Will Charlie Keating Ride Again?
Davis, L.J.
Will Charlie Keating Ride Again? Congress is once again looking at banking deregulation. Will it ignore the lessons of the past? BY L.J. DAVIS What has once happened, will invariably happen...
...When two seats became vacant, Keating put forward his own candidates, Professor George Benston, another of his paid academic flacks, and Lee Henkel, a Georgia lawyer who was involved in number of poorly performing enterprises to which Lincoln had loaned millions...
...The regulators politely looked the other way while the banks put their houses in order...
...As a result, the greater crimes are almost never revealed, and their larger meaning remains unknown...
...The great danger of using a single broker is that an investment house (and the people whose money it is investing) will fall prey to the brokerage’s hidden agendasagendas which often involve a broker’s desire to get rid of something no prudent investor will touch...
...banks to compete on the world stage with institutions such as the Japanese banks, which are unhobbled by outdated legislation...
...Keating,” Newsom replied, “I am from the state of California, and we did not sign the memorandum of understanding...
...The people at Lincoln and Arthur Andersen gave many and conflicting reasons for this state of affairs, but to the examiners, the most persuasive explanation came from Lincoln’s own in-house legal counsel, Mark Sauder...
...At a meeting with Seattle regulators, Keating offered to effect the transfer by establishing a bogus headquarters at a Utah thrift within Seattle’s district, which he volunteered to purchase on the spot with a personal check...
...Keating pressed on...
...Under Chairman Edwin Gray, a Reagan appointee of unusual integrity, the Bank Board began to impose a number of existing but long-neglected rules in an attempt to restore a measure of sanity to the situation...
...Deregulation-Take Two . In the waning years of the 20th century, Newt Gingrich‘s Washington strongly resembles a place where nothing has been learned and everything forgotten...
...It was, California Commissioner of Savings and Loans William Crawford later told the House Banking Committee, “window-dressing,” meaning Drexel managed to give Keating’s floundering ACC the appearance of ruddy good health and luminous solvency...
...Keating immediately did neither of these things...
...Just something to think about as you ponder the fact that Charlie Keating, like Michael Milken, is out of jail and on the prowl...
...Whereas the San Francisco regulators were wellinformed about the disastrous situation at Lincoln and gave the five Senators better than they got, the meeting of the Keating Four targeted Chairman Gray, who had been instructed to come alone, without his staff...
...All of the Four (except Glenn, whose former chief of staff had been hired by Keating at a princely salary) had received handsome contributions from Keating...
...Next, Drexel underwrote a $56 million preferred stock issue of ACC...
...Germain Act...
...Instead, when word reached Lincoln that the San Francisco examiners were on their way, Arthur Andersen, the Big Eight accounting firm that was Lincoln’s auditor, dispatched a team to “stuff the files” with the sort of documents that other financial institutions consider vital to makmg investment decisions...
...Germain had created a financial catastrophe of unknown dimensions...
...Reporters concentrated on his lavish lifestyle, the fact that he tried to buy the Phoenix City Council, and that he was able to get one of his associates appointed to the Home Loan Bank Board, the federal agency that monitored his activities and had the power to stop him cold...
...Wall’s dealings with Keating are a study in creative regulation...
...IVAN BOESKY Last October, as the OJ...
...In the second, he analyzed a number of other new, innovative, and soundly-run S&Ls and blessed their work...
...The company was in terrible shape, the loan was unsecured, and it was granted on a non-recourse basis: If DiConcini’s associates defaulted on the loan, they didn’t have to repay it...
...Lincoln would have been better off putting the taxpayers’ money in a bank...
...Shortly after Sen...
...But Keating had many more strings in his bow...
...On day one of the 105th Congress, however, he reintroduced the bill, and the folks in his office say that, with the election over, “the environment is different” and all parties seem more willing to negotiate in order to get the Leach Bill passed...
...Unfortunately, the thoughdul Mr...
...At the moment, the banks are humming along quite nicely-and profitably-prevented from gambling away their federally insured deposits by a law called Glass-Steagall...
...Lincoln got its money back, but not the returns it had been promised...
...Lincoln ceased to exist...
...This means trashing Glass - Steagall, and replacing it with his new bill that would allow banks to sell insurance and make “responsible investments” in securities...
...Germain, and a considerably more Keating-friendly regulator...
...The Agreement and the MOU were a virtual cease and desist order...
...Well, despite his role in the regrettable disappearance of $2.5 billion in taxpayer-insured funds, Keating was released on October 3, following a court ruling that jurors at his 1993 federal trial had been inappropriately influenced by their knowledge of Keating’s conviction in California state court...
...Indeed, even the most casual examination of Lincoln‘s junk bond purchases reveals a number of Mike Milken’s greatest hits, together with some of his biggest dogs...
...And when examiners from the Federal Home Loan Bank of San Francisco, Lincoln’s primary regulator, got around to takmg a good look at Keating’s notion of an S&L, they found a number of strange and alarming things about Lincoln’s junk bonds...
...In addition, complex financial crimes take days and weeks to explain in court, using language heavily freighted with obscure terms...
...Next, Keating engaged the services of Alan Greenspan, then an economist in private practice, as a paid flack...
...It was over...
...This was likened, correctly, to John Gotti getting one of his sidekicks appointed deputy director of the FBI...
...But although signed by Herbert Hoover, Glass-Steagall was vigorously enforced by Franklin Roosevelt...
...Nonetheless, Keating’s string had just about run out...
...Keating soon set his sights on a well-run southern California thrift named Lincoln Savings & Loan...
...The answer is both simple and urgent: deregulation...
...You remember Charlie, the poster boy of the savings and loan catastrophe of the 1980s...
...During his brief tenure on the Bank Board, Henkel proposed precisely one new regulation...
...Not one of these investment managers or analysts had worked for an investment banking firm...
...A new team of examiners was assembled from the staffs of Home Loan Banks around the country and placed under the direct control of Wall’s office-a third unprecedented move...
...Lincoln‘s Investment Department,” San Francisco wrote in its confidential examination report, “consisted of an executive vice president, an investment manager and two investment analysts...
...Keating made many strange loans and participated in weird real estate deals...
...And not before Keating and his associates had managed to blow $2.5 billion of the taxpayers’ money...
...But it gets worse...
...The transaction,” Richard Newsom, senior examiner for the California Department of Savings and Loans, told the Banlung Committee, “was so strange in its magnitude...
...Gray was in an impossible situation: Aware Keating was loudly proclaiming that the chairman was engaged in a personal vendetta, Gray had deliberately distanced himself from the examination...
...But experience suggests that the banks already have too much leeway in their investment strategies, and that, if anything, regulation should be tightened...
...Boesky was the emblematic risk arbitrageur of the 1980s, and hcoln‘s examiners regarded the Boesky investment as extraordinanly r i s b . If Boesky lost the thrift’s $100 million, he was not on the hook, Drexel was not on the hook, and Lincoln was not on the hook...
...The California regulators discovered one possible explanation: The supposedly secure telephone line from their office in Lincoln to Los Angeles headquarters had been bugged...
...Wall was a former top aide to Sen...
...Today there is somewhere between 11 and 12 times that amount, also taxpayer insured, in the nation’s banks...
...Seven years have passed since his Lincoln Savings and Loan became the symbol of an industry gone mad...
...The bonds were worthless...
...True, he didn’t have enough money to buy an S&L suitable to his purposes, but he knew Michael Milken...
...Largely because California had put some spine into a Federal examination that had previously seemed devoted to keeping Keating in business at all cost, Lincoln was seized by the government in 1989...
...To rid himself of his tormentor, he tried to hire Gray away from the Bank Board...
...The cut and pasted documents, Sauder said, had been put in the files for the examiners to find, and for no other reason...
...But Arthur Andersen didn’t do the job very well...
...Lincoln, the examiners concluded, did neither of these things...
...The Federal Home Loan Bank Board had three members, Gray and two others...
...The transfer did not take place...
...The investment constituted 24.6 percent of Lincoln‘s junk bond portfolio and a remarkable 575 percent of Lincoln’s net worth...
...Keating’s state convictions had been overturned in April, because his trial judge, the now notorious Lance Ito, had given improper instructions to the jury...
...We felt that the link to a U.S...
...Benston didn’t make the cut, but the Reagan Justice Department gave Henkel a clean bill of health...
...When examiners asked Lincoln for its analysis of this investment,” the government remarked, they found that “Lincoln’s written ‘analysis’ of a $100 million investment...
...Gray declined...
...And in words that no examiner could ever remember hearing from a superior’s lips-but which bore certain echoes of the 1980s Alan Greenspan-the examiners were informed that Lincoln was a new and imaginative hnd of thrift that many people did not understand...
...He is tan, rested, and-as Time magazine noted last month in an interview with Keating-“itching to get back on the horse...
...The future chairman of the Federal Reserve prepared two remarkable documents...
...Lincoln performed no due diligence...
...The story has a sour ending, but it ends...
...Glass-Steagall is an old law, passed more than 60 years ago...
...to a company with liabilities off the chart...
...is still deciding whether ,to retry the case...
...White House chief of staff Donald Regan tried to fire Gray, only to discover that Gray had been appointed for a fixed term...
...And with the banking industry at the forefront of those clamoring to be freed from their regulatory shackles, the nightmare of the S&L years could easily happen all over again...
...It looked as though Keating was about to slip away again...
...Even so, an inexperienced investment staff can quickly become knowledgeable as it perfoms the exhaustive, painstaking analysis of the companies and financial instruments that are candidates for the institution’s investments...
...Newsom, however, was quite clearly examining them-something that Keating did not hesitate to point out...
...it was a disastrous loan...
...It was, William Black, acting counsel for San Francisco and the former deputy director of the Bank Board, told the House Banking Committee, “the worst so-called enforcement document in history...
...In an unprecedented move, Wall allowed Keating to try to change his primary regulator from the hated San Francisco Home Loan Bank to the one in Seattle...
...Out of the 3,000 S&Ls in the land, it would have benefited just two, one of which was Lincoln...
...History tells us that even if well-meaning legislators replace current laws with more industry-friendly measures, then sometime soon after, the American people are likely to discover that their lawmakers have just bought them a mess of pottage...
...If Gray would call off his dogs and stop writing new rules, DiConcini explained, Keating would agree to make some home loans...
...Nonetheless, Keating was able to negotiate a memorandum of understanding (MOU) with Wall’s Home Loan Bank Board...
...Well, not quite...
...was released from jail...
...Not long after, all the thrifts on Greenspan’s list had failed but one, and the survivor-although Greenspan didn’t seem to know it-was not a thrift...
...Germain found Keating at loose ends...
...Dennis DiConcini of Arizona...
...Desperate to stop the sale but lachng the necessary powers, Commissioner William Crawford of the California Department of Savings and Loans sent his own small examination team to Lincoln, to see if his people could somehow put a spoke in Keating’s wheel...
...Nor does it appear that Clinton, who continues slouching ever-farther toward the right in his desire to be viewed as part of “the vital center,” would prove an obstacle to “updating” banking laws...
...Mr...
...But Garn-St...
...By a happy chance, however, California had just passed a new law allowing the owner of a thrift to invest 100 percent of his federally insured deposits in anything, anything at all...
...Back in Scottsdale, Ariz., with his family, Keating is confident he can vanquish any remaining legal issues that may crop up...
...So why revisit them now, aside from the fun in revealing an old but untold story-and, of course, the entertainment value of Charlie Keating...
...and somehow managed to mislay $2.5 billion of the taxpayers’ money...
...Under the terms of Keating’s understanding with Wall’s Bank Board, federal regulators were forbidden to examine certain documents containing information that Keating quite clearly wanted to keep to himself...
...There are a number of reasons for this...
...For example, in 1986 Lincoln invested $100 million in the Ivan Boesky Limited Partnership, with Drexel charging a $4 million brokerage fee...
...But most people are unaware that before this, there was the Keating Four (the Five minus Riegle) who called Gray in to plead the cause of the man they called “our friend.,’ In many ways, this meeting was the far more important of the two...
...Now, worn down by his failing attempts to restrain an industry spinning out of control and by the relentless attacks of his own administration, Gray found himself ill-prepared to face the hostile audience...
...This move did not please the White House, and it did not please Charlie Keating...
...money got lost there, too...
...The firm reserved 10 percent of Lincoln‘s stock, a fact that Drexel and Keating tactfully failed to mention to regulators until 1985, when they revealed their relationship so quietly the regulators failed to notice it...
...Gray believed that Henkel was unaware of the other one...
...East Coast Bank chairman Hjaima Jonson told the Times that the President was “an active participant” in discussing how Glass-Steagall could be overhauled...
...But DiConcini’s associates pledged no collateral, and their company’s few assets were overshadowed by huge liabilities...
...As a result, now may indeed be the perfect time to explore the full magnificence of Keating’s big adventure-keeping in mind, of course, that the next financial disaster, if it comes, will be infinitely greater...
...It was not a bad loan...
...The taxpayers lost no money...
...against the Bank Board...
...Keating took his own steps, which is where Senator DiConcini enters the picture...
...This is to ignore the fact that the Japanese banks, having speculated wildly during the bubble economy, are out of money, and remain open only because everybody tells the same lie: “Ain’t nothin’ wrong here, pall’ With his reputation as a level-headed sort, Leach‘s chances for loosening bankinp laws are consederably stronger than those of the more indiscriminate deregulation cowboys (and cowgirls) on Capitol Hill...
...Even then, there is no guarantee that a judge and jury will understand...
...During the meeting, DiConcini held on his lap a memorandum that outhed Keating‘s terms and conditions, as though Keating were a sovereign nation...
...It was also noted that he knowingly sold millions of dollars worth of valueless securities to thousands of people...
...Jake Garn, the co-author of Garn-St...
...erected a pyramid to himself in the Arizona desert in the form of a ridiculously extravagant hotel...
...Tracing the bug, they found that a number of Keating’s executives could listen in on every word...
...When most people bring the thrift crisis to mind, they recall the Keating Five-Senators Glenn, Cranston, McCain, kegle, and DiConcini-who met on Capitol Hill with Gray’s San Francisco regulators in an attempt to head them off...
...Garn-St...
...In fact, rather than hindering the deregulation process, the administration is considering doing Leach one better, by opening the way for ownership of banks by commercial firms...
...Senator...
...Germain, Keating was quick to realize, changed everything...
...therefore, prosecutors usually base their cases on the simplest and most comprehensible of the criminal’s misdeedsin Keating’s case, robbing widows and orphans...
...This deregulated the nation’s thrift industry and threw wide the doors of the S&Ls to anyone with a plausible story, a fistful of cash, and a visible desire to start doing all sorts of wonderful and imaginative things with the taxpayer-insured deposits...
...DAVIS What has once happened, will invariably happen again, when the same circumstances which combined to produce it, shall again combine in the same way...
...To understand what they were, a spot of background is in order...
...William Proxmire revealed Henkel’s relationship with Keating and Lincoln, however, Henkel declared that he was fed up and resigned...
...Keating took $51 million of the money and bought Lincoln...
...For example, in 1987 Lincoln made a $30 million loan to a company controlled by two close political associates of Sen...
...A loan is rated at its face value-in this case $30 million-plus accrued interest, and it is usually possible to recover money when a loan is bad...
...Seattle was not amused...
...4. The examiners were not permitted to look through Lincoln’s original documents but were supplied with copies instead (unprecedented move No...
...Then on December 2, the remainder of his criminal convictions were thrown out by a federal district court in Los Angeles...
...DAVIS is a contributing editor of harper's magazine, a contributing writer for Mother Jones magazine, and is writing a book on interactive television...
...ABRAHAM LINCOLN "Greed is healthy...
...Lincoln all but suspended its home loan operation, and company officers were replaced by ACC staffers who were essentially devoid of banking experience...
...In the first, he announced that Lincoln was a new, innovative, and soundly-run institution that “poses no foreseeable risk to FSLIC...
...The taxpayers were...
...The U.S...
...Having introduced his bill in January 1995, Leach enjoyed bi-partisan committee support until last June, at which time partisan bickering convinced him not to put the measure to a committee vote...
...When the examiners looked at the loan, they estimated its value-to Lincoln, that is-at $0...
...Instead, “[iln the junk bond files that we have examined,” wrote Professors Alan Shapiro and Mark Weinstein of the University of Southern California in a study made for San Francisco, “the only broker dealt with is Drexel Burnham Lambert...
...By a curious paradox commonplace in financial crimes, only a fraction of Keating’s antics-not including his intimate connection with Michael Milken, another emblematic felon of the Decade of Greed-made it into the spotlight...
...Nor were they ‘due diligence’ reports in any meaningful sense...
...While Congress’s drive to free industry from the clutches of big government may not be quite as maniacal as before last November’s elections, the urge is still deeply rooted in the soul of the GOP-which, if you’ll recall, remains firmly in control of both houses...
...Most reporters have to make sense of something by six o’clock in the evening, and major financial crimes such as Keating’s involve the sort of mind-numbingly tedious, specialized analysis that most reporters, their other virtues aside, are not trained to do...
...Aside from his dealings with Drexel, what else did Keating do with Lincoln’s - i.e., the taxpayers’- money...
...Or does it...
...should be brought to the attention of the appropriate officials, the FBI...
...In the last of many brazen moves, Keating began to sell bonds issued by his holding company, American Continental...
...Fortunately, any gung-ho deregulators looking to muck around with the banking system must first pass through Jim Leach, head of the House Banking Committee, and one of perhaps four people on the Hill who understands a thing about the industry...
...Gray’s term expired, and he was succeeded by M. Danny Wall...
...By 1987, when San Francisco made its examination of Lincoln, an alarmed Federal Home Loan Bank Board was aware that Garn-St...
...It is an unspoken axiom of the American government that a giant bank can under no circumstances be allowed to fail...
...Michael Milken also went to jail, but not a single charge against him involved Lincoln, the mulcting of the taxpayers, or the use of their money in creating a junk bond market that disrupted the economy of the entire country...
...And as every modern Republican knows, old laws-especially old laws with FDR’s fingerprints on them-are destined for the dustbin of history...
...I’ Clearly, Newsom had his suspicions...
...In addition, certain holes in Glass-Steagall permit banks to purchase arcane financial instruments as a speculation...
...The] analyses prepared by Arthur Andersen in no sense document the justification for securities purchases,” said the examination report...
...Among others, he pledged to retain Lincoln‘s experienced executives and to continue its slow, steady, unglamorous (and sound) policy of basing its business on home loans...
...They were essentially cut-and-paste jobs...
...The case is closed, the story is over, and Charlie Keating is ancient history...
...In a second unprecedented move, San Francisco was ordered to suspend its examination of Lincoln...
...To the contrary, this January The New York Times reported that representatives of the banking industry were among those in attendance at one of the DNC-sponsored White House koffeeklatches last May-as was Comptroller of the Currency Eugene Ludwig...
...This regression was all-too-vividly demonstrated during the S&L fiasco, which the General Accounting Office estimates will cost the country close to $380 billion...
...In those 60 years, the United States has not experienced a single systemwide banking calamity-and the United States was once a country of many banking calamities...
...The passage of Garn-St...
...In turn, Milken and his brokerage firm, Drexel Burnham Lambert, were looking for funds to create their dreamed-of junk bond network...
...attorney’s ofice L.J...
...The government’s conclusion: “Keating,” says a lawsuit filed by the Federal Deposit Insurance Corporation and the Resolution Trust, “purchased or sold junk bonds as directed by the Milken Group...
...On one of his tours, he encountered senior examiner Richard Newsom...
...While the banks were recovering from the consequences of their own stupidity, they gazed upon the real estate market of the 1980~su~p erheated as it was by the wild extravagances of Keating and others of similar ludney, and found it good...
...Still, things were looking up for Charlie Keating...
...But get this: Wall’s examiners wereforbidden to read San Francisco’s report on Lincolnunprecedented move No...
...Free Rein In 1982, flying in the face of everything known about banks, bankers, and human nature when they are placed in the vicinity of a huge sum of money, Congress passed the Garn-St...
...The group gathered in DiConcini’s office at the senator’s invitation...
...Lindner eventually settled with the SEC for $1.4 million...
...Bonds costing hundreds of millions of dollars were sold to thousands of people, many of them elderly -Keating’s salesmen particularly targeted the elderly-some of them widows and orphans, and most of them citizens of California...
...During the 1970s and %Os, the large institutions in the banking centers of New York, Chicago, and San Francisco lent truckloads of money to the world’s lessdeveloped countries and lost many billions when the customers could not repay the loans...
...Simpson saga roared into its 2000th irritating hour and the Whitewater hearings cost taxpayers yet another ten-grand, an equally significant event quietly took place in the American justice system: Charles H. Keating Jr...
...A lot of things, far too many to be documented here...
...With his plan thus in place, Keating set about purchasing $2.7 billion in junk bonds, almost all of them (or at least the ones that replators later inspected) from Drexel...
...Leach may pose an equally dangerous-and more immediate-threat to the current system...
...The money center banks made billions of dollars of real estate loans-and lost a huge chunk of them...
...Germain had dramatically increased the powers of the thrifts and dramatically reduced the powers of the federal watchdogs, but the states still had their own regulations...
...The administration threatened to have him arrested for enforcing the nation’s laws...
...Gray, though shaken by this exhibition of Keating’s raw political power, refused...
...But why revisit the Keating story now...
...Boesky later paid a $50 million fine and went to jail for hs financial misdeeds, taking Milken down with him...
...And you, sir, are in my jurisdiction...
...It was a meeting of minds...
...But much of what he did was never reported...
...On Capitol Hill, only a few aging progressive Democrats-and an equally small handful of thoughtful Republicans like Jim Leach of Iowa-remember why the country’s financial institutions were regulated in the first place: When regulations are removed from a financial institution, the very lunds of illegal behavior they were designed to prevent come roaring back with a vengeance...
...It was Keating’s habit to prowl through the rooms where regulators were conducting examinations, uttering threats and imprecations and talking grimly of personal lawsuits...
...It could not be repaid, it would probably never be repaid, and it should never have been made to begin with...
...The home-building business he then headed was not in terrific shape, and although President Reagan had tried to appoint him ambassador to the Bahamas-which would probably have saved everybody a tremendous amount of trouble-the appointment fell through when members of the Senate discovered that in 1979, the Securities and Exchange Commission had filed a complaint against Keating and his then-mentor, Ohio billionaire and big-time political donor Carl Lindner, for allegedly violating anti-fraud, disclosure, and proxy provisions...
...Responsible conservatives like Leach argue that the world has changed, the lessons of the past have been absorbed, and new laws are needed to allow U.S...
...The trick, Keating came to realize under the guidance of Milken, was not to find just any old S&L, but a particular lund of S&L...
...Whole reams of newsprint described his doings and his sins, and his face appeared so often on the nightly news that it was imprinted on the collective consciousness of the nation...
...A soundly-run investment operation will hedge its bets by seeking the advice of, and making its investments through, a number of different brokerage houses...
...Not one of their r6sum6s reflected pre-Lincoln experience in analyzing corporate debt or equity securities...
...consisted of a grossly inadequate two-page memorandum that consisted largely of a report on a conversation with a broker who had a vested interest in selling the notes...
...But he had reckoned without the state of California...
...This research and analysis, considered essential by virtually all investment houses, is called “due diligence...
...For years, Keating’s regulators had wondered how he always seemed to anticipate their moves...
...Keating went to jail...
...By 1989, the giant banks Citicorp and Chase Manhattanand perhaps the Bank of America-were arithmetically insolvent, which is a slightly complicated way of saying they were broke...
...Drexel also secretly purchased a substantial hunk of the thrift for itself...
...In 1983, Milken’s Drexel underwrote a $125 million debt-offering for Keating’s American Continental Corporation-an event largely overlooked by the press...
...True to form, Keating and Milken’s greater misdeeds never saw the light of day...
...James Miller 111’s Office of Management and Budget attempted to reduce Gray’s already-inadequate staff of underpaid examiners...
...But not before a truck emblazoned with the words “document destruction” had pulled up to the Lincoln loading dock...
...Among the topics discussed: the repeal of Glass-Steagall...
...In other words, Drexel bought Lincoln for Keating...
...the collateral can be seized and the salary of the lender can be garnisheed...
...he knew little about Keating or Lincoln...
...While opposing wholesale deregulation, Leach nonetheless believes the banking industry should be “modernized...
...In buymg Lincoln-where he never held an official position because, as he later blurted out to a Seattle regulator, he “didn’t want to go to jail”-Keating committed a number of promises to writing...
Vol. 29 • March 1997 • No. 3
