| 7 Financial Crimes That Rocked the U.S. | |
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| In the early 1980s, deregulation at the federal and state levels encouraged hundreds of U.S. thrifts already struggling due to high interest rates to make risky investments with their depositors' cash—with disastrous results. One of these banks, Lincoln Savings & Loan Association, collapsed in 1989 and was seized by regulators. Charles Keating, chairman of parent company American Continental Corp., was charged with funneling the thrift's federally insured money out of the bank for his own benefit. Keating became a symbol of the broader savings-and-loan crisis that devastated the thrift industry and cost taxpayers hundreds of billions of dollars. | |
| Thrifts are financial institutions that accept savings deposits from members and use the money to make mortgage, car and other loans. | | |
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| Charles Keating Jr: Keating's first foray into the financial sphere, at the insurance company American Financial Corp., resulted in a 1976 SEC settlement for allegedly defrauding investors. Keating never admitted wrongdoing. While chairman of American Continental, Keating flaunted his wealth with private jets and an exclusive Bahamas estate. He also donated extensively to Catholic charities, leading Mother Teresa to ask the court for leniency in his fraud sentencing. Keating died in 2014. | | |
| M. Danny Wall: Wall was appointed chairman of the Federal Home Loan Bank Board, the agency that regulated thrifts, in 1987, when one-fifth of savings-and-loan associations were insolvent or unprofitable. It took nearly two years for the Bank Board to pursue any action against Keating. "One of the things you can say in hindsight is that action should have been taken more promptly," Wall would later acknowledge. | | |
| Rosemary Stewart: In 1985, Stewart became the head of the Bank Board's Office of Enforcement in Washington. Regulators in the field said she often blocked or slowed enforcement actions, including when it came to Lincoln Savings. Stewart said at the time that she did the best she could with limited staff, and there wasn't enough evidence to move against Lincoln Savings any earlier than the Bank Board eventually did. | |
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| $2.6 billion | | The cost to the U.S. government for Lincoln Savings' failure, seizure and liquidation, equivalent to $6.2 billion today. It was the most expensive thrift failure in history. Ultimately, the U.S. savings-and-loan crisis cost taxpayers an estimated $200 billion. The Journal estimated that only $10 billion to $20 billion of that total was outright fraud. | | |
| | How the Journal Covered It | | |
| San Francisco regulators found evidence of accounting irregularities at Lincoln Savings in 1986, the Journal reported in 1990 in the first of a two-part analysis "Behind the S&L Debacle." Rather than take action, Stewart helped advance Keating's request to move the bank outside San Francisco's jurisdiction. The memo of understanding detailing this change became known at the agency as "Rosemary's Baby." Stewart recently said that there had been a turf war between regulators in San Francisco and Washington. The Bank Board also gave the OK for Keating to raise $200 million for American Continental by selling unsecured bonds to Lincoln Savings customers, many of whom were elderly and likely assumed the securities were federally insured. "We all must have been smoking dope," one Bank Board official wrote in a 1987 memo. Keating didn't always get his way with the agency. In March 1987, Lincoln Savings sued over a rule that limited what investments federally insured, state-chartered thrifts could make with funds deposited with them. Keating reportedly said in 1987 that he spent $50 million fighting regulators in San Francisco and Washington. In December 1988, Keating agreed to sell Lincoln Savings. "It isn't much fun being confrontational," he told the Journal in an interview at the time. "It'll be a lot more fun just running American Continental Corp." | |
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| The sale never happened. Two days after the announcement, the Bank Board found Lincoln Savings lacked sufficient capital. In March 1989, federal prosecutors revealed they were investigating the bank for fraud. The following month, American Continental filed for chapter 11 bankruptcy, and federal regulators seized control of Lincoln Savings. Keating spent more than a year fighting the seizure. In June 1989, the Journal published a letter to the editor from Keating in which he refuted assertions Lincoln Savings was insolvent and railed against government scrutiny of the bank. In fact, Keating wrote, he had tried to alert Congress about the Bank Board's failings. "Had our early warnings and those of many congressmen and several key figures in the administration been heeded, I believe there would have been little, if any, loss to the taxpayers from the savings and loan industry." Meanwhile, Keating's legal woes were mounting. In September 1989, federal regulators filed a $1.1 billion civil suit against Keating, various family members and others at American Continental, alleging they had profited through insider dealing, illegal loans and sham real-estate transactions. Keating and six others were also charged with racketeering. The case was consolidated with other actions in 1990; a $4.3 billion judgment against Keating was overturned in 1999. Lincoln Savings also drew Congressional scrutiny. The House Banking Committee held hearings on why it took so long to seize the bank when San Francisco regulators had recommended as much in May 1987. "If you were chief counsel of the Senate committee investigating Richard Nixon in 1972, he'd still be in office," one congressman told Stewart. Another called Wall "the Neville Chamberlain of financial regulation, a cheerleader who saw little evil and thus spoke little truth." Stewart and Wall cited a lack of evidence that would hold up in court as the reason for their delayed action. | |
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| In April 1987, Democratic Sens. Dennis DeConcini, Alan Cranston, John Glenn and Donald Riegle and GOP Sen. John McCain (pictured above, from left to right) met with federal regulators to ask them to ease up on Lincoln Savings. It turned out that Keating had arranged $1.3 million in political donations to the Keating Five, as they came to be known, and they had intervened repeatedly on his behalf. At the time, all five insisted the donations didn't influence their actions. DeConcini recently called the affair a "huge mistake." The Senate Ethics Committee in November 1989 hired a special outside counsel to study the allegations and held public hearings on the yearlong investigation. In the end, Cranston was the only one to be formally rebuked. He had previously announced he had prostate cancer and would retire in 1992 when his term ended. The committee found DeConcini and Riegle engaged in conduct that "gave the appearance of being improper." Both opted not to run for re-election in 1994. Glenn and McCain were found to have "exercised poor judgment." | |
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| California was the next to take a swing at Keating. He was indicted on 42 counts of fraud in September 1990, although a judge would throw out most of the charges by the time the case went to trial. The jury convicted Keating on 17 counts. He was sentenced to 10 years in prison, the maximum allowable. A week after his California conviction, Keating was indicted on federal fraud and racketeering charges. He was convicted in January 1993 and sentenced to 12 1/2 years, to run concurrently with his California prison term. However, the convictions didn't stick. In April 1996, a federal judge overturned Keating's state-court conviction because the judge in that case botched the jury instructions. A few months later, Keating's federal conviction was thrown out for similar reasons. In April 1999, Keating agreed to plead guilty to four counts of wire fraud and bankruptcy fraud. He was sentenced to time served, totaling less than five years in prison. | |
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| "Mr. Cheating, where's our money!" | | —Chants from a crowd gathered outside the courtroom at Keating's 1991 state fraud trial. Lincoln Savings bondholders eventually received $540 million from settlements with the bank and other entities, according to Cotchett, Pitre & McCarthy, one of the law firms that represented the bondholders. | | | |
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| ✍️ In August 1989, President George H.W. Bush signed into law a savings-and-loan bailout that created a new federal agency, the Resolution Trust Corp., to deal with insolvent thrifts. By the time it closed in 1995, the RTC sold 89% of the $453 billion in assets it got from 747 failed financial institutions. 👋 Facing increasing calls to step down after the Lincoln Savings Congressional hearings, Wall announced his resignation as director of the Office of Thrift Supervision, the successor to the Bank Board, in December 1989. Stewart resigned from OTS in August 1990. 🏦 Great Western Bank bought Lincoln Savings from the RTC in March 1991 for $12.1 million, a relative bargain even when compared with other defunct thrifts. | |
| | The Charles Keating Takeaway | | |
| Unless financial products are explicitly backed by the government—typically the Federal Deposit Insurance Corp. in the case of bank deposits—investors are at risk of losing money. Regulators, meanwhile, sometimes try to kick the can down the road when confronted with problems, but time and again that tactic has caused issues to grow worse, not fade away. | |
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| NEXT WEEK: The "Bank of Crooks and Criminals International" | |
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