Bill Black: While Wall Street executives responsible for the subprime mortgage crisis were never indicted, Charles Keating was criminally prosecuted for the 1980s Savings and Loan scandal
KAYLA RIVARA, TRNN PRODUCER: Welcome to The Real News Network. I’m Kayla Rivara in Baltimore. And welcome to this latest edition of the Black finance and fraud report.
Now joining us is Bill Black. Bill Black is an associate professor of economics and law at the University of Missouri-Kansas City. He’s a white-collar criminologist and a former financial regulator. He is also author of The Best Way to Rob a Bank Is to Own One. And he is a regular contributor to The Real News.
Thank you for joining us, Bill.
So, as you know, Charles Keating, who was a key figure in the 1980s savings and loan crisis, has died at the age of 90. Bill, can you tell us exactly who Charles Keating was? And what can we learn from him?
BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Sure, but let me make clear first that I’m someone that was personally involved, so, you know, you can consider any potential sources of bias. He sued me for $400 million in my individual capacity as a regulator. And he hired private investigators at least twice that we know of to look for dirt on me, and tried very hard to get me fired in allegiance with then speaker of the house James Wright, and, finally, penned or typed the infamous message highest priority: get Black, kill him dead
So, with those potential forms of bias up front: Charles Keating was a champion swimmer. He was a lawyer who went into business first as a housing developer, and then as the owner of the savings and loan known as Lincoln Savings, which he acquired not with any of his own money, but entirely with money funded by Michael Milkin, the “Junk Bond King” at Drexel Burnham Lambert.
Keating became the most notorious leader of an accounting control fraud during the savings and loan debacle, and Lincoln Savings became the most expensive failure of any financial institution in U.S. history until the current crisis. It cost $3.4 billion, which is an appreciable share of the total $150 billion cost of the savings and loan debacle. And he was able to produce $3.4 billion in losses from a relatively small financial institution that only claimed about $6 billion in total assets.
But Keating was most notorious for his enlistment of political aid to provide cover for all of these frauds. He’s best known, of course, for recruiting the five Senators who became known as the Keating Five that intervened with us. And indeed it is exactly 27 years ago as we speak–in fact it’s pretty much exactly when the meeting began with four of those U.S. senators. Riegle, Senator Riegle, was not present at the first meeting, but Senator McCain, Senator Glenn, Senator Cranston, and Senator DeConcini were. And then, a week later, April 9, 1987, was the second meeting with us, with the field regulators from San Francisco. Both of these meetings were designed to intimidate the regulators into not bringing an enforcement action against the largest and most destructive violation of our rules in the agency’s history. And Alan Greenspan, of all people, was used by Charles Keating as a lobbyist to recruit these five senators who became known as the Keating Five.
But Keating’s political power went well beyond the Keating Five. In addition I’ve noted that he enlisted the aid of the speaker of the house, James Wright, and he was an enormously powerful and nasty speaker. He (again, in disclosure) referred to me as the red-headed SOB, which my mother didn’t much like, and said that I was shooting poison arrows at him because I opposed his policies against the Contras, you know, versus the Sandinistas in the Nicaraguan civil war, which was another flight of fancy.
But Keating also got a majority of the members of the House of Representatives–and that included the leadership of both the Republicans and the Democrats, including a future Republican speaker of the house, who would then later resign in disgrace. And the majority of the House of Representatives cosponsored a resolution calling on us not to go forward with reregulating the industry, which we were doing under the Reagan administration. So, of course, that was anathema to the Reagan administration, but it was also anathema to both parties. And if we had given in to that coercion, the savings and loan debacle would have cost trillions of dollars.
And then the most astonishing aspect of Keating’s political power is that he had so much juice through his political contributions–he was a major contributor to each of the five senators and to Reagan and to the first President Bush–he had so much juice with the administration that he was able to get the administration to prepare to name two members of the federal agency that regulated savings and loan. Well, the federal agency only had three members, so that would have given Keating control of the agency that was supposed to regulate savings and loans, and that would have caused just catastrophic losses well into the trillions of dollars and would have been probably the worst political scandal in U.S. history. And that was blocked in part by random events, but in part because I blew the whistle on one of those moles for Charles Keating.
So Keating was no genius, but he was someone of enormous audacity who understood that what is a trivial amount of money, chump change from the perspective of somebody running a bank, is a huge political contribution from the standpoint of a member of the Senate or the House, and that the highest return on assets is always a political contribution. So Keating actually ran a very effective war against the regulators that stalled the takeover of Lincoln Savings for years, and that’s how it produced such massive losses.
RIVARA: Bill, can you briefly compare the legal consequences of those involved in the savings and loan scandal, as you mentioned, versus the executives who were responsible for the subprime mortgage crisis more recently?
BLACK: Yeah, sure. First, it isn’t a subprime crisis. It is largely a liar’s loan and appraisal fraud crisis. So what people forget is that by 2006, half of all the loans called subprime were also liar’s loans.
In any case, Charles Keating was the trailblazer for not only the current frauds but the frauds we saw in the Enron era, and in many cases the fraud mechanisms are exactly the same as he used.
In any event, the causes of why you get these fraud epidemics, which are the three Ds–deregulation, desupervision, and de facto decriminalization–and modern executive and professional compensation, these are the same in each of these crises. So if we had learned the right lessons in the savings and loan debacle, we would not suffer these crises.
In direct answer to your question, you’re asking about the de facto decriminalization that has occurred. In the savings and loan debacle, even the most elite, most powerful savings and loan executives, like Charles Keating, like the former governor of Illinois, who had become savings and loan executives, these people were prosecuted by us to the full limits of the law and ended up not only convicted, but serving substantial prison sentences. And to do that, our agency, the regulator, made over 30,000 criminal referrals to produce over 1,000 convictions just in cases designated as major–and I’ve talked about the fact that we hyper-prioritized to go after the worst frauds.
In the current crisis, exactly the opposite has been done. The banking regulatory agencies, who are the only ones who are going to do criminal referrals against CEOs–d’uh! Banks don’t make criminal referrals against their own CEOs, for obvious reason. Well, the banking regulatory agencies ceased making criminal referrals over a decade ago, and as far as we can tell, the Obama administration hasn’t even reinstituted that.
And the result of all that is complete impunity. The CEOs that led these three most destructive financial fraud epidemics in world history that caused this financial crisis and hyper-inflated the bubble and caused the great recession, not a single one of those elites has been even prosecuted, much less successfully prosecuted.
And it’s clear at this point that there will be a complete strategic failure. They may eventually trot out some executive, you know, before the ten-year statute of limitations run, but strategically it is a complete failure, because they have failed to learn all of the lessons–they being the political class–that Keating should have taught us.
Unfortunately, the CEOs of modern banks learned very well the lessons that Charles Keating taught them, and, as I said, used him and simply emulated many of his strategies quite successfully.
RIVARA: Bill Black, thank you so much for joining us.
BLACK: Thank you.
RIVARA: And thank you for joining us on The Real News Network.
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