THE CON: As the head of a California savings and loan, Charles Keating took in millions of dollars through uninsured bonds, which he used to make risky land deals. When the Government took over Lincoln’s parent company, about 20,000 bondholders lost more than $250 million. The federal bailout from the crisis cost taxpayers $2.5 billion.
THE DAMAGE: $250 million, or about $430 million today.
THE OUTCOME: Keating was sentenced to 10 years in prison and ordered to pay a $250,000 fine. The “Keating Five” – five senators who received donations from Keating and intervened with regulators on his behalf – were criticized for their “poor judgment.”
When Charles Keating took over Lincoln Savings and Loan in 1984, it was a $1 billion savings and loan association that made home mortgages in Southern California. In four years, he transformed the S&L into a $6 billion institution that put two-thirds of its funds into risky investments. Depositors, many of them elderly people on a fixed income, were urged to purchase bonds from Lincoln’s parent company. Those high-risk, uninsured bonds became worthless when Keating’s scam folded.
Early in his career, Keating had a brush with the Securities and Exchange Commission; in the 1970s, Keating and Carl H. Lindner were charged with taking funds from American Financial Corporation. Without admitting their guilt, the men agreed to a consent order to obey securities laws.
In 1984, Keating bought Lincoln Savings and Loan, a firm that made loans primarily in black and Latino neighborhoods in Southern California. He promised to continue along the same path, but Keating soon fired the senior management of Lincoln – replacing them with his wife, brother, son, daughters and sons-in-law. Later, the world learned about the Keatings’ exorbitant salaries, bonuses and stock profits; in total, the family took about $34 million from Lincoln and its parent company, American Continental Corporation.
Over the course of several years, more than 20,000 depositors purchased $250 million worth of American Continental bonds; many of these bondholders lived in the retirement communities where Lincoln had branches; none of them realized those bonds were not federally insured, or that Keating used their funds to snap up junk bonds that financed risky land development deals, including a $250 million resort.
Thanks to the deregulation of the savings and loan industry in California, Keating’s investments appeared to be legal – but not everyone considered them an appropriate avenue for a mortgage-lending institution. One vocal critic was Edwin Gray, the chairman of the Federal Home Loan Bank Board, who advocated that a savings institution be limited to spending no more than 10 percent of its assets on direct investments. In response, Keating hired Alan Greenspan – then an independent consultant – to produce a report showing that direct investments didn’t harm the industry. In a letter written on Keating’s behalf, Greenspan described the management of Lincoln as “seasoned and expert.”
Keating used Greenspan’s letter, and hefty donations, to earn the favor of politicians who were in a position to help him; most of that money came, of course, from Lincoln deposits. In early 1988 – as regulators sought to take over Lincoln – Keating made $1.3 million worth of contributions to five senators, who attended two meetings to encourage regulators to leave Keating alone. These senators, who came to be known as the “Keating Five,” included Alan Cranston of California, Donald Riegle of Michigan, John Glenn of Ohio and both Arizona senators, Dennis DeConcini and John McCain.
The Keating Five only delayed the inevitable: in 1989, American Continental Corporation declared bankruptcy and the Government took over Lincoln Savings and Loan. For their role in the scandal, the five senators were found guilty by the Senate Ethics Committee of exercising “poor judgment.” The bailout cost taxpayers $2.5 billion.
In 1992, a state court found Keating guilty of 17 counts of fraud and sentenced him to 10 years in prison; he also received a 12-year federal sentence. Keating served four years and was released in 1996 amidst allegations of jury misconduct during his federal trial. In 1999, he pleaded guilty to wire fraud; as part of his plea bargain, Keating and his son, Charles Keating III, did not receive prison time.