Monday, Aug. 26, 1991

Scandals: The Fall of the Patriarch

By John Greenwald

"There is no function of any kind on the part of B.C.C.I. I know of no present relationship. I know of no planned future relationship."

-- Clark Clifford, 1981

Those words must have long haunted the former Defense Secretary, but never more so than when he resigned under pressure last week as chairman of First American Bankshares, Washington's largest bank holding company. A decade ago regulators, relying on Clifford, permitted a group of Middle Eastern investors to acquire First American. Those purchasers, however, turned out to be alleged fronts for the notorious Bank of Credit & Commerce International, the criminal enterprise that collapsed in July with an estimated $10 billion in losses. First American's secret ownership demonstrated B.C.C.I.'s knack for infiltrating power elites even as it served as a cash conduit for terrorists, gunrunners and drug thugs.

The departure of Clifford, a venerated Democratic Party elder, and bank president Robert Altman, who also resigned, came after intense prodding by the Federal Reserve Board. The regulators have been seeking to restore public confidence in First American (assets: $11 billion), which has been plagued by troubled real estate loans in the Washington area. Last spring the Fed tapped former Republican Senator Charles Mathias of Maryland to head a committee of directors to oversee First American. While Clifford, 84, and law partner Altman, 44, retained their titles, investigators told TIME that the Mathias group gradually took over their duties. "It started to get nasty," said a federal investigator close to the power struggle.

By then the Federal Reserve, which last month fined B.C.C.I. $200 million for secretly acquiring First American and two other U.S. banking companies, had decided that Clifford and Altman had to go. To shore up the bank, regulators picked former Attorney General Nicholas Katzenbach to succeed his longtime friend Clifford as chairman.

Clifford and Altman still face a daunting battery of probes. Grand juries in Washington and New York City are studying how much both men knew about B.C.C.I.'s secret ownership of First American. Manhattan District Attorney Robert Morgenthau is investigating a 1988 deal in which Clifford and Altman reaped a combined $10 million profit after buying stock in a B.C.C.I. affiliate. The two had borrowed $18 million from B.C.C.I. to acquire the stock, which they held for less than two years. TIME's sources say investigators are probing whether the $10 million profit was a payoff for First American's 1987 purchase of the National Bank of Georgia for some $200 million from B.C.C.I. front man Ghaith Pharaon. That deal bailed out Pharaon and effectively transferred the $200 million from First American to B.C.C.I. Clifford and Altman deny that they carried out the deal under B.C.C.I.'s orders.

Prosecutors are examining other ways in which First American and B.C.C.I. might have been intertwined. Officers at the First American Bank of New York, a subsidiary of the Washington company, funneled financing for international deals to B.C.C.I., a customer has told TIME. He recalled how "the B.C.C.I. guys suddenly appeared" after several meetings at the New York bank. "When I asked the First American vice president what was going on, he looked at me and said that these guys were running the show."

With reporting by S.C. GWYNNE/WASHINGTON