), transformed the S&L debacle from an arcane financial issue buried in the business section to a first page political scandal, and led to the resignation in disgrace of Danny Wall.

Blowing the Whistle on Bank Board Chairman Wall

In rapid succession during the beginning of his term of office, Wall ordered that examiners not go into Lincoln Savings, that the enforcement investigation of Keating be halted and that the Washington staff investigate not Keating, but the San Francisco region. Soon, Wall was pressuring the Seattle region to allow Lincoln Savings (in violation of a host of Bank Board rules and policies) to acquire an S&L in its region for the sole purpose of escaping the supervision of San Francisco. Seattle said no, Wall insisted anew, Seattle said no, Wall insisted anew. You get the idea.

At this juncture, Keating upped the pressure on Wall to rid him of this accursed (SF) regulator. He had Senator Glenn arrange a luncheon meeting with Speaker Wright. He had Senator Cranston arrange a meeting with Danny Wall later that afternoon. Keating's key political aide later testified that he was amazed at the luncheon meeting with Wright and Glenn. Keating was an aggressive, arrogant man who tried to dominate everyone. But Keating could barely get in a word edgewise. The topic was the perfidy of Bill Black and Ed Gray. Wright was enraged at both of us and delighted that he had found someone who hated us as much as he did. He invited Keating to come back to the Hill to work with his staff. Wright's staff, first class haters but third class hacks, was frustrated at the constant bad press the Speaker was getting for his interventions on behalf of Gaubert and Dixon. They encouraged Keating to sue Gray and me and to get me fired.

Keating's first words to Wall were to emphasize that he had met earlier that day with Glenn and Wright. He then went on to tell Wall that the Speaker would be much friendlier toward him if he could get rid of a "red-bearded lawyer in San Francisco." (Me.) Consider what Keating had just done. He had just demonstrated that the Keating Five (through Glenn and Cranston) were still working on his behalf and that the Speaker had now been enlisted to his cause. Talk about a "dream team!"

Keating knew that Wall lived in terror of powerful politicians. Wall's self description was that he was "a child of the Senate." He knew how extraordinary Keating's political power was. This was a man who was able to get a majority of the members of the House of Representatives to co-sponsor a resolution calling on Gray not to go forward with the rule restricting direct investments. He could reach into the White House and make the Administration willing to select his two choices for appointment to the Bank Board so he could control his regulator. He could convince five U.S. Senators to come to two different meetings to whack his regulators. Now he was adding the Speaker as his "catch of the day."

Wall announced shortly after becoming Chairman that "by definition we don't close Texas S&Ls." He forced Selby to resign. These were both efforts to placate Speaker Wright. He also had his General Counsel, Jordan Luke, inform me about Wright's efforts to get me fired. This was not a friendly "heads up." I asked Jordan what Wall had against me. We met once before he became Chairman and the briefing was non- controversial. Jordan said that it was my blowing the whistle on Wright. First, Wall viewed the Speaker as the ultimate in power and vindictiveness. By taking on Wright publicly I had put the agency's survival at risk. Second, he viewed my action in taking on the Speaker as indicating horrific personal judgment. Wall would have never done anything remotely like what I had done, i.e., risking my career. I was scary to Wall. He knew that if he did something unprincipled I might call him to account.

There was a third reason that Jordan did not discuss. Wall shared the Speaker's policy views against vigorous enforcement of the law and rules. Wall, while still an aide to Garn, had joined Wright in urging Gray to remove the San Francisco supervisor's jurisdiction and give the DCCC contributor, on whose behalf Wright was holding the FSLIC Recap bill hostage, what he wanted. He had also joined the Speaker in urging Gray to force Selby to resign. Wall knew that I was a strong supporter of the policies he despised.

Wall responded to Keating's demonstration of raw political power by emulating Neville Chamberlain. He ordered his top Washington supervisor, Darrel Dochow, to reach a "peaceful resolution" with Keating. A "peaceful resolution" meant acceptable to Keating, i.e., he would not sue Wall and would call off the political dogs. Keating, of course, defined "acceptable" the same way Speaker Wright did - the Bank Board's unconditional surrender.

Wall gave concessions to Keating that were unprecedented in the history of federal banking regulation. There were myriad unprecedented acts; I will discuss only a few of them. The primary act of surrender was that Wall agreed that San Francisco's jurisdiction over Lincoln Savings would be removed. This was after another unprecedented act, agreeing to have Washington supervision review and reach its own judgment on the entire examination findings and supervision of the San Francisco region. That review found that the examination report was correct, that no one in San Francisco had acted abusively toward Lincoln Savings, and that Lincoln Savings had committed numerous crimes and was likely to cause enormous losses to the taxpayers. Nevertheless, the Bank Board agreed to two more unprecedented acts. They agreed that the San Francisco examination findings could not be used by the agency and they agreed to create a new examination team that would not be permitted to learn of our examination findings and would not be permitted to discuss Lincoln Savings with anyone in San Francisco. By way of contrast, Lincoln Savings agreed to no meaningful restraints. Wall's surrender was abject.

No S&L in the world was less deserving of unique favors and more certain to abuse them to produce still greater losses. Moreover, there was zero basis for removing the field's jurisdiction over Lincoln Savings. FSLIC Recap had become law and the agency had no legislation pending that was being held hostage. Wall's chief of staff, Jim Boland, told my boss in San Francisco, Mike Patriarca, that we should be thankful Wall had removed our jurisdiction. Boland gave Mike this chilling warning about Keating: "He's so powerful that he can get you in ways you'll never know you've been gotten."

But other bizarre things were going on behind the scenes related to my past whistle blowing on the Speaker and Lee Henkel. Roger Martin was eventually appointed to fill Lee Henkel's seat. Martin, like Wall, believed that Keating was a fine businessman who was abused by Gray and the San Francisco field office. Martin did two unique things in regulatory history. First, he received the "secret file" from Keating. Martin met frequently with Keating and his staff. (Martin never permitted San Francisco to brief him about its recommendation to close Lincoln Savings.) At one of these meetings, shortly after Wall had issue his "peaceful resolution" order, Keating was going on at length about how awful I was. He was consulting a file as he harangued Martin. Martin asked for the file and Keating gave it to him.

Martin later told Jim Cirona that he thought the Bank Board would have to cave in to Keating. He was asked why. He explained that otherwise Keating would sue the agency. Cirona said so what, people threaten to sue or sue the agency all the time. Martin said, but I've seen their file and I think we may lose.

Martin did not tell the San Francisco office about the file or give us any opportunity to respond to its charges. We learned about the file only from Dochow who mentioned it in response to questions we had about other matters at a pre-meeting to prepare for a meeting with Lincoln Savings' negotiators. We asked for a copy and Dochow said he could not give it to us without Martin's permission. He then told us that he would 1) recommend removal of our jurisdiction over Lincoln Savings and 2) that I, San Francisco's General Counsel, not be permitted to attend the meeting with Lincoln Savings because they objected to my presence. The basis for the objection was that I was hostile to them and they suspected that I leaked adverse documents about them. We were amazed and upset about all of these decisions and promptly went with Dochow to Bank Board Member White (Martin was out of the office). White indicated that he thought we should be given the file immediately and that Keating should not be able to determine the Bank Board's representatives. The meeting with Keating should be postponed until these matters were worked out. We got on the plane to return to San Francisco.

Martin's special assistant learned that Dochow had been told to give us the file and that White did not believe Keating should be able to exclude me from meetings. She went into emergency mode and contacted Martin to reverse all of these decisions. Martin and Wall ordered that the meeting go forward without anyone from San Francisco (Lincoln Savings' examiners and supervisors) being present. Martin ordered Dochow to return his copy of the secret file to prevent us from getting a copy of it an opportunity to respond. When we followed up and demanded a copy from Martin, he told us he could not give us the file without Keating's permission! He then sent all copies of the file back to Keating to make sure we could not see and respond to it. Remember that we were part of the agency, but Martin was treating us like the enemy and Keating as his client.

I only learned of the other unprecedented and bizarre act by Martin years later when the agency got access to Keating's lawyers' files. There is a memorandum by a lawyer in his primary outside law firm explaining why there is a good basis for suing me for leaking documents about Lincoln Savings. It claims that I must be the source for two stories by a reporter named Michael Binstein. (I was not the source for either.)

Perhaps the most significant evidence that Black is Binstein's source is an investigation conducted by Roger Martin. Martin has stated to Jim Grogan that he has no doubt that Black is the individual who has provided Lincoln's confidential information to Binstein and to other reporters. Martin's conclusion is based on an investigation he conducted of an anonymous letter received shortly after the initiation of settlement discussions between Lincoln and the FHLBB. The anonymous letter, in Marin's words, called him "on the carpet" for helping Keating. The letter stated that Keating was actually Martin's enemy. Martin has told Grogan he is certain that the anonymous letter came from Black. Black said that after he received the letter he authorized an investigation to determine if the postmark on the letter could be matched with the travel schedules of various Eleventh District personnel. Martin discovered that the letter was postmarked from the city in which Black and an assistant to Black had traveled to on government business on the day the letter was mailed.

First, I have never sent, caused someone else to send, or known anyone to send an anonymous letter to anyone. Second, this is significantly insane. Consider the context: Lincoln Savings is constantly threatening to, or actually, suing the Bank Board for illegally releasing confidential documents for the purpose of maliciously injuring it. In these circumstances, one of the presidential appointees decides to tell a Keating lawyer that he's sure his agency is guilty. That admission would be admissible in court against the agency and would make Martin Lincoln Savings' prime witness. Martin, of course, was freelancing. The Bank Board's attorneys and his fellow Board Members had no clue that he was acting with Keating's lawyers in this manner. Third, Martin investigates his own agency, but takes no steps to investigate Keating. Fourth, Martin's "investigation" is a farce. Does he investigate whether other Bank Board personnel, e.g., from headquarters are in this unidentified city at the time the letter is postmarked? No. Does the anonymous letter release any confidential information? Apparently not, based on the description of it by Keating's lawyers. What is the logic in considering an anonymous letter warning him about Keating as proof that someone (me) is leaking confidential information?

The point, of course, is that once you blow the whistle on the powerful you are never fully trusted again by powerful people. They always fear that you may blow the whistle on them next. This is not necessarily paranoia. Wall's fears that I would blow the whistle on his surrender to Keating were well founded.

My Decision to Delay Blowing the Whistle on Wall

We, the San Francisco region, knew that Wall, Dochow and Stewart (the Bank Board's enforcement director who was Keating's greatest ally on the staff) had destroyed their professional reputations and careers when they appeased Keating. We knew that Lincoln Savings would become an enormously expensive failure. (At $3 billion, it became the most expensive S&L failure.) We tried to do several things behind the scenes to reduce the harm. First, we provided the California state S&L regulators (CDSL) with analytical support. Second, we worked with the CDSL to try to convince the California Department of Corporation (DOC) to ban the sale of junk bonds issued by Lincoln Savings' parent company (ACC). Third, I tried to get the House banking committee to investigate the Bank Board's special deals for Keating.

What I did not do was leak confidential information about Lincoln Savings to anyone. I encouraged the CDSL and the DOC (both of which had a legitimate right to information from us) to request information from us. I did not talk to the press because Wall had ordered that I not do so. If I had talked to the press I would have 1) given him "cause" to fire me (insubordination) 2) been prosecuted by the Justice Department 3) confirmed Wall's (false) belief that San Francisco was the source of the leaks about Lincoln Savings, and 4) provided Keating with an excuse for Lincoln Savings' failure. (The source for the leaks was almost certainly Congress. None of us in San Francisco had access to some of the information about Lincoln Savings that became public.)

My largest moral quandary came when I realized Keating was engaged in the most cynical abuse of the entire S&L debacle. This was the sale of Lincoln Savings' parent company's (ACC's) junk bonds out of the offices of Lincoln Savings. It was bad enough that the bonds were worthless. It was made worse by the fact that they were sold out of S&L branches so that investors would think they were safe investments. What was intolerable was that the deliberate plan was to target retirees, primarily widows, as the primary victims. We tried, but failed, to get the DOC to stop the sales. I tried, but failed, to get the House banking committee to hold hearings. The Committee was still chaired by St Germain at that time.

We tried, but failed, to talk to folks working on the Lincoln Savings case in headquarters into stopping the sales. Many of them wanted to stop the sales as much as we did, but Wall and Martin and their senior lieutenants delayed unconscionably in shutting down the sales. They knew that ACC's sales of junk bonds to the widows were the only means to get cash to ACC and stave off its bankruptcy. They knew that the bonds were worthless and that ACC's bankruptcy would create a national scandal. For the first time there would be no deposit insurance. There would be identifiable human victims of Keating's control fraud. And when you looked at the victims they would look like your grandmother. Many thousands of widows had, collectively, lost over $200 million. There was going to be hell to pay and the regulators who had ignored our recommendation to close Lincoln Savings and had instead praised Charles Keating would get the blame. Wall was desperate to stave off ACC's bankruptcy. The old way to do so was to permit continued sales of the worthless ACC junk bonds to the widows.

This is when my real moral dilemma hit. I considered going public and trying to stop the bond sales by warning the public that they were worthless. I decided not to because it would have sent me to prison and could have gotten Keating and Wall off the hook. They would claim I had caused a "panic" that brought down ACC and that this is what caused the losses to the widows and the failure of Lincoln Savings.

Blowing the Whistle on Wall

By late 1988, a number of key changes occurred. First, St Germain was defeated in his bid for reelection and the new House banking committee chairman was Henry Gonzalez. Gonzalez was considered whacky by many of his colleagues. His behavior with regard to the S&L debacle was exemplary. Gonzalez promptly sent the committee's investigators to San Francisco to be briefed on Lincoln Savings and Wall's capitulation to Keating. The Bank Board knew by late 1988 that we had been right about Lincoln Savings and that it would be a colossal disaster that could end their careers. Wall began to try to make peace with the San Francisco region. We were in open revolt as to a host of Wall's improper actions. In January 1989, Gonzalez scheduled banking committee hearings in San Francisco.

Gonzalez asked us questions about Lincoln Savings. Wall issued a "gag" order forbidding us to discuss even public matters about Lincoln Savings. Gonzalez persisted and Wall caved. We provided the opening salvo in the agency civil war.

George Bush became president in 1989 and promptly announced that an enormous S&L bailout by the taxpayers was essential. He proposed legislation to terminate the Bank Board and the FSLIC, transfer FSLIC's function to the Federal Deposit Insurance Corporation (FDIC), and create a new S&L regulatory agency as a bureau within the Treasury Department - the Office of Thrift Supervision (OTS). The law designated Danny Wall as the new Director of OTS. Bush was warned that this was probably unconstitutional because it violated the "advice and consent" requirement. But Wall had been a good soldier and misled Congress about the purportedly adequate FSLIC resources to deal with any S&L problem without taxpayer funds, and Bush rewarded loyalty. (Wall's appointment was later declared unconstitutional.)

Six Senators (the Keating Five plus Jake Garn) were desperate to avoid a confirmation hearing for Danny Wall. They could do a whitewash, and get lambasted in the press. Alternatively, they could conduct a real hearing about Wall's regulation of Lincoln Savings and misleading of Congress about the scale of the problem, and get lambasted in the press.

The wily, and underestimated, Chairman Gonzalez took advantage of the Senate and White House's eagerness to avoid confirmation hearings for Wall. He wrung one concession after another from them in the conference committee on Bush's S&L bailout bill in return for allowing them to appoint Wall unconstitutionally to head OTS. Gonzalez then moved to have his concessions and Wall too. He scheduled a series of hearings on the Bank Board's supervision of Lincoln Savings for Fall 1989. Speaker Wright and his "whip" Tony Coelho had resigned earlier that year to end ethics investigations of their conduct.

Wall made one last effort to bring us on board with him. The new bailout law also ended the dual banking/regulatory function of the Federal Home Loan Banks that had served as the Bank Board's field offices. I could have stayed on as the General Counsel of the Federal Home Loan Bank of San Francisco (FHLBSF). Under the new law, Wall would have no power to fire me if I remained with the FHLBSF. But the regulatory side was always the most interesting side of the work to me, and I could not leave my supervisory colleagues at a time when the ultimate showdown with Wall was imminent, so I chose to join OTS. Wall's last effort was to suggest a common story line for our testimony. We, the senior FHLBSF leadership, and Wall and his lieutenants would claim that we would have loved to act vigorously against Lincoln Savings. Unfortunately, our lower level examiners had failed to do a thorough job and did not find the critical facts on Lincoln Savings' fraud. Wall would praise the FHLBSF leadership for the accuracy of its warnings about Keating and bemoan the "fact" that we simply lacked the information needed to close Lincoln Savings. Two of our friends in Washington headquarters, who had shared our concerns about Lincoln Savings and warned Wall against appeasing Keating were chosen to make this pitch to Mike Patriarca and me.

This was another tactical blunder by Wall. The suggestion enraged us. First, it was a lie. Second, it was the antithesis of our concept of leadership. You take responsibility for the actions of your staff in our office; you did not use them as scapegoats.

We went into the Gonzalez hearings heeding the ancient advice that if you go to kill the king you better succeed. Mike Patriarca, the head of our office, took the high road. I went for the jugular. We provided chapter and verse on exactly what Wall and his top lieutenants knew and when they knew it.

The response by one of Wall's lieutenants, Rosemary Stewart, was equally fierce. She called for me to be investigated for perjury and endorsed Keating's theory of the case - claiming that Gray and I had a "vendetta" against Keating. Fortunately, and ironically, Keating's lawyers destroyed her credibility. They, of course, rushed to take her testimony under oath through a deposition to use in their lawsuits challenging the closing of Lincoln Savings and their Bivens suit against me and a number of other regulators. The Bivens suit asked for $400 million in damages from me. It turned out, however, that Ms. Stewart based her views on a claim by Charles Keating. Keating had told her a fabulous tale about Gray telling people that he was going to "get" Keating. But Keating had not heard Gray say this. Keating said that someone (he didn't remember who) told him (he didn't remember when or where) that Gray had said this. My lawyer deposed Keating and asked him whether he had taken any steps to check out whether this hyper hearsay was true. Keating said he had talked with a staffer who was present when Gray had purportedly made this comment and was told Gray never made such a comment. Stewart, however, did not ask Keating any questions; she just believed his preposterous tale. (She hated Gray; we find it easy to believe the worst about the people we hate.) This made Stewart useless as a witness for Keating. If he quoted her he'd really be quoting her, quoting him, quoting someone unknown about something that never happened.

The point is that if you blow the whistle as a public employee you need to be prepared for the inevitable response. The reason you are blowing the whistle is likely to be that senior people within your agency are permitting, or even aiding, outsiders to act improperly. The Gonzalez hearings occurred in late 1989. There was ample information within the OTS for it to be clear that Keating was a control fraud who had repeatedly lied to the agency. Nevertheless, a senior OTS official was willing to believe him even after he was exposed and adopt his theory that the whistleblowers, not the control frauds, were the problem that needed to be stamped out.

The Gonzalez hearings soon forced Wall to resign in disgrace. The Bush administration replaced him with a new team that had orders to move vigorously against the most notorious control frauds. The Bush bailout bill went even farther than Gray had gone in adopting reregulation. Wall and his policies were discredited.

The Senate Ethics Committee and the Keating Five

The remarkable thing about the Senate Ethics Committee was how eager its Democratic members were to attack Gray. It's pretty hard to make Gray the bad guy in the context of his April 2, 1987 meeting with the four senators, but the Democratic members of the Committee made that their primary aim. Senator Pryor (D. AR) was a member of the committee. Recall that he joined Senator Cranston (one of the Keating Five) and Speaker Wright in putting a "hold" on the FSLIC Recap bill in 1986. The Keating Five were certainly judged by a jury of their peers! The further irony is that the Keating Five's primary defense was that the House ethics committee had "exonerated" Speaker Wright for his even worse interventions on behalf of the Texas control frauds. Weak ethical standards spread quickly.

It was inevitable that the Committee would not impose any meaningful sanctions on any of the Keating Five. Nevertheless, Gray's and my testimony exposed enough of the misconduct that the Senators took an enormous "hit" to their reputations.

Whistle Blowing in the Public Sector

Whistle blowers in the public sector often face the unique problem that their disclosure may constitute a crime. This can create an ethical dilemma when the ongoing misconduct is severe and there is no reasonable prospect that the abuse will end absent blowing the whistle. I am confident that I would have blown the whistle if the actions had been a direct threat to life and health. I would still recommend trying to get the responsible organs (e.g., your agency's/department's congressional oversight committees and/or inspector general) to take action first unless the threat to public safety was imminent.

Try to always work with a supportive group. Whistle blowers have a tendency to become more isolated and more paranoid as the retaliation begins. The retaliation is inevitable. You need to understand that. They will use anything in your life that is embarrassing against you. Do not provide them with ammunition. One of the great advantages we had in San Francisco is that we acted as a group and we could reassure each other that we weren't crazy. Don't go looking for fights. Keep superb records and phrase your complaints and charges specifically and carefully and support them with facts. Avoid overstatement and burnish your credibility. Limit greatly your inferences about the motives of those that you criticize. Keep a sense of proportion and humor about life and yourself! But ultimately have the courage of your convictions and present your views.

William K. Black
Assistant Professor, LBJ School of Public Affairs
University of Texas at Austin
Visiting Scholar, Markkula Center for Applied Ethics
Santa Clara University

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