The Federal Deposit Insurance Corp. erred when it cleared a controversial Arizona businessman to buy a failed Oklahoma bank three years ago and is investigating to see whether any wrongdoing was involved, FDIC Chairman L. William Seidman said Thursday.
Seidman told the Senate Banking, Housing and Urban Affairs Committee that he has instructed his agency's inspector general "to investigate whether it was just a mistake or something worse" when James M. Fail was cleared to buy the insolvent United Oklahoma Bank in 1987.
Fail, who now resides in Phoenix, had been indicted in Alabama in 1976 on charges of securities fraud. Although the charges later were dropped in return for a voluntary ban on future business activities in the state, the indictment should have raised a serious barrier to Fail's application to acquire a bank under FDIC rules.
A year after acquiring the Oklahoma bank, Fail bought a string of 15 insolvent Texas savings and loans during a rushed government selloff of failed thrifts and their assets. He purchased the S&Ls; with $1,000 of his own money, $70 million in borrowed funds and up to $3 billion in government subsidies in a deal that has been roundly criticized in Congress.
Seidman acknowledged to the committee that his agency did not investigate Fail adequately in its review of the 1987 Oklahoma bank purchase. He also suggested that Oklahoma authorities did not provide the FDIC with all relevant information.
"We did not have all the information on him we should have had," the FDIC chairman said. "We didn't carry the process out as far as we should have."
It has been reported previously that Fail, in applying to purchase the bank, filed substitute documents instead of a standard application form that would have asked specifically if the applicant had ever been indicted.
As a result, his application did not disclose his 1976 indictment in Alabama, although it mentioned that his insurance company had pleaded guilty to securities fraud.
Although the insolvent Oklahoma bank had assets valued at $100 million when Fail acquired it, Seidman said the $500,000 purchase price was not a bad deal for the government. "He got no bargain," Seidman said. "He paid 10 times the nearest bidder."
Seidman also serves as chairman of the Resolution Trust Corp., the new government agency charged with coordinating the government bailout of the savings and loan industry. Congress has directed the RTC to conduct a full-scale investigation of the 1988 S&L; sales. The inquiry includes Fail's purchase of the Texas thrifts.
Seidman has said the RTC investigation is nearing a close and that its results will be presented to the Senate and House Banking committees soon, perhaps shortly after Congress' August recess.
"We are looking at every avenue the government might legally follow to lower the cost to the government" of the 1988 deals, he said.
Such steps could include rescinding some of the selloff contracts "if there is a legal basis for doing so," he said.
In a related disclosure, Seidman said that he expects government officials to file claims in the pending bankruptcy case of Drexel Burnham Lambert in an effort to recover funds lost by S&Ls; on junk bond investments in which Drexel was involved.
Seidman told the committee that authorities who are investigating insider abuse and misconduct in failed thrifts are looking at instances of unauthorized trading in mortgage-backed securities, junk bonds and other financial instruments.
"Based on preliminary information available to us, we anticipate filing claims in the Drexel bankruptcy proceedings against the $750-million pool being administered by the Securities and Exchange Commission, and for any civil recoveries available," Seidman said.
In separate testimony before the Senate Banking Committee, Atty. Gen. Dick Thornburgh declined to discuss a report published in Thursday's Times of an ongoing FBI investigation of political favoritism and influence peddling in the 1988 S&L; sales.
"I can't discuss any matter under investigation," Thornburgh said. "Our job is to present evidence in open court, not to comment on pending matters."
Thornburgh said that since October, 1988, when the magnitude of the S&L; crisis had become clear, the Justice Department has brought in 328 criminal indictments leading to 231 convictions in "major" fraud cases connected with the scandal.
"There is no significant savings and loan fraud allegation that isn't in one state or another of investigation at this time," the attorney general said.
Thornburgh estimated that the executives of approximately one-third of all failed thrifts had been involved in some kind of criminal fraud activity.
He said that another one-third of the failures are tainted by civil fraud, such as improper, but not necessarily criminal, insider dealing. The remaining third of the failures, he said, were caused by "sheer stupidity and incompetence."
In a related development, House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) said that former officials of the Jimmy Carter and Ronald Reagan administrations would be called to testify before his panel on their role in the evolution of the thrift crisis.
"It is absolutely essential to understand the policies pursued in this period if we are to prevent financial disasters in the future," Gonzalez said in a statement. Among witnesses to be invited are former treasury secretaries G. William Miller and Donald Regan, he said.
The opening hearing is scheduled for Sept. 12.