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07-21-2008, 09:22 PM


Chapter V: The Keating Five
By Bill Muller
The Arizona Republic
Oct. 03, 1999 12:12:00

As a war hero and U.S. senator, John McCain's life has been chronicled in pictures.

There are grainy mug shots of a young McCain, printed in U.S. newspapers after his jet was shot down over North Vietnam. There are black-and-white images of his return, grinning and waving, his hair turned prematurely gray by 5 1/2 years of malnutrition and torture in a Hanoi prison camp.

In happier times, there is McCain holding his newborn daughter while his wife, Cindy, smiles from her hospital bed.

But it is an innocent vacation picture that symbolizes McCain's Achilles heel and carries the reminder of the scandal that threatened his political career.

In the picture, which was taken in the Bahamas, McCain is seated on a bandstand while wearing an outrageous, straw party hat. Next to him on the dais, a bottle tipped to his lips, sits Charles Keating III, son of developer Charles H Keating Jr.

McCain calls the Keating scandal ''my asterisk.'' Over the years, his opponents have failed to turn it into a period.

It all started in March 1987. Charles H Keating Jr., the flamboyant developer and anti-porn crusader, needed help. The government was poised to seize Lincoln Savings and Loan, a freewheeling subsidiary of Keating's American Continental Corp.

As federal auditors crawled all over Lincoln, Keating was not content to wait and hope for the best. He'd spread a lot of money around Washington, and it was time to call in his chits.

One of his first stops was Sen. Dennis DeConcini. The Arizona lawmaker was one of Keating's most loyal friends in Congress, and for good reason. Keating had given thousands of dollars to DeConcini's campaigns. At one point, DeConcini even pushed Keating for ambassador to the Bahamas, where Keating owned a luxurious vacation home.

Now Keating had a job for DeConcini. He wanted him to organize a meeting with the regulators. The message: Get off Lincoln's back. Eventually, DeConcini would set up a meeting between five senators and the regulators. One of them was John McCain.

McCain knew Keating well. His ties to the home builder dated to 1981, when the two men met at a Navy League dinner where McCain was the speaker.

After the speech, Keating walked up to McCain and told him that he, too, was a Navy flier, and that he greatly respected McCain's war record. He met McCain's wife and family. The two men became friends.

Charlie Keating always took care of his friends, especially those in politics. John McCain was no exception.

In 1982, during McCain's first run for the House, Keating held a fund-raiser for him, collecting more than $11,000 from 40 employees of American Continental Corp. McCain would spend more than $550,000 to win the primary and the general election.

In 1983, during McCain's second House race, Keating hosted a $1,000-a-plate dinner for McCain, though he had no serious competition and coasted into his second term. When McCain pushed for the Senate in 1986, Keating was there with more than $50,000.

By 1987, McCain had received about $112,000 in political contributions from Keating and his associates.

McCain had also carried a little water for Keating in Washington. While in the House, McCain, along with a majority of representatives, co-sponsored a resolution to delay new regulations designed to curb risky investments by thrifts like Lincoln.

Despite his history with Keating, McCain was hesitant about intervening. At that point, he had been in the Senate only three months. DeConcini wanted McCain to fly to San Francisco with him and talk to the regulators. McCain refused.

Keating would not be dissuaded.

On March 24 at 9:30 a.m., Keating went to DeConcini's office and asked him if the meeting with the regulators was on. DeConcini told Keating that McCain was nervous.

''McCain's a wimp,'' Keating replied, according to the book Trust Me, by Michael Binstein and Charles Bowden. ''We'll go talk to him.''

Keating had other business on the Hill and did not reach McCain's office until 1:30. A DeConcini staffer had already told McCain about the wimp comment.

When he arrived, Keating presented McCain with a laundry list of demands for the regulators.

McCain told Keating that he would attend the meeting and find out whether Keating was getting treated fairly, but that was all.

''Keating gave me the clear impression that he expected me to do more,'' McCain said later. ''He had several specific requests.''

When Keating questioned his courage, McCain invoked his POW experience. He told Keating that he didn't spend 5 1/2 years in the Hanoi Hilton to be called a coward.

The two argued, then Keating stormed out.

Despite the dust-up, McCain attended not one but two meetings with the regulators. McCain later explained that he thought it was the right thing to do, because Keating was a constituent.

McCain would live to regret it.

The first meeting, on April 2 in DeConcini's office, included Ed Gray, chairman of the Federal Home Loan Bank Board, as well as four senators: DeConcini, McCain, Alan Cranston, D-Calif., and John Glenn, D-Ohio.

The meeting had a clandestine air. Gray came alone. None of the senators brought their aides. DeConcini asked Gray to withdraw a regulation in order to help Lincoln. Gray shook his head.

For Keating, the meeting was a bust. Gray told the senators that as head of the loan board, he worried about the big picture. He didn't have any specific information about Lincoln. Bank regulators in San Francisco would be versed in that, not him. Gray offered to set up a meeting between the senators and the San Francisco regulators.

The second meeting was on April 9. The same four senators attended, along with Sen. Don Riegle, D-Mich. Also at the meeting were William Black, then deputy director of the Federal Savings and Loan Insurance Corp., James Cirona, president of the Federal Home Loan Bank of San Francisco, and Michael Patriarca, director of agency functions at the FSLIC.

In a recent interview with The Republic, Black said the meeting was a show of force by Keating, who wanted the senators to pressure the regulators into dropping their case against Lincoln. The thrift was in trouble for violating ''direct investment'' rules, which prohibited S&Ls from taking large ownership positions in various ventures.

''The Senate is a really small club, like the cliche goes,'' Black said. ''And you really did have one-twentieth of the Senate in one room, called by one guy, who was the biggest crook in the S&L debacle.''

Black said the senators could have accomplished their goal ''if they had simply had us show up and see this incredible room and said, 'Hi. Charles Keating asked us to meet with you. 'Bye.' ''
The five senators, including McCain, seemed like a united front to Black.

''They presented themselves as a group,'' Black said, ''and DeConcini is the dad, who's going to take the primary speaking role. Both meetings are in his office, and in both cases it's 'we' want this, with no one going, 'What do you mean we, kemo sabe?' ''

According to nearly verbatim notes taken by Black, McCain started the second meeting with a careful comment.

''One of our jobs as elected officials is to help constituents in a proper fashion,'' McCain said. ''ACC (American Continental Corp.) is a big employer and important to the local economy. I wouldn't want any special favors for them. . . .

''I don't want any part of our conversation to be improper.''

Black said the comment had the opposite effect for the regulators. It made them nervous about what might really be going on.

''McCain was the weirdest,'' Black said. ''They were all different in their own way. McCain was always Hamlet . . . wringing his hands about what to do.''

Glenn, a former astronaut and the first American to orbit the Earth, was not as tactful.

''To be blunt, you should charge them or get off their backs,'' he told the regulators. ''If things are bad there, get to them. Their view is that they took a failing business and put it back on its feet. It's now viable and profitable. They took it off the endangered species list. Why has the exam dragged on and on and on?''

Added DeConcini, ''What's wrong with this if they're willing to clean up their act?''

Cirona, the banking official, told the senators that it was ''very unusual'' to hold a meeting to discuss a particular company.

DeConcini shot back: ''It's very unusual for us to have a company that could be put out of business by its regulators.''

The meeting went on. McCain was quiet, while DeConcini carried the ball. The regulators told the senators that Lincoln was in trouble. The thrift, Cirona said, was a ''ticking time bomb.''

Then Patriarca made a stunning comment, according to transcripts released later.

''We're sending a criminal referral to the Department of Justice,'' he said. ''Not maybe, we're sending one. This is an extraordinarily serious matter. It involves a whole range of imprudent actions. I can't tell you strongly enough how serious this is. This is not a profitable institution.''

The statement made DeConcini back off a little.

''The criminality surprises me,'' he said. ''We're not interested in discussing those issues. Our premise was that we had a viable institution concerned that it was being overregulated.''

''What can we say to Lincoln?'' Glenn asked.

''Nothing,'' Black responded, ''with regard to the criminal referral. They haven't, and won't be told by us that we're making one.''

''You haven't told them?'' Glenn asked.

''No,'' said Black. ''Justice would skin us alive if we did. Those referrals are very confidential. We can't prosecute anyone ourselves. All we can do is refer it to Justice.''

After the meeting, McCain was done with Keating.

''Again, I was troubled by the appearance of the meeting,'' McCain said later. ''I stated I didn't want any special favors from them. I only wanted them (Lincoln Savings) to be fairly treated.''

Black doesn't completely buy that argument. If McCain was concerned about Keating asking him to do things that were improper, why go to either meeting at all?

Black said McCain probably went because Keating was close to being the political godfather of Arizona and McCain still had plenty of ambition.

''Keating was incredibly powerful,'' Black said. ''And incredibly useful.''

McCain's reservations aside, Keating accomplished his goal. He had bought some time, though the price was very high.
A month later, the San Francisco regulators finished a yearlong audit and recommended that Lincoln be seized. But the report was virtually ignored because of politics on the bank board.

Gray was being replaced as chairman by Danny Wall, who was more sympathetic to Keating.

The audit, which described Lincoln as a thrift reeling out of control, sat on a shelf.

In September 1987, the investigation was taken away from the San Francisco office, away from Black and Patriarca. In May 1988, it was transferred to Washington, where Lincoln would get a new audit.

It was a win for Keating. A battle, not the war.

In Phoenix, the move sparked a triumphant party at the posh headquarters of American Continental.

Someone hurled a computer from the second floor, shattering a window. Keating, all 6-feet-5 of him, struck a Superman pose and ripped open his shirt to display a hand-drawn skull and crossbones over the letters FHLBB - the Federal Home Loan Bank Board.

A secretary climbed onto a desk to take photos, and American Continental executive Robert Kielty joined her. Keating grabbed a roll of tape and lashed their legs together.

Potted plants were knocked over. Beer and champagne were spilled on the carved wood desks. Kielty took a bottle of champagne and poured it down another secretary's blouse.

''Get this champagne colder,'' Keating yelled.

Back in San Francisco, Black was fuming.

''Clearly, we were shot in the back,'' he would say later.

Despite the reprieve, Keating's businesses continued to spiral downward, taking the five senators with him. News of the meeting leaked out, and now all five men were answering some very embarrassing questions.

''Did you lean on regulators for Charlie Keating?''

''Did you get campaign contributions in exchange for your cooperation?''

''Why did you protect Keating?''

Together, the five senators had accepted more than $300,000 in contributions from Keating, and their critics added a new term to the American lexicon:

Keating Five.

As the S&L failure deepened, the sheer magnitude of the losses hit the press. Billions of dollars had been squandered. The Keating Five became shorthand for the kind of political influence that money can buy. The five senators were linked as the gang who went to bat for an S&L bandit.

S&L ''trading cards'' came out. The Keating Five card showed Charles Keating holding up his hand, with a senator's head adorning each finger. McCain was on Keating's pinkie.

As the Keating investigation dragged through 1988, McCain dodged the body blows. Most landed on DeConcini, who had arranged the meetings and had other close ties to Keating, including $50 million in loans from Keating to DeConcini's aides.

But McCain made a critical error.

In spinning his side of the Keating story, McCain adopted the blanket defense that Keating was a constituent and that he had every right to ask his senators for help. In attending the meetings, McCain said, he simply wanted to make sure that Keating was treated like any other constituent.

Keating was far more than a constituent to McCain, however.

On Oct. 8, 1989, The Republic revealed that McCain's wife and her father had invested $359,100 in a Keating shopping center in April 1986, a year before McCain met with the regulators.

The paper also reported that the McCains, sometimes accompanied by their daughter and baby-sitter, had made at least nine trips at Keating's expense, sometimes aboard the American Continental jet. Three of trips were made during vacations to Keating's opulent Bahamas retreat at Cat Cay.

McCain also did not pay Keating for the trips until years after they were taken, when he learned that Keating was in trouble over Lincoln. Total cost: $13,433.

When the story broke, McCain did nothing to help himself. When reporters first called him, he was furious. Caught out in the open, the former fighter pilot let go with a barrage of cover fire. Sen. Hothead came out in all his glory.

''You're a liar,''' McCain snapped Sept. 29 when a Republic reporter asked him about business ties between his wife and Keating.

''That's the spouse's involvement, you idiot,'' McCain said later in the same conversation. ''You do understand English, don't you?''

He also belittled the reporters when they asked about his wife's ties to Keating.

''It's up to you to find that out, kids.''

And then he played the POW card.

''Even the Vietnamese didn't question my ethics,'' McCain said.

The paper ran the story a few days later. At a news conference, McCain was a changed man. He stood calmly for 90 minutes and answered every question.

On the shopping center, his defense was simple. The deal did not involve him. The shares in the shopping center had been purchased by a partnership set up between McCain's wife and her father.

But McCain also had to explain his trips with Keating and why he didn't pay Keating back right away.

On that score, McCain admitted he had fouled up. He said he should have reimbursed Keating immediately, not waited several years. His staff said it was an oversight, but it looked bad, McCain jetting around with Keating, then going to bat for him with the federal regulators.

Meanwhile, Lincoln continued to founder.

In April 1989, two years after the Keating Five meetings, the government seized Lincoln, which declared bankruptcy. In September 1990, Keating was booked into Los Angeles County Jail, charged with 42 counts of fraud. His bond was set at $5 million.

During Keating's eventual trial, the prosecution produced a parade of elderly investors who had lost their life's savings by investing in American Continental junk bonds.
In November 1990, the Senate Ethics Committee convened to decide what punishment, if any, should be doled out to the Keating Five.

Robert Bennett, who would later represent President Bill Clinton in the Paula Jones case, was the special counsel for the committee. In his opening remarks, he slammed DeConcini but went lightly on McCain, the lone Republican ensnared with four Democrats.

''In the case of Senator McCain, there is very substantial evidence that he thought he had an understanding with Senator DeConcini's office that certain matters would not be gone into at the meeting with (bank board) Chairman (Ed) Gray,'' Bennett said.

''Moreover, there is substantial evidence that, as a result of Senator McCain's refusal to do certain things, he had a fallout with Mr. Keating.''

McCain, the ultimate survivor, had dodged another missile.

Among the Keating Five, McCain received the most direct contributions from Keating. But the investigation found that he was the least culpable, along with Glenn. McCain attended the meetings but did nothing afterward to stop Lincoln's death spiral.

Lincoln's losses eventually were set at $3.4 billion, the most expensive failure in the national S&L scandal.

McCain also looked good in contrast to DeConcini, who continued to defend Keating until fall 1989, when federal regulators filed a $1.1 billion civil racketeering and fraud suit against Keating, accusing him of siphoning Lincoln's deposits to his family and into political campaigns.

In the end, McCain received only a mild rebuke from the Ethics Committee for exercising ''poor judgment'' for intervening with the federal regulators on behalf of Keating. Still, he felt tarred by the affair.

''The appearance of it was wrong,'' McCain said recently. ''It's a wrong appearance when a group of senators appear in a meeting with a group of regulators, because it conveys the impression of undue and improper influence. And it was the wrong thing to do.''

McCain noted that Bennett, the independent counsel, recommended that McCain and Glenn be dropped from the investigation.

''For the first time in history, the Ethics Committee overruled the recommendation of the independent counsel,'' McCain said. ''I'm sure it had nothing to do with the fact that I was the only Republican of the five and the Democrats were in the majority (in the Senate).''

But McCain owns up to his mistake:

''I was judged eventually, after three years, of using, quote, poor judgment, and I agree with that assessment.''

07-21-2008, 10:11 PM
Is McCain a crook?

Is McCain a politician?

The answers are often the same.