Keating Five - Corruption Allegations

Corruption Allegations

The core allegation of the Keating Five affair is that Keating had made contributions of about $1.3 million to various U.S. Senators, and he called on those Senators to help him resist regulators. The regulators backed off, to later disastrous consequences.

Beginning in 1985, Edwin J. Gray, chair of 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. Gray instituted a rule whereby savings associations could hold no more than ten 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 Federal Deposit Insurance Corporation-insured accounts 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 earlier taken several measures to oppose Gray and the FHLBB, including recruiting a study from then-private economist Alan Greenspan saying that direct investments were not harmful, and getting President Ronald Reagan to make a recess appointment of a Keating ally, Atlanta real estate developer Lee H. Henkel Jr., to an open seat on the FHLBB. By March 1987, however, Henkel had resigned, upon news of his having large loans due to Lincoln. Meanwhile, the Senate had changed control from Republican to Democratic during the 1986 Congressional elections, placing several Democratic senators in key positions, and starting in January 1987, Keating's staff was putting pressure on Cranston to remove Gray from any FHLBB discussion regarding Lincoln. The following month, Keating began large-scale contributions into Cranston's project to increase California voter registration. In February 1987, Keating met with Riegle and began contributing to Riegle's 1988 re-election campaign.

It appeared as though the government might seize Lincoln for being insolvent. The investigation was, however, taking a long time. Keating was asking that Lincoln be given a lenient judgment by the FHLBB, so that it could limit its high risk investments and get into the safe (at the time) home mortgage business, thus 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. Keating now wanted the five senators to intervene with the FHLBB on his behalf.

By March 1987, Riegle was telling Gray that "Some senators out west are very concerned about the way the bank board is regulating Lincoln Savings," adding, "I think you need to meet with the senators. You'll be getting a call." Keating and DeConcini were asking McCain to travel to San Francisco to meet with regulators regarding Lincoln Savings; McCain refused. DeConcini told Keating that McCain was nervous about interfering. Keating called McCain a "wimp" behind his back, and on March 24, Keating and McCain had a heated, contentious meeting.

On April 2, 1987, a meeting with Gray was held in DeConcini's Capitol office, with Senators Cranston, Glenn, and McCain also in attendance. The senators requested that no staff be present. DeConcini started the meeting with a mention of "our friend at Lincoln". Gray told the assembled senators that he did not know the particular details of the status of Lincoln Savings and Loan, and that the senators would have to go to the bank regulators in San Francisco that had oversight jurisdiction for the bank. Gray did offer to set up a meeting between those regulators and the senators.

On April 9, 1987, a two-hour meeting with three members of the FHLBB San Francisco branch was held, again in DeConcini's office, to discuss the government's investigation of Lincoln. Present were Cranston, DeConcini, Glenn, McCain, and additionally Riegle. The regulators felt that the meeting was very unusual and that they were being pressured by a united front, as the senators presented their reasons for having the meeting. DeConcini began the meeting by saying, "We wanted to meet with you because we have determined that potential actions of yours could injure a constituent." McCain said, "One of our jobs as elected officials is to help constituents in a proper fashion. ACC is a big employer and important to the local economy. I wouldn't want any special favors for them.... I don't want any part of our conversation to be improper." Glenn said, "To be blunt, you should charge them or get off their backs," while DeConcini said, "What's wrong with this if they're willing to clean up their act? ... It's very unusual for us to have a company that could be put out of business by its regulators." The regulators then revealed that Lincoln was under criminal investigation on a variety of serious charges, at which point McCain severed all relations with Keating.

The San Francisco regulators finished their report in May 1987 and recommended that Lincoln be seized by the government due to unsound lending practices. Gray, whose time as chair was about to expire, deferred action on the report, saying that his adversarial relationship with Keating would make any action he took seem vindictive, and that instead the incoming chair should take over the decision. Meanwhile, Keating filed a lawsuit against the FHLBB, saying it had leaked confidential information about Lincoln. The new FHLBB chair was M. Danny Wall, who was more sympathetic to Keating and took no action on the report, saying its evidence was insufficient. In September 1987, the Lincoln investigation was removed from the San Francisco group and in May 1988, the FHLBB signed an agreement with Lincoln that included not going ahead with a criminal referral to the Department of Justice. In July 1988, a new audit of both Lincoln and American Continental began in Washington.

Cranston continued intervening on behalf of Keating after the April 1987 meetings, contacting both Wall and California state regulators and continuing to receive large amounts of new donations to the voter registration projects from Keating. DeConcini also continued on behalf of Keating, contacting Wall, California state regulators, and the Federal Deposit Insurance Corporation (FDIC) advocating approval of a sale of Lincoln as a December 1988 alternative to government seizure. Bank regulators refused to approve the sale of Lincoln. Glenn too continued to help Keating after the April 1987 revelation, by setting up a meeting with then-House Majority Leader Jim Wright.

News of the April meetings between the senators and the FHLBB officials first appeared in National Thrift News in September 1987, but was only sporadically covered by the general media for the next year and a half. In early 1988, The Detroit News ran a story on Riegle's participation, which Riegle responded to on Meet the Press by denying an interceding on Lincoln's behalf, before returning Keating's campaign contributions back to him. In spring 1988, the Los Angeles Times ran a short piece in their business section, but their political reporters did not follow up on it; two isolated, inside page mentions by The Washington Post and The Wall Street Journal similarly failed to develop further. As media critic Howard Kurtz would later write, "the saga of Charles Keating took years to penetrate the national consciousness." The political fortunes of the senators involved did not suffer at this time. During the 1988 U.S. presidential election, McCain was mentioned by the press as a vice-presidential running mate for Republican nominee George H. W. Bush, while Glenn was one of the two vice-presidential finalists in Michael Dukakis' selection process, losing out to Lloyd Bentsen.