Favoritism Claims in Texas S&L; Probe Stir Up Washington : Thrifts: The conduct of figures involved in the Southwest Plan selloff is being investigated. Some say it could be a political bombshell for the White House.

One afternoon in the summer of 1988, six angry federal regulators in Dallas walked into their supervisor’s office to complain that some bidders were getting special treatment in a then-new U.S. program to sell insolvent Texas thrifts.

“I remember the meeting was in the afternoon,” one participant recalls, “because we spent all morning getting up the courage to go in there.”

Indeed, buyers of the Texas S&Ls; in 1988 received concessions that will cost the taxpayers at least $52 billion, according to government estimates. Several of them were big contributors to the Republican Party, and one was represented by a former aide to then-Vice President George Bush.

But today, those 1988 deals are more than the subject of anxiety among some regulators in Texas. Now, what was supposed to be the cleanup of the savings and loan fiasco threatens to turn into a political firestorm. Moreover, unlike the collapse of the thrift industry itself, the fallout from the mishandling of the rescue effort may land entirely on the White House and the Administration.

“The worst part of the savings and loan crisis, in a political sense, is the Southwest Plan deals,” said Bert Ely, a financial consultant in Alexandria, Va., who was an early and persistent critic of the government’s handling of the bailouts. “They were rotten deals at the time. They are costing the taxpayers a bundle. And they are going to be a political bombshell.”

A case in point--and the object of the regulators’ complaints two summers ago--was Thomas J. Lykos. A hard-charging young lawyer with no experience in real estate or banking but lots of political clout, Lykos, at 31, had been made the point man in the government’s ambitious--and, some argue, flawed--program to offer billions of dollars in cash assistance and tax benefits to investors who were willing to acquire failed thrifts in Texas.

In all, Lykos oversaw 15 transactions involving the sale of 87 failed thrifts in a frenzied attempt by regulators to ease the deepening S&L; crisis.

Some of those special deals are now under investigation by the FBI, which is looking for evidence of favoritism and high-level influence-peddling. Democrats in Congress have criticized the arrangements as too generous. And regulators in Washington are reviewing the bidding procedures and costs in all of the 1988 bailouts, with a view toward opening them anew and negotiating better deals for the taxpayer.

Sources have declined to identify any deals under investigation, and no one has been accused of wrongdoing.

While Lykos has not emerged as a central figure in the $500 billion savings-and-loan debacle--and has not been accused of any wrongdoing--the spotlight has begun to shine on the young Texan who jumped from a political post on Capitol Hill to negotiating billion-dollar deals with the nation’s shrewdest lawyers and investment bankers on behalf of the taxpayers.

“I saw him (Lykos) as being someone who was untouchable as far as any wrongdoing, and I had absolute confidence in his integrity and toughness,” says M. Danny Wall, the nation’s top thrift regulator in 1988 and the person who hired Lykos.

But others, speaking with the promise of anonymity, claim Lykos exerted too much influence in deciding who won the lucrative bailout deals. Lykos did not return telephone calls placed to the Dallas brokerage house where he now works, and his attorney said he has advised him not to comment.

Lykos, a Houston native, was graduated from Harvard University and earned a law degree at the University of Texas in Austin in 1981. He worked briefly for a Houston-based law firm and later for the Securities and Exchange Commission before joining the Republican staff of the House Energy and Commerce Committee in 1983.

“He was pretty much sent in to keep an eye on us for the Republicans on securities stuff,” says a Democratic staffer on the committee, who described Lykos as friendly and sensible.

In 1985, Lykos moved to the Senate Banking, Housing and Urban Affairs Committee as a lawyer under the sponsorship of Sen. Alfonse M. D’Amato (R-N.Y.), a close ally of the securities industry. His boss on the committee was Wall.

A Democratic staffer there recalls Lykos most clearly for a memo he wrote attacking a bill on corporate takeovers proposed by then-Sen. William Proxmire (D-Wis.).

“Generally criticisms are polite up here, but Lykos delivered this ad hominem attack accusing Proxmire of having--and I remember the exact words--’an infirm grasp of reality,’ ” the staffer says.

In April, 1987, President Ronald Reagan appointed Wall chairman of the Federal Home Loan Bank Board, which then regulated the S&L; industry. The job put him in charge of trying to stop the industry’s nationwide collapse.

The federal insurance fund for S&Ls; was bankrupt, so there was not enough money to pay off depositors and shut down insolvent institutions. As a result, hopelessly sick institutions were kept open and became known as “zombies.”

Dozens of zombies littered the financial landscape of Texas, where the crisis was deepest, and finding a way to revive or kill them became a paramount concern at the bank board in Washington.

The solution that the regulators devised was to be called the Texas Plan, according to several insiders, but was later renamed the Southwest Plan to avoid focusing all the attention on Texas.

The concept was to package failed thrifts in groups and offer them to bidders. In exchange for investing some money to get the thrifts going again, the government would provide buyers with cash assistance and tax benefits spread out over several years.

The tax benefits were a particular lure, because they would enable a business to shelter income from other operations. As a result, powerful businessmen and major corporations began to eye the Texas deals. The hitch was that since the benefits were to be eliminated by Congress at the end of 1988, the sales had to be completed by year-end for the buyer to qualify for the writeoffs.

The Southwest Plan was approved in February, 1988, and in April, Wall hired Lykos to head the operation. Handing such a critical job to someone so young and inexperienced in the field surprised many Senate staffers. But Wall defended the choice in an interview last week.

“The Southwest Plan deals were mergers-and-acquisitions kinds of transactions and he had that kind of background,” Wall said.

Preliminary negotiations were already under way on the first six deals when Lykos began shuttling between Dallas and Washington in his new post. In testimony before a Senate subcommittee last week, Lykos described his job as overseeing the preparation of bid packages on the deals and keeping the bank board up to date on negotiations.

“It was not my responsibility to evaluate or choose who would bid and who the ultimate successful bidder would be,” he testified. “The responsibility . . . was that of the negotiating teams and ultimately the bank board, which was composed of a chairman and two board members.”

A former high-ranking official with the bank board in Washington, however, says Lykos played a far more influential role in determining winners.

“Lykos’ attitude was that whatever he decided would be a good deal to propose to the board should just be rubber-stamped by the board,” he recalls.

The six analysts evaluating Southwest Plan packages in Dallas soon came to believe that Lykos was playing a major role by favoring certain bidders and excluding others without proper grounds, according to two of the analysts. Near the middle of the summer in 1988, all six walked into the office of David Bradley, their supervisor, and complained about Lykos.

Two participants described the meeting on the condition that their names not be used in this article, on grounds that they still work for the government and very likely would lose their jobs if their identities were known. Through a spokesman, Bradley declined to comment.

“We told Bradley that we weren’t going to make up reasons why people weren’t going to get these deals,” said one of the participants.

Both said Bradley had little reaction, but they said their role in evaluating bids was cut back soon after the meeting.

Wall says he never heard of the session, adding: “I have no idea why they would have felt that way.”

Robert W. Stallings, a Phoenix businessman who lost bids for two Southwest Plan deals, praises Lykos as a smart regulator and says he saw no evidence of favoritism.

“He doesn’t suffer fools lightly, and he really put the pressure on to get deals closed. I get the feeling he probably rubbed some people the wrong way,” Stallings said.

Some losing bidders complained to the bank board, and an audit by the board’s inspector general’s office in 1989 raised a question about Lykos’ explanation for his actions in one transaction.

The report, released by the Senate subcommittee last week, said Lykos justified his dismissal of one bid on grounds that it was “expensive” at a time when regulators had not completed their analysis of its ultimate cost.

As a result of that action and others by Lykos and his subordinates, the inspector general concluded in the report: “Competition . . . was restricted,” denying “at least two qualified investors . . . sufficient time to prepare complete proposals.”

A 1989 report prepared by the Mid-America Institute for the bank board concluded that the 1988 deals were riddled with errors and complications that made it extremely difficult for the government to evaluate competing bids. One result was that the wrong people may have won the bids, said the report.

Some of the winners in the Southwest Plan were big contributors to the Republican Party.

Robert H. Dedman, a Dallas businessman and chairman of the Texas Highway Commission, obtained three Austin thrifts in September, 1988. The month before, he and his wife each contributed $5,000 to a Republican congressional committee in Texas, and both had previously contributed the maximum $1,000 each to the Bush presidential campaign.

Dedman could have been disqualified as an acquirer under federal regulations because a small number of businesses associated with his company, Club Corp. International, had declared bankruptcy. An analyst in Dallas says that when he raised the bankruptcy issue, Lykos defended Dedman saying, “He’s a successful businessman.”

The bank board was alerted to the bankruptcies but approved the deal because the problems affected only a fraction of Dedman’s businesses, Wall says. Dedman did not return telephone calls from The Times.

Dallas-based developer Trammell Crow, who contributed $120,000 to the Republican National Committee in 1988, received a 9.9% interest in a group of thrifts, although companies associated with him had defaulted on loans at other savings and loans--traditionally another reason for disqualification. But the rule only affects people with an interest of 10% or more and therefore did not apply.

One of the most controversial Southwest Plan deals involved the sale of 15 thrifts to Phoenix insurance man James M. Fail, who borrowed $70 million. In return, Fail received benefits of as much as $3 billion for the thrifts, which were consolidated and renamed Bluebonnet Savings.

Fail was represented by Washington lobbyist Robert Thompson, who had been an aide to George Bush when Bush was vice president. Thompson and Fail both told the Senate panel they did nothing improper in connection with the transaction, which Sen. Howard M. Metzenbaum (D-Ohio) has criticized.

In his recent appearance before the Senate panel, Lykos said he had no contact with Thompson during negotiations on the deal. But he acknowledged that he provided Thompson with a confidential copy of an internal government report that criticized the transaction. The arrangement allowed Thompson to propose revisions to a draft of the report.

Weston Edwards, the losing bidder on Bluebonnet, declined to comment about Lykos. But Edwards said he now suspects that political connections provided the winning edge to many bidders.

“If someone close to the Administration was pushing this, (the regulators) broke their own rules and obviously pushed and expedited these things,” Edwards said in an interview.