Charles Keating - Failure of Lincoln and American Continental

Failure of Lincoln and American Continental

Lincoln stayed in business; from mid-1987 to April 1989, its assets grew from $3.91 billion to $5.46 billion. Following Keating's past practices with Lindner, American Continental also amassed a large collection of confusingly connected subsidiaries in real estate, banking, and insurance businesses; these numbered at least 54, and there were some overseas ones that auditors were not aware of. Keating was triumphant in having defeated the regulators, whom he despised as useless relics from an outmoded financial past, and defended his high salary and business practices. Keating spent about $500,000 on radio advertisements in the Phoenix area to improve his public image; the commercials stressed his real estate projects and his family-oriented values. A 1988 Los Angeles Times profile assessed Keating as "a businessman without apparent peer in Arizona in terms of riches, clout and color." While Keating had taken Citizens for Decency through Law with him, he had generally deemphasized his anti-pornography work when he moved to Arizona. Nevertheless, X-rated movies and Playboy magazine were banned from his hotels.

In October 1988, Keating opened his most extravagant real estate project ever, the 250 acres (1.0 km2), 600-room The Phoenician resort at the base of Camelback Mountain. Its construction cost $300 million, included many opulent, imported features, and saw a number of instances of Keating or his decorator wife making wholesale late design changes at great expense. Keating's other grand project was Estrella, a 20,000 acres (81 km2) mixed-use development outside of Phoenix in Goodyear, Arizona in the direction of the Sierra Estrella. Incorporating homes, offices, industrial buildings, schools, shopping, a resort and a hospital, it was intended to eventually house 200,000 people and become a model 21st century city. American Continental wrote rules saying that Estrella homeowners could not "intentionally terminat a human pregnancy" or possess "adult material", but removed them once Keating was informed that such covenants were unconstitutional. A late 1980s downturn in the Sun Belt real estate market put Estrella in jeopardy before much building could be done.

Asked in an interview if he ever worried about going broke, Keating responded, "All the time, every day. I come into the office with this hollow feeling in my stomach lots of time.... You get trapped almost. You get too many responsibilities. It's a bellyfull to carry. It's risky. Dangerous. There's the possibility of failure with it every day and every night. But in a way, it's a challenge. It's invigorating. There isn't any point in not being a player – you're here.... It's not only the money. It's the disgrace, yourself, your manhood. I'm not sure I'd have a big problem with that. On the other hand I'm not sure I wouldn't."

As Lincoln grew, money was siphoned from Lincoln to the parent American Continental Corporation under a variety of schemes, and American Continental spent lavishly on speculative investments and personal expenses. A new regulatory investigation began in July 1988. After Arthur Young indicated doubts about some accounting practices, Keating fired them in September 1988 and switched to Touche Ross. American Continental was desperate for cash inflow to make up for losses in real estate purchases and projects. Lincoln's branch managers and tellers convinced customers to replace their federally-insured certificates of deposit with higher-yielding bond certificates of American Continental; the customers later said they were never properly informed that the bonds were uninsured and very risky given the state of American Continental's finances. Indeed, the regulators had already adjudged the bonds to have no solvent backing. Federal Deposit Insurance Corporation chair L. William Seidman would later write that Lincoln's push to get depositors to switch was "one of the most heartless and cruel frauds in modern memory." In late 1988, Keating began desperate attempts to sell Lincoln; regulators rejected one $50 million potential sale due to the buyers not meeting federal requirements. A December 1988 audit by the FHLBB found Lincoln in violation of many regulations and in danger of default. The following month they ordered Keating to stop transferring cash from Lincoln to American Continental, which imperiled the latter's survival strategy and caused its stock price to nosedive. Keating tried to arrange junk bond deals with Michael Milken and place bets in the global currency markets to generate cash, but the moves failed and he lost $11 million in one month alone. Keating got Senators DeConcini and Cranston to pressure the regulators to let a sale go through, but this time the lawmakers were ignored.

American Continental went bankrupt in April 1989, and Lincoln was seized by the FHLBB. About 23,000 customers were left with worthless bonds. Many investors, often ones living in California retirement communities, lost their life savings, and later claimed to have suffered emotional trauma for having been duped on top of their financial devastation. The total bondholder loss came to between $250 million and $288 million. The federal government was eventually liable for $3.4 billion to cover Lincoln's losses when it seized the institution. In talking to reporters in April 1989, Keating maintained that he was the victim of a federal government that had spent years trying to destroy him, and then said, "One question, among many raised in recent weeks, had to do with whether my financial support in any way influenced several political figures to take up my cause. I want to say in the most forceful way I can: I certainly hope so."

In September 1989, Keating was hit with a $1.1 billion fraud and racketeering action, filed against him by the regulators. He proclaimed that, "We've lost everything in this thing, my wife and I. It's devastating." In November 1989, Keating was subpoenaed to testify before the House Banking Committee, but refused to answer questions, invoking his right against self-incrimination under the Fifth Amendment. Also in November, his Phoenician Resort was seized by the FBI; under their operation it became known as "Club Fed" before later being sold to a Kuwaiti group. The vastly ambitious Estrella project would remain desert and was sold in 1993 to an investment group.

By November 1989, the estimated cost of the overall savings and loan crisis had reached $500 billion, and the media's coverage often highlighted Keating's role as part of what became a feeding frenzy. Indeed, Keating and Lincoln Savings became convenient symbols for arguments about what had gone wrong in America's financial system and society, as well as for 1980s greed in general, and were featured in popular culture references. A deck of playing cards would be marketed, called "The Savings and Loan Scandal", that featured on their face Charles Keating holding up his hand, with images of the Keating Five senators portrayed as puppets on his fingers.