Will Charlie Keating ride again? Congress is once again looking at banking deregulation. Will it ignore the lessons of the past?

• Author: Davis, L.J.
• Position: Charles H. Keating Jr. and the Lincoln Savings and Loan scandals of the 1980s

What has once happened, will invariably happen again, when the same circumstances which combined to produce it, shall again combine in the same way"

ABRAHAM LINCOLN

"Greed is healthy"

IVAN BOESKY

Last October, as the O.J. Simpson saga roared into its 2000th irritating hour and the Whitewater hearings cost taxpayers yet another ten-grand, an equally significant event quietly took place in the American justice system: Charles H. Keating Jr. was released from jail.

You remember Charlie, the poster boy of the savings and loan catastrophe of the 1980s. Well, despite his role in the regrettable disappearance of $2.5 billion in taxpayer-insured funds, Keating was released on October 3, following a court ruling that jurors at his 1993 federal trial had been inappropriately influenced by their knowledge of Keating's conviction in California state court. Keating's state convictions had been overturned in April, because his trial judge, the now notorious Lance Ito, had given improper instructions to the jury. Then on December 2, the remainder of his criminal convictions were thrown out by a federal district court in Los Angeles. The U.S. attorney's office is still deciding whether to retry the case.

But why revisit the Keating story now? Seven years have passed since his Lincoln Savings and Loan became the symbol of an industry gone mad. Whole reams of newsprint described his doings and his sins, and his face appeared so often on the nightly news that it was imprinted on the collective consciousness of the nation. The case is closed, the story is over, and Charlie Keating is ancient history.

Well, not quite.

By a curious paradox commonplace in financial crimes, only a fraction of Keating's antics--not including his intimate connection with Michael Milken, another emblematic felon of the Decade of Greed--made it into the spotlight. Reporters concentrated on his lavish lifestyle, the fact that he tried to buy the Phoenix City Council, and that he was able to get one of his associates appointed to the Home Loan Bank Board, the federal agency that monitored his activities and had the power to stop him cold. (This was likened, correctly, to John Gotti getting one of his sidekicks appointed deputy director of the FBI.) It was also noted that he knowingly sold millions of dollars worth of valueless securities to thousands of people; erected a pyramid to himself in the Arizona desert in the form of a ridiculously extravagant hotel; and somehow managed to mislay $2.5 billion of the taxpayers' money. But much of what he did was never reported.

There are a number of reasons for this. Most reporters have to make sense of something by six o'clock in the evening, and major financial crimes such as Keating's involve the sort of mind-numbingly tedious, specialized analysis that most reporters, their other virtues aside, are not trained to do. In addition, complex financial crimes take days and weeks to explain in court, using language heavily freighted with obscure terms. Even then, there is no guarantee that a judge and jury will understand; therefore, prosecutors usually base their cases on the simplest and most comprehensible of the criminal's misdeeds--in Keating's case, robbing widows and orphans. As a result, the greater crimes are almost never revealed, and their larger meaning remains unknown. True to form, Keating and Milken's greater misdeeds never saw the light of day. So why revisit them now, aside from the fun in revealing an old but untold story--and, of course, the entertainment value of Charlie Keating?

The answer is both simple and urgent: deregulation. While Congress's drive to free industry from the clutches of big government may not be quite as maniacal as before last November's elections, the urge is still deeply rooted in the soul of the GOP--which, if you'll recall, remains firmly in control of both houses. And with the banking industry at the forefront of those clamoring to be freed from their regulatory shackles, the nightmare of the S&L years could easily happen all over again. As a result, now may indeed be the perfect time to explore the full magnificence of Keating's big adventure--keeping in mind, of course, that the next financial disaster, if it comes, will be infinitely greater.

Free Rein

In 1982, flying in the face of everything known about banks, bankers, and human nature when they are placed in the vicinity of a huge sum of money, Congress passed the Garn-St. Germain Act. This deregulated the nation's thrift industry and threw wide the doors of the S&Ls to anyone with a plausible story, a fistful of cash, and a visible desire to start doing all sorts of wonderful and imaginative things with the taxpayer-insured deposits.

The passage of Garn-St. Germain found Keating at loose ends. The home-building business he then headed was not in terrific shape, and although President Reagan had tried to appoint him ambassador to the Bahamas--which would probably have saved everybody a tremendous amount of trouble--the appointment fell through when members of the Senate discovered that in 1979, the Securities and Exchange Commission had filed a complaint against Keating and his then-mentor, Ohio billionaire and big-time political donor Carl Lindner, for allegedly violating anti-fraud, disclosure, and proxy provisions. (Lindner eventually settled with the SEC for $1.4 million.) But Garn-St. Germain, Keating was quick to realize, changed everything. True, he didn't have enough money to buy an S&L suitable to his purposes, but he knew Michael Milken. In turn, Milken and his brokerage firm, Drexel Burnham Lambert, were looking for funds to create their dreamed-of junk bond network. It was a meeting of minds.

The trick, Keating came to realize under the guidance of Milken, was not to find just any old S&L, but a particular kind of S&L. Garn-St. Germain had dramatically increased the powers of the thrifts and dramatically reduced the powers of the federal watchdogs, but...