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Fraud May Have Big Role in S&L; Failures, GAO Says

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Times Staff Writer

A massive wave of fraud and other criminal behavior may have played a much bigger role in the financial collapse of hundreds of savings and loan associations than has previously been disclosed, the General Accounting Office said Friday.

In an intensive investigation of a group of failed S&Ls;, including some of the largest, the GAO found that fraud or insider abuse existed in every case, GAO official Frederick D. Wolf said during a hearing here of the House Banking Committee.

The thrust of the GAO report implies that the massive wave of collapses in the U.S. savings and loan industry will be viewed ultimately as the biggest white-collar crime in history.

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Previously, federal regulators have insisted that fraud was a problem, but only a minor issue compared with the collapse of oil prices and real estate values in Texas and Oklahoma.

Federal Home Loan Bank Board Chairman M. Danny Wall told Congress last week that fraud apparently was involved in just 20% or 25% of thrift failures.

But Wolf, previewing for the congressional committee a GAO report that will be issued soon, said Friday that illegal behavior was rampant.

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“Fraud or insider abuse existed at each and every one of the failed thrifts (surveyed),” said Wolf, who is director of the accounting and financial management division of the GAO, which is the investigative arm of Congress.

The illegal activities combined with the impact of an economic slump to drive S&Ls; into financial collapse. Honestly run S&Ls;, by contrast, weathered the economic slump. As the report puts it: “On the other hand, many thrifts which operated prudently survived the same adverse conditions.”

The pervasiveness of corruption was uncovered in the GAO’s review of 26 institutions from among the 284 failed or failing S&Ls; that were merged, liquidated or helped by federal regulators between the beginning of 1985 and Sept. 30, 1987. The companies in the sample accounted for $11.4 billion in losses to the Federal Savings and Loan Insurance Corp. fund, or 57% of the losses incurred by the fund in connection with all 284 cases.

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The 26 companies were not identified, Wolf said, because disclosure could jeopardize “the government’s efforts to seek recoveries in civil suits or to prosecute alleged criminal acts.”

Wolf added that the federal bailouts of insolvent thrifts last year may only worsen the crisis. He said the sale of the thrifts to private investors could cost the taxpayers more than if the government had simply closed the institutions and paid off depositors.

The bank board provided more than $37 billion in federal notes and tax breaks to private investors who agreed to take over insolvent thrifts in 1988. But Wolf said the actual cost of the deals may be closer to $50 billion by the time all the notes are paid off.

‘Serious reservations’

“We also have serious reservations about whether these assistance actions will result in permanent solutions or simply prolong the problem and increase its ultimate cost,” he said.

Another witness, James Cirona, president of the San Francisco Home Loan Bank, told the committee that the FBI and the Justice Department need more money to pursue white-collar criminals in the savings and loan business.

“Judges must take these crimes more seriously and sentence convicted felons to substantial prison terms,” Cirona said. “Some sentences in this district have been scandalously weak. We must deter future looting of thrifts.”

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Rep. Richard H. Lehman (D-Sanger) asked witness Larry Taggart, who served as California savings and loan commissioner during a period of major savings and loan growth in 1983 and 1984: “How did all these crooks get into the S&L; industry in the state?”

Taggart responded, “I’d have to have your definition of a crook.” Taggart said many of the industry’s problems could have been managed except that federal regulators acted too quickly in closing down troubled institutions. “There was a tremendous amount of seizure mania,” he said.

Many industry observers say just the opposite--that many thrifts were allowed to remain alive long after it was clear that they would never return to profitability. The losses such companies continued to accumulate, these critics say, greatly intensified the crisis in the industry.

Letter Distributed

The committee distributed a letter that Taggart wrote in 1986, when he was a private consultant, appealing to White House Chief of Staff Donald T. Regan for help against federal S&L; regulators. The bank board’s actions “are likely to have a very adverse impact on the ability of our party to raise needed campaign funds in the upcoming elections,” Taggart’s letter said.

Taggart said he sent the letter because federal regulators were acting unfairly toward the industry, especially in Texas.

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