Strict Controls Proposed for State’s Thrifts : S&Ls;: The measure would impose limits on insider deals and prohibit high-risk investments in real estate and junk bonds.

Responding to an expected $2-billion bailout of troubled Lincoln Savings & Loan, the chairman of the Assembly Finance and Insurance Committee on Thursday proposed sweeping changes in the law governing state-chartered S&Ls.;

The measure would impose limits on insider deals, prohibit high-risk investments in real estate and junk bonds and increase penalties for violators of state rules to as much as $1 million a day.

The changes would restore many of the tight controls over S&Ls; that were in place until 1982, when the Legislature agreed to let state-chartered thrifts move away from traditional home mortgages and engage in more speculative transactions, said Assemblyman Patrick Johnston (D-Stockton), who outlined his proposal at a Capitol press conference.

Johnston said if his plan had been in place a few years ago, “Lincoln Savings would have had a much more difficult time doing business in California (and) would have been shut down much earlier.”

Last April, Lincoln’s parent company, American Continental Corp., filed for bankruptcy, and federal regulators took over operations of the thrift. An estimated 22,000 Lincoln customers, who had invested $250 million in uninsured American Continental bonds sold at the thrift’s branches, found themselves holding worthless paper.

Many of the features of Johnston’s proposal have already been imposed on state-chartered S&Ls; by recent changes in federal law that apply to all federally insured institutions. No thrift can be chartered in California without federal insurance.

However, other changes would give the state savings and loan commissioner new authority to bring a reckless thrift back into line and to seek penalties against lawyers and accountants who knowingly aid an S&L; in illegal activity.

State S&L; Commissioner William J. Crawford said he supports Johnston’s plan.

Under existing law, Crawford said the state commissioner has wide latitude in granting new S&L; charters and in approving a thrift’s mix of investments.

Crawford complained that his predecessor, Lawrence W. Taggart, approved 201 charters in his 500 days in office, without turning a single applicant down. In contrast, Crawford said he turned down 67 of 68 applications that have come before him.

Crawford said he was particularly pleased that Johnston proposed reimposing limits on unsecured construction loans--capping them at 5% of an S&L;’s assets.

In addition, Johnston said he will ask for an outright ban on direct investment in real estate.

“Lincoln was first in the nation in terms of direct investment in real estate and half of its assets were in those kinds of direct investments,” Johnston said. “In over a 15-month period, (Lincoln officials) only made 11 home loans, while they were investing massively in raw land in Arizona.”

The Johnston measure would also provide new protections for whistle-blowers--S&L; employees who alert regulators to possible violations of state or federal law.

Crawford said since 1986, he has required S&Ls; to inform employees about their obligation to tell regulators if they suspect wrongdoing.