S&Ls, Big Banks and Other Triumphs of Capitalism | The Nation


S&Ls, Big Banks and Other Triumphs of Capitalism

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Robert Sherrill
Robert Sherrill, a frequent and longtime contributor to The Nation, was formerly a reporter for the Washington Post. He...

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The interminable bullying by Speaker Wright was one of the two events that made Edwin Gray's last year as chair of the bank board so memorably awful. The other was his confrontation with Charles Keating Jr. and the senators known as the Keating Five. Like many of his other troubles, Gray brought the Keating misery on himself.

If any one hustler was the living symbol of the underlying rot of the savings and loan industry as created by Congress and Reagan's bureaucracy in the 1980s, it was Charles Keating. He was pious, he was a devoted family man--and he was lawless. He believed the main purpose of politics was to make people like him rich. Although Keating eventually wound up, by hook or by crook, a very wealthy fellow, it was a failed wealth. Everything he ever did was, in a way, a failure. Twenty years ago, he got one of President Nixon's most meaningless appointments--to the President's Commission on Obscenity and Pornography. Ten years ago he briefly managed one of the biggest and most costly busts in politics: John Connally's campaign for the presidency. Nine years ago President Reagan tried to make him Ambassador to the Bahamas, but the nomination fell through when the press resurrected a 1979 scandal. It seems that Keating and his boss, Carl Lindner of the multibillion-dollar holding company American Financial Corporation ("A holding company," as Will Rogers once explained, "is a thing where you hand an accomplice the goods while the policeman searches you"), had been charged by the Securities and Exchange Commission with fraud in making millions of dollars of improper loans to insiders and friends. Keating got off by promising he wouldn't do that sort of thing in the future.

Five years ago he and his family were worth $100 million, at least on paper. Today Keating claims to be broke (by which he means he had to sell his yacht and some of his wife's diamonds), but he still lives and travels in high style, followed by a retinue of costly lawyers. Whatever money he has, his reputation is shot. Mother Teresa probably won't be dropping by to give him another crucifix, as she once did (after Keating gave her $1.4 million). Most people would probably agree with the Chicago Tribune's assessment of Keating as "the greediest man in America," and with the Resolution Trust Corporation, which in its $1.1 billion racketeering suit against him said he had "an evil mind."

In 1976 Keating bought American Continental Homes in Phoenix from Lindner and became a highly successful real estate developer, who trained for his later dealings with Congress by contributing as much as $25,000 to a mere city councilman's race. Developers do, after all, sometimes need to get permits from city governments.

When the savings and loan industry was deregulated in the early 1980s, Keating saw a window of opportunity as big and as gloriously brilliant as the stained glass of Sainte-Chapelle. Saying that he was certain that he could "profit immensely," in 1984 he bought for $51 million the old-line Lincoln Savings & Loan of Irvine, California, which had assets of almost $1 billion. Money for the purchase was obtained, naturally, by everyone's favorite junk-bond swindler, Michael Milken of Drexel Burnham Lambert.

How could a guy who only five years earlier was battling the S.E.C.'s fraud charges, which he escaped not by proving his innocence but by promising to behave himself, wind up with a savings and loan? Why would the bank board approve such a purchase? It was one of the blackest marks on Ed Gray's record, hardly lessened by his claim of ignorance: "I had never heard of Charles Keating. Didn't hear of Charles Keating until sometime later. There are a lot of Lincoln Savings in America. That meant nothing to me."

To win bank board approval of his purchase, Keating lied, lied, lied. He said he would keep Lincoln's experienced managers; he said he would continue to concentrate on home mortgages in Southern California. But immediately on taking over he fired the managers and quit making home loans. He began doing what so many of the scoundrels were doing--getting the big brokered funds and investing them in wild schemes.

Apparently the network of federal home loan banks never made follow-up checks to see if the people granted S&L charters kept their word. If the San Francisco home loan bank, which had jurisdiction, had done a follow-up, it would have seen that from the very beginning Keating intended to make Lincoln his personal piggy bank. One of his first gambles was on a hunk of land outside Austin, Texas, a deal in which his old pal John Connally was involved. Connally defaulted, leaving Lincoln (and now the taxpayers) holding a $70 million loss on the land.

Some of the other early loans and joint ventures, a total of $134 million, went to companies owned by Lee Henkel, who had been Keating's friend since they worked together on Connally's campaign. Keating surely must have thought his investment in Henkel would pay off when, in 1986, Keating got Reagan to appoint his buddy to the bank board (in part by getting one of his patsies, Senator Dennis DeConcini, to lobby Don Regan). There, according to Gray, Henkel "proposed a regulation that appeared to us could only benefit Lincoln Savings"--the proposal being made just a few weeks after Lincoln paid Henkel's personal blind trust $3.7 million for 25,000 shares of stock in one of Henkel's companies. (Insisting that his intentions had been completely honorable and misunderstood, Henkel resigned a few months later.)

Much of Lincoln's money was spent through the S&L's parent, American Continental Corporation, which became a developer of grandiose planned communities, resorts and hotels. The most infamous of the planned communities is Estrella, 20,000 acres in the Arizona desert that was supposed to be home to 200,000 tanned and happy residents.

Looking at Lincoln's books, one would have assumed that Estrella was making enormous profits from land sales; what the books did not show, say government examiners, was that Lincoln hired straw buyers and gave them money to buy the land at grossly inflated prices. It was a marvelous bit of abracadabra: the creation of "profits" by giving money away, after which these "profits" launched another wave of borrowing and lending, et cetera. Pure Ponzi. Today you and I own those 20,000 acres, still inhabited only by coyotes and jack rabbits, and we are spending about a million dollars a year just to keep the landscaping in shape.

As mentioned earlier, Keating was a great family man. At least ten members of his immediate kin were on the payroll of American Continental. The Keating family as a whole reaped at least $34 million in salaries, bonuses and stock sales.

Alan Greenspan and the Five Stooges

Keating's biggest troubles with the government began when Gray, in one of his smartest moves, ordered in 1985 a radical reduction in the amount an S&L could invest directly in a project. Lincoln was already $600 million over the maximum set by Gray. Furious and frightened, Keating went to work in his usual style to have Lincoln grandfathered under the new rule.

First he tried to get Gray out of the way by offering him a job at $300,000 a year. When that didn't work, he began calling in political chits. Descending on Washington, Keating went to see Vice President Bush (aides said nothing of importance was discussed).

Then Keating hired Alan Greenspan--whose conduct as a sleazy peddler of endorsements in this affair bodes no good for the future of the Federal Reserve Board, which unfortunately he now chairs--to write letters to Congressmen and to the bank board arguing that Keating's desires should be met because he was a financier of infinitely sound judgment and ethics. Greenspan enclosed with his letter a report by the notorious accounting firm of Arthur Young; the Arthur Young agent who wrote the report later went to work for Keating at a salary of nearly $1 million a year.

Finally, in April 1987 Keating called in his five senatorial stooges: Alan Cranston of California, John McCain (whose wife and father-in-law were partners with Keating in a shopping center) and DeConcini of Arizona (DeConcini's campaign manager's company got loans totaling $68 million, some now delinquent, from Lincoln), John Glenn of Ohio (Keating hired three of Glenn's former staff members as lobbyists and lawyers) and Donald Riegle Jr. of Michigan. Of course they would later deny that the $1.4 million they received from Keating and his associates had anything to do with their actions, but they got plenty rough with Gray: What the hell were he and his regulators doing, harassing this good man? Officials from the San Francisco home loan bank were summoned to Washington one week later to be given a further going-over by the Keating Five.

The West Coast regulators called their bluff. They came to the meeting loaded with evidence that Lincoln should be taken away from Keating because it had become a rogue institution operating in an unsafe and illegal way, stuffing its files with postdated documents, doing no credit checks on its borrowers and lending money with phony appraisals or with no appraisal at all.

Nevertheless, despite this evidence, Keating was about to win the battle. A couple of months after these encounters, Gray's term as chair ended and he was replaced by Senator Garn's protégé, M. Danny Wall, one of the chaps who had written the disastrous Garn-St. Germain bill. The S&L lobby would not have a more dedicated friend. The Wall Street Journal later called him "The S&L Looters' Water-Boy."

First he took the Lincoln case away from the San Francisco office and buried it in Washington. Then he killed Gray's direct investment limit and some of the other reforms Gray had proposed. The upshot was that for another two years Keating and his gang at American Continental were allowed to loot Lincoln until it was hardly more than a shell. In April 1989 American Continental declared bankruptcy and the next day the government seized Lincoln. The failure of this thrift is expected to cost taxpayers $2.5 billion, much of the loss due to Wall's delay in closing it down.

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