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Charles H. Keating

Essay by review  •  August 23, 2010  •  Essay  •  1,653 Words (7 Pages)  •  1,818 Views

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Charles H. Keating Jr. has been the focus of criminal investigations by the Federal Bureau of Investigation, the Internal Revenue Service, the Justice Department, The Securities and Exchange Commission, and the House Banking Committee for a six-year shadow of the nation's biggest savings-and loan debacle. The federal government proclaims that he fraudulently managed California's Lincoln Savings into its closure, and in the process profited for himself and his family an estimated thirty-four million dollars. Consequently, taxpayers may suffer a loss of two billion dollars. The federal government is suing Keating, his family and associates for one billion dollars.

Despite Keating's denial to the charges, evidence proves that his misconduct began since the early 1980s. Shockingly, Charles Keating worked for an extended amount of time without being investigated or caught. Keating did not have a very credible background, which should have led to some suspicion. About a decade ago, many incidents should have foreshadowed Keating's malicious intentions. At that point Keating was under the leadership of Carl Lindner at American Financial Corp., a city conglomerate with interests in insurance and banking. In 1979 SEC, better known as the Security & Exchange Commission, cited Keating and other officials of the American Exchange Commission for failure to reveal particular loan transactions with their employer.

Keating, a national championship swimmer, attended the University of Cincinnati on an athletic scholarship and continued in law school. Along with help from his brother, Charles Keating founded the prominent Cincinnati law firm of Keating, Muething and Klekamp. In 1972 Keating abandoned the profession of law, turning to work for the publicity-shy multimillionaire Carl Linder. Lindner served as a guide and mentor in the life of Mr. Keating. Many similarities can be traced between the business style of these two men; preeminently they both built their empires on savings and loans.1

Charles Keating exceeded Mr. Lindner's expectations, which persuaded Mr. Lindner to extend an offer to the forty-eight year-old lawyer a position with American Financial in 1972 as the executive vice-president. Under Lindner's supervision at American Financial in the mid-1970's, Keating found a resourceful strategy to raise money from the public without the interference of the Wall Street underwriters. The success of this strategy resulted from sharp decline in profits that Lindner's company was experiencing. Keating's success revolved around him raising fifty million dollars for American Financial from the public without using an underwriting syndicate. This technique was quite uncommon for a corporate business of their size. Consequently, American Financial sold the fifty million dollars in debentures through local stockbrokers. These debentures were offered at a surprisingly high annual interest payment of eleven and three-quarters. As a result of the high payment, these debentures were promoted in cities where small savers were eager for high rates. Keating had no fear of re-sales because he assumed that most of the buyers would simply store the debentures, providing American Financial with stable, long-term money. Also there was a lack of restrictive covenants or sinking fund requirements, which normally would have been required in a syndicated offering.

Keating left Lindner's shadow and the employ of American Financial in 1976, when he departed to Phoenix, Arizona. At the time his departure, he took a four-year consulting contract at one hundred and fifty thousand a year from Lindner. Despite the fact that Keating had left Lindner's side, in some way Keating success was connected with Lindner. In 1977 Keating gained control of American Continental Homes, a home building operation.

The reasons for Keating's leave from American Financial stand quite vague to the public eye. The question remains as whether or not Charles H. Keating Jr. left by his free will or with the aid of others. The loan activities that occurred during the duration of Keating's vice presidency at American Financial resulted in a consent decree with the Securities & Exchange Commission, better known as the SEC, in 1979. The SEC charges Lindner, Keating, and Donald Klekamp of the Keating law firm with arranging millions of dollars in improper loans to Lindner's employees. Despite the close encounters with the officials of the SEC, Keating developed tactics to raise reported earnings at American Continental Homes. The most popular tactic was the use of interest capitalization, which involves listing interest payments as an asset rather than as an expense, thus boosting earnings.

Evidence confirms that Keating inflated American Continental Homes's pretax earning by having fifteen million dollars out of American Continental Homes's twenty-five million dollars interest payments capitalized in 1980. Similarly, in 1981, he managed to capitalize eighteen million dollars out of the thirty-two million dollars. The money had been paid out in interest, but more than half of it remained recorded under American Continental Homes's books as an asset. American Continental Homes lost an estimate of two and a half million dollars in the year 1981, and surprisingly managed to post a net income of roughly three and a half million dollar with the aid of some unusual land dealing that produced a sizable gain. These efforts were merely the beginning of Keating's operation. He later turned to approaches such as: joint ventures, partnerships and debt-for-property swaps in an attempt to magnify the profits of American Continental Homes.

In 1984 Charles Keating purchased Lincoln Savings and Loan, an Irvine, Calif. Thrift. Alas, he possessed a large sum of money, specifically the thrift's one billion dollars or so of deposits. Not only did Lincoln Savings and Loan have one billion dollars in deposits, but also, luckily, it was located in California, the state with most liberal rules in the country in reference to investing funds. It took Keating no more than a year to double Lincoln's deposits, bringing in most of the new money through brokered deposits. When it came time for Keating to invest the deposits, he considered the

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