LINCOLN SAVINGS AND LOAN: A CASE STUDY OF REGULATORY FAILURE
This paper summarizes, analyzes and assesses the evolution, consequences and implications of the financial collapse of Lincoln Savings and Loan Association of Irvine, California (Lincoln), including the machinations and ultimate fate of its principal owner, Charles H. Keating, Jr. (Keating). The first part of this essay deals with the way in which the Lincoln collapse developed and how it was accomplished. The second and third parts focus on the regulatory and political environment in which that collapse occurred.
The financial failure of Lincoln was the product of mismanagement and fraud practiced by Keating and his cronies on a colossal scale. Regulatory and political failures contributed to that debacle and aggravated its consequences. When they are viewed in the context of the overall breakdown of a significant portion of the nation's savings and loan (S and L) industry, those failures amounted to what Rep. James Leach, a member of the House Banking Committee termed "the single greatest regulatory lapse of the century" (Waldman, 1990, p. 20). At their core was a poorly planned and administered scheme for the deregulation of the thrift industry. Steps have since been taken to prevent a reoccurrence of cases like Lincoln; nevertheless, it stands as a reminder that the deregulation of financial markets and institutions in the United States cannot be pursued in such a pell mell fashion without causing enormous adverse economic, political and human consequences.
With the assistance of $51 million of financing arranged by Michael Milliken, the junk bond king, Keating acquired control of Lincoln in 1984 through a company he owned, American Continental Corp. (AC) of Phoenix, Arizona. Less than five years later in April, 1989, AC and Lincoln, which were by then insolvent, filed petitions in bankruptcy. Six days after that, the Federal Savings and Loan Insurance Corp. (...