McCain Support for New Trust Resurrects Keating Five Role
Karl Marx famously said that historical events occur twice, first as tragedy and the second time as farce. Truer words were never spoken of John McCain's new-found support for a Mortgage and Financial Institutions (MFI) trust, the very type of agency he strenuously opposed until just this week. But completing the tragic-comedy is the fact that McCain is now inadvertently shining a spotlight on his own dark past in the 1980's Keating Five scandal, an episode central to the last massive federal bailout of the U.S. financial system.
After his proposal Tuesday to create a 9/11-style commission to investigate the meltdown on Wall Street was greeted with a mixture of yawns and giggles, McCain on Thursday essentially proposed the resurrection of the Resolution Trust Corporation, the entity signed into law by President George H.W. Bush that in the 1980's and 1990's ultimately poured $400 billion into hundreds of faltering savings and loan institutions:
First, to deal with the immediate crisis, I will lead in the creation of the Mortgage and Financial Institutions trust -- the MFI. The underlying principle of the MFI or any approach considered by Congress should be to keep people in their homes and safe guard the life savings of all Americans by protecting our financial system and capital markets. This trust will work with the private sector and regulators to identify institutions that are weak and fix them before they become insolvent.
Sadly, John McCain has a 20 year record of opposing the very kind of entity he now proposes to create. On March 25 of this year, his chief economic adviser Douglas Holtz-Eakin (the same man who credited McCain with the invention of the Blackberry device) proclaimed McCain's opposition to a new Resolution Trust Corporation (RTC) to address the home mortgage crisis:
"The senator is not in favor of an RTC-like vehicle that would wholesale purchase loans."
And as the Guardian noted yesterday, at the height of the savings and loan scandal two decades ago, John McCain tried to halt action by the creation of the RTC:
McCain joined Phil Gramm and other Republican senators in rebelling against the 1989 bill that created the RTC. Today he praised the very idea he voted to slow down, saying the RTC was "designed to clean up the system and worked."
Of course, McCain's free market orthodoxy wasn't the only factor at work in opposing the original RTC. Back then, John McCain's political benefactor was Charles Keating. And McCain's role in assisting Keating's Lincoln Financial, whose ultimate collapse cost American taxpayers $3 billion, nearly ended his political career.
Earlier this year, the Boston Globe summarized McCain's close relationship with Keating and his decision to intervene with federal regulators on his behalf:
McCain met Keating in 1982, during McCain's successful run for Congress, and soon began accepting offers from Keating to fly McCain's family on a corporate plane to Keating's house in the Bahamas. McCain did not pay for most of the trips until years later, when the matter became public.
Keating, meanwhile, complained regularly to McCain that a proposed regulation would hurt his business. Known as the "direct investment" rule, it limited the amount that savings-and-loan institutions could invest from their assets. In 1985, after having "heard frequently from Charlie on the matter," McCain decided that Keating's complaints "were sound enough to warrant our assistance." He cosponsored a resolution sought by Keating, but it failed to postpone the regulation, McCain wrote in his autobiography.
By then, Keating was one of McCain's most important benefactors; McCain received $112,000 in campaign donations from Keating and his Lincoln associates, mostly between 1982 and 1986.
It was in April 1987 that McCain fatefully joined four other senators in meeting with Edwin Gray, chairman of the Federal Home Loan Bank Board in Washington. After that meeting, Gray told his associate William K. Black that he was "very upset" that the senators were trying to pressure him.
Ultimately, a Senate ethics panel agreed with that assessment. California Democrat Alan Cranston was censured for "an impermissible pattern of conduct," while Senators DeConcini (D-AZ) and Riegle (D-MI) were criticized for actions which "gave the appearance of being improper." As for McCain, he and John Glenn (D-OH) were admonished for exercising "poor judgment."
McCain, who had told the Ethics Committee that his role in support of Keating was "to help constituents in a proper fashion," reacted to the panel's findings in 1991, "I am, of course, relieved that I have been exonerated."
And so it was that John McCain survived the Keating Five and S&L scandals with his career, if not his reputation, intact. As the New York Times recounted this past February:
When Lincoln went bankrupt in 1989 - one of the biggest collapses of the savings and loan crisis, costing taxpayers $3.4 billion - the Keating Five became infamous. The scandal sent Mr. Keating to prison and ended the careers of three senators, who were rebuked by the Senate Ethics Committee in 1991 for intervening. Mr. McCain, who had been a less aggressive advocate for Mr. Keating than the others, was reprimanded only for "poor judgment" and was re-elected the next year.
Some people involved think Mr. McCain got off too lightly. William Black, one of the banking regulators the senator met with, argued that Mrs. McCain's investment with Mr. Keating created an obvious conflict of interest for her husband. (Mr. McCain had said a prenuptial agreement divided the couple's assets.) He should not be able to "put this behind him," Mr. Black said. "It sullied his integrity."
For his part, John McCain has acknowledged the blight on his record, if not his sense of his own honor. As Senator McCain put it in December 1999, the taint of his Keating Five role is permanent:
"The fact is, it was the wrong thing to do, and it will be on my tombstone and deservedly so."
But that hasn't prevented presidential candidate McCain from pretending this week that his part in the S&L tragedy never happened. That's quite a farce indeed. But Karl Marx notwithstanding, the election of John McCain to the White House in the face of this second, trillion-dollar American financial crisis would be no joke, but an epic tragedy.