October 7, 2008 — Patrick Zimmerman

John McCain and the Making of a Financial Crisis

The McCain-Keating Scandal: The Past is Prologue

In Salon, Walter Shapira points out that the driving narrative of John McCain’s political career is not having endured five and a half years in a POW camp, but rather his having suffered through four years as a center of attention in the late 1980s congressional scandal known as the Keating Five. As McCain tells it, this was a classic tale of sin and salvation as an erring senator made a grievous mistake in judgment, was hauled before the Senate Ethics Committee and, as a result, was forever changed by the public humiliation.

“I would very much like to think that I have never been a man whose favor could be bought. From my earliest youth, I would have considered such a reputation to be the most shameful ignominy imaginable,” McCain wrote in his 2002 memoir. “Yet that is exactly how millions of Americans viewed me for a time, a time that I will forever consider one of the worst experiences of my life.” For those who don’t know about or remember 1988 news headlines, McCain, along with four other Democratic senators, improperly intervened with federal regulators in an effort to save the crumbling savings-and-loan empire of Charles Keating, an Arizona friend and campaign contributor of McCain’s.

The Keating Five have long lingered on the periphery of the 2008 campaign as a blast-from-the-past partisan talking point. Twenty years is a long time for penance, and most voters seemed willing to abide by a statute of limitations about scandals that date back to the era of phone booths and boom boxes.

But all that changed when the minute-by-minute chart of the Dow Jones Average began to look like a plunge off a mountain. Confronted with America’s incredible shrinking stock portfolio, both McCain and Sarah Palin reacted by openly committing their campaign to brutish and ugly attempts to tarnish Obama. The aim of those tactics clearly is to deflect the public’s attention away from the economic crisis, since McCain is increasingly viewed as extremely weak when it comes to economic issues.

The Obama campaign countered the vicious personal attacks by attempting to link the early 1990s scandal to the current economic crisis. It launched a video entitled Keating Economics, which is a searing documentary-style video of McCain’s involvement in the Keating Saving and Loan scandal. The Obama campaign, including its surrogates appearing on radio and television, will be arguing that the deregulatory fervor that caused the massive, cascading savings-and-loan collapses in the late 1980s has been pursued by McCain throughout his career, and helped to cause the current credit crisis.

Obama’s website about Keating says: “The current economic crisis demands that we understand John McCain’s attitudes about economic oversight and corporate influence in federal regulation. ….The Keating scandal is eerily similar to today’s credit crisis, where a lack of regulation and cozy relationships between the financial industry and Congress has allowed banks to make risky loans and profit by bending the rules.”

The Keating Five Scandal: McCain’s Defining Moments

When McCain was first elected to the U.S. House of Representatives, he quickly positioned himself as a GOP hard-liner. He voted against honoring Martin Luther King Jr. with a national holiday in 1983, a position that he held until 1989. He backed President Reagan on tax cuts for the wealthy, abortion and support for the Nicaraguan contras. He sought to slash federal spending on social programs, and he voted twice against campaign-finance reform. He states that his “biggest” legislative victory of that era was a 1989 bill that abolished catastrophic health insurance for seniors, a move he still cheers as the first-ever repeal of a federal entitlement program.

Although he was a hawkish Cold Warrior, McCain showed an independent streak when it came to the use of American military power. Because of his experience in Vietnam, he said, he didn’t favor the deployment of U.S. forces unless there was a clear and attainable military objective. In 1983, McCain broke with Reagan and voted against the deployment of Marine peace-keepers to Lebanon. The unorthodox stance caught the attention of the media, which praised McCain’s “enormous courage.” It was the beginning of a beautiful friendship. McCain recognized early on how the game was played: The Washington press corps “tend to notice acts of political independence from unexpected quarters,” he later noted. “Now I was debating Lebanon on programs like MacNeil/Lehrer NewsHour and in the pages of The New York Times and The Washington Post. I was gratified by the attention and eager for more.”

In The Rolling Stone, Tim Dickinson’s account of the Keating Five scandal, describes McCain’s early years as a senator. When McCain first became a senator in 1986, filling the seat of retiring Republican icon Barry Goldwater, he was finally in a position that a true maverick could use to battle the entrenched interests in Washington. Instead, McCain did the bidding of his major donor, Charlie Keating, whose financial empire was on the brink of collapse. Federal regulators were closing in on Keating, who had taken federally insured deposits from his Lincoln Savings and Loan and leveraged them to make wildly risky real estate ventures. If regulators restricted his investments, Keating knew that it would all be over.

In the year before his Senate run, as a U.S. representative McCain had fought for legislation that would have delayed new regulations of savings and loans. Grateful, Keating contributed $54,000 to McCain’s Senate campaign. Now, when Keating tried to stack the federal regulatory bank board with cronies, McCain made a phone call seeking to push them through. In 1987, in an unprecedented display of political intimidation, McCain also attended two meetings convened by Keating to pressure federal regulators to back off. The senators who participated in the effort would later come to be known as the Keating Five.

“Senate historians were unable to find any instance in U.S. history that was comparable, in terms of five U.S. senators meeting with a regulator on behalf of one institution,” says Bill Black, who was then the deputy director of the Federal Savings and Loan Insurance Corporation, and who attended the second meeting. “And it hasn’t happened since.”

Subsequent to the meetings with McCain and the other senators, the regulators backed off, stalling their investigation of Lincoln. By the time the Saving and Loan collapsed two years later, taxpayers were on the hook for $3.4 billion, which stood as a record for the most expensive bank failure, until our current mortgage crisis. In addition, 20,000 investors who had bought junk bonds from Keating, thinking they were federally insured, had their savings wiped out.

“McCain saw the political pressure on the regulators,” recalls Black. “He could have saved these widows from losing their life savings. But he did absolutely nothing.” McCain was ultimately given a slap on the wrist by the Senate Ethics Committee, which concluded only that he had exercised “poor judgment.”

Lessons Not Learned: The False Self

While some political pundits have disagreed with Obama’s launching of the McCain-Keating documentary as not a smart political play, as looking too much like the negative punching that is now the major strategy of team McCain. From perhaps a more perceptive approach, Walter Shapiro points out that the Obama campaign missed the real reason that the Keating Five scandal still remains relevant 20 years later.

The point lies not in the details of the bygone scandal, but rather in the way that McCain has abandoned in this presidential campaign all the good-government habits that he adopted after he was chastised by the Ethics Committee. As McCain described in his memoir, “I decided right then that not talking to reporters or sharply denying even the appearance of a problem wasn’t going to do me any good. I would henceforth accept every single request for an interview…and answer every question as completely and straightforwardly as I could.”

McCain, who until this spring was indeed one of the most accessible major politicians in America, has veered completely in the other direction, avoiding reporters at one point for more than a month. As the decision-maker on the Republican ticket, McCain is also responsible for the media strategy that has almost completely muzzled Sarah Palin since her selection as his running mate.

Far more disturbing is that it has become difficult to believe that John McCain recalls the larger message about personal honor that he supposedly learned from his Keating Five disgrace. As the campaign to tarnish Obama grows more ugly, it seems clear that McCain has made a Faustian bargain in his attempt to win the White House.

As Walter Shapiro has put it it, “If successful, McCain, of course, will have power. But if he fails, he will only have his regrets and his late-in-life reputation for low-road tactics.”

Barclay Walsh and Kitty Bennett have written more about McCain and the Keating Five in The New York Times here.

In The New Republic, there were comments about Obama’s McCain documentary written by Jason Zengerle and by Noam Scheiber.

John McCain: The Making of a Financial Crisis

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