The Keating Five Legacy

By William K. Black
Submitted by OurFuture.org Staff
April 9th, 2008

William K. Black is Associate Professor of Law and Economics at the University of Missouri, Kansas City. He was counsel to the Federal Home Loan Bank Board during the savings and loan crisis of the 1980s and was a whistleblower in the Keating Five scandal. His book on the crisis is "The Best Way to Rob a Bank Is to Own One."

Twenty-one years ago today five U.S. senators met with federal savings and loan regulators at the request of Charles Keating, who controlled Lincoln Savings and Loan. They became known as the "Keating Five"—Alan Cranston, D-Calif., Dennis DeConcini, D-Ariz., John Glenn, D-Ohio, John McCain, R-Ariz., and Donald Riegle, D-Mich. The Keating Five meeting was the event that transformed the S&L debacle from a story buried in the business section to one of the worst financial and political scandals in U.S. history (though the current financial crises have proven even worse).

The Keating Five, including McCain, were perfectly situated to take action to protect their constituents. They could have held oversight hearings. They could have warned the widows. "All that is necessary for the triumph of evil is that good men do nothing," an anonymous commenter one said (in a statement generally, but inaccurately, attributed to Edmund Burke). These men did nothing.

Lincoln was (and remains) the most expensive S&L failure of an insured U.S. depository, costing the taxpayers $3.4 billion. Keating recruited the senators because the regulators were about to remove his control over Lincoln. The regulators had discovered that Lincoln had large losses and was engaged in widespread fraud and forgeries designed to hide its violation of the "direct investment" rule. That violation was the largest in history — over $600 million. S&Ls that had large amounts of direct investment always failed. Direct investments were fatal not because of their intrinsic risk, but because they were superb aids to accounting fraud, the "weapon of choice" of financial firms.

When Keating launched a jihad against the proposed direct investment rule in 1984, he used politicians as his most important ally. He began in the House of Representatives. Within a few weeks, he was able to get a majority of members to co-sponsor a resolution intended to kill the direct investment rule. The supporters included John McCain (then a congressman), Jim Wright, D-Texas, (soon to be the Speaker of the House), and Newt Gingrich, R-Ga., (soon to be Wright's nemesis and a strong critic of his aid to fraudulent S&L owners). McCain was, and remains, a strident opponent of financial regulation. Federal Home Loan Bank Board chairman Edwin Gray, convinced that direct investments posed a critical threat to the taxpayers, went ahead with the regulation.

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