The "Keating Five" Corruption Story Has Lessons for the Citizens United Era

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AY replaced AA as Keating’s outside auditor. The AY audit partner, Jack Atchison, signed an extraordinary screed on AY letterhead – on behalf of AY (he signed as “AY” rather than signing his name). Landing such a huge client was Atchison’s greatest coup. Becoming a top “rainmaker” is the route to promotion, prestige, and power in modern audit and legal firms. Snagging Lincoln Savings as a client stood to make Atchison even wealthier because Keating was soon offering to triple his salary and bring him in-house. Atchison accepted the offer.

Keating primarily recruited the Keating Five, however, through the most traditional of means – large political contributions (implicitly) paid for by the government. He maximized the contributions through two traditional tactics. Lincoln Savings’ officers received exceptional compensation. They were expected to make large contributions to entities Keating favored. Keating took credit for these contributions by “bundling” them together and delivering them to the politician. Keating also gave “soft” money to funds to benefit Senators Cranston (voter registration) and Glenn (retiring his campaign debt). Similarly, Speaker of the House James Wright, Jr. did favors for the worst Texas S&L frauds after they made campaign contributions to the Democratic Congressional Campaign Committee (DCCC). The underlying commonality is that the most fraudulent firms have the greatest incentive to use political contributions to secure immunity from effective regulation and prosecution. Money is no object to a CEO that is looting “his” firm. Keating bragged that he spent $50 million in 2007 in legal, accounting, and lobbying fees to fight our examination findings about Lincoln Savings. My saying during the S&L debacle was that for a looter the highest return on assets was always a political contribution.

Senator McCain was unique among the Senators in having a family financial interest in Lincoln Savings securing immunity from sanctions for its violation of the direct investment rule. His wife and father-in-law (the source of his family wealth) were engaged in a large direct investment with Lincoln Savings. If we enforced the rule the McCain family and his father-in-law were likely to suffer severe losses.

Senator McCain, of course, was chastened by the Keating Five experience and later, with Senator Feingold, introduced legislation to restrain campaign finance’s abuses. The Supreme Court gutted the reform effort in its Citizens United decision.

Keating’s frauds should have also warned us against the recently passed JOBS Act. One of the problems we had in getting the public to treat the growing S&L crisis as a crisis was that federal deposit insurance meant that there were few obvious individual victims. Keating put a face on the crisis. He caused Lincoln Savings’ insolvent holding company (ACC) to fraudulently issue worthless junk bonds – sold out of Lincoln’s branches under a special SEC exemption for issuers of securities who do not sell through investment bankers. Lincoln Savings targeted retirement communities for these sales. Tens of thousands of California widows were victims of Lincoln and ACC’s frauds. The S&L debacle now had a face, and it was our grandmother’s face. The JOBS Act will encourage frauds against the most vulnerable members of our society.

It is remarkable that Bank Board Chairman Gray refused the Senators efforts to coerce a deal to immunize Lincoln Saving’s violation of the direct investment rule given the Senators’ exceptional political leverage. Our only hope to restore remotely adequate funding to close the frauds depended on support for the FSLIC Recapitalization bill in the Senate (we had just been crushed in the House in March 1987 by combination of the “Faustian Bargain” between the S&L industry’s trade association and the representatives of the S&L control frauds and the deal between Speaker Wright and the Reagan administration not to reappoint Chairman Gray upon the expiry of his term at the end of June 1987. The latter deal led to Senator Garn’s protégé, M. Danny Wall, becoming Bank Board Chairman. Wall promptly took a series of unprecedented actions to placate Keating’s political cronies (which soon include Speaker Wright). He ordered an end to the examination and investigation of Lincoln Savings. When we persisted in recommending that Lincoln Savings be placed in conservatorship he removed our jurisdiction over Lincoln Savings and agreed not to take any enforcement action against the massive violation of the direct investment rule. The result was the looting of the widows. Lincoln Savings’ frauds were so pervasive that it used its impunity from meaningful enforcement to become the most expensive financial failure in our history.