Charles H. Keating Jr.Essay title: Charles H. Keating Jr.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 nations biggest savings-and loan debacle. The federal government proclaims that he fraudulently managed Californias 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 Keatings 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 Keatings 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. Lindners 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 Lindners supervision at American Financial in the mid-1970s, 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 Lindners company was experiencing. Keatings 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 Lindners 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 Lindners 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 Keatings 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 Keatings 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 Lindners 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.
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This type of money-lending strategy, which is used more by Wall Street financial conglomerates and special interests in various countries around the world, is called an implicit loan, not a written loan.[5] In this type of case, a loan is only allowed if: – it clearly demonstrates the assets of the principal holder and the principal holder’s willingness to engage its money maker (e.g., $25,000 for an interest of 0.5%), – the “loans are for cash” were the primary goal of the loans and were to be repaid automatically by the principal holder, or – the principalholder’s ability to make payments and pay back the $25,000,000 in interest was not violated by the loan.[6]
To take a step back, it has been common knowledge for the bank holding company and other financial firms to have an implicit loan with the Securities and Exchange Commission. The bank holding company’s sole use of implicit loans is to make loans to those who, because of the status of their assets, receive favorable or favorable terms from its stockholders on behalf of its stockholders. The Securities and Exchange Commission’s “loans” policies encourage banks, including these banks, specifically to have the securities issued without implicit loan policy.[7] This policy is further stated by the Securities and Exchange Commission: “[B]efore any implicit relationship is entered into, the Securities and Exchange Commission shall continue to be governed by the Securities and Exchange Act of 1934.” Accordingly, when a bank holds more than $100 million assets and is required by any applicable law to engage in an implicit loan for the purpose of meeting the financial needs of its employees, the bank held $100 million that was intended to meet the financial needs of its employees. Therefore, this policy is not applicable by the SEC.
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This implied loan policies, which are not considered in the standard case of implied interest loans, are much more limited than implicit loan policies. Instead, implicit loans are only allowed if one of the financial assets of the bank holding company is the principal value of a particular asset or, more specifically, that the bank has a “great likelihood” of providing loans to the “large, institutionalized financial institutions.” Thus, “the vast bulk of investment in new public companies is done outside of the public financial system because many financial institutions have already accepted such offers as collateral.” The term “great likelihood” was coined by the Federal Reserve in 1913:[8]
“Such large, institutionalized financial institutions as all have the power to demand, bear interest, and are at the same time expected to have more of the loans in place than a very small number can do at present by virtue of the fact that they have been used to satisfy their most profitable investors.”
According to the Securities and Exchange Commission’s policy statement, in order for a bank to receive federal money, it must be able to take out $100 million which would cover the principal and interest on all principal-equity securities issued by the bank holding company. Because this type of “loan agreement” is extremely simple and may not require complex procedures to obtain, the SEC does not regulate this type of implicit lending. However, an implicit loan is an indirect loan with a principal that is expected to pay as much as the principal amount borrowed, with or without interest. The amount the person with the implicit loan is expected to pay
Evidence confirms that Keating inflated American Continental Homess pretax earning by having fifteen million dollars