Family Took in $34 Million as S&L;, Parent Firm Failed
Charles Keating Jr. and members of his family received $34 million in salaries, bonuses and payments for their stock from American Continental Corp. in the three years before it went bankrupt and its major subsidiary, Lincoln Savings & Loan Assn., was taken over by the federal government, federal regulators disclosed Tuesday.
Lincoln’s collapse is expected to cost taxpayers up to $2 billion, and has raised questions about the involvement of legislators, including Sen. Alan Cranston (D-Calif.), who received campaign funds from Keating.
House investigators were also told Tuesday that the Keating-controlled American Continental Corp. paid $22 million in fees to a Swiss bank and invested another $18 million in the Saudi European bank. Moreover, it lost $25 million in foreign currency trading and concealed “mysterious” subsidiaries in Panama and the Bahamas, regulators testified.
Rep. Nancy Pelosi (D-San Francisco) declared: “Charlie’s web is incredible . . . and all to satisfy the arrogance and greed of Mr. Keating.”
New reports show that the firm invested $17.5 million in a Bahamas-based firm, Trendinvest, but sold the stock less than a year later for a profit of only $1,504. There was no justification by American Continental for such an unusual transaction that provided a minuscule return on capital, regulators said. Similarly, according to testimony, the firm had another subsidiary in Panama, Southbrook Holdings, that was hidden by American Continental officers until its existence was disclosed only a few weeks ago.
One federal regulator termed the two holdings “mysterious” because they were not mentioned in ACC’s financial records or minutes of its board of directors.
In the days just before the bankruptcy was announced last April, other witnesses testified, a truck labeled “Document Destruction Center” carried away two large bags of shredded paper from ACC headquarters in Phoenix.
Discussing ACC management’s reaction to rapid erosion of its financial condition in the closing months of 1988, federal regulator Alex Barabolak testified:
“Rather than tightening their belts in any fashion, they engaged in actions which would soon deplete all available resources . . . . Although ACC was funded in large part by Lincoln and the subordinated debt holders, our continuing review revealed a pattern where funds were used almost exclusively for the benefit of ACC insiders.
“ACC bought back its stock from Charles Keating and other family members and insiders, lost huge amounts on speculative trading, paid exorbitant salaries and consulting fees, maintained a fleet of five aircraft and owned a hangar.
“These actions quickly resulted in complete dissipation of its assets,” Barabolak told the House Banking, Finance and Urban Affairs Committee hearings on the collapse of Lincoln Savings.
ACC lost nearly $14 million in foreign currency swaps in 1988. And in January, 1989, three months before it declared bankruptcy, it lost another $11 million in such trading, according to the testimony.
“We could never understand why ACC continued to trade so heavily in these markets when it was incurring such huge losses,” said John J. Meek II, a senior examiner for the Office of Thrift Supervision.
Other federal regulators described efforts by ACC and a chief examiner from the bank board’s Washington office, Steve Scott, to restrict the scope of a 1988 examination and portray ACC’s financial condition as far better than it actually was. At the time, according to Richard E. Newsom, a senior examiner for the state of California, he had identified at least $50 million in worthless holdings and added that the firm was virtually broke despite its claims to the contrary.
At issue is whether M. Danny Wall, then chairman of the Federal Home Loan Bank Board, blocked action by bank board regulators in San Francisco and Washington to take over Lincoln in the summer of 1987, when its weakened condition was first discovered.
Rep. Henry B. Gonzalez (D-Tex.), chairman of the House panel, has called for Wall’s ouster as director of the Office of Thrift Supervision, the successor agency to the bank board that regulates the savings and loan industry.
In other testimony, federal regulators said a top assistant to Wall tried without success in 1988 to get the bank board’s 12th District, headquartered in Seattle, to allow ACC to buy a distressed S&L; in that district to escape from more hard-nosed regulation in the 11th District, headquartered in San Francisco.
Another witness said a contribution of $400,000 by ACC to a nonprofit group associated with Cranston was examined by California regulators as a “possible dissipation of assets” by ACC.
Cranston has acknowledged soliciting a total of $850,000 from Keating for voter registration. The Senate Democratic whip, joined by four other U.S. senators, participated in two controversial 1987 meetings with federal regulators, urging them to wind up a yearlong audit of the Keating-controlled firms.
Meek, a senior examiner with OTS in Chicago assigned to the 1988 examination of ACC and Lincoln, said Keating became “increasingly belligerent” toward the regulators as their concern grew over his firm’s solvency.
Meek said Keating received compensation of $1,673,000 from ACC in 1988 and his son, Charles Keating III, then only 24 years old, was paid $1,161,000. A Keating son-in-law, Robert Wurzelbacher Jr., was on the payroll for $1,270,500 a year. Another son-in-law, Robert Hubbard, got $569,375 in salaries and bonuses.
In all, Meek testified, the Keating family received $16 million for selling stock to the firm or its employee stock ownership plan. Salaries and bonuses for Keating and other family members totalled $18 million in the three-year period starting in January, 1985.
Drexel Burnham Lambert, the Wall Street brokerage firm, also sold $12.2-million worth of ACC stock back to the firm, Meek added, noting: “I am not aware of any disclosures by Drexel to the FHLBB of its ownership interest in ACC, which appears to be over 10% of ACC’s total outstanding stock.
“It is my understanding that Drexel brokered hundreds of millions of dollars of junk bonds and other investments to Lincoln since Lincoln was acquired by ACC,” he added.
Commenting on the daylong testimony by 10 federal regulators about the practices at ACC and Lincoln, Rep. Stan Parris (R-Va.) said: “It’s been said the best way to rob a bank is to own one.”
