Keating Five - Failure of Lincoln and Investigation of The Senators

Failure of Lincoln and Investigation of The Senators

Lincoln stayed in business; from mid-1987 to April 1989, its assets grew from $3.91 billion to $5.46 billion. During this time, the parent American Continental Corporation was desperate for cash inflow to make up for losses in real estate purchases and projects. Lincoln's branch managers and tellers convinced customers to replace their federally-insured certificates of deposit with higher-yielding bond certificates of American Continental; the customers later said they were never properly informed that the bonds were uninsured and very risky given the state of American Continental's finances. Indeed the regulators had already adjudged the bonds to have no solvent backing. FDIC chair L. William Seidman would later write that Lincoln push to get depositors to switch was "one of the most heartless and cruel frauds in modern memory."

American Continental went bankrupt in April 1989, and Lincoln was seized by the FHLBB on April 14, 1989. About 23,000 customers were left with worthless bonds. Many investors, often ones living in California retirement communities, lost their life savings, and felt emotional damage for having been duped on top of their financial devastation. The total bondholder loss came to between $250 million and $288 million. The federal government was eventually liable for $3.4 billion to cover Lincoln's losses when it seized the institution.

Keating was hit with a $1.1 billion fraud and racketeering action, filed against him by the regulators. In talking to reporters in April, Keating said, "One question, among many raised in recent weeks, had to do with whether my financial support in any way influenced several political figures to take up my cause. I want to say in the most forceful way I can: I certainly hope so."

In the wake of the Lincoln failure, former FHLBB chair Gray went public about all five of the senators' assistance to Keating in a May 21, 1989 front page story by John Dougherty in the Dayton Daily News, saying that in the April 1987 meetings the senators had sought "to directly subvert the regulatory process" to benefit Keating. Press attention to the senators began to pick up, with a July 1989 Los Angeles Times article about Cranston's role. With a couple of months, Arizona Republic and Washington Post reporters were investigating McCain's personal relationships with Keating.

On September 25, 1989, several Republicans from Ohio filed an ethics complaint against Glenn, charging that he had improperly intervened on Keating's behalf. The initial charges against the five Senators were made on October 13, 1989 by Common Cause, a public interest group, who asked for the U.S. Justice Department and the Senate Ethics Committee to investigate the actions of the senators relative to Lincoln and the contributions received from Keating and whether they violated the rules of the Senate or federal election laws. But the most public attention came from the House Banking Committee, whose new chair Henry B. Gonzalez held 50 hours of hearings into the Lincoln failure and associated events.

By November 1989, the estimated cost of the overall savings and loan crisis had reached $500 billion, and the media's formerly erratic coverage had turned around and become a feeding frenzy. The Lincoln matter was getting large-scale press attention and the senators became commonly known as the "Keating Five". All the senators denied they had done anything improper in the matter, and said Keating's contributions made no difference to their actions. The senators' initial defense of their actions rested on Keating being one of their constituents; McCain said, "I have done this kind of thing many, many times," and said the Lincoln case was like "helping the little lady who didn't get her Social Security." Some of the five hired high-power Washington lawyers to represent them – including Charles Ruff for Glenn and John Dowd for McCain – while others feared that to do so would give the appearance their political careers were in jeopardy.

The Justice Department and the FBI began by investigation possible criminal actions by Keating, but then expanded its inquiries to include the five senators. The FBI soon focused their attention on Cranston, because the largest sums of money from Keating came in to Cranston-involved voter-registration drives whose tax-exempt status might have been violated.