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Charles Keating's Techniques Were Replicated by Those Who Helped Trigger the 2008 Financial Collapse

Charles Keating Jr. at a House of Representatives hearing on the Lincoln Federal Savings and Loan scandal.
Charles Keating Jr. at a House of Representatives hearing on the Lincoln Federal Savings and Loan scandal.
Dennis Brack/Newscom

Charles H Keating Jr. is remembered not only as the most notorious figure of the savings & loan crisis that swept the nation in the late 1980s - and as the namesake of the infamous Keating Five political scandal - but also as the fraudster whose techniques were replicated by those who helped trigger the 2008 financial collapse and Great Recession.

Keating, who pleaded guilty to federal bankruptcy-fraud charges in 1999 after earlier state and federal criminal convictions were overturned on appeal, died March 31 at age 90. He served four years in a Tucson federal prison, where he (a competitive swimmer himself in his youth) watched on television as his grandson, Gary Hall Jr., won Olympic gold swimming metals during the 1996 Atlanta Games.

"Keating was the test pilot, the guy who blazed the trail" for the crooked businessmen that fueled the financial crisis that crashed the world economy following the collapse of Lehman Brothers in 2008, says William Black, a former federal S&L regulator and now associate professor of economics and law at the University of Missouri-Kansas City.

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"It was easy for folks who came after him," Black says. "They didn't have to invent the playbook.

"Had we learned the right lessons from dealing with the Keatings of the world and the Savings & Loan debacle, there certainly would not have been the great financial crisis that were suffering from now," Black says.

Black had a ringside seat to Keating's influence-peddling when he attended a 1987 meeting with Ed Gray, former chairman of the Federal Home Loan Bank Board, and five U.S. Senators at Keating's behest. Alan Greenspan, who was one of Keating's army of powerful advocates and who later became chairman of the Federal Reserve Board, arranged the unusual meeting, Black says.

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Gray later told me when I worked at the Dayton Daily News in Ohio that he believed the senators pressured him to subvert a regulatory rule that Keating opposed. Keating owned Irvine, Califiornia-based Lincoln Savings & Loan. Gray resisted the pressure, but he was soon replaced with a regulator who was more accommodating to Keating's demands.

Among the five senators attending the meeting with Gray were two from Arizona: Democrat Dennis DeConcini and Republican John McCain. The other three senators were all Democrats Don Riegle of Michigan, John Glenn of Ohio, and Alan Cranston of California.

Gray's allegation that the senators worked on behalf of their "friend" Keating to weaken a regulation designed to protect taxpayers was first reported in the Daily News. The story eventually led to a major investigation by the Senate Ethics Committee, and televised hearings on the probe became the showcase for the S&L debacle that cost American taxpayers more than $150 billion to cover thrift losses.

The Ethics Committee determined in 1991 that the five senators violated no laws. The committee however, "rebuked" Cranston, DeConcini, and Riegle for interfering with an ongoing bank board investigation Lincoln. The Committee criticized Glenn and McCain for exercising "poor judgment."

 

Senator John McCain was a central figure in the Keating Five scandal.
Senator John McCain was a central figure in the Keating Five scandal.

Greenspan wrote a report on Keating's behalf concluding that Lincoln posed no "foreseeable risk" to depositors and praised the thrift's "seasoned and expert" management. Taxpayers later paid more than $3.4 billion to cover Lincoln's losses after it failed.

"Keating showed it was child's play to be able suborn the most powerful" leaders in the country, Black says.

In Arizona, every thrift failed. The Resolution Trust Corporation, a government agency created to handle commercial real estate projects financed by the doomed thrifts, sold many marquee properties, often for as little as 10 cents on the dollar.

Keating's financial empire began to unravel in the 1988 when federal regulators started finding a disturbing pattern of falsified documents at American Continental Corp., a Phoenix holding company controlled by Keating. American Continental owned Lincoln Savings.

In spring 1988, federal banking examiners brought in 39-year-old private attorney Michael Manning to help unravel the conflicting information that was beginning to surface. Manning had cut his teeth on leading major bank-fraud investigations in Texas.

"I was brought in to do a fraud investigation of our own based on the tip of the iceberg that had been discovered by regulators in the summer and fall of 1988," recalls Manning, a prominent Phoenix lawyer who went on to win many court battles against Maricopa County Sheriff Joe Arpaio.

Back then, Manning brought in teams of lawyers who began going through millions of pages of records in Phoenix and in California.

"We just kept finding more and more evidence," Manning says. "There was backdating, destroying documents, tampering with witnesses."

It quickly became apparent that Keating had enlisted teams of lawyers and accountants to help with the fraud that essentially hid hundreds of millions of dollars of losses at Lincoln from federal regulators.

"That didn't surprise us because we didn't think you could pull of a fraud like this without professional help from lawyers and accountants," Manning says.

The seven-week audit turned into a year-long investigation, and before it was over, Manning's team had compiled 50 million pages of records. The investigation eventually led to criminal charges, and Keating was convicted of fraud, racketeering, and conspiracy in state and federal courts in California. Keating served more than four years in prison before the convictions were overturned on technicalities in 1996. In 1999, facing a second federal criminal trial, Keating pleaded guilty to four counts of wire and bankruptcy fraud and was sentenced to time served.

 

Keating wasn't the only crooked S&L businessman in the late 1980s and early 1990s, but he was far and above the most sophisticated, Manning says.

"What was stunning about Keating is that he covered every aspect, every front in a good bank-fraud scheme," Manning says. "He covered himself with political influence and with public influence."

Keating, for example, was hailed as a major benefactor for Nobel Peace Prize winner Mother Theresa. But the money he gave her wasn't from his own pocket but instead came from taxpayers who covered Lincoln's billions in losses.

"Keating figured out how to bridge the separation between church and state," Manning says, jokingly.

Keating, Manning says, could have been a very successful legitimate businessman: "He was a brilliant and charismatic man." But the trappings of wealth and power seduced Keating.

"He was head-over-heals infatuated with Michael Milken," Manning says.

Milken was known as the "junk bond king" and earned more than $1 billion over a four-year period as head of the high-yield department at Drexel Burnham Lambert. Milken pleaded guilty to securities-reporting violations, was sentenced to 10 years in prison, and was fined $600 million. The sentence was cut to two years after he cooperated with investigators and testified against his former partners.

Manning says he had dozens of conversations with Keating after Keating was released from prison, most of them unpleasant.

"I was in mass with my family one Saturday evening and going up to take communion. I was kneeling down and got that uncomfortable feeling that somebody was near and staring at [me]," Manning recalls. "And then this person started whispering expletives that I could hear, and I looked up and saw it was Charlie.

"He was dropping "F-bombs, MFs, assholes - in church," he says.

No doubt Keating's victims uttered the same expletives toward him.

Keating directed American Continental bond salesmen to urge investors to move their money from federally insured CDs at Lincoln Savings to American Continental's higher-yielding, but uninsured, junk bonds. American Continental's 1988 bankruptcy left 23,000 customers with worthless investments. Many of the duped investors lost their life savings.

Former Federal Deposit Insurance Corporation Chairman L. William Seidman would later write that Lincoln's push to get depositors to switch to American Continental's junk bonds was "one of the most heartless and cruel frauds in modern memory."


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