Beyond the Dome

Here is the piece about McCain’s role from CQ’s coverage during that period, from “Keating and the Five Senators: Putting the Puzzle Together,” by John R. Cranford, CQ Weekly Report, Jan. 26, 1991:

John McCain: Friends No More

Of the five senators, McCain was easily the closest to Keating in 1987, when Keating first began seeking help on Capitol Hill in his fight with the regulators.

McCain is a former Vietnam POW; Keating, a former World War II pilot. They met in 1981 at a Navy League dinner in Phoenix and hit it off immediately. McCain was a brash, conservative Republican candidate for the House; Keating was a brash, conservative capitalist and antipornography crusader. Keating was active in politics and in promoting a building boom in the Arizona desert. And his American Continental Corp. (which purchased the Irvine, Calif.-based Lincoln in 1984) was to be the engine to drive that boom.

McCain liked that; his wife and father-in-law have a lot of money invested in Arizona real estate. So the two found friendship and common cause.

The families vacationed together yearly in the mid-1980s at Keating’s private resort on Cat Cay in the Bahamas. Keating was fond of the islands; he even thought he might become ambassador to the Bahamas in the first Reagan administration. Something — probably his run-in with the SEC — got in the way of his hoped-for appointment. McCain and his family often flew on American Continental’s planes or on charters hired by the company.

McCain got about $112,000 in contributions from Keating, his family and associates for two House campaigns in 1982 and 1984 and a campaign for the Senate in 1986.

Then-Rep. McCain supported Keating and other Arizona thrift executives in 1984 and 1985, when they opposed a new bank board regulation limiting direct ownership by thrifts of real estate and other assets. Like many members, McCain wrote letters to the bank board objecting to the new rule. He joined a majority of the House in cosponsoring a non-binding resolution asking the bank board to delay the regulation.

So when Keating complained in early 1987 that the bank board’s San Francisco regulators were harassing him, McCain lent an ear.

McCain met with Dennis DeConcini on March 19, 1987; by then, the idea of meeting with bank board chairman Ed Gray had already germinated in the minds of several senators.

McCain and DeConcini discussed why the San Francisco regulators were taking so long with the Lincoln examination.It had begun a year before, and the constant requests for documents and complaints about appraisals and loan underwriting were getting in the way of Lincoln’s business.

About the same time, McCain got a letter from Jack D. Atchison, then a managing partner with the Big Eight accounting firm of Arthur Young & Co., which did Keating’s books. (A year later, Atchison would go on Keating’s payroll for about $900,000 a year.)

Atchison made a strong case that the regulators were unfairly picking on Lincoln and that the thrift was strong and profitable. He said the regulators had taken “unusually antagonistic positions and actions” toward Lincoln. McCain reasoned that if such an independent source as an outside auditor supported him, Keating must be right.

Just to be sure, McCain’s banking aide, Gwendolyn van Paasschen, called Atchison. She was convinced; Atchison was as forceful on the phone as in writing.

DeConcini wanted to drop everything and go see Gray in his office. McCain says DeConcini even proposed flying to San Francisco to confront the regulators; DeConcini disputes this.

McCain, still lodged in a temporary office and feeling his way in the Senate, balked at a trip to bank board headquarters. But when a meeting with Gray in DeConcini’s office was proposed, he agreed to come.

All along, van Paasschen was uneasy. She didn’t trust Keating, and she worried that the meeting might be misconstrued.

But her warnings to McCain went largely unheeded. She chatted regularly with DeConcini’s banking aide, Laurie Sedlmayr, also troubled about Keating. Sedlmayr shared with van Paasschen briefing materials she had prepared for DeConcini, some of which originated with Lincoln. Van Paasschen thought she had an agreement with DeConcini’s office to limit the conversation at the meeting with Gray — and not to engage in any negotiation in Lincoln’s behalf. Sedlmayr disputes this.

Whatever Keating expected from DeConcini and McCain at the upcoming meeting, he didn’t get it.

When DeConcini met Keating March 24 to talk about the meeting, he told Keating that McCain didn’t want to negotiate for Lincoln or otherwise intervene improperly. Keating called McCain a “wimp.”

When McCain met with Keating later that day, he immediately confronted Keating with the insult.

They talked — or rather McCain talked — for several minutes.

McCain informed Keating that their friendship was over. He would go to the meeting with Gray but would not negotiate for Keating; he wanted no part of that. Keating protested: McCain should not even go, but McCain insisted that he had obligations to American Continental employees and would try to find out why the examination was dragging on.

Despite McCain’s intent to break off relations, Keating lobbyist Jim Grogan continued to lean on him. At one point, he asked McCain to invite Riegle to the meeting with Gray — Riegle had first suggested the meeting, according to DeConcini, Grogan and Gray — but McCain refused to do so.

Grogan remembers McCain reluctantly walking to Riegle’s office, where the two senators conferred privately. McCain recalls a meeting, but Riegle does not.

Despite van Paasschen’s misgivings, his own concerns about the propriety of a meeting and his anger at Keating, McCain went to DeConcini’s office at 6 p.m. April 2, 1987, to meet with Gray. Cranston and Glenn showed up, and the five men began to talk.

Van Paasschen had come along to DeConcini’s office. Aides weren’t invited, but McCain wanted her there, in case he had questions for her. She waited outside with Sedlmayr. The lack of aides bothered McCain slightly, but he did not object.

What happened in the meeting with Gray is unclear; there are no notes. But McCain and Gray agree that McCain was concerned about the propriety of the meeting. Gray assured McCain it was all right to ask questions. The problem was, Gray came unprepared to answer questions about Lincoln.

Since that was the point, McCain says he tuned out as soon as Gray revealed he could not discuss the specifics of Lincoln’s complaints. Before the meeting broke up - it lasted perhaps an hour, perhaps half that time - it was clear that the San Francisco regulators were going to meet with the senators to clear up the issue. That, it seems, was Gray’s idea. And because Gray had suggested it, McCain reasoned, the second meeting also would not be improper.

The following week, on April 9, at the same time and place, the same senators, plus Riegle, gathered.

As he had at the first meeting with Gray, McCain quickly tried to reassure the regulators: “I wouldn’t want any special favors” for American Continental, he said, according to voluminous, near verbatim notes taken by William Black, one of the regulators. “I don’t want any part of our conversation to be improper.”

McCain wanted to talk about why the Lincoln exam had taken so long and asked why the regulators were downgrading appraisals of real estate ventures owned by Lincoln.

Those reappraisals were killing the thrift’s balance sheet and made it a potential target for takeover by the government.

The regulators saw the two concerns as contradictory. To get new appraisals would further delay the exam; maybe what the senators really wanted was more delay — or maybe they were arguing that the regulators should accept the thrift’s numbers and be done with it. Either would be wrong, they believed. But McCain never suggested the exam be delayed.

Though they testified later that they had felt intimidated, the regulators decided to open up against Keating with both barrels. “We’re sending a criminal referral to the Department of Justice,” said Michael Patriarca, head supervisor for the San Francisco bank board office.

That caught the senators by surprise, but they continued talking. Finally, after more than two hours, the meeting adjourned. Afterward, McCain told van Paasschen that he wanted nothing more to do with Lincoln.

McCain’s connections to Keating continued to haunt him, however.

In 1989, about the time that American Continental went bust and the government seized Lincoln, the Internal Revenue Service began questioning the company’s claimed tax deductions for the cost of flying McCain and his family to the Bahamas on several occasions in 1984, 1985 and 1986. McCain, who insists that he had intended to repay the company for the trips — and says he believed that he had — sent checks for $13,433 to American Continental. His failure to promptly reimburse the company is one of the points about the case that most dogs McCain.