Sen. Barack Obama recently made public a video (http://my.barackobama.com/keatingvideo) outlining Senator John McCain’s role in the Keating Five scandal. The release may be in response to the personal attacks on Obama by McCain and his running mate, Gov. Sarah Palin. Bringing up McCain’s role now isn’t just about the past because his role in that scandal has possible implications to the present financial crisis. The video shows McCain as someone who helped out a constituent, Charles Keating, while—just like today—taxpayers got stuck with the bill. Is his admitted poor judgment then an indication as to how he would handle the current financial crisis as president? You will have to decide that on Nov. 4.
I have compiled a more complete account of his role in the Keating Five scandal.
Sen. John McCain was one of five senators accused of corruption in 1989 in the savings and loan (S&L) crisis of the late 1980s and early 1990s. The other four senators were Alan Cranston (D-CA), Dennis DeConcini (D-AZ), John Glenn (D-OH), and Donald W. Riegle (D-MI). The crisis was the failure of 747 S&Ls in the United States costing an estimated $160.1 billion, about $124.6 billion of which was directly paid for by the taxpayers.
These five senators were accused of improperly intervening before the Federal Home Loan Bank Board (FHLBB) in 1987 on behalf of Charles Keating, chairman of the Lincoln Savings and Loan Association, which was a target of a regulatory investigation by the FHLBB. The FHLBB subsequently backed off taking action against Lincoln. By failing to take action, Lincoln was able to operate for two more years until its collapse in 1989, at a cost of $2 billion to the federal government. Some 23,000 Lincoln bondholders were defrauded and many elderly investors lost their life savings.
McCain and Keating had become personal friends following their initial contacts in 1981, and McCain was the only one of the five senators with close social and personal ties to Keating. McCain considered Keating a constituent as he lived in Arizona. McCain, his family, and their baby-sitter made nine trips at Keating’s expense, sometimes aboard Keating’s jet. Three of the trips were made to Keating’s luxurious retreat in the Bahamas. McCain did not pay Keating—some $13,433—for some of these trips until years after the trips were taken, after he learned that Keating was under investigation. Between 1982 and 1987, McCain received $112,000 in political contributions from Keating and his associates. In addition, McCain’s wife Cindy McCain and her father Jim Hensley, invested $359,100 in a Keating shopping center in April 1986, a year before McCain met with the regulators. In 1989, the Phoenix New Times writer Tom Fitzpatrick called McCain the “most reprehensible” of the five senators.
The Keating Five were investigated by the Senate Ethics Committee. The Committee’s work, however, was made difficult because at the time there was no specific rule governing the propriety of members intervening with federal regulators. During the investigation, McCain said, “I have done this kind of thing [intervene] many, many times,” and said the Lincoln case was like “helping the little lady who didn’t get her Social Security.” In 1991, after a lengthy investigation, the committee cleared McCain of impropriety but said he had exercised “poor judgment.” Some of the committee members were concerned that letting the senators off lightly would harm their own reputations. Nevertheless, the existing Senate rules did not specifically proscribe the actions taken by DeConcini, Riegle, Glenn, and McCain. After the finding, McCain admitted his poor judgment and would write in 2002 that attending the two April 1987 meetings with Keating was “the worst mistake of my life.”
Keating ultimately was sentenced to five years in prison for fraud. His conviction was later overturned on appeal because of the trial judge’s faulty jury instructions. Keating ultimately pleaded guilty to federal fraud charges and was sentenced to the four years time already served.
Not everyone was satisfied with the committee’s conclusions. The president of Common Cause, who initially demanded the investigation, thought the treatment of McCain and the other senators was far too lenient, and said, “[The] action by the Senate Ethics Committee is a cop-out and a damning indictment of the committee,” and “The U.S. Senate remains on the auction block to the Charles Keatings of the world.” The president of Public Citizen called it a “whitewash.” Newsweek said it was a classic case of the government trying to investigate itself, labelling the Senate Ethics Committee “shameless” for having “let four of the infamous Keating Five [including McCain] off with a wrist tap.” A San Francisco bank regulator felt that McCain had gotten off too lightly, saying that Keating’s business involvement with Cindy McCain was an obvious conflict of interest.
The present financial crisis is, as that wise philosopher Yogi Berra once said, “Like deja vu all over again.”
Ralph E. Stone is a retired Bay Area attorney.