Lincoln Savings And Loan Case Study

Creative accounting, influence peddling and other abuses at Lincoln Savings and Loan Charles Keating employed accounting schemes to divert the savings and loan’s federally insured deposits into ACC’s treasury. Keating would be permitted to withdraw funds from Lincoln and invest them in ACC or use them for only to the extent that Lincoln reported after-tax profits. He and his associates wove together complex real estate transactions involving Lincoln, ACC, and related third parties to make profits for Lincoln. Kenneth Leventhal & Company, an accounting firm to analyze and report on Lincoln’s accounting practices.
In 1987 Lincoln was the large Hidden Valley transaction that took place. On March 30, 1987, Lincoln loaned $19.6 million to E.C. Garcia & Company. And Garcia is a close friend of Keating and the owner of the land development company; extended a $3.5 million loan to Wescon, a mortgage real estate concern owned by Garcia’s friend, Fernando Acosta and Wescon purchased 1,000 acres from Lincoln for $14 million. Acosta
used the loan from Garcia as the down payment on the tract of land and signed a nonrecourse note for the balance. Lincoln recorded a profit of $11.1 million on the transaction-profit that was never realized, since the savings and loan never received payment on the nonrecourse note.
Lincoln never expected to be paid the balance of the nonrecourse note and executives arranged the loan simply to allow the saving and loan to book a large paper gain.
Garcia that agreed to become involved in the deceptive Hidden Valley transaction only because he wanted the $19.6 million loan from Lincoln. Recognizing a profit on the Hidden Valley transaction would have openly violated financial accounting standards if Garcia had acquired the property directly from Lincoln and used funds loaned to him by the saving and loan for his down payment. Which prior to the Hidden Valley transaction has total assets of $87,000 and a net worth of $30,000, was only a straw buyer of the Hidden Valley property. Acosta reported that Wescon was too small to buy the property and he signed the documents without reading them to help his friend, Garcia. This letter Acosta wrote to Garcia to assume title to the property so that he could take it off Wescon’s
books.
Keating and his associates used bogus real estate transactions to produce enormous gains for Lincoln. And Lincoln recognized more than $135 million of profits on such transaction. When the purchasers of these tracts of land defaulted on their nonrecourse note, Lincoln was forced to recognize losses with additional profitable real estate transactions. That Lincoln would fail.
Charles Keating not only for employing creative accounting methods but for several other abusive practices as well. In 1985 Charles Keating III, to serve as Lincoln’s president. He did not understand many of the transactions he signed off on as Lincoln’s president.
Met with federal banking regulators and lobbied for favorable treatment of Lincoln Savings and Loan. The key issue in lobby is so called direct investment rule adopted by the FHLBB in 1985
In 1986 the amendment failed to be seconded and thus was never adopted. That Keating loaned $250,000, with very favorable payback terms, to a former SEC, who then lobbied the SEC. in a legal brief submitted to the FHLBB, Greenspan reported that Lincoln’s management team was seasoned and expert and that the savings and loan was a financially strong institution. Federal authorities eventually indicted Keating on various racketeering and securities fraud charges. He used by the Resolution Trust Corporation, the federal agency created to manage the massive savings and loan crisis that threatened the integrity of the nation’s banking system during the 1980s. That agency charged Keating with insider dealing, illegal loans, sham real estate and tax transactions, and the fraudulent sale of Lincoln securities.