- 5 months ago
A look at the savings and loan crisis and the role of politics in the failure of Lincoln Savings and Loan Association.
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00:00Frontline is made possible by the financial support of viewers like you, and by the Corporation for Public Broadcasting.
00:11Tonight, after the colossal failure of Lincoln Savings and Loan, an inside look at Charles Keating's financial empire.
00:17It's our money, and our hopes, and our dreams.
00:22Frontline investigates Keating's extraordinary political connections, and the role five U.S. senators played in the $2.5 billion scandal.
00:28There were lots of constituents that needed protecting.
00:32The one constituent who put up more than a million bucks in contributions to the five senators is the only one that got the protection.
00:41Tonight on Frontline, other people's money.
00:52From the network of public television stations, a presentation of KCTS Seattle.
00:57W-N-E-T New York, W-P-B-T Miami, W-T-V-S Detroit, and W-G-B-H Boston.
01:06This is Frontline, with Judy Woodruff.
01:10Good evening.
01:15Listen carefully to this number.
01:17Five hundred billion dollars.
01:20That's the latest estimate of what the failure of hundreds of federally insured savings and loans will eventually cost American taxpayers.
01:28The losses are unprecedented.
01:31The savings and loans scandal is now the worst financial disaster in American history.
01:36One official says it is the largest bailout in the history of the world.
01:42Tonight, Frontline investigates the case that has come to symbolize this disaster, the biggest failure of all, Charles Keating's Lincoln Savings and Loan.
01:52Tonight's program was reported by Marion Golden and Joe Rosenblum.
01:57It was produced and narrated by Marion Golden.
02:00It is called Other People's Money.
02:06I give you this morning, Mr. Charles H. Keating, Jr., Chairman of the Board of American Continental Corporation.
02:12April 17, 1989.
02:16Charles Keating summons the press, his family, and his employees to protest the government's takeover of Lincoln's savings and loan.
02:26And it is our thrift, and it has been our thrift, and we paid for it.
02:32It was our money, and our hopes, and our dreams.
02:36Five years earlier, Keating and his American Continental Corporation paid $51 million for the old-line Lincoln Savings and Loan of Irvine, California.
02:49It was the heyday of deregulation.
02:52All in all, I think we hit the jackpot.
02:56October 15, 1982.
03:00The White House Rose Garden.
03:02President Ronald Reagan fulfills a favorite campaign promise to get government off the backs of business by signing the Garn St. Germain Act.
03:11The bill gave savings and loans, license to expand beyond their traditional role of making home loans, and allowed them to use federally insured deposits to buy and develop all kinds of properties.
03:26One thing the new law did not change, federal deposit insurance.
03:31Deregulation was seen as a panacea in Washington.
03:34The very next year, Edwin Gray became chairman of the Federal Home Loan Bank Board.
03:41That was the agency charged with oversight of the savings and loan industry in the new era of deregulation.
03:47We are going to allow you to do a lot of new things, and you can use as your operating funds money that you get from depositors.
03:59The airlines don't have that source of operating funds.
04:03Truckers don't have that source of operating funds.
04:05Nobody does.
04:07Only the thrifts.
04:08Deregulation was an invitation for developers and entrepreneurs, like Charles Keating, Jr., to enter the staid world of savings and loans.
04:19Keating, a conservative Republican and devout Catholic, first drew attention as an uncompromising opponent of abortion and pornography.
04:30Twenty years ago, Richard Nixon appointed him to the President's Commission on Obscenity and Pornography.
04:37For example, Teresa and Isabel, I happened to see that film on 42nd Street in a dive of a theater in New York.
04:44It's a lesbian theme, and it's very explicit, very degenerate in all detail, and I'd say there should have been arrests made in that case.
04:56On the political front, Keating forged an alliance with former Texas Governor John Connolly
05:02and briefly managed Connolly's 1980 campaign for the presidency.
05:09In his native Ohio, Keating was a business executive and a banker.
05:14In 1979, the Securities and Exchange Commission charged him with fraud in making millions of dollars of insider loans.
05:24He neither admitted nor denied the allegations, but promised not to do it in the future.
05:29In 1981, President Reagan tapped Charles Keating to be the United States ambassador to the Bahamas.
05:38Publicity about the SEC action forced the Reagan White House to scuttle the nomination.
05:44But his SEC history did not stop Keating from buying Lincoln.
05:49Did you know about Charles Keating's history with the SEC?
05:53I'd never heard of Charles Keating. Didn't hear of Charles Keating until sometime later.
05:59There are a lot of Lincoln savings in America. That meant nothing to me.
06:04So Lincoln savings, with assets of almost $1 billion, became the centerpiece of Keating's American Continental Corporation.
06:13Charles Keating had moved to Arizona and turned American Continental into one of the largest builders in the nation.
06:22With Lincoln's federally insured deposits and a green light from deregulation,
06:28Charles Keating began buying and developing more land and making loans around the country.
06:34One of the first loans Lincoln and Keating made was to a company owned in part by his old friend John Connolly
06:43to buy these thousands of acres near Austin, Texas.
06:47The loan came to more than $50 million.
06:52Charles Keating also used Lincoln's money for some projects of his own.
06:56He called these 20,000 acres in the Arizona desert Estrella and said it was the best thing we ever did.
07:05He envisioned a planned community for $200,000 and would put almost $200 million federally insured dollars into its development.
07:18But Keating's monument was to be the Phoenician Hotel near Scottsdale, Arizona.
07:24Five and a half years ago, we saw this beautiful site and thought it would be nice to have a resort here.
07:31We rise from a world of distinction.
07:35Welcome to the Phoenician.
07:38The Phoenician is destined to be a world-renowned resort.
07:42The 130-acre luxury resort was just a Keating dream
07:47until $300 million federally insured dollars made it a reality.
07:52Construction began early in 1986.
07:57The amenities of tomorrow, present at the Phoenician today.
08:02They were off in luxury hotels, raw land, that means undeveloped land, junk bonds, you name it.
08:09They tried it.
08:10Almost everything except the one thing that savings and loans are supposed to do, which is home loans.
08:16William Black was the general counsel in the San Francisco regional office of the Bank Board.
08:23He and Director Michael Patriarca and their staff were responsible for the oversight of Lincoln.
08:31In 1986, San Francisco began to worry about how Lincoln and Keating were spending other people's money.
08:40We have an institution here who had the combination of very risky lines of business
08:46and vastly imprudent ways of proceeding in them.
08:51The worst of all possible combinations.
08:55There was no expense ever spared for any task that I could see.
09:01Money was no object.
09:03Oh, money was never an object.
09:04Patricia Johnson was Keating's Director of Public Relations until a year ago.
09:10She is the highest-ranking insider to talk openly.
09:13She began by describing how many Keatings were on the company payrolls.
09:19He has five daughters.
09:21All their husbands worked at American Continental except Dr. Gary Hall.
09:26And he was a member of the Board of Directors.
09:29All the daughters worked there, but one.
09:32Charlie Keating III worked there.
09:35Mr. Keating's son, as an example, didn't have much relevant experience.
09:40His prior experience had been as a bus boy and as a waiter.
09:43He was a renowned swimmer but hadn't graduated from college.
09:48Total annual compensation of about $1.1 million.
09:52Michael Patriarca is referring to this list of annual compensation for some Lincoln and ACC executives.
10:03Charles Keating, $1.7 million.
10:07Son-in-law Robert Wurzelbacher, $1.3 million.
10:12Son-in-law Robert Hubbard, $520,000.
10:16From 1985 to 1988, federal examiners estimate the Keating family took out $34 million in salaries, bonuses, and stock sales.
10:32In fact, it was a mom-and-pop operation.
10:36A $6.4 billion mom-and-pop operation.
10:40Absolutely, absolutely.
10:42There was the Keating touch in every aspect of American Continental Corporation.
10:47The Keating generosity also extended to non-family members.
10:53This is a man who went to Ireland and found a man singing in a castle, in a pub,
10:59and brought that man home to the United States and made him vice president of American Continental Corporation.
11:05His name, Terry Wilson.
11:08His salary, $181,000.
11:13ACC president Judy Wisher got over a million dollars a year.
11:18Senior vice president Robert Keelty, a million four.
11:22Did anyone ever refer to the fact that these high salaries were made possible
11:28by the existence of a federally insured savings and loan?
11:32No, my assumption was that the company was doing quite well
11:38and that the salaries that were being paid reflected a very successful, very thriving company.
11:45Were the Lincoln ACC salaries in line with the industry?
11:50It's hard to say what industry they'd be in line with.
11:54I can't think of any at the moment.
11:58Keating's interior designer at the Phoenician was Roland Jutras.
12:02He had first-hand knowledge of the lifestyle financed by the salaries and the companies.
12:08They had a private hangar where they kept the two helicopters and the three jets.
12:14Welcome aboard American Continental's Bach 111.
12:17It's a magnificent airplane.
12:20The interior is a teak.
12:21And when I was first on the plane, I thought the interior was superb, very understated,
12:26not the slick kind of chrome approach that you see in most large corporate jets.
12:33Please make yourself at home.
12:34The Keatings certainly flew frequently over to Europe.
12:37They took two planes.
12:39There were so many of them.
12:40They flew into the remote Bahamian island of Cat Key,
12:46site of one of three Keating mansions.
12:50A second Keating estate is located on private Indian Creek Island in Florida.
12:57This house was bought by the American Continental Corporation,
13:00remodeled at company expense,
13:03and sold last summer for $4 million.
13:07Home base is a compound in Paradise Valley,
13:11one of Phoenix's poshest suburbs.
13:13It's just minutes from the Phoenician Hotel,
13:16where Mrs. Charles Keating had become the interior design coordinator.
13:22Oh, I really like that one.
13:24Mary Elaine Keating, in fact, decorated the entire Phoenician resort.
13:29And went all over the world to seek items of an exquisite nature
13:35to make it the finest hotel in the world,
13:37which was Charlie Keating's goal.
13:39I jokingly called it the world's largest shopping spree
13:42and was immediately reprimanded because of the impression that gave.
13:47But, in fact, you know, it was.
13:50Contractor Gerald Murphy built the hotel.
13:53What can you tell us about the 23-carat gold ceilings?
13:57They just painted all over the hotel.
13:59There was applied gold leaf in the restaurant ceilings,
14:02the ballroom ceiling.
14:03It was very expensive because they were up on scaffolds.
14:06Sometimes they were lying on their back,
14:08just like Michelangelo did the Sistine Chapel.
14:12Keating insisted his aides make several trips to Europe
14:16to select the very best Italian marble they could find.
14:21Final cost of the marble, $12 to $14 million.
14:27And Charles Keating wasn't through yet.
14:31The thing that stands out the most at the Phoenician resort is the artwork.
14:35$25 million worth of art, original art, in one resort.
14:40Was it at Indian Creek that you and Mr. Keating talked about the financial feasibility of the hotel?
14:48We had an interesting dinner one night.
14:50My opening remark was that I think this is a very, very dangerous misadventure.
14:57It is impossible for the hotel to break even.
15:00Basically, what Charlie said is a roll and look.
15:03Look, I've been told from day one, everything I've accomplished in this world, that I couldn't do it.
15:08And I hear what you say and I agree.
15:11The logic is irrefutable.
15:15My decision is we will proceed full bore as planned and build this great hotel property.
15:22But by the summer of 1988, the hotel was over budget and behind schedule.
15:29In this tape obtained by Frontline, Keating himself was beginning to have misgivings.
15:36He is voicing his doubts to Phoenician construction workers.
15:40It will never be possible.
15:42This is the kind of a mausoleum idiots build, and then they can't make it work.
15:46I agree with that.
15:48It is the kind of mausoleum that idiots build.
15:51The only reason, you know, they go bankrupt, and they sell it to the next guy down the line.
15:56He goes bankrupt.
15:57The third guy finally gets to the price.
15:59He can make it work.
16:00I've got to make it work.
16:02The hotel is an economic disaster.
16:04It's probably the most expensive hotel that's ever been built in the free world.
16:11Charles Keating had expensive taste when it came to charities as well.
16:16He gave millions to his favorite causes.
16:19Every year, he hosted a ball to fight child pornography.
16:24He solicited his family, his executives, companies, and business associates.
16:30One year, I made a $10,000 contribution, and then I got a call back by one of his staff that said that that wasn't enough.
16:39And so I made the other $10,000 that year, which got to the $20,000 for that year.
16:44The ball was sponsored by Keating's anti-pornography organization, Citizens for Decency Through Law.
16:53From 1984 to 1987, this Keating network donated at least $2.5 million to his cause.
17:02But the federal government takes a different view of Keating's fundraising.
17:08In a $1.1 billion civil racketeering and fraud suit, it charges these Keating entities used Lincoln and depositors' money to fund the personal, political, and charitable convictions of Keating.
17:22Another recipient of this largesse was Mother Teresa.
17:28She got $1.4 million and use of a company plane.
17:34He carried in his pocket a crucifix that Mother Teresa had given him when they first met, and he carried it always.
17:42Documents reveal that money also came directly from Lincoln and American Continental.
17:48To maintain this lifestyle and his expanding business, Charles Keating needed to bring in more money for American Continental, Lincoln's parent.
18:03So ACC, not Lincoln, floated multimillion-dollar bond issues to raise funds.
18:10That reduced scrutiny from Lincoln's regulators.
18:13But they sold the bonds to Lincoln customers right in the lobbies of Lincoln branches.
18:21We would first get them hooked with the high interest rate.
18:25Brian Grossman was one of a legion of Lincoln employees who sold ACC bonds despite assurances that Lincoln Savings has absolutely no involvement with those sales efforts.
18:39We'd, you know, say, hello, Mr. Jones, you know, this is Brian Grossman.
18:43I'm calling you from Lincoln Savings.
18:45I'm calling to inform you that your CD is going to mature at the end of the month or whatever day it is.
18:49You know, you could just let it roll over for 7.1 percent, or you could roll your money over into one of our bonds.
18:55And that bond would pay 9.5 percent, say.
18:58And that would definitely get the customer interested.
19:00There were 23,000 customers who would buy $250 million of these bonds.
19:09ACC targeted the elderly, retirees like these residents of Leisure World in Laguna Hills.
19:16They were definitely interested in whether the ACC bonds were federally insured.
19:22She told me, American Continental is protected by $5.5 billion of Lincoln Savings.
19:31That was exactly those words, quote.
19:34We actually did have a script at one point.
19:37The one big speech that we had was, like I said, you're discurting the issue of insurance.
19:41Because that, of course, was the weakest point of the bond, and that was the first question that would come out.
19:46The people who instructed you in selling the bonds spoke specifically about skirting the question of insurance?
19:56Well, yeah, because you didn't want to just say no.
19:58They wanted to downplay that risk as much as possible, otherwise they wouldn't buy the bonds.
20:03The ACC prospectus does say the bonds were not federally insured.
20:08And did you get a copy of the prospectus at the time that you...
20:11Have you ever read the fine print in a prospectus when a charming salesman is talking his head off?
20:19In fact, as this confidential memo reveals, some bond salesmen were told not to hand out the prospectus.
20:28They were told to run a slideshow and to memorize the pitch until it flows from your mouth
20:36like carbon monoxide from the exhaust pipe of a Mack truck.
20:41We had sold our home in Sherman Oaks.
20:49My husband had had a stroke.
20:50We moved down here, went to Lincoln Savings down here because...
20:54Anita and George Sparrow believed they had made a sound investment until ACC declared bankruptcy
21:00and the bondholders found they were holding worthless paper.
21:05How much is your dementia?
21:06You really want to know?
21:08Yes.
21:09It was $30,000, and for us that was quite a bit.
21:12The Sparrows are not alone.
21:22How much money did you invest in this American continental bond?
21:26$90,000.
21:29Everything I had.
21:31Joan Leff was divorced nine years ago.
21:34Those $90,000 represent her entire settlement, the proceeds from the sale of their house.
21:42It's unbelievable to me what happened.
21:43I just can't even comprehend the loss.
21:47If I dwelled on it, I would might as well just roll over.
21:52At my age, I'm not going to replace the money I lost.
21:59Meet Victor Hernandez.
22:01He lost his life savings, earned in an auto body shop, and earmarked for a down payment on a house.
22:09Tell me again what the loss of this $30,000 means to you.
22:14It means a lot to me and my wife and my kids.
22:19Ten years of savings, you know.
22:22Ten years of, you know, go to work every day in the morning, you know.
22:28Sometimes work overtime, you know, to have another dollar.
22:33We don't have anything else, you know, in the world, you know.
22:38Capitalize on this, the bond salesmen were told.
22:41The weak, meek, and ignorant are always good targets.
22:47I bought one myself, so I was positive it was a great investment.
22:50What finally made Brian Grossman suspicious?
22:53When he didn't receive the Christmas bonus he'd been promised.
22:58We ended up getting bathrobes instead.
23:00They were from the Phoenician.
23:05Meanwhile, back in the Arizona desert,
23:08Keating and Lincoln were selling land in Australia.
23:12These sales appeared to generate huge profits on Lincoln's books.
23:17But the government's accountants say it was just a scheme that worked like this.
23:23Lincoln would find straw buyers and lend them the money to buy land here.
23:28But at prices much higher than Lincoln had paid only months earlier.
23:33The government charges these questionable loans made on the basis of inflated prices
23:40were simply sham transactions.
23:43Quote, Lincoln was manufacturing profits by giving its money away.
23:49There was no economic substance.
23:52The earnings were spurious.
23:53They were just fictional.
23:55They slipped the borrower the money to purchase the land that they own.
23:59The nice thing about these roads is that you're not likely to meet a lot of oncoming traffic.
24:09Robert Kamrath is an independent real estate consultant and appraiser in Phoenix.
24:14He took us on a tour of Australia and described where else the money went.
24:19I think the lion's share of the money in Australia is not literally in the vacant land,
24:27but rather it is in the improvements upon the land.
24:32The development of the lake and the fire hydrants, the streetlights,
24:37running the electric utilities and the water lines.
24:40Any great distance is quite expensive.
24:43Keating was especially determined to have those lakes at Australia.
24:49Leading the fight to stop developers from using scarce fresh water in man-made lakes
24:56was Alfredo Gutierrez, the Democratic minority leader of the Arizona Senate.
25:02The year was 1986.
25:04The first sort of things that he did was to throw lobbyists at us,
25:10and I don't mean one or two.
25:11At times it appeared that he'd hired the entire state.
25:14Keating persuaded Gutierrez to come to a meeting
25:17and brought in some heavy artillery from out of state.
25:21Charles Keating's son runs into the room and says,
25:25Dad, Dad, Jerry's here, Jerry's here.
25:28And he's very excited.
25:29And Mr. Keating stands up and he's very excited.
25:33They all turn to me and say,
25:35You want to meet Jerry, don't you?
25:37At this point I thought I was going to meet Jerry Lewis.
25:40And a few moments later, the Secret Service ran into the room
25:42and lo and behold, there he is, Jerry Ford.
25:46Jerry Ford walks up to Charlie Keating.
25:50Charlie says, Hi, Jerry.
25:51And Jerry says, Hi, Charlie.
25:54Charlie says, How you been, Jerry?
25:55And Jerry says, Just great, Charlie.
25:58Charlie, the president turns to me and says,
26:00Senator, I've heard so much about you.
26:02Well, of course.
26:03I mean, Jerry Ford worries about what I was doing in Arizona.
26:07Of course he does.
26:08He did tell me what a great guy Charlie was.
26:11Known each other for years.
26:12They golfed together.
26:14It was over in a few moments.
26:15The day I was lobbied by the president of the United States.
26:19In all fairness to President Ford,
26:21at no time did he ask me to vote for a specific piece of legislation.
26:26Afterwards, did you ask Charles Keating?
26:28Or anyone else who was at that meeting?
26:30What Gerald Ford was doing there?
26:31I did.
26:32And I got these knowing looks, you know.
26:34I got these, you know.
26:36I assumed they were trying to show how important Charlie was.
26:42Apparently, Charles Keating's clout paid off in the Lakes Bill.
26:46It appears that they did.
26:47The law wouldn't allow anyone else in the future to do what he had done.
26:51But by simply delaying the law, he was able to get around it.
26:56He got in under the wire.
26:57That's right.
26:58That's right.
26:59And he created the wire, in effect.
27:02That year, Keating and his associates contributed $131,000 to Arizona state politicians.
27:10And $255,000 over the years to Phoenix area politicians, a grand total of $386,000.
27:23Kind of good these days to have a few friends around.
27:26The tactics he used in Arizona in this instance are not unlike those that are being described elsewhere.
27:31Perhaps he even refined it here to take it on the road.
27:35Charles Keating took it on the road to Washington, D.C., where he was facing increasing pressure from federal regulators.
27:46Who regulates the regulators?
27:50Where does one go to the protest if you feel you have been a victim of a corrupt or abusive process?
27:58Keating was talking about bank board chairman Ed Gray, among others.
28:02As early as 1984, Gray had become deeply worried about what deregulation had wrought.
28:10We had all kinds of money that was federally insured coming in to institutions that had no real strength.
28:23And yet, they were taking that money and investing it and making loans with it.
28:29Many, many of the uses were direct investments.
28:32Ed Gray responded with the direct investment rule.
28:37That was a regulation that would limit the amount of insured deposits that were being invested in risky business like Estrella and the Phoenician.
28:47Charles Keating came to Washington to do battle with Ed Gray and the proposed rule.
28:54Keating took his campaign to Treasury Undersecretary George Gould.
28:58He had offered Ed Gray a $300,000 job at Lincoln Savings so that Ed would move on.
29:05He said Ed Gray was a stumbling block to what should be done for the industry, that Ed was a person who didn't have the breath of mind necessary to see the proper vision.
29:17Ed Gray wanted to hire me out of the job because he thought, apparently, money would buy anything and would buy me.
29:29Ed Gray says you threw Charles Keating out of your office.
29:32Well, when you're the Undersecretary of the Treasury, you do not throw people out of your office.
29:40You might say that you terminate conversations and make sure they do not reoccur.
29:47Keating did succeed in hiring prestigious economist Alan Greenspan as a lobbyist to fight the direct investment rule.
29:57Lincoln Savings was working with Mr. Greenspan, who was about to become chairman of the Federal Reserve.
30:05In testimony, a report, and letters to Congress and the bank board, Alan Greenspan opposed adoption of the direct investment rule and pled for an exemption for Lincoln once it went into effect.
30:20The fact that Alan Greenspan would lend his name to an effort like this, when I knew that direct equity investments for thrifts were poison, we used to talk about it.
30:34God, how much money did they have to pay him to get this?
30:39Greenspan wouldn't talk to us, but Frontline has learned he received at least $40,000 from a law firm hired by Charles Keating.
30:49Thank you very much.
30:52Next stop for Keating, the old executive office building, where he personally met with then-Vice President George Bush.
31:02A spokesman for President Bush says nothing of substance was discussed.
31:08Then it was on to the Reagan White House.
31:12Keating by now had half a billion dollars more in direct investments than the regulation allowed.
31:18He couldn't get Ed Gray off the bank board, so when another vacancy occurred, Keating boasted he got Chief of Staff Donald Regan to appoint.
31:28Lee Hinkle, a close associate, a man who was an attorney for and had loans with Lincoln Savings.
31:35This blew my mind.
31:39Think of the clout it takes to get members appointed to the bank board.
31:46Charlie Keating was interested in my being appointed.
31:49I had known Keating since 1979, when we worked together on John Connolly's campaign for the Republican nomination.
31:55Like Connolly, Henkel got one of the first loans Lincoln made after Keating bought it.
32:03Henkel companies would end up with $134 million in loans from and joint ventures with Lincoln.
32:11In this ACC memo, Keating referred to Henkel and his partners as the boys, and to their company as our company.
32:23In October 1986, Lee Henkel was appointed to the bank board.
32:29Within two months, he made an unusual proposal.
32:32In an open board meeting, he proposed a regulation that appeared to us could only benefit Lincoln Savings.
32:43Which would have had the effect of taking that $500 million-plus violation of the direct investment rule by Lincoln and wiping it out.
32:55His proposal was voted down.
32:57Just weeks earlier, Lincoln had paid Henkel's personal blind trust $3.7 million for 25,000 shares of stock in one Henkel company.
33:12Three months later, denying he even knew his bank board proposal would have benefited Lincoln and Keating, Lee Henkel resigned.
33:21And that every single minute of my public service was conducted properly, ethically, and without any thought whatsoever of either personal benefit or some benefit for a past associate.
33:34From the beginning, Lee Henkel had other powerful allies.
33:39Arizona Senators John McCain and Dennis DeConsini lobbied the White House to appoint him.
33:45Senator Alan Cranston, Democrat of California, and his banking committee aide, Carolyn Jordan, championed Henkel's nomination.
33:56Bart Naylor was the committee's chief investigator, charged with looking into Henkel's background.
34:03We uncovered some very, what we thought, serious questions about what Henkel was doing and his connection to Keating.
34:10When we relayed these to Cranston's aide, she didn't seem to understand why we would be concerned about this.
34:16And I was concerned why she wasn't concerned.
34:19On the Keating case, there was no other aide that seemed to frustrate me or discourage me from doing what I was doing than Cranston's aide.
34:31Well, I don't know anything about that.
34:32All I know is that I never did anything to derail any investigation of anybody.
34:36Carolyn Jordan spends a week in Phoenix in California, paid in part by Keating's American Continental Corporation?
34:44I don't recall that detail.
34:46I know she went there to take a look, as I took a look at one point, at Lincoln, just to see what the operation looked like.
34:53Cranston had at least 10 meetings with Charles Keating.
34:56He went to Phoenix, stayed at Keating's home, and personally solicited some of the $892,000 Keating contributed to his campaign, the California Democratic Party, and his voter registration drives.
35:13I asked him if he would contribute.
35:15He said he would.
35:16Most people who contribute to me contribute simply because they like what I do in the Senate.
35:22They like my work for the environment or for peace or pro-choice.
35:25Charles Keating, conservative Republican, crusader against abortion.
35:30Does he like what you do in the Senate on pro-choice?
35:34I think he liked what I was doing in terms of my understanding of the savings and loan industry before we ever met.
35:41Senator John McCain, Republican from Arizona, former Vietnam prisoner of war.
35:50McCain received $125,000 in Keating contributions.
35:56They were from his associates and people who were business relations, many of them who I knew who would have contributed anyway.
36:04All on the same day, all in the same amount, 50 checks for $1,000 each, in one day, a total of $50,000 to the election campaign of John McCain.
36:20Your wife and father-in-law are the biggest investors in the Fountain Square shopping center developed by Mr. Keating?
36:28It was a straight up-and-down investment, which was disclosed in my financial disclosure statement.
36:34You vacationed at Mr. Keating's Bahamas retreat, accepting airfare, food, and lodging for yourself, your wife, your baby, and a babysitter.
36:44Not accurate.
36:47I flew on Mr. Keating's plane, and we stayed at his home in Bahamas on three occasions.
36:55I made a very serious oversight in not making full reimbursement.
37:00When it was brought to my attention, not by the media, but in a letter from American Continental, we reimbursed immediately.
37:07Arizona Democrat Dennis DeConsini, a front-line study shows $78,000 in contributions from Charles Keating and his associates.
37:17DeConsini returned $48,000 and claims the rest was contributed independently.
37:24Though I know I've done nothing wrong, I understand your doubts.
37:28And I want to say plainly for all to hear, I have never violated my public trust.
37:33DeConsini intervened often on Keating's behalf.
37:38He called regulators in California and Washington.
37:42His campaign manager's company got at least $68 million in loans from Lincoln.
37:48Some of those loans are now delinquent.
37:52Senators DeConsini, McCain, and Cranston were three of five senators who would be labeled the Keating Five for their actions on behalf of Charles Keating.
38:03The other two, Senators Donald Riegel and John Glenn.
38:10Space hero John Glenn, Democrat of Ohio, received $233,000 Keating dollars for his Senate and presidential campaigns.
38:21That contribution was never made with any view toward doing anything for him.
38:26In fact, it was some year and a half or two years before anything came up with regard to Lincoln savings and loan.
38:31Keating and Glenn met at least four times, dining once privately.
38:36And Keating hired three of Glenn's former aides as lawyers and lobbyists.
38:42Soon-to-be Senate Banking Chairman Don Riegel, Democrat of Michigan, $76,100.
38:50Returned one year later, only after the controversy erupted.
38:54I don't consider myself as having intervened in the case or having tried to somehow, you know, tilt the process one way or the other.
39:05I didn't do that and wouldn't do that.
39:07Riegel and Keating met at least eight times.
39:10Riegel attended the opening of Keating's Detroit Hotel, where Keating also sponsored a fundraiser for Senator Riegel.
39:18According to Frontline's own study, Charles Keating and his associates contributed almost $1.4 million to the Keating Five and their causes.
39:32In the last decade, Keating has donated approximately $3 million to politicians in Washington, D.C., Arizona, and California.
39:42One question among the many raised in recent weeks had to do with whether my financial support in any way influenced several political figures who took up my cause.
39:54I want to say in the most forceful way that I can, I certainly hope so.
40:02Charles Keating needed the senator's help in his continuing battle with Ed Gray.
40:07Just 10 days after Keating's fundraiser for Senator Riegel, Riegel set up a meeting with the four other senators and Gray.
40:17The meeting took place on April 2nd, 1987.
40:21Said they were there on behalf of their friend at Lincoln Savings.
40:25Four senators in a room with the chief regulator to talk about their heavy contributor.
40:33Senator Riegel said, I mean, what would an ordinary person think about that?
40:38If you were so stunned, why would you let your San Francisco regulators go to another meeting the very next week?
40:45Because they were United States senators.
40:50The senators were those who oversaw our agency.
40:55You know, I considered senators pretty important, especially a lot of them at one time.
41:05One week later, four of his San Francisco deputies flew across the country for the second meeting with the Keating Five.
41:13Back in 1986, the San Francisco regulators had described what they termed Lincoln's unsafe and unsound practices.
41:22They came to the meeting with information from this report.
41:27Bill Black, who took detailed notes, and Michael Patriarcha recollect what they told the senators and what the senators told them.
41:37The meeting was held in Senator Dennis DeConsini's office.
41:41Senator DeConsini was kind of the master of ceremonies and put forward basically the deal.
41:48DeConsini's staff had prepared this agenda, what American Continental wants for concessions, what American Continental is willing to do.
41:58Despite the fact that Lincoln's savings was believed by the bank board to be a massive, unprecedented violation of the direct investment rule,
42:08we were to ignore their violation of the rule.
42:11Senator Cranston, in charge of a bill on the floor, said he shared the concerns of the other senators, and he left.
42:20Senator McCain started out very defensively.
42:24We're only trying to see whether a constituent is being fairly or not, and we don't want any improper or special favors done.
42:33Senator Glenn spoke up next to be blunt.
42:37Charge them or get off their backs. If there's been wrongdoing, go get them.
42:42So the regulators laid out the specifics.
42:45The examiners looked at 52 real estate loans that Lincoln had made since the 1984 exam.
42:52There were no credit reports on the borrowers in all 52.
42:57We were flabbergasted at the response of the senators.
43:01Senator Deconcini, are you saying that their underwriting practices were illegal or just not the best practice?
43:08The regulators responded that they felt it was both.
43:12...that this institution is flying blind.
43:15They don't know what the outcome is going to be on these loans if they haven't done the homework in advance.
43:19Senator Glenn responds, well, some people don't do the kind of underwriting you want.
43:25Is their judgment good?
43:29You know, of course their judgment isn't good.
43:32Patriarca responds, that approach might be okay if they were doing it with their own money.
43:37They aren't.
43:38They're using federally insured deposits.
43:41Then the regulators revealed evidence that Lincoln was stuffing the files.
43:45They took undated documents purporting to show underwriting efforts and put them into the file sometimes more than a year after they had made the investment.
43:56And then Senator John Glenn asked, have you done anything about these violations of the law?
44:01I told them that we were making a referral to the Justice Department on the file stuffing, that we considered this evidence of a criminal investigation,
44:10and it's not that we were maybe going to do it, we were in fact going to do it.
44:14That gave the Senators pause.
44:17They all maintain that what got them into these meetings were not Keating's contributions or his clout,
44:25but Alan Greenspan's reputation and this document,
44:29a seven-page letter from Keating's accounting firm alleging government harassment of Lincoln.
44:36There is legitimacy to what a big eight accounting firm says and what Alan Greenspan says,
44:41unless you believe everybody is for sale, which I don't.
44:44The man who wrote the letter, Arthur Young's Jack Acheson, later went to work for Keating at a salary of $954,000 a year.
44:55He took the Fifth Amendment when called to testify.
44:58Michael Patriarcha told the Senators,
45:03I don't care how many accountants they get to say something is right, the stuff they're doing is wrong.
45:09Senator Deacon Seney comes back,
45:12well, why would Arthur Young, the Lincoln's accountant, say these things?
45:16They have to guard their credibility, too.
45:19You believe they'd prostitute themselves for a client?
45:21And my answer was, absolutely, it happens all the time.
45:28The meeting broke up after 8 o'clock.
45:31The Senators and the regulators had met for more than two hours.
45:36They were told just how bad the financial condition was already in April of 87.
45:43And frankly, they didn't seem much to care.
45:46Months went by before the meeting became public.
45:52Then the Keating Five were called upon to explain their presence.
45:57Was there something wrong with five Senators' meetings?
46:00Yes, it's a bad appearance.
46:02But the real question is, is did John McCain abuse his office?
46:06The evidence indicates clearly no.
46:10I never acted in a more ethical, moral, and legal way in my life.
46:18I think politically it was a pretty stupid thing to do,
46:21to go into those meetings and to solicit the funds from Keating under these circumstances.
46:28But for the political contributions, the meeting would not have taken place.
46:33It's as simple and as stark as that.
46:36Have you ever heard of five Senators calling in the head of an agency
46:41and then all the top regulators out of the district to talk about Mrs. McGillicuddy's problems with Social Security?
46:53The five Senators said that is one of their obligations, to represent their constituents.
46:59There were lots of constituents that needed protecting.
47:02But the one constituent who put up more than a million bucks in contributions to the five Senators
47:08is the only one that got the protection.
47:11All of these other thousands of folks got the shaft.
47:15William Black is referring to the people who bought those now worthless bonds.
47:19Most are from California, and many blame their senator, Alan Cranston, for their plight.
47:26How about Senator Cranston, that got such a good contribution for the Lincoln saving?
47:32He should return it to us.
47:36Senator Cranston blames the regulators.
47:38During the House Banking Committee hearings, the San Francisco regulators,
47:43particularly Michael Patriarca and Bill Black, were called heroes.
47:46What am I supposed to say to that?
47:53Are they heroes in your eyes?
47:58I don't think the San Francisco regulators handled the regulatory process appropriately.
48:07After their meeting with the Senators, the regulators returned to San Francisco
48:12and pursued their examination of Lincoln.
48:15Just weeks later, on May 1st, 1987,
48:20they recommended that Lincoln's savings and loan be taken over by the government.
48:25Two months later, Ed Gray's term as chairman of the bank board expired.
48:31He was replaced by M. Danny Wall,
48:34a former staff director of the Senate Banking Committee
48:37and a self-described child of the Senate.
48:40At Lincoln's insistence, Wall took San Francisco off the case
48:45and began a new exam to gather information he says
48:49San Francisco failed to provide in its report.
48:53San Francisco had not made the case,
48:55and that we needed to have the case made,
48:58and that we were not going to get it made as fast
49:01if San Francisco was going to be involved in the second exam.
49:04We reminded Mr. Wall of just some of what was in San Francisco's report.
49:09Lack of credit checks, inadequate or non-existent appraisals,
49:14file stuffing, $100 million investment in Ivan Boski's junk bonds.
49:21$100 million investment in junk bonds with the pejorative added of Ivan Boski
49:27today means something.
49:29Today didn't, then didn't.
49:30Ivan Boski hadn't been accused of anything at that point in the process,
49:33as I recall, in 1986, 1987.
49:37Mr. Wall, Ivan Boski pled in the fall of 86.
49:42I could be wrong. I could be wrong.
49:44After Wall transferred oversight of Lincoln from San Francisco to Washington,
49:50Michael Patriarca protested to Wall's chief of staff, James Boland.
49:55I conveyed to Jim my belief that this business about transferring the jurisdiction
50:01was the stupidest thing I'd ever heard of under any circumstances.
50:05And Jim's response was,
50:08believe me, we're doing this for your own good.
50:13These guys are so connected that they can get you in ways
50:18that you never know you've been gotten.
50:20Did you ask him to elaborate?
50:24I did, and he wouldn't.
50:27Dear Charlie,
50:29you have the board right where you want them,
50:31Keating's attorney wrote in May of 1988.
50:35You should be able to reach an agreement
50:37which will completely satisfy you.
50:40I have put pressure on Wall
50:41to work toward meeting your demands,
50:44and he has so instructed his staff.
50:47San Francisco is finished.
50:50No political figure influenced my decision.
50:54I don't know how I can say that more emphatically.
50:57Well, what political influence?
50:58Nobody told him to delay that I'm aware of.
51:01Certainly I didn't.
51:03Senators Cranston and Deconcini
51:05basically never backed off.
51:09And they continue to be very vocal supporters
51:12of Lincoln's savings
51:14and continue to try to influence the regulatory decisions
51:18in a way favorable to Lincoln
51:19for years after this meeting.
51:22April 1989.
51:25Washington finally acknowledged
51:27what San Francisco had first charged
51:29back in 1986.
51:32Lincoln's savings and loan
51:33was unsafe and unsound.
51:36ACC declared bankruptcy
51:38the day before the federal government
51:41took Lincoln away from Charles Keating.
51:45The next evening,
51:47Senator Deconcini was at the Phoenician.
51:50The Keating family has contributed a lot here.
51:53They've made money,
51:54but they've done it honestly, in my opinion,
51:56and I'm sorry to see that happen.
51:59The Phoenician resort is now owned and operated
52:03by the United States government.
52:05They don't know how much it will ultimately cost
52:08or how much it may lose.
52:11Those estimates range as high as $74 million.
52:16The FDIC's Mark Randall
52:18is in charge of Lincoln's savings
52:20and all its properties,
52:22including the Phoenician.
52:24However fine a facility it is,
52:27however well-run it is,
52:29that to return on the investment
52:31that has been put into it
52:33may be impossible.
52:36Why?
52:36Each room ended up costing
52:38approximately $500,000.
52:41Just to break even,
52:43the resort would have to fill them
52:4570% of the time
52:47and charge $500 a night.
52:50Frontline has been told, however,
52:53that the Phoenician was averaging
52:54only $137 a night
52:57and its rooms were occupied
52:59only 58% of the time.
53:04It's a similar story at Astraea,
53:07where losses are estimated
53:09at more than $55 million.
53:13What we have done thus far
53:15with Astraea
53:16is protect our investment
53:19by maintaining
53:21the infrastructure,
53:23the landscaping,
53:24the improvements
53:25that are there.
53:26Are we talking about
53:27hundreds of thousands?
53:29Are we talking about millions?
53:31Are we ever talking about
53:32anything less than millions?
53:33The actual day-to-day maintenance
53:39of Australia
53:40probably is
53:42somewhat,
53:44although not much,
53:45less than a million dollars a year.
53:47We have expended more than that.
53:52Remember the $50 million
53:54Keating loan to John Connolly
53:56to buy this land?
53:58Connolly's company defaulted,
54:00Lincoln took over
54:02and put another $45 million
54:04into improvements
54:06and overhead.
54:08Now it's another big part
54:10of Uncle Sam's inventory.
54:13Beautiful piece of property.
54:15It is in the
54:16relatively early stages
54:18of development.
54:19Beautiful piece of property,
54:21but the projected loss
54:22is greater than the projected
54:24loss on Astraea.
54:25Paid over $100 million,
54:28estimated value,
54:29$32 million,
54:31for a loss
54:32of $70 million.
54:38The problem with the regulators
54:40is that there's an arrogance
54:42without accountability.
54:43It's unparalleled in our system
54:45by leaks, distortions,
54:48and outright lies.
54:49They will try to force us
54:51to capitulate
54:52to avoid being painted
54:53as a scoundrel
54:54or worse.
54:56But I will not,
54:57I simply cannot
54:59play the game.
55:02Charles Keating invoked
55:03the Fifth Amendment
55:04before the House
55:05Banking Committee.
55:07He declined
55:09to talk to Frontline.
55:11He is talking in court,
55:14where the battles
55:15over Lincoln and ACC
55:16promise to drag on
55:18for years.
55:20Most of us don't have
55:21a lot of years.
55:21Do you have any idea
55:23how long that will take?
55:25The bondholders lawsuit
55:26against Keating
55:27and his associates
55:28is scheduled
55:29for trial in August.
55:31That may seem
55:33like a long time.
55:36All I can tell you is,
55:38in the 15 years
55:39I've been practicing,
55:41that's real fast.
55:44There is no timetable
55:52for when the
55:53$2.5 billion loss
55:55to the U.S. taxpayers
55:56will be recovered,
55:58if ever.
56:00So we get the trial
56:01somewhere
56:02by August of next year.
56:04That's real quick.
56:06All I can tell you is,
56:07it's hard to...
56:09Just last week,
56:11a judge postponed
56:13the bondholders' trial
56:14until lengthy
56:15pretrial proceedings
56:16are completed.
56:18At least 24 lawsuits
56:20have been filed
56:21in the wake
56:22of Lincoln's failure.
56:23Today,
56:24the Justice Department,
56:25the SEC,
56:27the Federal Elections
56:28Commission,
56:29the House Banking Committee,
56:30and the Senate Ethics Committee
56:32are all investigating
56:34Keating,
56:34his companies,
56:35or the U.S. senators
56:37he supported.
56:37And Charles Keating
56:39is in turn
56:40suing the federal government
56:42to get Lincoln back
56:43and to pay him
56:45for taking it away
56:46in the first place.
56:48I'm Judy Woodruff.
56:50Good night.
57:07Frontline is produced
57:26for the documentary consortium
57:28by WGBH Boston,
57:30which is solely responsible
57:31for its content.
57:32Frontline is made possible
57:36by the financial support
57:37of viewers like you
57:38and by the Corporation
57:41for Public Broadcasting.
57:48This is PBS.
57:50her house.
57:51It's not the case.
57:52It's not the case.
57:53The second-
58:05this is Imma
58:06you
58:07or
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