The definitive movie on Charlie Keating has yet to be made. The savings and loan scandal figure did manage to get some screen time, though, in the film "The People vs. Larry Flynt" as an anti-porn crusader and nemesis of the Hustler publisher. It was an apt case for Keating to be portrayed in (he was played by the fine character actor James Cromwell). Keating was a hustler, on a huge scale.
He should have stuck to sparring with porn peddlers. Instead Keating moved on to the despicable conning of depositors at his Lincoln Savings and Loan Association. He persuaded many of them to switch over their insured deposits at the Irvine, Calif., thrift into worthless bonds issued by his holding company, Phoenix-based American Continental Corp. Some of his victims were elderly people. He would send cars to pick them up.
Keating’s ACC real estate projects included the Phoenician Hotel, a palace of marble excess in Phoenix, and Estrella, a planned community in the desert outside of Phoenix that was abandoned before it could rise out of the tumbleweeds.
Both of these projects were successful under later ownership, but were a disaster for taxpayers when Lincoln failed. Contemporary accounts in the Los Angeles Times put the loss to Treasury on the sale of the Phoenician at $66 million, while Estrella received bids in the range of ten cents on the dollar.
Influence-peddling was another one of his resume items. Most of us have two U.S. senators. Keating apparently thought he had five of them. That’s how many he summoned to try to get federal thrift examiners off his back. The “Keating Five” maneuver backfired. An intrepid federal official, William K. Black, took copious notes on a meeting in which the senators pressured regulators to lay off their "constituent." The details wound up in the press. Senators from three states (Ohio, Arizona and California) got to answer ethics inquiries over their actions. (The first story on the Keating Five ran in National Thrift News, a predecessor to National Mortgage News. Our editor and founder, Stan Strachan, an American Banker alumnus, obtained the meeting notes and the story was reported by Stephen Kleege, now executive editor of The Bond Buyer.) Federal scrutiny of Keating increased and Lincoln eventually failed.
The way Keating, a real estate developer, got control of a savings and loan he could tap for deposit money epitomizes the thrift crisis of the 1980s. In the late 1970s and early 1980s, thrifts got caught in a rapid rise in interest rates. Since they borrowed short and lent long, many developed huge asset-liability mismatches. Many failed (even before the crisis of the late 1980s). The prevailing wisdom on how to prevent this from happening again was that stodgy thrifts needed to be liberated from the "borrow short/lend long" trap by diversifying their beyond mortgage lending. Congress granted these powers with the Garn-St Germain Act and many unorthodox operators like Keating came into the thrift field.
Disaster ensued. It was a colorful time, at least. Thrifts diversified their asset bases, with limited success, into areas like credit cards and real estate development, or rather overdevelopment. Some of them invested in even more esoteric properties like rare jazz records, magician paraphernalia (which entertainer David Copperfield eventually bought from the Resolution Trust Corp. at a substantial discount), racehorses, and Old Masters paintings. (The stallion proved to have syphilis when the government tried to sell him off to stud, and the Old Master turned out to be worth millions less than paid for. The jazz record collection brought a nice price, however.)
The crisis ballooned into the failure of hundreds of thrifts and the loss of hundreds of billions of dollars. There's an enduring lesson in this story for today's mortgage industry. At a time when lenders are getting less than 5% on fixed-rate mortgages, it might be a good idea for them to start thinking again about the perils of borrowing short and lending long for their portfolios.
As for Keating, he was eventually tried, convicted and sent to prison—an outcome unlike during the most recent mortgage collapse, where criminal charges have been scarce. (He was freed when his state and federal convictions were overturned, and on the eve of his federal retrial, he pleaded guilty and was sentenced to time served.) Keating served nearly five years and then spent many years in retirement until his death Tuesday at the age of 90. May he rest in peace.
Mark Fogarty, Editor at Large at National Mortgage News, is starting a regular blog of analysis and commentary based on his 30 years covering the mortgage industry.