Overall Story

The Banking Crisis: Lincoln, Keating and Gray

In 1984 Charles Keating, the President of American Continental Coorporation (ACC), bought Lincoln Savings & Loan, an Irvine, California thrift. His operation was lavish and high-flying. He became the highest paid executive of all the public companies in Arizona (five other ACC employees were in the top ten). While owning Lincoln, Keating effectively eliminated traditional home lending. Keating took full advantage of California's liberalized investment powers and established a high-risk operation characterized by explosive growth and excessive concentrations in speculative activities.

Around the same time that Keating purchased Lincoln, Ed Gray was appointed Chair of the 3-member Bank Board. The Washington Post reported: "Gray was neither an economist nor a businessman by profession, but rather a born pitchman and cheerleader. After a brief episode as a reporter, working in the Madrid bureau of United Press International during the early 1960s, he went into public relations and made a career of saying positive things about his employees. This decidedly average man--brown hair, square face, medium height and build--instinctively shunned controversy and conflict" (Washington Post, June 11, 1990)1.

As Gray stepped into his leadership position, the S&L industry was beginning to collapse. Lending companies had over extended themselves; one after the other were going bankrupt as numerous high risk loans went sour. In an effort to reduce the fallout, Gray proposed a number of reforms and regulations. These were very unpopular amongst the leaders of the thrift industry, including Keating. One of the regulations Gray proposed were caps on "direct investments" -- real estate ventures initiated by the thrift. In this way, he broke away from industry trends and forged his own path with concern to brokered accounts, cash reserves, and direct investment laws. In December 1985, Keating attempted to hire Gray out of his Bank Board position. Gray refused the offer and reported Keating to the Justice Department.2

On March 12, 1986, the (Federal Home Loan Bank) FHLBB began its first major examination of Lincoln in two years (the last examination, conducted six months after Keating acquired Lincoln, revealed "appraisal difficulties," "an overvaluation of capital," and "lack of an internal audit committee"). Keating claimed that the examination was months overdue and that the FHLBB was harassing him and leaking information to discredit him for being critical of Ed Gray. The San Francisco regulators claimed that, under the circumstances, the Lincoln examination was not unusually long. In his testimony in front of the Senate Ethic Committee, William Black, one of the FHLB Regulators explained, "When a thrift has engaged in complex transactions, is troubled, or does not cooperate, the examination takes longer"—all three of these complications applied to Lincoln's case. The examination dealt with unusually complicated tax agreements, potentially "troubled" real estate holdings, and "junk bond" investments.

What's more, hostilities surfaced at a meeting on July 3, 1986 to discuss the preliminary findings of the examination. Keating berated the examiners and threatened to sue the Supervisory.3 For two weeks, Lincoln's people refused to permit the examination to continue. Then, Keating insisted that the examiners conduct their examination through Lincoln's New York litigation counsel. This unusual arrangement was later approved by the FHLBB with the proviso that Lincoln's counsel move to Phoenix.

In August, 1986, the San Francisco regulators summarized their preliminary finding of Lincoln's exam in a "Statement of Supervisory Concerns" and sent a draft to Washington. It detailed many areas of concern: underwriting deficiencies, appraisals deficiencies, improperly capitalized interest, $600 million in excess direct investments, misclassification of joint ventures, false profits, and over concentrations of loans to one borrower. Fieldwork continued on the examination of Lincoln. In late September, the Washington Post ran a story about the delay of Lincoln's examination and "the feud" between Keating and Gray. Having had no contact with Lincoln's exam, Gray was confused about these allegations. He wrote to the San Francisco regulators for an explanation. Three days later, Gray received the so-called "Cirona memo" (link to Cirona Memo Exhibit) -- a lengthy explanation of the concerns addressed in the draft Statement of Supervisory Concerns, along with details about how Keating had impeded the examination. The FHLBB ended its fieldwork a few weeks later. While still working on the final Statement of Supervisory Concerns, on February 3, 1987, the San Francisco regulators forwarded the Bank Board a summary of its review of Lincoln's securities transactions and related corporations.

As the regulators were completing the Report of Examination for Lincoln, Keating was busy. He helped raise sizable sums of money for Senators Cranston and Riegle. On March 3, 1987, he contributed $100,000 to America Votes (Cranston's voter registration organization). Twenty days later, he raised $78,250 for Riegle at a fund-raiser held at Keating's Detroit hotel. ACC's lawyer and Keating's chief legal counsel, James Grogan, did much of Keating's political lobbying. In late February of 1987, the offices of Senator Cranston, DeConcini, and Riegle all received letters from Keating that solicited advice regarding their motion to disqualify Ed Gray from the Bank Board. Around the same time, Grogan and Jack Attchison—a managing partner at the Arthur Young accounting firm, who conducted Lincoln's audits– went to DC to lobby on behalf of Keating against new direct investment regulations.

Bringing in the "big guns"- Senators get involved

Gray's office contacted Senator Riegle to schedule a meeting. The two men met on March 6th. Gray says that, around the same time, he was talking to "anyone who would listen" about the FSLIC recapitalization bill he was about to put before Congress. According to Gray, at the end of the meeting Riegle pulled him aside and told him that there were senators out West who were concerned about the Bank Board's actions regarding Lincoln S&L, and that these senators wanted to meet with Gray. Gray says he told Riegle that he didn't like the idea; he had had enough headaches with Keating. In what Gray describes as a three-minute meeting, he expressed his belief that nothing productive would come of meeting with the senators. According to Gray, Rielge simply responded, "You'll be getting a call." "What?" "You'll be getting a call." Rielge claims that he has no independent recollection of what occurred in his March 6 meeting with Gray.

Grogan testified that he and Reigle met a little over a week later, around the time the senators received copies of the Arthur Young Letter. The letter, written by Jack Atchison, concluded that federal regulators were "harassing" Lincoln by being "unduly harsh". Grogan claims that Riegle told him a meeting between Ed Gray and the senators would occur. Grogan needed to have either Senator DeConcini or Senator McCain invite him (Riegle) to this meeting. Riegle has no recollection of this conversation. A little more than a week later, Keating organized a successful fundraiser at Detroit's Ponchetrain hotel (March 23rd), raising over $30,000 on Riegle's behalf.

After his office received the Arthur Young letter, Senator DeConcini met with Senator Riegle on March 17, 1987. DeConcini says that he told Riegle he was having trouble with Gray and that he asked for help. Two days later — after receiving a memo from Lincoln that summarized all of the things they wanted the regulators to stop doing and a list of what they were willing to do in return – DeConcini and his aide, Laurie Sedlmayr met with Senator McCain and his banking aid, Gwendolyn VanPaaschen. DeConcini testified that they discussed Keating's problems with the regulators and whether meeting with Ed Gray would be productive. DeConcini also testified that McCain repeatedly voiced his concerns regarding Grays reputation, and that Gray might miss-represent any meeting they had. DeConcini says he suggested that he and McCain go to Gray's office right then to discuss matters. McCain refused to go to Gray's office that day and remained non-committal about any future meetings.

DeConcini says he called Gray the next day and asked him to meet with a few senators regarding Lincoln's problems with the bank board. He testified that Gray responded that he would be happy to meet. (DeConcini says that there was no mention of aids at all during their conversation). And so the April 1st meeting was set.

The April Meetings

The first meeting-- held on April 2, 1987 in Senator DeConcini's office-- included Ed Gray, as well as four senators: DeConcini, McCain, Cranston, and Glenn. (Years later, McCain recalled that DeConcini started the meeting with a reference to "our friend at Lincoln." McCain characterized this as "an unfortunate choice of words, which Gray would remember and repeat publicly many times.") No aides attended this meeting Gray claims he was told not to bring any. It was his common practice to bring at least one aide, who would take notes to virtually every meeting he attended. McCain received similar instructions to attend the meeting, but was upset by the instruction and decided to bring his aide. McCain stationed his aide (VanPaaschen) outside of the meeting in case he had any substantive questions. Neither Cranston nor Glenn brought an aide, but it was not unusual for Glenn to attend such meetings alone. The evidence is unclear about the origin of the command for "no aides." Senator DeConcini denies the existence of such an order. It is also unclear who instigated the meeting. There is evidence that Riegle suggested it, and then asked McCain's office invite him to the meeting. No one has taken responsibility for planning the meeting.

For Keating, the meeting was a bust. Gray told the senators that, as head of the loan board, he was only concerned with the big picture of the S&L industry. He didn't have specific information about Lincoln; the bank regulators in San Francisco would, he said, have information about that. Many of the meeting's attendees recalled the senators' frustration with Gray's lack of information (Glenn was especially frustrated). Gray offered to set up a meeting between the senators and the San Francisco regulators; he says that he was preoccupied with staying on the senators' "good side" during the meeting so that he could get a FHSL bill passed.

A day or two after the meeting, DeConcini told Gray that the senators were interested in meeting with the regulators. Gray's office responded a few days later saying the regulators would fly in from San Francisco to meet with the men exactly a week after the first meeting had taken place, at the same time and the same place.

When Keating got word of this, he put plans into motion. He sent Grogan to Washington, along with a a revised "Schedule (link to exhibit 136)" of Lincoln's complaints and offerings, with instructions to "keep the team together." Grogan believed that Keating saw this second meeting as an opportunity to raise additional issues. Between April 2nd and April 9th, Grogan informally met or bumped into each of the five senators, reiterating how important their attendance at the second meeting was to Mr. Keating.

Hours before the April 9th meeting, DeConcini had his aide, Laurie Sedlmayr, draft a letter to Senator Riegle, which invited him to that day's meeting. The letter was sent from Senator DeConcini and Senator McCain, but only DeConcini signed it. He testified that both he and McCain agreed to the invitation. (Sedlmayr says that she was rushed to put this letter together at the end of the day, and that she forgot to take it to McCain's office to have it signed). With the invitation accepted, the four senators, along with Sen. Riegle, attended the second meeting. Also at the meeting were William Black, then deputy director of the Federal Savings and Loan Insurance Corp.; James Cirona, President of the Federal Home Loan Bank of San Francisco; and Michael Patriarca, Director of agency functions at the FSLIC.

In an interview with The [Arizona] Republic, Black described the meeting as a show of force by Keating, who wanted the senators to pressure the regulators into dropping their case against Lincoln. The thrift was in trouble for violating "direct investment" rules, which prohibited S&Ls from taking large ownership positions in various ventures. "The Senate is a really small club, like the cliché goes," Black said. "And you really did have one-twentieth of the Senate in one room, called by one guy, who was the biggest crook in the S&L debacle." Black claimed the senators could have accomplished their goal "if they had simply had us show up and see this incredible room and said, 'Hi. Charles Keating asked us to meet with you. 'Bye.'…They presented themselves as a group."

McCain had previously refused DeConcini's request to meet with the Lincoln auditors. In his book Worth the Fighting For, McCain wrote that he remained "a little troubled" at the prospect, "but since the chairman of the bank board didn't seem to have a problem with the idea, maybe a discussion with the regulators wouldn't be as problematic as I had earlier thought." McCain testified that he did not sense that Gray and the thrift examiners felt threatened by the senators' meddling.

According to nearly verbatim notes taken by Black, McCain started the second meeting with a careful comment. "One of our jobs as elected officials is to help constituents in a proper fashion," McCain said. "ACC (American Continental Corp.) is a big employer and important to the local economy. I wouldn't want any special favors for them. . . .I don't want any part of our conversation to be improper." Black claimed the comment had the opposite effect for the regulators. It made them nervous about what might really be happening. Glenn, a former astronaut and the first American to orbit the Earth, was not as tactful. "You should charge them or get off their backs," he told the regulators. "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?" DeConcini added: "What's wrong with this if they're willing to clean up their act?"

Cirona, the banking official, told the senators that it was "very unusual" to hold a meeting to discuss a particular company. DeConcini shot back: "It's very unusual for us to have a company that could be put out of business by its regulators". At the end of the meeting, the regulators told the senators that Lincoln was in trouble. Black told the senators that the regulators were sending a criminal referral to the Department of Justice, and that the senators couldn't breathe a word of it to Lincoln. The meeting then ended abruptly. Grogan says that Glenn returned to his office, where Grogan waited during the meeting, and simply told Grogan not to expect much from the Bank Board. Keating himself did not try to interact further with the regulators or the Bank Board.

The "Keating Five" Complaint

In May of 1987, the San Francisco regulators finished a yearlong audit and recommended that Lincoln be seized. Because of politics on the bank board, the report was virtually ignored. Danny Wall, a man who was more sympathetic to Keating, replaced Gray as chairman. The audit, which described Lincoln as a thrift reeling out of control, sat on a shelf. In September 1987, the investigation was taken away from the San Francisco office, Black and Patriarca. In May 1988, it was transferred to Washington, where Lincoln would be audited again. Back in San Francisco, Black was fuming. "Clearly, we were shot in the back," he would later say. Despite the reprieve, Keating's businesses continued to spiral downward, taking the five senators with them.

In April 1989, two years after the Keating Five meetings, the government seized Lincoln, which declared bankruptcy. In September 1990, Keating was booked into Los Angeles County Jail, charged with 42 counts of fraud. His bond was set at $5 million. During Keating's trial, the prosecution produced a parade of elderly investors who lost their life's savings by investing in American Continental junk bonds. Keating was convicted in both federal and state courts of many counts of fraud, racketeering, and conspiracy. He served four and a half years in prison before those convictions were overturned in 1996. In 1999, he pleaded guilty to a more limited set of wire fraud and bankruptcy fraud counts, and was sentenced to the time he had already served.

On x date, The New York Times published an article that uncovered the events and coined the phrase "Keating Five". Shortly there after, Common Cause issued a complaint to the senate ethic committee. In November 1990, the Senate Ethics Committee convened to decide what punishment, if any, should be doled out to the Keating Five.


"Keating and Lincoln Savings became convenient symbols for arguments about what had gone wrong in America's financial system and society. The senators did not escape infamy either. By spring 199, a deck of playing cards was being marketed, called "The Savings and Loan Scandal", that featured on their face Charles Keating holding up his hand, with images of the five senators portrayed as puppets on his fingers. Polls showed that most Americans believed the actions of the Keating Five were typical of Congress as a whole. The only difference, according to political historian Lewis Gould, was that those involved in the Keating Five had been caught.

McCain testified against Keating in a civil suit brought by Lincoln bondholders, and was seen as the plaintiffs' best witness. The other four senators refused to testify. Cranston left office in January 1993, and died in December 200. DeConcini and Riegle served in senate until their terms expired, but did not seek re-election in 1994. Glenn did choose to run for re-election in 1992. After 1999, the only member of the Keating Five remaining in the U.S. Senate was John McCain, who had an easier time gaining re-election in 1992 than he anticipated.

During the 200s, several retrospective accounts of the controversy reiterated the contention that McCain was included in the investigation primarily so that there would be at least one Republican target. Glenn's inclusion in the investigation has been attributed to Republicans who were angered by the inclusion of McCain, as well as committee members who thought that dropping Glenn (and McCain) would make it look bad for the remaining three Democratic Senators.

The scandal was followed by a number of attempts to adopt campaign finance reform, but most attempts died in committee. A weakened reform was passed in 1993. Substantial campaign finance reform was not passed until the adoption of the McCain Feingold Act in 2002. Bennett would later write that the Keating Five investigation did make a difference, as members of Congress were afterward far less likely to intercede with federal investigations on behalf of contributors.

In early October 2008, the Keating Five Scandal, its possible parallel to the sub prime mortgage crisis and liquidity crisis of September 2008, and specifically the role in the scandal of Republican presidential nominee McCain, were briefly emphasized by the campaign of Democratic opponent, Barack Obama, through a 13-minute "documentary" entitled Keating Economics. The Keating Five matter otherwise had little impact on McCain's eventually unsuccessful campaign.


2Gray was later charged with ethics violations in connections with industry-paid trips. Someone in the industry leaded the story, possibly Keating.

3In 1987, Keating sent Lincoln's General Counsel a memo to "Get Black" — the San Francisco regulator, closted to Gray, who took copious notes at the April 9th meeting. Keating told Grogan: "if you can't get [former House Speaker Jim] Wright and Congress to get Black — kill him dead – you outh to retire."