PERVERSION FOR PROFIT

“If pro is the opposite of con, what is the opposite of Congress?”

Will Rogers

I find it curious that Charlie Humphrey Keating Jr (above) spent his adult life crusading against pornography, which he called a “Perversion for Profit”. At the same time he saw no perversion in profiting from duping naive investors, even telling his sales agents, “...the weak, meek and ignorant are always good targets.” Charlie did not invent hypocrisy, nor the investment scam, nor even political graft. But when asked if he had bought five U.S. Senators, Charlie responded forcefully, “I certainly hope so.” It was Charlie's sociopathic self-serving arrogance which made him famously wealthy and infamously despised. And then Charlie got his hands on a bank.

“A holding company is a thing where you hand an accomplice the goods while the policeman searches you.”
Will Rogers

Once upon a time in America there were two kinds of banks, commercial banks, with few restrictions on their investments, and “Savings and Loans”. Federal regulations kept S&L's the dull, cautious bedrock of private home ownership. But even real estate suffers the boom and bust of capitalism, better known as the “business cycle”. So politicians, following an ideology of greed, created the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980, which among other things, lifted the limit S&L's were allowed to invest in things other than homes. In the decade after, S&L's went from 53% of their money being in home loans, to less than 30%. Seeking profit Savings and Loan bankers then invented the Certificate of Deposit, or CD's, which allowed them to pay higher interest rates and compete with commercial banks for investors. But paying higher interest rates meant each new customer also cost more. In the world of academic economics this is known as an “asset-liability mismatch”. In Charlie Keating's world this was known as a business opportunity.

“Don't gamble. Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it.”
Will Rogers

Charlie had arrived in Phoenix, Arizona  (above) in 1976, having been chased out of Cincinnati, Ohio by the Federal Securities and Exchange Commission. Once in town he proceeded to duplicate the behavior which had gotten him into trouble in Ohio, metamorphosing a faltering home construction company into American Continental Corporation, a holding company with maze of 54 divisions (and a few secret overseas operations), $6 billion in assets, 2,500 employees and a couple of corporate jets. When federal regulators started sniffing around Charlie even got economics guru Alan Greenspan to write him a letter of recommendation. Forbes Magazine, although impressed with Charlie's explosive growth, noted, “It seems almost impossible to find anyone who actually likes Charlie Keating.” His own brother admitted that Charlie was impatient and aggressive - but he left out, greedy. And then in 1980, Ronald Reagan won the White House, and geed became “good”, and deregulation, such as DIDMCA, became the mantra of the day. In 1984, Charlie used American Continental to buy Lincoln Savings Bank of California, for $51 million. He fired the management wholesale, and converted it into his personal bank.

“Big business don’t go broke any more. The minute it looks bad for them, they combine with something else and issue more stock.”

Will Rogers

Three years later an audit by three investigators for the San Francisco office of the Federal Home Loan Banks Board found that Lincoln had unreported losses of $135 million, and had exceeded the new looser limit on risky investments by $600 million. But what Charlie had learned from his first run-in with financial regulators back in Ohio was that it paid to have friends in high places. He had made over $1 million in political contributions to five U.S. Senators – Alan Cranston (D-Ca), Dennis DeConcini (D-Az), John McCain (R-Az), John Glenn (D-Ohio) and Donald Riegle (D-Michigan). Charlie now insisted that his “Keating Five” have a joint sit down with the three investigators from the FHLBB.

“Ancient Rome declined because it had a Senate. Now, what's going to happen to us, with both a House and a Senate?”

Will Rogers

On Thursday, 19 April, 1987, the investigators were flown to Washington to be intimidated by the five senators in person. DeConcini explained that “Our friend at Lincoln...is a big employer and important to the local economy.” Former Astronaut and former Marine, Senator John Glenn, had little patience for such niceties. “To be blunt”, he told the bureaucrats,. “You should charge them (Lincoln Savings) or get off their backs.” The regulators worked up the courage to explain that it appeared money was being siphoned out of Lincoln to fuel false profits at American Continental. That converted their audit into a criminal investigation. The Senators backed off and rushed to tell Charlie.

“There ought to be one day - just one - when there is open season on senators.”

Will Rogers

Charlie was not happy "his" senators had not shut down the investigation. . He even called Senator John McCain a “whimp” to his face, and went looking for politicians more willing to do his bidding. When the San Francisco regulators persisted in recommending that Lincoln Savings be seized, the Reagan administration appointed a new head of the FHLBB, who forgave Lincoln for any past violations and started a brand new audit, this time run from Washington, D.C., where it could be controlled.  Charlie always said if they just relaxed the rules, the Savings and Loan industry could be “the biggest moneymaker in the world.”

“A lobbyist is a person that is supposed to help a politician make up his mind—not only help him but pay him.”

Will Rogers

It was at this point that the tellers at Lincoln Savings were ordered to begin pushing their customers to switch their savings from insured CD's to the uninsured American Continental bonds. Twenty -three thousand eventually fell for this sales pitch. Thanks to the delay in moving against him, Charlie had now bypassed the bank entirely. He was siphoning cash directly out of the customers' pockets into his. Federal Deposit Insurance Corporation chairman Seidman would later call this “one of the most heartless and cruel frauds in modern memory.”

“The short memories of the American voters is what keeps our politicians in office.”

Will Rogers

By December of 1988, even the bought politicians had become convinced Charlie was a fraudster. In January they finally ordered him to stop transferring money out of Lincoln savings. Three months later, both American Continental and Lincoln Savings and Loan went bankrupt, and those 23,000 dupes, who on the advice of the tellers and managers at their neighborhood bank, had invested $288 million in uninsured Lincoln bonds, lost it all. Among the many suicides this crime produced, was that of Anthony Elliott, who slit his wrists after losing his life savings - $200,000 – to feed Charlie's ego. Anthony's Thanksgiving Day 1990 note asked, “My government is supposed to serve and protect, but who?" He then answered himself, writing, "Those who can gather the most savings from retired people. . . . It takes billions to fill the pockets of spend-o-crats”.

“I tell you folks, all politics is applesauce.”

Will Rogers

The FDIC had to shell out 3.4 billion in tax payer dollars to cover the insured part of Charlie's looting of Lincoln Savings. Finally, in December of 1991, the state of California convicted Charlie of 17 counts of fraud, racketeering, and conspiracy. In January 1993, the feds convicted him of 73 counts of fraud, racketeering and conspiracy.  In 1994 the Resolution Trust Corporation, which had been created to clean up the Reagan deregulation mess, won the largest judgement against a private person in American history - $4.3 billion, against Charlie Keating.  Still, somehow, after serving just 4 ½ years in jail, Charlie Keating was released, free and clear.  As the authors of the 1993 book wondered, "He did not simply rob a bank, he broke it with his dreams... If he (was) such a devout communicant of his faith, why did he peddle hundreds of millions of dollars' worth of junk bonds to old people when he knew his empire was in serious jeaopardy?"  After living with his daughter in Phoenix, Arizona for a few years, Charlie went back into businss. Successfully. He died in March of 2014, still convinced that if the government had just left him alone, all his investors, even Anthony Elliot, would have been rich.

“There are three kinds of men. The ones that learn by readin’. The few who learn by observation. The rest of them have to pee on the electric fence for themselves.”

Will Rogers

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