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Charles Keating and the Lessons of the Savings and Loan Crisis

On Wednesday, Charles H. Keating Jr., one of the most notorious fraudsters in American history, died at the age of 90.

(Image: Global finance via Shutterstock)

Charles H. Keating Jr., one of the most notorious fraudsters in American history, died yesterday at the age of 90.

Although his status as financial criminal number one has slipped a bit in the wake of the 2008 financial crisis, Keating was for many years the guy many Americans thought off when they thought off bankster rip-off artists, and his story reminds us that historically governments have had a very specific response to bad behavior by banks and banksters.

From FDR to Reagan, from Sweden to Iceland, when banks have broken the rules or even engaged in dangerous behavior that might technically be legal but crashes an economy, the investors in those banks have lost their investments, the banks themselves have been taken over by the government (at least for a short time) and the banksters that caused the crisis have gone to jail.

Case and point: After Reagan deregulated the savings and loans in the early 1980s, Charles Keating made millions of dollars through risky investments that ripped off the people who invested in two of the companies he ran, American Continental Corporation and Lincoln Savings and Loan.

Tens of thousands of everyday Americans, many of them senior citizens, lost millions of dollars on the junk bonds Keating sold to them.

Keating was protected from federal regulators for a while by a group of senators, including John McCain, but by 1989 the gig was up. American Continental went bankrupt and Lincoln Continental was seized by the government. This was the largest bank failure of the savings and loan (S&L) crisis of the 1980s and 1990s

Ethically and logistically, there’s very little difference between what Keating did 25 years ago during the savings and loans debacle and what Wall Street banksters did in the lead-up to the 2008 financial meltdown.

Like the people in charge of Bear Sterns, Lehman Brothers, and Bank of America, Keating took advantage of loose regulations to make risky and eventually unsustainable investments. And like the people in charge of Bear Sterns, Lehman Brothers, and Bank of America, Keating passed the costs of those risky investments onto everyday investors.

There’s one very big difference between what Keating did during the savings and loans crisis and what the Wall Street banksters did during the 2000s, however: Keating went to jail for his crimes.

In 1993, he was convicted on 73 counts of bankruptcy and wire fraud and sentenced to 12 years in prison. Keating ended up serving only 4 ½ years of that sentence, but those 4 ½ years in prison are still longer than any prison time served by any head of any big bank responsible for the 2008 financial crisis

And Keating wasn’t the only bankster who went to prison for his role in the S&L debacle. During the late 1980s and early 1990s, the Reagan and Bush administrations prosecuted over 1,000 different individuals for their role in the crisis, and of those prosecutions, 839 resulted in convictions.

Since the 2008 crisis, however, the government hasn’t done anything like what it did after the savings and loans crisis. In fact, it’s really done nothing at all. No major player in the great mortgage bubble of the 2000’s has gone to jail for their crimes.

As the stock market continues to rise and the big banks get bigger, the shadow of the savings and loans crisis looms larger every day.

By throwing the savings and loans banksters in jail, the government sent a message: if you rip people off, you will pay for it. And it gave that message extra weight by stripping the banksters of their assets, nationalizing those assets, and then reselling them to the public using a special agency called the Resolution Trust Corporation.

In the wake of the savings and loans meltdown, the government did exactly what governments should do after banking crisis. Since almost all banking crises have, to some degree, something to do with fraud, it treated the S&L crisis as a criminal matter and punished those responsible for the crimes.

The 2008 financial crisis was the savings and loans crisis on steroids, and the government should have done the same to the people in charge of Lehman Brothers and Bank of America as it did to Charles Keating and the S&L banksters. It should have sent them to jail and stripped them of their assets.

But it didn’t, and now the big banks are bigger than ever and comfortable in the knowledge that not only are they too big to fail, they’re also too big to jail.

Let’s hope the death of Charles Keating reminds the government to take action now and jail the banksters before yet another financial crisis decimates the economy.

After all, it’s what Reagan would have done.

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