Subsidized Sale of Failing Thrift Is Under Attack : S&L;: It cost billions to sell a Texas firm to Ronald Perelman. A regulator and a senator say it would have been cheaper to close it outright and pay off on insured deposits.

It would have been cheaper for the government to shut down First Gibraltar, a failing Texas savings and loan, than it was to sell it to billionaire financier Ronald O. Perelman, according to a federal regulator who analyzed the deal.

First Gibraltar was sold as part of a flurry of deals in December, 1988, just before the expiration of key tax breaks. Perelman received government subsidies of $5 billion in cash and guarantees plus $1.2 billion in tax breaks.

Houston-based First Gibraltar is now one of the nation’s most profitable S&Ls;, with earnings of $129 million last year and a 44% return on its investors’ capital.

Taxpayers actually would have saved money if the government had closed First Gibraltar and paid off its depositors, whose accounts are insured up to $100,000, according to a memorandum by Jeff Potter, an analyst with the Federal Home Loan Bank of Dallas.

But the potential cost of shutting down the S&L; was “grossly overstated” by $1.6 billion, Potter said in the memo, which was made public Tuesday by Sen. Howard Metzenbaum (D-Ohio).

At the time of the Gibraltar deal, regulators said the federal deposit insurance fund did not have enough money to pay for the liquidation of ailing S&Ls.; They argued that the only available strategy was to offer financial incentives, including guarantees against losses and tax breaks, to woo private investors to furnish new capital for the beleaguered industry.

The disposal of First Gibraltar “may have amounted to an unnecessary sale at distressed prices based on erroneous calculations,” Metzenbaum said in a letter to L. William Seidman, who is heading the government’s S&L; cleanup as chairman of the Resolution Trust Corp.

The Potter memo also raised questions about the regulators’ financial acumen in handling three other 1988 deals, involving the sale of Texas Trust Savings Bank, Pacific Southwest Savings Bank and United Savings Assn. The government assumed that these institutions would suffer losses of 50% on their capital assets, when the standard expectation of loss was only 25% by regulators auditing S&L; books.

“A review of the (government’s) bid and liquidation calculations of those deals would be in order,” Metzenbaum said. If the government was incorrect in estimating the potential losses of these S&Ls;, it would be overly generous in the financial aid offered to prospective buyers.

First Gibraltar consisted of a group of five failed thrifts, then known collectively as First Texas.

Potter’s memo, written in February, 1989, two months after the deal was completed, argued that the government made several other errors in deciding whether to close or sell the thrift.

The government assumed that all the raw land held by First Gibraltar was worthless, a view described in Potter’s memo as “absurd.” Metzenbaum agreed, saying, “I cannot imagine any land anywhere in the U.S. that is ‘worthless.’ ”

The Resolution Trust Corp., which is handling the cleanup of failed thrifts, should “look at every available opportunity to renegotiate these hastily put-together deals, including retaining outside law firms if necessary,” Metzenbaum said.

Seidman’s office had no comment Tuesday.

Gerald J. Ford, chairman of First Gibraltar Bank, responded this way: “All the points made in Sen. Metzenbaum’s letter have been on the public record for some time and add nothing new on the subject of the First Gibraltar acquisition. In the sale of the thrift, the federal government solicited bids from a broad range of individuals and institutions and with the assistance of one of Wall Street’s most prestigious investment banking groups, conducted a vigorous highly competitive auction.

“MacAndrews & Forbes made the bid judged most advantageous to the government,” Ford continued. “First Gibraltar, through a forward-looking program of asset management, branch consolidation and operating efficiencies has made great strides in restoring stability and depositor confidence to the thrift industry in Texas.”

Metzenbaum noted that the First Gibraltar sale was one of 96 deals competed in 1988. “A reasonable person reading the memo would ask if the problems it alleges are true of these other acquisitions,” he said.

“Our investigation had found evidence that bidding on the several Southwest Plan deals was irregular and done in haste,” Metzenbaum said, referring to regulators’ plans to dispose of ailing thrifts in Texas and Oklahoma.

“Billions in federal subsidies and thrift assets were juggled in a rush to close as many deals as possible before the end of 1988,” he said. “It is hard to believe that the facts alleged in this memo are not typical of some or all of these hastily put-together deals,” he said.