Pluck, leaks helped McCain to overcome S&L scandal

By Walter V. Robinson, Globe Staff, 2/29/2000

decade ago, Senator John McCain's role in the most politically corrosive episode of the $150 billion savings and loan debacle threatened to end a political career that now holds some promise of concluding instead with a McCain presidency. Back then, McCain said the Keating Five scandal was a more nightmarish experience than his years in a North Vietnamese prison camp.

What a difference a decade makes: One mischievous commentator recently suggested that the Keating Five was a rock group. And nowadays, McCain dismisses the tawdry Senate scandal as a mere asterisk in his career, in hopes the electorate will too.

Yet the scandal remains the other crucible of McCain's career, and its every filament is likely to be picked apart if McCain wins the Republican nomination, as now seems plausible.

With the passage of time, McCain's role has come to be seen as relatively benign. But had it not been for good fortune and determination - and carefully targeted news leaks that McCain subsequently denied responsibility for - McCain might have been badly tarnished.

He was a close friend and early congressional ally of Charles H. Keating Jr. - the figure at the core of scandal - and one of the leading beneficiaries of Keating's political and personal largesse. Yet, he benefited from decisions by the Senate Ethics Committee that minimized his culpability and the resulting sanction.

And there is evidence that McCain averted major damage to his public image with well-choreographed news leaks from his office that undermined three of the four other senators caught up in the controversy. In 1992, McCain denied under oath that he or his aides had anything to do with the leaks.

The scandal's raw content is unflattering: McCain and four other senators - indelibly known ever since as the Keating Five - pressuring federal regulators on behalf of Keating, a prodigious fund-raiser and owner of the Lincoln Savings & Loan Association. His bank's subsequent $3.4 billion failure made Keating the most enduring symbol of the devil-may-care S&L excesses of the 1980s.

To be sure, the record shows that McCain did less for Keating than most of the others, and abandoned Keating the moment he learned there might be criminal charges against his friend. The Senate Ethics Committee gave McCain, along with Senator John Glenn, the lightest of reprimands, saying they displayed ''poor judgment'' for going to two meetings with banking regulators.

And McCain, who has endeared himself to many voters for cheerfully acknowledging that he too has been compromised from time to time by the very special interests he now rails against, admits there was an ''appearance'' of impropriety in his intercession for Keating.

Indeed, the Ethics Committee concluded that the meetings themselves were not improper, despite evidence that the five senators so intimidated regulators that action against Lincoln was delayed for a year. The added cost to taxpayers because of the delay: a billion dollars, by some estimates.

Two investigations of the leaked news stories that often portrayed McCain favorably, one by the General Accounting Office and a later inquiry by a special counsel, Peter Fleming Jr., were inconclusive, and did not directly implicate anyone.

But in an interview this month, Clark B. Hall, a former FBI agent and congressional investigator who led the GAO investigation, told the Globe he had no doubt, after doing scores of interviews and obtaining documentary evidence, that McCain was one of the principal leakers. But Hall said the Ethics Committee ''smoothed it over.''

''You don't betray other people to protect yourself, and that's what he was doing,'' Hall said. ''And he was breaking Senate rules to do it.'' The targets of the leaks were Democrats Dennis DeConcini of Arizona, Alan Cranston of California, and Donald Riegle of Michigan. (In the end, DeConcini and Riegle would be sharply criticized by the committee; Cranston drew a formal reprimand.)

Fleming's own report in 1992, which was virtually ignored by Washington news outlets that were recipients of the leaks, left a clear inference that the circumstantial evidence points to McCain's office as the source for some pivotal leaks.

What's more, former senator Warren Rudman, the co-chairman of McCain's presidential campaign who was vice chairman of the Ethics Committee at the time, states flatly in his 1996 autobiography that McCain and his staff were among those responsible for the leaks.

Through a spokesman, McCain declined to be interviewed about the matter. But his attorney and friend, John W. Dowd, said the investigation by the bipartisan Senate Ethics Committee was a ''travesty and a farce'' and ''the most corrupt'' ever held by the Senate; that the case against his client was entirely without merit; and that the committee's chairman, Democrat Howell Heflin of Alabama, who is now retired, ''was a son of a bitch who wanted to rub salt in John's wounds.''

Dowd also had harsh words for the Globe. ''The Bush campaign must be paying for your time,'' he said. As for the leaks, Dowd said: ''If you guys want to go and masturbate about these leaks, go ahead. But I had no part in them.''

A pugnacious strategy

From the beginning, Keating also adopted a pugnacious strategy in his attempts to outfox, intimidate, and even seize control of the federal regulatory apparatus that sniffed big trouble in the way his Lincoln Savings & Loan Association was lending depositors' money for risky ventures. Many of the loans were for real estate developments by Keating's Phoenix-based American Continental Corp., which purchased the California-based Lincoln S&L in 1984.

As federal banking regulators closed in, Keating deployed powerful allies against them. He raised enormous sums for members of Congress - $1.3 million for the five senators alone, $112,000 of that for McCain's campaigns. He and his lobbyists prevailed on McCain and others to write letters and support congressional resolutions condemning Federal Home Loan Bank Board regulations that would restrict risky direct investments like those Lincoln's deposits were used for.

In 1989, Keating himself left no doubt that the campaign funds he lavished on the five senators were designed to produce results, when he declared to reporters: ''One question, among the many others raised in recent weeks, had to do with whether my financial support in any way influenced several political figures to take up my cause. I want to say in the most forceful way I can: I certainly hope so.''

Months before he pushed the five senators to meet with regulators, Keating even sought to seize control of the bank board by asking his congressional allies to support two of his choices for the three-member board that was overseeing the investigation of Lincoln. One of the two, Lee H. Henkel Jr., was appointed to the board in November 1986.

During the Ethics Committee investigation, one of the leaked stories that benefited McCain reported that DeConcini and Riegle, at Keating's behest, had lobbied the White House for Henkel's appointment. But in a little noticed finding in its final report, the committee reported that McCain had, too.

Alone among the five senators, McCain counted Keating as a personal friend; their families vacationed together from 1983 to 1986 - the four years McCain served in the House - flying to Keating's private retreat in the Bahamas aboard corporate aircraft paid for by Keating's company.

In 1986, McCain's wife, Cindy, and her father, James W. Hensley, also invested $359,100 in a Phoenix shopping mall developed by a subsidiary of Keating's American Continental Corp.

When the scandal became public, and along with it his family's personal and business links to Keating, McCain reimbursed Keating $13,433 for the flights and vacations. By not reporting them and reimbursing Keating at the time they occurred, McCain had violated House ethics rules. (He was elected to the Senate in 1986.)

But the Senate Ethics Committee decided that the vacation subsidies were House matters - outside its jurisdiction. The committee did not consider the mall investment germane. Nor was it troubled by McCain's lobbying for Henkel.

With public hearings looming, the bipartisan panel - three members from each party - split over whether to follow the urging of its counsel, Robert M. Bennett, that the case against McCain and Glenn be dropped. The committee Democrats resisted, and McCain has long insisted they did so because he was the sole Republican among the five and they feared that a pared-down ''Keating Three'' would be recast as a Democratic scandal.

Most important, the committee concluded it was not improper for five senators to seek two separate meetings with regulators, even though Keating orchestrated the April 1987 meetings. The first meeting was with bank board chairman Edwin J. Gray, at a time when Gray was seeking Senate approval for a $15 billion bailout bill to rescue hundreds of failing thrifts. Gray was summoned to a meeting in DeConcini's office and told to come alone. The second meeting, a week later, was with regulators who were directly overseeing the investigation.

Fred Wertheimer, then president of Common Cause, which filed the official complaint that prompted the Ethics investigation, said the committee's decision on the propriety of the meetings was unfortunate.

''The meetings themselves were wrong and should not have occurred. The five senators involved put undue and inappropriate pressure on regulators,'' Wertheimer said. The meetings, Common Cause argued in 1990, were ''seemingly designed to put the maximum senatorial pressure on the board to accede to Keating's wishes.''

McCain's own role remains a puzzle. Before the meetings, he had a falling out with Keating when he learned that Keating wanted the senators to negotiate on his behalf. McCain, new to the Senate and concerned about recent publicity over Keating's fund-raising for him, said he would attend the meetings only to assure himself that regulators were treating Keating fairly.

But at both meetings, first with Gray and then with thrift regulators flown in from San Francisco, McCain looked on as DeConcini pushed the regulators to give Lincoln a dispensation on a board regulation that barred further risky investments - a ban that Lincoln had already exceeded by $600 million.

Two years later, Gray told a House committee that the meetings were an attempt to ''subvert'' the regulatory process.

William Black, one of the regulators who attended the second meeting, said in an interview that Keating clearly intended to intimidate the bank board by assembling ''one-twentieth of the US Senate, to include two bona fide American heroes, a Democratic leader [Cranston] and the man who was about to become chairman of the Banking Committee [Riegle].''

McCain, despite his later insistence that he had refused to negotiate on Keating's behalf, did not raise objections to DeConcini's advocacy for Keating, according to Black.

But Dowd, McCain's attorney, said McCain ''did nothing improper, and he didn't know that...DeConcini was going to misbehave.''

The public's perception

As the committee struggled in private to sort out the scandal, another battle was joined, this one over public perceptions of the case.

The weapon of choice? News leaks.

Without leaks, there would be little fuel to stoke Washington's political fires. In a city where matters of significance are often disclosed by sources, journalists build reputations by obtaining leaks. Anonymous leaks of unauthorized information helped topple President Nixon and seriously damaged President Clinton.

McCain, who has mastered press relations like no other presidential candidate in recent history, has been no less adroit in courting reporters in the House and Senate.

Eleven years ago, when McCain was first linked to Keating, along with the other four, his relations with Washington reporters served him well. A former aide to McCain, who declined to be identified, said the senator's strategy from the outset was ''to create the clear impression he did little wrong, but that others had.''

In October 1989, when McCain held a Phoenix news conference to acknowledge he had made mistakes, his office leaked a memorandum that made DeConcini's role look more incriminating, according to the 1991-92 leak investigation by Fleming.

The Oct. 17, 1989, Arizona Republic carried an account of McCain's news conference, under the headline, ''McCain Meets the Press, Shouldering the Blame,'' and a separate story about the damaging memo from DeConcini's office. The second story bore the subhead, ''Memo Backs McCain.''

Fleming, in his report, wrote that the leaked memo ''had come to the press from Senator McCain's office, and the juxtaposition of the two articles is disturbing.''

A year later, as the Ethics Committee argued in private over Bennett's recommendation that Glenn and McCain be dropped as targets of the inquiry, Dowd, McCain's attorney, wrote letters to the committee on Sept. 24 and 28, 1990, imploring the committee to make Bennett's report public.

The next morning, The New York Times, citing ''congressional officials,'' reported Bennett's recommendation that Glenn and McCain be cleared.

Assessing the source of that leak, Fleming concluded there was ''substantial evidence'' that the five senators and their attorneys knew Bennett's recommendation. Fleming wrote in his report that Riegle, DeConcini, and Cranston had no motivation to leak information ''adverse'' to them. As for Glenn, he wrote, ''there is simply a total lack of evidence implicating Glenn.''

But Fleming wrote: ''Senator McCain, his staff as well as his counsel all deny that they knew Bennett's recommendation. These denials are contradicted by the evidence.'' However, he wrote, ''there is no direct evidence to show that McCain made the disclosures to The New York Times.''

Similarly, after McCain testified before the committee in private on Oct. 4, a subsequent Associated Press article appeared in the Phoenix Gazette, headlined ''Source: Nothing new found against McCain.''

The article, Fleming wrote, ''was accurate to a point approaching transcript form.'' He concluded: ''Senator McCain and his staff had reason to want such an article. As reflected in the headline...the article was not designed merely to report what had occurred, but also to reflect the fact that Senator McCain's testimony was exculpatory.'' Fleming reached no conclusion about the source for the article.

Within a week, Fleming wrote, ''a sea of fresh leaks, all of which were aimed at DeConcini, Cranston, and Riegle,'' occurred. The New York Times, The Washington Post, The Wall Street Journal, and The Washington Times all reported damaging evidence about the three Democrats.

Fleming, his inquiry frustrated because reporters refused to cooperate, ultimately declared that there were ''multiple sources,'' and that sensitive documents were ''distributed in an attempt to influence the proceedings.''

In 1990, Cranston complained bitterly to the committee about the leaks in a letter that suggested McCain was responsible. DeConcini, in a recent interview, said he has little doubt that McCain was responsible, but he said Fleming could not find enough corroborating evidence to say so. Whatever evidence Fleming did assemble is now in the National Archives - under seal for 42 more years. Fleming declined to be interviewed.

Hall, who led the earlier GAO investigation, said the circumstantial evidence against McCain was overwhelming, and he said there was documentary evidence to buttress the GAO's suspicions, although he said he was barred from discussing it.

When he interviewed McCain, and laid out the evidence, Hall said, McCain lost his temper. ''Senator McCain has a reputation as a stand-up guy, but his reaction that day was to point the finger at others. He said I ought to look at DeConcini, I ought to look at Riegle, and at their attorneys,'' Hall recalled.

Hall, who is now a corporate investigator, said he found McCain's finger-pointing ''contemptible'' and ''consistent with the leaks themselves, which were intended to shift the blame elsewhere.''

Former senator Rudman, asked about his book's conclusion that McCain was responsible for many of the leaks, initially said that McCain was justified in leaking because the committee had rejected Bennett's plea that McCain and Glenn be excused because their roles were minimal.

Reminded that McCain denied under oath that he was responsible for any news leaks, Rudman said his friend ''would never lie under oath. He's an honorable man.'' Rudman then added that he had no evidence that McCain had leaked anything.

Later, Rudman called to say the leaks might have come from ''someone close to'' McCain without his knowledge. The statement in the book, he added, ''was just Warren Rudman's opinion. When you're writing a book, sometimes you're not that careful.''