Wall Street History

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Wall Street History

03/03/2000

Charles Keating, Part I

Charles Keating is the leading figure in what can safely be called
the largest banking scandal in history. While figures vary, the
estimated total cost to taxpayers is in the neighborhood of $500
billion.

Keating was a championship swimmer, a World War II fighter
pilot and, later, a fruit stand owner, before he received his law
degree. In Cincinnati, he launched a crusade against pornography
and Hustler magazine''s Larry Flynt in particular. Keating then
became counsel to one of the earliest takeover artists, Carl
Lindner. In 1978, Keating purchased a large house-building
company from Lindner whose name he changed to American
Continental.

Meanwhile, the principle of savings and loans (or building and
loans as they were called in the times of "It''s a Wonderful Life"
and Bedford Falls) was to take short-term deposits and use them
to make long-term loans or mortgages. The savings and loan
industry was created by Congress back in 1932 and for decades
the system worked. The disparity between short and long-term
interest rates was small.

All of that changed, however, when the Federal Reserve acted in
the late 1970s to push up interest rates in an effort to tame
inflation. The S&Ls were then forced to pay more for deposits
than their mortgage portfolios were yielding. At the same time
the advent of the money market mutual fund provided stiff
competition and folks began to withdraw their money from the
banks. The industry then had to sell assets at a loss.

Senator Jake Garn, who later introduced legislation in an attempt
to help the S&Ls out, said of the time, "I don''t think that most of
us really understood just how serious the problem was. When we
began to realize how big it was, we did not have the resources to
handle it."

In 1980 Congress deregulated the interest rates that depository
institutions could pay on deposits. Then, President Jimmy Carter
increased the guarantee on a bank deposit from $40,000 to
$100,000. Both moves were designed to help the industry.

But the hemorrhaging continued and hundreds of S&Ls failed. In
October, 1982, Garn and Rep. Fernand St. Germain introduced
legislation that allowed the thrifts to invest 40% of their assets in
other businesses. The idea was to let the industry diversify its
portfolio in an attempt to shore up their finances. Some states
went even further. California-chartered thrifts could invest
wherever they liked and it would all be federally insured. Many
of the S&Ls then lost millions when they speculated on race
horses, windmill farms, exotic financial instruments and chancy
real estate ventures.

While this was going on, you would think that there would have
been increased scrutiny of the banks and their practices,
particularly since the government was now on the hook for
$100,000 an account. But one of Ronald Reagan''s mistakes was
to not add funds for more, and better trained, regulators. The
system was set up to be abused by the likes of Charles Keating.

With the help of Michael Milken (see the "Wall Street History"
archives), in 1982 Keating acquired Lincoln Savings and Loan of
Irvine, California. From his headquarters in Phoenix, Arizona, he
proceeded to go on a building spree - 8 luxury homes a day, a
$300 million hotel (the Phoenician..and a great place it
is.thanks, Charles), and massive office complexes.

What was Keating like? He has been labeled an "unpredictable
force of nature," who used to walk through his companies
dropping pink slips on executive desks, or firing someone for not
wearing the required dark suit (which considering this was the
Southwest, wasn''t real considerate when you factor in the heat).
On an impulse he would give a secretary $500 in cash with the
stipulation that it had to be spent in 20 minutes. On Bahamian
island, every mother who named a son Charles received $100.
[George Foreman missed out. Since he names all of his sons
George, if he had named them Charles he may have qualified for
$700 or so.but I digress.]

Keating was also a generous man, but with corporate, not his
own funds. He gave $6 million to charity and even flew Mother
Teresa around in his jet. And he was generous to his family,
wouldn''t you know. Family members, including himself, received
about $42 million in salaries and benefits in the five years he ran
Lincoln.

By 1988, Keating had about $5 billion in deposits which, in the
words of Harold Evans, he "whisked around the world, booking
''profits'' to the tune of 42% until people began to realize the
profits were prodigious losses."

Regulators began to take notice and attempted to crack down but
they were met by an all-out legal and political onslaught. Keating
had about 80 teams of lawyers, including (as was discussed in an
earlier piece), Alan Greenspan, who was paid $40,000 to write
some papers to regulators, basically saying that "(Lincoln)
presents no foreseeable risk to the government." [By the way, of
the 17 S&Ls that Greenspan was asked to comment on before
Congress, 16 failed and the survivor was not a S&L. But nooo,
he knows what he''s doing when it comes to today''s economy!]

And, as I mentioned above, the regulators were overmatched.
Keating was so brazen he even offered jobs to some of the very
regulators and examiners who were working his case. Many of
them were toiling at $14,000 salaries. Who wouldn''t want to lie
around the Phoenician, checking out the four pools and the action
around them (but I digress). One fellow, a man heavily in debt to
Lincoln, was appointed as commissioner to the Bank Board, the
body ultimately responsible for regulating Lincoln''s affairs.

Next week, the regulators win out.and the role of The Keating
Five.

Sources: "The American Century," Harold Evans
"Money, Greed & Risk," Charles Morris
"Devil Take the Hindmost," Edward Chancellor
"The New York Times Century of Business,"
Floyd Norris and Christine Bockelmann

Brian Trumbore

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