Charles H. Keating Essay, Research Paper

Charles H. Keating Jr. has been the focus of criminal investigations by the Federal Bureau of Investigation, the Internal Revenue Service, the Justice Department, The Securities and Exchange Commission, and the House Banking Committee for a six-year shadow of the nation’s biggest savings-and loan debacle. The federal government proclaims that he fraudulently managed California’s Lincoln Savings into its closure, and in the process profited for himself and his family an estimated thirty-four million dollars. Consequently, taxpayers may suffer a loss of two billion dollars. The federal government is suing Keating, his family and associates for one billion dollars.

Despite Keating’s denial to the charges, evidence proves that his misconduct began since the early 1980s. Shockingly, Charles Keating worked for an extended amount of time without being investigated or caught. Keating did not have a very credible background, which should have led to some suspicion. About a decade ago, many incidents should have foreshadowed Keating’s malicious intentions. At that point Keating was under the leadership of Carl Lindner at American Financial Corp., a city conglomerate with interests in insurance and banking. In 1979 SEC, better known as the Security & Exchange Commission, cited Keating and other officials of the American Exchange Commission for failure to reveal particular loan transactions with their employer.

Keating, a national championship swimmer, attended the University of Cincinnati on an athletic scholarship and continued in law school. Along with help from his brother, Charles Keating founded the prominent Cincinnati law firm of Keating, Muething and Klekamp. In 1972 Keating abandoned the profession of law, turning to work for the publicity-shy multimillionaire Carl Linder. Lindner served as a guide and mentor in the life of Mr. Keating. Many similarities can be traced between the business style of these two men; preeminently they both built their empires on savings and loans.1

Charles Keating exceeded Mr. Lindner’s expectations, which persuaded Mr. Lindner to extend an offer to the forty-eight year-old lawyer a position with American Financial in 1972 as the executive vice-president. Under Lindner’s supervision at American Financial in the mid-1970’s, Keating found a resourceful strategy to raise money from the public without the interference of the Wall Street underwriters. The success of this strategy resulted from sharp decline in profits that Lindner’s company was experiencing. Keating’s success revolved around him raising fifty million dollars for American Financial from the public without using an underwriting syndicate. This technique was quite uncommon for a corporate business of their size. Consequently, American Financial sold the fifty million dollars in debentures through local stockbrokers. These debentures were offered at a surprisingly high annual interest payment of eleven and three-quarters. As a result of the high payment, these debentures were promoted in cities where small savers were eager for high rates. Keating had no fear of re-sales because he assumed that most of the buyers would simply store the debentures, providing American Financial with stable, long-term money. Also there was a lack of restrictive covenants or sinking fund requirements, which normally would have been required in a syndicated offering.

Keating left Lindner’s shadow and the employ of American Financial in 1976, when he departed to Phoenix, Arizona. At the time his departure, he took a four-year consulting contract at one hundred and fifty thousand a year from Lindner. Despite the fact that Keating had left Lindner’s side, in some way Keating success was connected with Lindner. In 1977 Keating gained control of American Continental Homes, a home building operation.

The reasons for Keating’s leave from American Financial stand quite vague to the public eye. The question remains as whether or not Charles H. Keating Jr. left by his free will or with the aid of others. The loan activities that occurred during the duration of Keating’s vice presidency at American Financial resulted in a consent decree with the Securities & Exchange Commission, better known as the SEC, in 1979. The SEC charges Lindner, Keating, and Donald Klekamp of the Keating law firm with arranging millions of dollars in improper loans to Lindner’s employees. Despite the close encounters with the officials of the SEC, Keating developed tactics to raise reported earnings at American Continental Homes. The most popular tactic was the use of interest capitalization, which involves listing interest payments as an asset rather than as an expense, thus boosting earnings.

Evidence confirms that Keating inflated American Continental Homes’s pretax earning by having fifteen million dollars out of American Continental Homes’s twenty-five million dollars interest payments capitalized in 1980. Similarly, in 1981, he managed to capitalize eighteen million dollars out of the thirty-two million dollars. The money had been paid out in interest, but more than half of it remained recorded under American Continental Homes’s books as an asset. American Continental Homes lost an estimate of two and a half million dollars in the year 1981, and surprisingly managed to post a net income of roughly three and a half million dollar with the aid of some unusual land dealing that produced a sizable gain. These efforts were merely the beginning of Keating’s operation. He later turned to approaches such as: joint ventures, partnerships and debt-for-property swaps in an attempt to magnify the profits of American Continental Homes.

In 1984 Charles Keating purchased Lincoln Savings and Loan, an Irvine, Calif. Thrift. Alas, he possessed a large sum of money, specifically the thrift’s one billion dollars or so of deposits. Not only did Lincoln Savings and Loan have one billion dollars in deposits, but also, luckily, it was located in California, the state with most liberal rules in the country in reference to investing funds. It took Keating no more than a year to double Lincoln’s deposits, bringing in most of the new money through brokered deposits. When it came time for Keating to invest the deposits, he considered the traditional home mortgage lending pretty dull. Instead he chose speculative business like the two hundred eighty million dollars resort hotel, the Phoenician in Scottsdale, Arizona. Keating also invested funds into land development and stocks, as well as junk bonds.

Keating established a tax-sharing plan between Lincoln Savings and Loans and its parent company, American Continental Homes, which was permitted by the Internal Revenue Service, or IRS. The initial purpose of the plan allows subsidiaries to advance cash to the parent company to cover tax liabilities. The government reports that Keating altered the plan’s purpose to fit his purpose. Lincoln Savings and Loans paid about ninety-five million dollars to American Continental Homes between the time of 1986 and 1988, but there were no taxes payable to the IRS by the parent company. Keating used this method for stealing from Lincoln for the benefit of Keating and American Continental Homes. The government accuses Keating and his family for taking approximately thirty-four million dollars from American Continental Homes in salaries, bonuses, and sales of stock during the years of 1986, 1987 and 1988.

In order for Keating’s ingenious plan to work, income had to be created in Lincoln. Officials believe that Lincoln and its subsidiaries frequently would come up with “straw” borrowers. The institution profited from doing so, because it forced the “straw” borrowers to pay interest.

The model example of this lending and investing tactic emerged in the Hotel Pontchartrain Limited Partnership deal. Keating and his associates obtained unsecured loans from Lincoln Savings and Loans that allowed their partnership to acquire Detroit’s ancient Pontchartrain hotel for about thirty-seven million dollars in March of 1986. With the aid of Keating’s accounting skills, this somehow triggered a bookkeeping profit of almost ten million dollars out of Lincoln Savings and Loans under the tax-sharing plan. The true beneficiaries of the Pontchartrain loan, according to officials, were Keating, his family and friends. The loan allowed them to repay ten million dollars in money Lincoln Savings and Loans had previously advanced to the partnership, to service the debt of Hotel Pontchartrain, and to obtain sizable tax benefits.

It was not until early 1987 that government regulators began to raise suspicion about Keating’s activities at Lincoln Savings and Loans. A delay in action resulted because officials were held back by five U.S. senators to whom Keating had made substantial campaign contributions.2

Alas, in 1991 the Supreme Court convicted Charles H. Keating on the charges of fraud and racketeering. Keating spent a duration of four years and nine months in jail, which he describes as a time in which he never felt concerned about his safety because he was located in medium-to-high-security areas. He claims to have enjoyed the company of some of the other inmates, as well as the physical training that he endured. The state of California overturned the conviction of Mr. Keating had in April, meaning that once again Mr. Keating was “presumed innocent”. The prosecutors are expected to appeal U.S. District Judge Mariana Pfaelzer’s decision to overturn Mr. Keating’s federal conviction. The judge decided that the jurors were prejudiced by knowledge of Mr. Keating’s 1991-state conviction. Stephen C. Neal, Mr. Keating’s longtime attorney, stated that a new trial would be a wasteful attempt.3 All in all, Charles H. Keating Jr. was seventy-three years old when he was released from prison, he served time for his crimes, but there really would be no purpose to try to pursue any other convictions.

1. Adams, James Ring. The Big Fix: Inside the S & L Scandal (New York, NY: John Wiley & Sons Inc., 1990), p. 238

2. Porteous, Skipp. Institute for First Amendment Studies, Inc. (Freedom Writer. November/December 1989).

3. McKinney, Jeff. The Enquirer. (December 1996). www.enquirer.com/editions/1996/12/04/bus-keating.html