In found success in law, and in 1952 helped

the late 1980s and early 1990s one of the largest financial scandals of all
time took place.  The primary name
associated with the scandal was Charles Keating.  Five U.S. senators, Alan Cranston of
California, Dennis DeConcini of Arizona, John Glenn of Ohio, John McCain of
Arizona, and Donald Riegle of Michigan played a significant role in the
scandal.  All five senators were
associated with the Democratic Party aside from Republican, John McCain.   The industry at the center of the scandal was
the savings and loan (S&L) industry. 
An S&L institution, also known as a thrift institution, provided
mortgages and other loans, and accepted savings deposits.  Unlike their similar counterpart, commercial
banks, savings and loan companies were not managed by a board of directors but
were rather managed by the institution’s borrowers and depositors. 

            Charles Keating, the man at the
center of the scandal, wore many hats over the course of his professional life,
a financer, lawyer, banker, real estate developer, and activist, were only a
few.  In 1948 Keating graduated law
school at the University of Cincinnati College of Law.  Keating went on to marry and had six children.  Upon graduating Keating found success in law,
and in 1952 helped found the Cincinnati law firm Keating, Meuthing &
Keating.  Several years later in 1960
Keating met Carl Linder, Jr., a successful businessman in the dairy industry.  Keating and Linder founded American Financial
Corporation (American).  American was a holding
company of financial instruments.  By
1972 Keating had left the world of corporate law and joined American full
time.  During the years of 1975 and 1976
American faced several lawsuits brought by stockholders.  Accusations ranged from American engaging in
unsecured loans to a suspicious $14 million loan from the Securities and
Exchange Commission (SEC).  Shortly after
this, in 1976, Keating resigned from the corporation.

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            Following his resignation, Keating
moved to Arizona to purchase a struggling real-estate firm, American
Continental Homes.  The purchase was part
of his resignation deal.  Keating found
great success in his new venture, 
American was making millions by the early 1980s.  Keating maintained his charitable nature
through his newfound success, making substantial donations to religious and
political organization.  More than $1
million was donated to Mother Teresa’s endeavors in Keating’s name.  In 1984 American purchased a thrift bank called
Lincoln Savings and Loan Association (Lincoln) for just over $50 million.  Prior to the purchase Lincoln had not been
performing well, slow growth had plagued the thrift bank for several
years.  Keating made an immediate effort
to remedy the company, firing management and giving the association a fresh

            Prior to purchasing Lincoln the
S industry had been facing two significant problems. During the late
1970s and into the early 1980s the S industry faced an increase in
interest rates and an increase in inflation rates.  In an effort to address these problems the
industry decided to decrease regulations. 
An article from the Cato Institute,
headquartered in Washington, D.C., described the deregulation response that
S’s chose to take, “overregulation had bankrupted the industry; it was
logical to expect that greater freedom would enable S&L owners and managers
to improve their financial health. Unfortunately, policymakers overlooked one
crucial step- recapitalization” (England, 38). Recapitalization is used in an
effort to increase the stability of a firm’s capital structure.  For example, a firm may reshape the makeup of
their debt and equity to improve their overall liquidity. According to an
article from The Federal Reserve History, “S&Ls primarily made long-term
fixed-rate mortgages. When interest rates rose, these mortgages lost a
considerable amount of value, which essentially wiped out the S&L industry’s
net worth” (Robinson, 2).  Keating had
entered the S industry shortly after the deregulations.  This allowed Lincoln to engage in risky investments,
such as purchasing high-yield junk bonds, and taking risky positions in real
estate projects, in an attempt to derive higher gains.  As a result of the deregulation Lincoln was
able to raise their assets from $1.1 billion to around $5.5 billion.  By 1985 the Federal Home Loan Bank Board (FHLBB)
took action, placing a cap on the dollar amount that S could legally
invest in these highly volatile instruments. 
According to a Time article, “an
investigation into Lincoln Savings and Loan uncovered flagrant violations of
these regulations, exceeding the limit by over $615 million” (Fetini, 3).  Lincoln had violated the cap that the FHLBB
had placed on highly volatile instruments. 
The S industry had overextended itself.  As high-risk loans went unpaid S’s
began to go bankrupt.  Around 23,000
people lost more than a combined $200 million by purchasing American
Continental bonds, sold at the Lincoln branches.  For many people this was their lifesavings. By
1987 Keating was seeking out past and current friends who had political power
in the industry.

            It was at this point that the “Keating
Five” entered the picture.  The “Keating
Five” consisted of five U.S. senators who had all, at one point in time, had a
mutual relationship with Keating.  Each
senator had received a considerable amount in the form of campaign donations
and gifts from Keating, according to Fetini, Keating donated “close to $1.4
million dollars in total” (Fetini, 4) to the campaigns of the five

            First there was Alan Cranston,
senator of California.  Despite their
political differences, Cranston and Keating formed a relationship over their
mutual interest in direct investment. 
During Cranston’s 1986 run for senator Keating contributed a last minute
line of credit in the amount of $300,000 for Cranston’s campaign.  In 1987 Cranston attended a meeting with Ed Gray,
Bank Board Chairman, Glenn, McCain, and DeConcini regarding Keating and Lincoln’s
problems. Due to a battle with cancer Cranston was unable to testify on Keating
behalf at the Senate Ethics Committee hearings in 1990. 

            Second was Dennis DeConcini, senator
of Arizona.  DeConcini enjoyed Keating’s
friendship due to his political views. 
DeConcini was a democrat, therefore having Keating, a republican, as a
friend helped him to appeal to more voters. During DeConcini’s 1982 campaign he
received around $20,000 from Keating and an additional $48,000 for his 1988 campaign.  DeConcini met with Gray, and regulators to
discuss regulations that were holding Keating’s Lincoln Corporation back.  DeConcini argued that a company should not be
put under by its regulators and therefore regulators should work with Lincoln
in an effort to keep the S&L afloat.

            Third was John Glen, senator of Ohio.  Glen and Keating did not have much of a
personal relationship aside from the fact that Glenn was born in Ohio and the
parent company of Lincoln, American Continental Corporation, was started in
Ohio. Out of all five senators, Glen accepted the least monetary contributions
from Keating. That said Keating did pay off around $34,000 of Glen’s debt,
acquired during his presidential campaign. 
Keating also made a donation in the amount of $200,000 to an
organization that Glen was a spokesman for, Political Action Committee.  Glen did not assist Keating politically
however he did express dissatisfaction to Ed Gray regarding the Direct
Investment law.  Glen made it clear on
several occasions that he was disappointed in Gray and his lack of information.  This was beneficial for Keating, as Gray was
one of his largest opponents in the case.

            Fourth was John McCain, senator of
Arizona.  Of the four other senators McCain
was said to be the closest with Keating. 
Over the course of McCain’s various campaigns Keating donated over
$112,600 and allowed McCain and his family to vacation at his Bahamas
resort.  In addition Keating allowed
McCain to use American Continental Corporation’s private jet.  In 1987 began to McCain’s receive complaints
from the Arizona League of Savings and Loans Associations regarding the Bank
Board’s policies.  Shortly after, McCain
met with Senator DcConcini to discuss these complaints, many of which directly
related to Keating and Lincoln.  DeConcini
wanted to take the issue to Gray but McCain did not want to commit to a
meeting.  Lincoln’s Vice President
recommended that McCain meet with Senator Riegle and Gray, however McCain only
agreed to meet with Riegle privately. 
Shortly after it was made aware to McCain that Keating had referred to
him as a “wimp” when talking with Senator DeConcini.  After this the friendship between Keating and
McCain ended.  In April of 1987 McCain
attended a meeting with Gray and the four other senators.  He claimed that he attended this meeting not
for Keating, but for the thousands of jobs that ACC provided in Arizona.  Upon receiving information related to the
criminal action of Keating McCain stopped all contact with Keating and returned
all the donations and gifts that Keating had given to him.  In the end McCain testified against
Keaton.  McCain was the only senator who
agreed to testify. 

            Fifth was Donald Riegle, senator of
Michigan.  Keating was connected to
Riegle through an investment that Keating had made in Riegle’s state,
Michigan.  Keating made a $37 million
investment in the Ponchetrain Hotel. 
Riegle first met Keating in 1985 at the opening of the hotel.  Later in Riegle’s political career Keating
held a fundraiser for him at the Ponchetrain Hotel, raising around $30,000.  A few weeks later Riegle returned the funds
after a newspaper story connected them to his recent meetings with
Keating.  Riegle was invited by McCain
and DeConcini to attend a meeting with regulators.  After attending the meeting Riegle broke off contact
with Keating and Lincoln.  In the end
Riegle claimed that he could not remember the conversations that he had with
Keating in an effort to avoid responsibility.

            As a result of the S&L crisis
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA) was enacted.  This act was
established in an effort to pay back depositors who had lost money due to the
crisis.  As of today, FIRREA aids the
Justice Department in investigating poor quality loans.  When all was said and done the FHLBB found Keating
guilty of many violations.  By 1989 American
was bankrupt and the FHLBB seized Lincoln. 
Life savings evaporated and investors suffered complete financial
turmoil. Keating attributed government regulators for the demise of
Lincoln.  In 1991 Keating was convicted
of 17 counts of fraud.  It was at this
time that Mother Teresa, a recipient of Keating’s large donations, came to his
defense.  Mother Teresa asked to courts
to take into consideration the millions of dollars of charitable donations that
Keating had gave.  In 1992 Keating was
given a 10-year prison sentence, the maximum possible.  Keating was given an early release after
serving four and a half years.

            There were several parties who were at
fault in this case.  First and foremost
Charles Keating.  Not only did Keating
break the law, Keating put the livelihood of thousands of American’s and their
families in turmoil. Second, the five senators, Alan Cranston, Dennis
DeConcini, John Glenn, John McCain, and Donald Riegle, were at fault for their
role in the collapse of the S&L industry. 
The senators acted unethically in advising the Federal Home Loan Bank
Board to not pursue charges against Keating and his Lincoln S&L association.  The senators felt as though they owed Keating
something for his lavish donations.  Finally,
and perhaps most importantly, the system failed the S&L industry.  At the time necessary laws and regulations
were not set in place to ensure the security of the industry.  Preventing such an economic crisis is an
extremely difficult task as regulators can never be sure how large a future
default will be.  Currently, in an effort
to come as close as possible to calculating potential defaults regulators use
statistical models.  During this time the
reserve requirement also failed the S&L industry.  A larger reserve requirement could have
potentially reduced the impact of the scandal. 
That said, there is a trade off associated with raising the capital
requirements.  An article from The Washington Post, explains that, “larger capital requirements reduce
loan volume and raise interest rates” (Guttentag, 5).  Finding a balance between reserves and
interest rates is not an easy task and is constantly being assessed.  

            Researching the collapse of the
S&L industry has made me more aware of the complexity of financial institutions.  There is a constant balance that must be
achieved between regulating the industry and allowing the free market to take
place.  Charles Keating’s role in the
collapse industry has reminded me of the power that money has over people.  Keating may not have been an inherently bad
person but under the control of money Keating made choices that ruined his own
life and the lives of thousands of other Americans.  Senators, Alan Cranston, Dennis DeConcini,
John Glenn, John McCain, and Donald Riegle have reminded me of the dangers of
power, status, and control.  Again, these
men may not have been inherently bad people but when faced with the decision to
support Keating and his unethical investing practices in order to receive campaign
benefits all five men succeeded.  After
researching the unfortunately events that led up to the collapse of the S
industry it is clear that there is much to learn.  Had society learned it’s lesson the financial
crisis of 2008 may not have been as severe or perhaps may not have transpired
at all.  Today, the Federal Reserve has
required large banks to hold higher levels of capital.  Jack Guttentag, professor of finance at the
Wharton School of the University of Pennsylvania, argues that more advanced regulatory
tools are need.  In his article,
Guttentag suggests “We should take a hard look at applying the system used to
regulate mortgage insurance companies to mortgage lenders. Under this system,
lenders would be required to allocate a portion of every dollar they receive in
interest above some base rate to a reserve account that would not be touchable
for 10 years except in an emergency.” (Guttentag, 4).  Under this system as the interest rate
increase the allocation of funds to the reserve account would also increase.  This appears to be a strong proposal.  In the future, developing more fitting
regulatory tools to prevent or reduce the severity of future financial crises
must be a priority.  Charles Keating and
the “Keating Five” have left us with an important lesson on the importance of
regulations, a system of checks and balances, and the flawed nature of mankind.