Charles Keating

Charles H. Keating Jr. (1923-2014) was an American financier and the central figure in one of the most infamous financial scandals of the 20th century. As the head of Lincoln Savings and Loan Association, he transformed a once-sleepy thrift into a high-flying, high-risk enterprise that ultimately collapsed in 1989. The failure of Lincoln cost the U.S. government over $3 billion, making it a poster child for the wider Savings and Loan Crisis of the 1980s and 1990s. Keating's story is a masterclass in what investors should avoid: opaque accounting, excessive risk-taking, over-reliance on political influence, and a disconnect between reported profits and actual economic reality. For value investors, his legacy serves as a powerful cautionary tale about the perils of speculation and the critical importance of scrutinizing not just the numbers, but the character and integrity of a company's management.

Keating wasn't a traditional banker. He acquired Lincoln Savings and Loan in 1984 through his real estate development company, American Continental Corporation. Under new deregulation laws, he quickly pivoted the institution away from its core business of safe home mortgages. Instead, he plunged its depositors' money into speculative ventures like raw land development, luxury hotels, and a vast portfolio of high-yield junk bonds. To fund this rapid expansion, Lincoln aggressively solicited funds from across the country through brokered deposits, paying higher-than-market interest rates. On the surface, American Continental reported spectacular profits, but federal regulators later found these were largely the result of fraudulent accounting and sham real estate transactions.

When federal regulators began to scrutinize Lincoln's risky practices in the mid-1980s, Keating didn't change course; he went on the political offensive. He made substantial campaign contributions to five prominent U.S. Senators—Alan Cranston, Dennis DeConcini, John Glenn, John McCain, and Donald Riegle—who became known as the “Keating Five”. These senators intervened on Keating's behalf with the regulators, successfully delaying a government takeover of the failing institution for two years. This delay allowed Lincoln's financial hole to grow exponentially, ultimately multiplying the cost to taxpayers when the government finally seized it. The scandal highlighted the dangerous intersection of money and politics and served as a stark warning about companies that use political influence to mask fundamental business weaknesses.

By the time regulators seized Lincoln in 1989, it was hopelessly insolvent. The bailout was handled by the Federal Savings and Loan Insurance Corporation (FSLIC), which itself went bankrupt and had to be bailed out by taxpayers. The total cost of the Lincoln failure exceeded $3.4 billion, one of the largest single losses of the S&L crisis. The human cost was also immense. More than 20,000 investors, many of them elderly customers, lost their life savings. They had been deceptively sold worthless subordinated debentures (unsecured bonds) issued by American Continental. These were sold by tellers in the lobbies of Lincoln branches, with customers being led to believe they were as safe as federally insured certificates of deposit (CDs). Keating was eventually convicted of fraud, though his convictions were later overturned.

The Charles Keating saga is more than just a history lesson; it's a treasure trove of wisdom for the prudent investor.

• Lesson 1: Scrutinize the Source of Profits. Lincoln's parent company reported dazzling earnings, but they were a mirage created by accounting tricks. A true value investor digs deep to understand how a company makes money. Are the profits from sustainable operations or from one-off land sales and financial engineering? Always demand a margin of safety.
• Lesson 2: Management Integrity is Not Optional. Warren Buffett famously said he looks for businesses run by able and honest managers. Keating was undeniably able, but his actions demonstrated a profound lack of integrity. When management's primary skill is exploiting loopholes, lobbying politicians, and deceiving customers, it's a giant red flag.
• Lesson 3: If It Seems Too Good to Be True, It Is. The high interest rates Lincoln offered on its deposits and the rosy picture it painted for its bonds were designed to lure in unsuspecting investors. In investing, exceptionally high returns almost always carry exceptionally high, and often hidden, risks. Avoid the siren song of easy money.
• Lesson 4: Understand Exactly What You Are Buying. The investors who bought American Continental's bonds in Lincoln branches thought they were buying a safe, bank-issued product. They were buying unsecured corporate debt from a highly speculative parent company. This is a painful reminder of Peter Lynch's advice to never invest in any idea you can't illustrate with a crayon. If you don't understand the instrument, the risk, and its place in the company's capital structure, stay away.