Keating Economics: John McCain and a Financial Crisis
Rosa Brooks: Keating 5 ring a bell?
That politician was John McCain, and his generous friend was Charles Keating, head of Lincoln Savings & Loan. While he was courting McCain and other senators and urging them to oppose tougher regulation of S&Ls, Keating was also investing his depositors' federally insured savings in risky ventures. When those lost money, Keating tried to hide the losses from regulators by inducing his customers to switch from insured accounts to uninsured (and worthless) bonds issued by Lincoln's near-bankrupt parent company. In 1989, it went belly up -- and more than 20,000 Lincoln customers saw their savings vanish.
Keating went to prison, and McCain's Senate career almost ended. Together with the rest of the so-called Keating Five -- Sens. Alan Cranston (D-Calif.), John Glenn (D-Ohio), Don Riegle (D-Mich.) and Dennis DeConcini (D-Ariz.), all of whom had also accepted large donations from Keating and intervened on his behalf -- McCain was investigated by the Senate Ethics Committee and ultimately reprimanded for "poor judgment."
But the savings and loan crisis mushroomed. Eventually, the government spent about $125 billion in taxpayer dollars to bail out hundreds of failed S&Ls that, like Keating's, fell victim to a combination of private-sector greed and the "poor judgment" of politicians like McCain.
The $125 billion seems like small change compared to the $700-billion price tag for the Bush administration's proposed Wall Street bailout. But the root causes of both crises are the same: a lethal mix of deregulation and greed.
Today's meltdown began when unscrupulous mortgage lenders pushed naive borrowers to sign up for loans they couldn't afford to pay back. The original lenders didn't care: They pocketed the upfront fees and quickly sold the loans to others, who sold them to others still. With the government MIA, soon mortgage-backed securities were zipping around the globe. But by the time many ordinary people began to struggle to make their mortgage payments, the numerous "good" loans (held by borrowers able to pay) had gotten hopelessly mixed up with the bad loans. Investors and banks started to panic about being left with the hot potato -- securities backed mainly by worthless loans. And so began the downward spiral of a credit crunch, short-selling, stock sell-offs and bankruptcies.
Could all this have been prevented? Sure. It's not rocket science: A sensible package of regulatory reforms -- like those Barack Obama has been pushing since well before the current meltdown began -- could have kept this most recent crisis from escalating, just as maintaining reasonable regulatory regimes for S&Ls in the '80s could have prevented that crisis (McCain learned this the hard way).
But, despite his political near-death experience as a member of the Keating Five, McCain continued to champion deregulation, voting in 2000, for instance, against federal regulation of the kind of financial derivatives at the heart of today's crisis.
Shades of the Keating Five scandal don't end there. This week, for instance, news broke that until August, the lobbying firm owned by McCain campaign manager Rick Davis was paid $15,000 a month by Freddie Mac, one of the mortgage giants implicated in the current crisis (now taken over by the government and under investigation by the FBI). Apparently, Freddie Mac's plan was to gain influence with McCain's campaign in hopes that he would help shield it from pesky government regulations. And until very recently, Freddie Mac executives probably figured money paid to Davis' firm was money well spent. "I'm always in favor of less regulation," McCain told the Wall Street Journal in March.
These days, McCain is singing a different tune.
"There are no atheists in foxholes and no ideologues in financial crises," Fed Chairman Ben Bernanke said last week, explaining the sudden mass conversion of so many onetime free marketeers into champions of robust government intervention. Fair enough. But as you try to figure out what and who can get us out of this mess, beware of those who now embrace regulation with the fervor of new converts.
Mishaps mark John McCain's record as naval aviator
McCain recounted the accident decades later in his autobiography. "The engine quit while I was practicing landings," he wrote. But an investigation board at the Naval Aviation Safety Center found no evidence of engine failure.
The crash was one of three early in McCain's aviation career in which his flying skills and judgment were faulted or questioned by Navy officials.
In his most serious lapse, McCain was "clowning" around in a Skyraider over southern Spain about December 1961 and flew into electrical wires, causing a blackout, according to McCain's own account as well as those of naval officers and enlistees aboard the carrier Intrepid. In another incident, in 1965, McCain crashed a T-2 trainer jet in Virginia.
As a presidential candidate, McCain has cited his military service -- particularly his 5 1/2 years as a POW. But he has been less forthcoming about his mistakes in the cockpit.
The Times interviewed men who served with McCain and located once-confidential 1960s-era accident reports and formerly classified evaluations of his squadrons during the Vietnam War. This examination of his record revealed a pilot who early in his career was cocky, occasionally cavalier and prone to testing limits.
In today's military, a lapse in judgment that causes a crash can end a pilot's career. Though standards were looser and crashes more frequent in the 1960s, McCain's record stands out.
"Three mishaps are unusual," said Michael L. Barr, a former Air Force pilot with 137 combat missions in Vietnam and an internationally known aviation safety expert who teaches in USC's Aviation Safety and Security Program. "After the third accident, you would say: Is there a trend here in terms of his flying skills and his judgment?"
Jeremiah Pearson, a Navy officer who flew 400 missions over Vietnam without a mishap and later became the head of human spaceflight at NASA, said: "That's a lot. You don't want any. Maybe he was just unlucky."
Naval aviation experts say the three accidents before McCain's deployment to Vietnam probably triggered a review to determine whether he should be allowed to continue flying. The results of the review would have been confidential.
The Times asked McCain's campaign to release any military personnel records in the candidate's possession showing how the Navy handled the three incidents. The campaign said it would have no comment.
Navy veterans who flew with McCain called him a good pilot.
"John was what you called a push-the-envelope guy," said Sam H. Hawkins, who flew with McCain's VA-44 squadron in the 1960s and now teaches political science at Florida Atlantic University. "There are some naval aviators who are on the cautious side. They don't get out on the edges, but the edges are where you get the maximum out of yourself and out of your plane. That's where John operated. And when you are out there, you take risks."
The young McCain has often been described as undisciplined and fearless -- a characterization McCain himself fostered in his autobiography.
"In his military career, he was a risk-taker and a daredevil," said John Karaagac, a lecturer at Johns Hopkins' School of Advanced International Studies and the author of a book on McCain. "What was interesting was that he got into accidents, and it didn't rattle his nerves. He takes hits and still stands."
McCain, the son and grandson of admirals, had a privileged status in the Navy. He was invited to the captain's cabin for dinner on the maiden voyage of the Enterprise in 1962, a perk other aviators and sailors attributed to his famous name, recalled Gene Furr, an enlisted man who shared an office and went on carrier deployments with McCain over three years.
On another occasion, McCain was selected to make a commemorative landing on the Enterprise and had his picture taken in front of a cake in the officers' galley, Furr said.
McCain's commanders sarcastically dubbed him "Ace McCain" because of his string of pre-Vietnam accidents, recalled Maurice Rishel, who commanded McCain's VA-65 squadron in early 1961, when it was deployed in the Mediterranean. Still, Rishel said, "he did his job."
No - he was an insubordinate and disobediant showoff.