FBI Looking for Fraud at 530 Failed Thrifts, Sessions Says

Federal law enforcers are searching for fraud at 530 failed financial institutions as part of an effort to trace responsibility for the collapse in the savings and loan industry, the FBI director said Wednesday.

“Although it was the general economic downturn in Texas that surfaced the problem, it appears to the FBI as if a pervasive pattern of fraudulent lending activity began much earlier,” William Sessions said at a hearing of the House Banking Committee in Dallas.

The committee, chaired by Rep. Henry B. Gonzalez (D-Tex.), is holding two days of hearings in Dallas to examine investigations of profound fraud in the industry, which has emerged as an important theme in the savings and loan crisis.

“Experience demonstrates that insider abuse is a major factor in almost all of our investigations involving failed financial institutions,” Sessions said.

“This is not a problem that is limited to Texas, or even to the Southwest,” Sessions said. “More incidents of insider abuse have been identified in Texas, however, because the Texas institutions are coming under closer scrutiny as they are being declared insolvent.”

In North Texas alone, Sessions said, “the Dallas (Bank Fraud) Task force currently has 38 separate savings and loans institutions identified wherein major conspiratorial fraud is alleged. Over 500 subjects have been identified for investigation and possible prosecution.

“Potential financial loss exposure is $10.5 billion,” Sessions said.

Gonzalez criticized the Bush Administration for the pace of implementing regulations and safeguards adopted last year in bailout legislation.

“We gave the regulatory and the law enforcement agencies unprecedented power to deal with the crisis and the cleanup,” Gonzalez said. “We intended that this effort have priority at every level--from the Oval Office of the White House, to the examiners in the field, to the agents of the Federal Bureau of Investigation, and to the attorneys in the bureaucracy of the Justice Department.”

But Gonzalez said the administration left key jobs unfilled and failed to develop a “sense of urgency.”

“The recovery machinery at the Resolution Trust Corp., (the agency created to rescue thrifts) creaks along like some old Model T with many of its parts missing. The biggest evidence of life and vigor has been the outlandish bureaucratic infighting that has paralyzed and driven away the better people,” Gonzalez said.

“The American people--judging from my mail and my telephone calls--are angry about what they see as ‘business as usual’ approach to a disaster that is costing them dearly,” Gonzalez said.

Sessions, who led off the testimony, defended the agency’s effort, recalling bank fraud investigations as far back as 1982. Sessions said limited resources and other demands on the agency, plus the complexity of the frauds, had limited the agency’s ability.