Even the Vietnamese didn't question my ethics.
- John McCain, to a reporter for the Arizona Republic, with regards to the ethics investigation in the aftermath of the Keating Five scandal

Keating Five (the common shorthand name of the Keating Five scandal) refers to a banking scandal in the late 1980s which involved the financial destruction of Lincoln Savings and Loan, a financial institution owned by Charles Keating that in 1989 went out of business, taking $2 billion in investor money along with it. The "five" referred to in this case are five United States senators: Alan Cranston (D, CA), Dennis DeConcini (D, AZ), John Glenn (D, OH), Donald W. Riegle, Jr. (D, MI), and perhaps most notably, John McCain (R, AZ).

This episode in American history makes the dangers of laissez faire capitalism quite clear to everyone. If there are not checks and balances to ensure that the democratically elected leaders are responsible to the people and not beholden to corporations, then situations like this can and will happen.

In essence, the Keating Five were a warning about the dangers of deregulation and, in a more general sense, a sad example of the confluence of money and power in an attempt to subvert established rules of fair play.

Background (1980-1986)
In the late 1970s, the economy of the United States was facing its greatest troubles since the Great Depression. Oil shortages, lack of consumer spending, and wildly varying interest rates resulted in a number of savings and loan institutions finding themselves in a state of financial instability.

In order to solve this, in 1980, the savings and loan industry slowly began to be deregulated, meaning that the businesses themselves would have much more opportunity to make their own decisions without government regulation. Such deregulation was a standard part of Ronald Reagan's economic policies in the 1980s.

Charles Keating was the head of American Continental Corporation, a rather large group that controlled several subsidiaries, most notably Lincoln Savings and Loan. Beyond this, he was also an influential person in Washington, and he had contributed a significant amount of money to a number of congressional candidates, many of whom were elected thanks to the financial help of Keating.

Keating's Desperation
In March 1987, after several years of freewheeling spending and bad economic choices, Lincoln Savings and Loan was in deep trouble and about to go under. In order to protect the investors in Lincoln, federal regulators were considering taking over the company in order to save it. Keating would have none of this, of course, and thus he decided to collect on his investments in Washington.

In late March 1987, Keating set up a meeting with one of his closest associates in Washington, Senator Dennis DeConcini, the Democratic senior senator from Arizona. Keating requested that DeConcini set up a meeting with the federal regulators, with the purpose of getting them to leave Lincoln Savings and Loan alone.

DeConcini was quite willing to follow up on the request, since Keating had donated thousands of dollars to DeConcini's senate campaigns. So DeConcini sought out a number of senators that Keating had donated money to in the past and invited them to a meeting with the regulators on April 2.

To be blunt, you should charge them or get off their backs. If things are bad there, get to them. Their view is that they took a failing business and put it back on its feet. It's now viable and profitable. They took it off the endangered species list. Why has the exam dragged on and on and on?
- John Glenn, to federal regulators, in reference to Lincoln Savings and Loan

The Regulator Meetings
The first of two meetings between the Federal Home Loan Bank Board (the oversight committee for the savings and loans) and the Keating senators was held in DeConcini's office on April 2, 1987. In addition to DeConcini, Senators John McCain, John Glenn, and Alan Cranston were in attendance, as was Ed Gray, the chairman of the Federal Home Loan Bank Board.

During this first meeting, Gray indicated that he had little or no information about Lincoln Savings and Loan itself, and that the board was mostly focused on the larger picture of the general health of savings and loan deregulation. Instead, Gray set up a meeting between the senators and the specific regulators handling the case, who were based in San Francisco.

This second meeting occurred on April 9, 1987, and it involved the same four senators, plus a fifth, Don Riegle of Michigan. Also attending the meeting were William Black, deputy director of the Federal Savings and Loan Insurance Corporation (the group that provided insurance for loans); James Cirona, president of the Federal Home Loan Bank of San Francisco (i.e., the local investigators into the Lincoln Savings and Loan owned by Keating); and Michael Patriarca, a representative of the FSLIC.

This meeting was perhaps more successful. The senators directly requested that the regulators either submit charges against Lincoln Savings and Loan, or cease and desist their investigation, which the senators presented as being wasteful. While Cirona claimed that their investigation would result in charges against Lincoln being filed with the Department of Justice, in actuality, no charges were ever filed during this investigation.

The Aftermath
So, what happened next? Over the next several months, Lincoln Savings and Loan continued its death spiral, eventually falling apart in early 1989. When the final tallies were counted, roughly $3.2 billion dollars were lost by the corporation, including $2 billion in investor money; the investments were bailed out by the government through the FSLIC.

In early 1988, news of the meetings between the five senators, who would be dubbed the Keating Five, and the regulators leaked out and was widely reported by many newspapers, including a very harsh investigative report by the Washington Post. Eventually, all five of the senators had rather messy connections to Keating revealed publicly.

By 1990, the shockwaves were being felt far and wide. Charles Keating himself was indicted on 42 counts of fraud in California, and would eventually go on to serve four years in prison. As for the Keating Five? They were the subjects of a Senate Ethics Committee investigation, held in November 1990, but the hearing was somewhat overshadowed by the impending invasion of Iraq by the United States. Thus, the five Senators were quietly let off the hook with merely a slap on the wrist.

In essence, there were no real long-term ramifications for the Keating Five: John Glenn would go on to take another trip into space and would leave the Senate seen as a hero, and John McCain is seen by many as the eventual "savior" of the Republican Party.

Trust Me: Charles Keating and the Missing Billions by Michael Binstein and Charles Bowden. 1993. ASIN: 0679416994
The Keating Five. Bill Muller. Arizona Republic. October 3, 1999

Editors Note:

Charles Keating died in Phoenix on March 31, 2014, at the age of 90 from undisclosed causes.

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