Charles Keating - Lincoln Savings and The Keating Five

Lincoln Savings and The Keating Five

In 1984, American Continental Corporation bought Lincoln Savings and Loan Association for just over $50 million. Up through the early 1980s, Lincoln had been a conservatively-run enterprise, with almost half its assets in home loans and only a quarter of its assets considered at risk. It made slow growth at best, and had shown a loss for several years until it made a profit of a few million dollars in 1983. Once he took over, Keating fired the existing management. Savings and loan associations had been deregulated in the early 1980s, allowing them to make high-risk investments with their depositors' money, a change of which Keating and other savings and loan operators took advantage. (When Keating was later asked why he got into savings and loans, he said, "I know the business inside out, and I always felt that an S & L, if they'd relax the rules, was the biggest moneymaker in the world.") Over the next four years, Lincoln's assets increased from $1.1 billion to $5.5 billion. Lincoln's particular investments took the form of buying land, taking equity positions in real estate development projects, and buying high-yield junk bonds. A sales document from this period urges staff to, "always remember the weak, meek and ignorant are always good targets."

Beginning in 1985, the Federal Home Loan Bank Board (FHLBB) feared that the savings industry's risky investment practices were exposing the government's insurance funds to huge losses. It instituted a rule whereby savings associations could hold no more than 10 percent of their assets in "direct investments", and were thus prohibited from taking ownership positions in certain financial entities and instruments. Lincoln had become burdened with bad debt resulting from its past aggressiveness, and by early 1986, its investment practices were being investigated and audited by the FHLBB: in particular, whether it had violated these direct investment rules; Lincoln had directed accounts insured by the Federal Deposit Insurance Corporation into commercial real estate ventures. By the end of 1986, the FHLBB had found that Lincoln had $135 million in unreported losses and had surpassed the regulated direct investments limit by $600 million.

Keating had taken several aggressive measures to oppose the FHLBB, including recruiting a study from then-private economist Alan Greenspan saying that direct investments were not harmful, trying to hire FHLBB members or their wives, and getting President Ronald Reagan to make a recess appointment of a Keating ally, real estate developer Lee H. Henkel Jr., to the FHLBB. By March 1987, however, the ally had resigned upon news of his having large loans due to Lincoln. It appeared as though the government might seize Lincoln for being insolvent.

Starting in January 1987, Keating looked for help from what became known as the Keating Five: U.S. Senators Alan Cranston (D-CA), Dennis DeConcini (D-AZ), John Glenn (D-OH), John McCain (R-AZ), and Donald W. Riegle (D-MI). Keating had, or would soon make, legal political contributions of about $1.3 million to the senators, and he called on them to help him resist the regulators. Keating had become a personal friend of McCain following their initial contacts in 1981, and McCain was the only one of the five with close social and personal ties to Keating. McCain and his family had made several trips at Keating's expense, sometimes aboard American Continental's jet, for vacations at Keating's opulent Bahamas retreat at Cat Cay.

Keating asked that Lincoln be given a lenient judgment by the FHLBB, so it could limit its high risk investments and get into the relatively safe home mortgage business, allowing the business to survive. A letter from audit firm Arthur Young & Co. bolstered Keating's case that the government investigation was taking a long time. McCain initially refused to meet with Keating over the FHLBB matter and Keating called McCain a "wimp" behind his back. The two had a heated, contentious meeting in which McCain said he had not spent years in North Vietnamese prisoner-of-war camps to have his courage or integrity questioned; the friendship ended and they would not speak again. In April 1987, the group of senators met twice with FHLBB members who were investigating American Continental Corporation and Lincoln, in an attempt to end the investigation. Meanwhile Keating filed a lawsuit against the FHLBB, saying it had leaked confidential information about Lincoln. The outgoing head of the FHLBB deferred judgment on the matter, and the new head was more sympathetic to Keating; in May 1988, the FHLBB agreed to an unprecedented memorandum of understanding that gave Lincoln a clean slate and forgiveness for any violations up to that point. (In 1991, the senators would be rebuked to various degrees by the Senate Ethics Committee, with Cranston receiving the harshest verdict and Glenn and McCain the least. McCain later testified against Keating in a civil lawsuit brought by Lincoln bondholders, while the other four refused to testify.)