Charles Keating had already put on a full-court press to prevent the Bank Board from adopting the rules on capital, growth, and direct investment. We were impressed by his expensive lawyers and economists. We were utterly amazed, however, by his political power. Within a few weeks, Keating was able to get a majority of House members to cosponsor a resolution designed to kill the rule. We had never seen such raw political power. Gray went forward with the rule even though the administration, the House, and the industry opposed it.
We discovered later that one of Keating’s effective lobbying tactics was to have the state commissioners complain to their congressional delegations about any Bank
Board rule that reduced state-granted investment powers. Keating made allies of the state commissioners by offering to sue to have the direct-investment rule declared invalid and by providing small gifts to what was then called the National Association of State Savings and Loan Commissioners (NASSLS). NASSLS was a very poor organization, so Keating’s money allowed its members to stay in places that were not dumps and to have a hospitality suite with alcohol. They were very appreciative.
Keating continued to wine and dine the commissioners despite the failure in late 1984 of the House resolution to stop reregulation. His efforts were so successful that NASSLS was on the verge of voting in 1987, with only one dissent (Bill Crawford, Taggart’s successor), to file a “friend of the court” brief supporting Keating’s lawsuit against the direct-investment rule. Fortunately, just before NASSLS authorized filing the brief, Keating told the press, “There’s no regulator alive who knows what he’s doing” (Kammer 1987). Crawford told his counterparts about Keating’s statements, which killed the brief.
Keating was new to the S&L industry, but he already had a bad track record. An SEC investigation found that he and his mentor, Carl Lindner, had engaged in fraud and insider abuse at Provident Bank. Keating and Lindner signed consent decrees in which they admitted no guilt, but also promised not to do it again (U.S. House
Banking Committee 1989, 4:289). The taint led the Reagan administration not to go forward with its plan to make Keating (a major Republican contributor) U.S.
ambassador to the Bahamas (U.S. Senate Committee 1990–1991a, 4:101). It obviously should have led to at least the presumption that Keating was unfit to run an S&L, but the agency’s “change of control” tests were a farce in 1984.1
The second reason to fear Keating’s entry into the industry was that he was paying
a premium price to the existing shareholders to acquire an S&L that was insolvent by
$100 million on a market-value basis. He knew that it was market-value insolvent because of the mark-to-market. A great deal of Lincoln Savings’ reported income in the first two years arose from selling the mortgages he acquired from Lincoln Savings at a loss but accounting for them as a gain.
Nobody asked the question a white-collar criminologist would have asked: Why would any honest buyer agree to pay a substantial amount of money (over $50
million) to the shareholders of an S&L that was insolvent on a market-value basis by over $100 million, when the acquirer was not an S&L and would experience no
possible (honest) synergies by acquiring Lincoln Savings’ branch structure?
Overpaying makes no sense for an honest buyer. It makes sense for control frauds because they manufacture fictitious profits, and the key determinant of their profits is how quickly they get control of the S&L and cause it to grow massively.
Norm Raiden, before becoming Gray’s general counsel, represented Lincoln
Savings in its sale to Keating. He was amazed when Keating wanted the complex deal done so quickly that he was willing to accept contract terms that Norm drafted to be totally one-sided in favor of the seller. Norm anticipated that this would lead to negotiations and compromise language, but Keating simply signed.
In 1993, when I served as the NCFIRRE’s deputy staff director, one of the
members of the commission told me that Keating called him immediately after buying Lincoln Savings to offer him the job of CEO. Keating told him having a California charter was “a license to steal” and guaranteed his salary would exceed $1 million. He declined Keating’s offer.
The third reason to fear Keating was that not a penny of his purchase of Lincoln Savings came from his pocket. Michael Milken and the junk bond operations he
controlled at Drexel Burnham Lambert provided all the cash for the deal. Milken had a standard operating procedure in such cases. Drexel greatly overfunded the buyer.
Keating needed $51 million to purchase Lincoln Savings, but Drexel issued over $125 million in junk bonds out of American Continental Corp. (ACC), the holding
company that Keating used to acquire Lincoln Savings. ACC was a failing real estate development company even before it had this crushing debt dumped on it (Binstein and Bowden 1993, 164; U.S. House Banking Committee 1989, 2:370; Black 1985).
Milken wanted companies like ACC to be in desperate circumstances; that maximized his leverage over Keating.2
The fourth warning that Keating would be trouble was that he was a major contributor to the Republican Party and was “known for buying politicians.”3
The agency was eventually mesmerized by Keating’s political power, but we did not have the luxury of concentrating on him. He was one of hundreds of high fliers.
The agency felt overwhelmed by what had become a deluge of increasingly shrill warnings from the field that things were wholly out of control, particularly in Texas.
PREPARE TO REPEL BOARDERS—KEATING’S PLAN TO TAKE OVER THE BANK BOARD
In the case of Charles Keating, we have the unusual advantage of having found a
planning document. (The full document is reproduced as Appendix A.) It is an August 28, 1985, letter from Michael R. (“Mickey”) Gardner to Charles Keating. The context of the letter is important. Gardner was a lawyer in the Washington, D.C., office of Akin, Gump, Strauss, Hauer & Feld. Akin, Gump (as the firm is called) began in Texas and is one of the premiere lobbying firms in the United States. The firm was predominately Democratic, but Mickey was a senior Republican lobbyist. Robert (Bob) Strauss was the most famous partner, the grand old man of the Democratic Party and its former national chairman. Gardner’s expertise was communications law (which largely means knowing your way around the Federal Communications
Commission, the FCC).
One of the great advantages that white-collar criminals have over blue-collar criminals is the ability to use top lawyers, not only at trial but also before criminal investigations even begin. Control frauds maximize this advantage by paying for the lawyers who help the controlling insider loot the firm. Then, as evidence of their legitimacy, control frauds trumpet that they sought legal counsel and that the counsel advised them that their activities were lawful.
One of Keating’s first big plays after acquiring Lincoln Savings was to “greenmail”
Gulf Broadcasting.4
Gardner had at least one, and reportedly two, roles in all this. He contended that Lincoln Savings put him on retainer to run Gulf Broadcasting if Lincoln Savings were to buy a controlling interest in it. Lincoln Savings paid $900,000 to Gardner in
connection with Gulf Broadcasting. Lincoln Savings did not pay this fee to Akin, Gump, but to Gardner directly at his home address. Since the fee was so substantial and since members of a firm are required to send all fees for legal services to the firm for distribution, Akin, Gump induced Gardner to resign from the firm when the
government discovered the payments years later.
Gardner’s claim that this large fee was a retainer to secure his services as CEO is improbable. He had no expertise as a CEO. He did not have to give up any
opportunity to make money to be available to act as CEO should Keating gain control
of Gulf Broadcasting. The other potential role Gardner had was as a source of inside information, since Akin, Gump represented Gulf Broadcasting. Such inside
information would be worth millions to a greenmailer.
By August 1985, Keating knew that he had to neutralize Gray or risk having
Lincoln Savings taken over by the Bank Board. Gray had just pushed through the first three of what would become the four pillars of reregulation. Gray restricted direct investments, limited growth, and increased real capital requirements. Gray was
pushing the fourth pillar, the power to “classify” assets. Gray was also implementing his two great efforts to improve supervision. He was transferring the examination function to the FHLBs, which were not subject to OMB and Office of Personnel Management (OPM) limits on staff and pay, and recruiting tougher supervisors for key positions.
GARDNER’S PROPOSED PLAN
Gardner was one of several outside professionals whom Keating used to help plan his war against Gray and the Bank Board. Other professionals were usually clever enough to give their advice orally, but Gardner was more brazen. His August 28, 1985, letter to Keating begins by recounting the original strategy that Gardner and Keating
developed: have the Reagan administration “dismiss” Gray and replace Hovde with someone selected by Keating. Gardner checked with his “good friends in the
Administration” about whether it was doable. He reports: “Regrettably, the consensus is a bit gloomier … than our earlier prognosis.” Gardner was frustrated that “the
President’s illness” means he is concentrating on only a few major priorities, namely,
“the budget and tax bills, and the Gorbach[e]v meeting” rather than “our goal of getting some near-term relief for Lincoln.”5
Gardner is a highly partisan Republican writing to another highly partisan
Republican, so his negative views about President Reagan are revealing. His greatest frustration is that Gray is a longtime associate of the president. Gray “is
unquestionably a disaster but still ‘a nice guy’ to the Reagan inner circle.” The
administration cares far more for its cronies than it cares whether they are causing a
“disaster.” Gardner writes that Gray, “like so many before him in this Administration, would have to be criminally liable or worse before they [sic] would be removed.” The irony is exquisite. Gardner is complaining to Keating that the principal weakness in their plan to pervert public policy is that the Reagan administration is too tolerant of sleaze and incompetence.
Because they cannot convince Reagan to dismiss Gray, Gardner suggests a revised, two-track strategy. One track is “to make life unbearable for Gray.” The goal is to
push Gray to resign. The second track is to destroy the effectiveness of the Bank
Board until Gray can be removed. Gardner advises that essential action for both tracks will be to induce the Reagan administration to appoint “your new [Bank] Board
Member.” Note the possessive: “your” Bank Board member. Gardner explains the advantages that Keating will derive from having his own Bank Board member.
It would … serve notice on Gray and his staff … that he is out of favor with the White House. This is key since most Reagan- appointed Chairmen of regulatory commissions enjoy great influence over the selection of their fellow commissioners. By robbing Gray of this important perogative [sic], you could hurt him both psychologically and practically, thereby making his early resignation more likely.
Gardner was correct. Note that he understands that the effect will be felt not just by Gray but also by his staff.
Gardner’s next point showed how well he understood agency dynamics.
Chairmen who lose their influence over Board appointments often find that the loyalties of their own staffs become shallow at best.
This could temper the action of key FHLBB staff, both in Washington and in … San Francisco.
There are two reasons for this loss of staff loyalty. The chairman is “damaged goods”: he is on the wrong side of the White House because he is following policies they oppose. The chairman may not be able to help loyal staff advance to high-level positions that require White House approval. The new appointee represents the true views of the White House. The staff, seeing which way the wind is blowing, will not want to antagonize the appointee, who may soon be chairman.
Gardner suggested that Keating direct his new appointee to take an active role on Keating’s behalf.
Once confirmed, the Hovde replacement immediately could start to issue strong dissents that could provide your litigators with some good material for appeals to the Federal Courts.
As a litigator who has both defended and brought lawsuits asking the courts to strike down agency regulations, I can confirm that it would be of immense value to control a presidential appointee who would “issue strong dissents” calculated to aid one’s legal case.
Gardner then turned to another key player: the third Bank Board member, Mary Grigsby, a Texan. If Keating’s Bank Board member could get her to vote with him, Keating would have effective control of the board.
With an enlightened Hovde replacement on the horizon, the now-cowed female Member of the Board may take a more independent approach, including occasionally dissenting from the Chairman. The obvious displeasure of Texans, including the Vice President, with the Gray Chairmanship could further enhance this Member’s independence from Gray if she sensed she wasn’t alone.
Other than the sexism, Gardner was again perceptive. George Bush was a major proponent of S&L deregulation, so Gray’s reregulation was anathema to him, and
Bush shared the “obvious displeasure” so many Texans had for Gray.
Gardner also understood the importance of other actors, including Congress.
Congressional leaders would have a greatly improved opportunity to show in public hearings the folly of the Gray approach since all three Board Members would be testifying with the replacement presenting an opposing viewpoint to Gray’s. Nothing could better educate Members of Congress and the Administration as to the FHLBB problems and opportunities than an enlightened Board Member who could publicly disagree with Gray.
I testified frequently on behalf of the Bank Board before Congress, and I agree that had Gardner’s plan been implemented successfully our congressional appearances would have been a disaster. Keating’s board member would have attacked our positions and our motives, claiming that we were biased and were suppressing information adverse to our arguments. He would have stressed, accurately, that we were acting contrary to the policies and beliefs of the administration. A public civil war among board members at a congressional hearing would have guaranteed wide, intense media coverage by the major networks and C-SPAN. The chairman always loses in these circumstances: it looks like he is incapable of exercising effective leadership.
Gardner then turned to the other major actor that would be decisive against us, the media.
[T]he PR value of the Hovde replacement would be unlimited…. [Y]our new Board Member could articulate an intelligent approach, and do so with the mantel [sic] of authority that goes along with membership … on the FHLBB.
The press would have had a field day with publicly feuding Bank Board members.
Keating’s member would have had instant credibility because of his position. Again, the chairman has to lose in such a war.
Gardner stressed the need “to pursue a number of actions in tandem” in order to
“successfully replace Hovde and to simultaneously make life unbearable for Gray.”
The actions were mutually reinforcing, designed to force Gray out and to make it impossible for the Bank Board to act against Lincoln Savings in the interim.
Appointing Keating’s board member would serve both purposes. The difficulty was that President Reagan was focused on only a few critical items, and Keating’s desires were “barely a bleep [sic] on the far right-hand corner of the White House’s radar screen.” Gardner had a plan to make Keating’s desires a White House priority.
Part of his plan was conventional: intense lobbying of “important members of the Executive branch.” Part of the plan reveals Gardner’s view of George Benston.
Surrogates like Professor Benston should be used to call on key members and staff, and to testify in open Congressional hearings about the counter-productive, re-regulatory approach the Gray Board is pursuing. If we don’t provide articulate surrogates for Lincoln, the robust point of view that you need to have expressed simply won’t occur.
Gardner also suggested that “Gershon Kekst and Company [Keating’s PR firm]
mount a major public relations program in responsible print media” against Gray. The idea was to plant stories in the media that could then be “offered as ‘objective’
information pieces for officials of the Executive Branch, Congressional members and even important Kitchen Cabinet members.”
Gardner proposed that Keating use his congressional allies to pressure the administration to appoint Keating’s choice as Hovde’s replacement.
Congressional pressure also should be kept on Don Regan [the president’s chief of staff] and Bob Tuttle [the president’s director of personnel] to insure that the White House feels the real anxiety of key members of the Senate and House about the Hovde
replacement. This pressure should start immediately after the Labor Day Recess and continue throughout September and October when the White House will probably be very much in need of Congressional votes on the budget and tax bills. Achieving significant changes in the make-up of the FHLBB by the Christmas recess must become the quid pro quo for some key Members whose votes on these crucial bills will be vital to the White House. (emphasis in original)
Gardner’s plan is to extort the president by holding his top priorities (the tax and budget bills) hostage. Keating must convince key members of the Senate and House to tell the president that they will kill the budget bill or the tax bill unless he appoints Keating’s choice to the Bank Board. Think about that. A senator is supposed to tell President Reagan that he will kill the tax bill, legislation of critical national
importance, unless Keating’s demand that he select his own regulator is granted.
Gardner understands that it would be difficult for a senator to make this threat credible, which is why he emphasizes the word “real.”
This portion of the letter reveals a great deal about Gardner and Keating and about their views of Gray, Congress, and the Reagan administration. First, Gardner knew that Keating believed he could get senators to condition key votes on whether the administration appointed Keating’s choice to the Bank Board. Gardner had already received enormous sums from Keating and plainly wanted to stay in his employ. He would not have recommended a strategy that Keating would view as absurd. This demonstrates that Gardner and Keating believed that they had enormous influence over the senators. Second, Gardner thought it was realistic that the White House would give in to such extortion (particularly if the publicity campaign to tarnish Gray’s reputation were successful). Third, it is clear that neutralizing and then
removing Gray was Keating’s sole priority. Think of the political capital that Keating was willing to expend in this effort. Keating had senators who would kill critical national legislation on his behalf, and he was prepared to use up all those chits to get rid of Gray faster. These two partisan Republicans, purported Reaganites, were willing to prevent implementation of Reagan’s top priorities if they felt it would help Keating remain in charge of Lincoln Savings.
Gardner’s plan to ruin Gray’s reputation was cleverly designed to intimidate the