Charles Keating, the leader of the savings & loan scams of the 1980s, passed away last week. Not too many people remember the damage that was done by the S&P crisis and how few of the lessons from that crisis were remembered. Instead, new scams and frauds occur with regularity. Here’s a good review of Keating’s actions by a many who tried to regulate Keating and regularly was confronted by politicians Keating had purchased through campaign contributions.
The Savings and Loan debacle was the test bed for the epidemics of accounting control fraud that drove our subsequent financial crises. The debacle was the only one that was “successfully” contained before it could cause a financial crisis. The debacle was widely described at the time as the “worst financial scandal is U.S. history,” so the phrase “successfully contained” is obviously one that could spark disbelief. The critical modifier is “before it could cause a financial crisis.” The S&L debacle did not lead to even a mild national recession. It did hyper-inflate regional real estate bubbles that pushed parts of the Southwest region into a serious economic decline. The Enron-era frauds substantially contributed (in conjunction with the related collapse of the dot com bubble) to a $7 trillion fall in market capitalization and the fraud epidemics hyper-inflated the largest bubble in history and drove a Great Recession that is projected to cost over $20 trillion in lost production. The S&L debacle, therefore, allows us to understand not only went wrong, but also how to prevent things from going wrong.