Charles Keating, Part II

Charles Keating, Part II

As we pick up the story on Charles Keating, we find that the

federal regulators who began to monitor the activities of his

Lincoln Savings & Loan were overmatched. But there was one

hero, Edwin Gray, a mainstream Reaganite who was made

chairman of the Federal Home Loan Bank Board. He sounded

the alarm.

In the House, Speaker Jim Wright, and Texas Democrats J.J.

Pickle and Jim Chapman, fought Gray at every turn. In the

Senate he was harangued by the Keating Five (more later).

The public interest group, Common Cause, issued a report on the

period of the investigation into the S&Ls. Gray said there were

two significant problems in trying to handle the issues in the

savings and loan industry.

“On the one hand, the White House during the Reagan

Administration was pursuing a policy of deregulation, and under

this policy refused to support requests for the personnel and funds

required to carry out increased examinations of individual thrifts.

On the other hand, Congress – and especially the House and

Senate Banking Committees – refused to pass the legislation that

was necessary in some cases to more strictly regulate the S&Ls,

and prevent a further deterioration of a worsening situation.”

By the end of his term, June 1987, author Harold Evans described

Gray as “like a boxer who had taken too many punches.” Gray

was then replaced by M. Danny Wall, to put it mildly, a disaster.

Wall had been a key staff member for Utah Senator Jake Garn.

And under Wall supervision was lax. He promptly suspended the

audit of Keating”s S&L and set out on junkets around the country

telling everyone that 70% of the S&Ls were healthy. As for

Lincoln Savings & Loan, the delay in closing it cost the U.S.

taxpayers hundreds of millions of dollars.

And then there was the Keating Five. From 1984 to 1988,

Charles Keating gave about $2 million to various candidates and

$1.3 million to his special “angels,” Senators Alan Cranston (D-

CA), John Glenn (D-OH), John McCain (R-AZ), Donald Riegle

(D-MI), and Dennis DeConcini (D-AZ).

According to historian Charles Morris, the Keating Five

“intervened repeatedly and heavy-handedly to block regulatory

actions against Keating, and when local regulators revealed that

they planned to file criminal charges (April 1987), the senators

succeeded in transferring regulatory oversight back to the D.C.

Bank Board, allowing Keating to wreak havoc with taxpayers

money for more than another year.”

During the first quarter of 1989, Lincoln Savings had lost $29

million and Keating was frantically trying to put together a deal to

sell the bank and avoid a Federal takeover. He wrote a note to

Alan Cranston.

“Some politically important person [Cranston] has got to lay it on

the line to Danny Wall and Jake Garn that they unescapably (sic)

and must decisively approve this deal.” Cranston was the

messenger.

Finally, in April of that year, Lincoln was taken over by the

authorities. At a press conference, Charles Keating was asked

about his political contributions.

“One question, among the many raised in recent weeks, has to do

with whether my financial support in any way influenced several

political figures to take up any cause. I want to say in the most

forceful way I can: I certainly hope so.”

The Keating Five was investigated for leaning on federal

regulatory officials on behalf of Keating and a number of

investigations began as to whether these senators had acted

improperly and whether Keating had been able to buy influence

through his campaign contributions. These included

investigations by the State of California, the U.S. Department of

Justice, and the Senate Ethics Committee. While the California

and the Justice Department investigations concentrated on

Keating”s action, the Senate Ethics Committee investigation

concentrated on the actions of the five senators implicated.

Although the special counsel to the Ethics Committee advised the

Senate that Senators Glenn and McCain were not substantially

involved, months of testimony revealed that all five senators had

acted improperly in varying degrees. All of them, however, continued

to proclaim that they were not involved in any wrongdoing, and were

just following normal campaign funding practices.

In the end, the Senate Ethics Committee concluded that Cranston,

DeConcini, and Riegle had substantially interfered with the

federal regulators” enforcement processes at the request of

Charles Keating. In August 1991, the Ethics Committee

recommended to the full Senate the censuring of Cranston for

reprehensible conduct. The other four senators were noted for

questionable conduct. Cranston had already decided not to seek

re-election, citing medical problems. Riegle and DeConcini were

mortally wounded, politically, while McCain and Glenn survived.

Keating, for his part, continued to blame regulators whom he

suggested had a vendetta against him and were out to sabotage

his business. At the time of the collapse, Lincoln assets were $5.8

billion. Home mortgages were now only about 2% of total

assets. Keating claimed that if the government had left him alone

he would have gotten out of his hole.

In the end, President Bush established the Resolution Trust Corp.

to manage and sell the insolvent S&Ls. The RTC was authorized

to issue long-term bonds to take over the insolvent institutions,

pay off the depositors, and sell off the assets. The original clean-

up cost of $50 billion, escalated to $150 billion. Aside from the

cost to taxpayers of $2 billion, alone, for Lincoln, Keating had

bilked about 20,000 individual investors, mostly in California,

who purchased $200 million of junk bonds during the last days of

Lincoln as Keating scrambled to save the bank. Unfortunately,

most of the bonds were sold by unscrupulous Lincoln salespeople

who led many of the investors to believe that the bonds were

federally insured. They weren”t.

In April 1992, Keating was sentenced in California state court to

ten years in prison for duping the bond investors. That July, a

federal jury ordered Keating to pay $3.3 billion in damages as

well as serve an additional 12-years for 73 counts of federal

securities and wire fraud.

Next week, the Keating verdicts take a twist or two. Plus, I”ll

explore the genesis of the war between McCain and the Arizona

Republic, as well as his links to Keating. Yes, his campaign for

the Republican nomination may be over, but when you read some of

the tales of the 1980s, you”ll nod your head as you compare them

to what transpired during this past primary season. And finally,

a figure from the O.J. Simpson trial emerges as well! All of this,

if you keep it where it is.

Sources: Various wire service reports

Common Cause web site

“The American Century,” Harold Evans

“Devil Take the Hindmost,” Edward Chancellor

“Money, Greed & Risk,” Charles Morris

Brian Trumbore