The Lincoln Savings and Loan Association of Irvine, California was the financial institution at the heart of the Keating Five scandal. Through the early 1980s, Lincoln was a conservatively run enterprise. Almost half its assets were in home loans and only a quarter were considered “at-risk” investments. It had slow growth at best, and sustained losses for several years until 1983, when it made a profit of a few million dollars.
In February 1984, Charles Keating became the head of Lincoln. As Chairman of a home construction company, American Continental Corporation (ACC), he purchased Lincoln for $51 million. Keating fired the existing management and, over the next four years, Lincoln’s assets increased from $1.1 billion to $5.5 billion. Keating took keen advantage of savings and loan associations’ deregulation in the early 1980s, which allowed them to make highly risky investments with their depositors’ money. In February 1985, Alan Greenspan sent a letter to officials of the Federal Home Loan Bank of San Francisco. The letter supported Lincoln’s application for an exemption to a Bank Board rule forbidding the bank from using large amounts of capital for certain risky investments.
When ACC went bankrupt in 1989, more than 21,000 investors, many of whom were elderly, lost their life savings. The losses totaled around $285 million: Many investors held securities backed by the parent company rather than deposits in a Federally insured account. This distinction was apparently lost on many if not most of Lincoln’s customers until it was too late. When the Federal government seized Lincoln, it still covered almost $3 billion of the company’s losses. Many creditors were made whole. The government then attempted to liquidate the seized assets through its Resolution Trust Corporation. This was often done at pennies on the dollar compared to what the property had allegedly been worth and the valuation at which loans against it had been made. Charles Keating was sent to prison for fraud, but was later released on appeal.