COLUMN ONE : Bashing the Bank Police : Examiners, once attacked as too lenient, now stand accused of being too tough on financial institutions. Their work environment has never been more tense.

Jennifer Jones thought she had learned to tolerate complaints about people like her. Then came a family dinner where a brother-in-law launched his attack. Those who regulate the country’s banks and savings and loans, he said, are wrecking the economy.

“It took me a long time to get over that one,” said Jones, a senior S&L; examiner in La Palma, Calif., for the federal government.

At least her brother-in-law is in good company. No less than President Bush himself has joined the critics bashing those responsible for the safety and soundness of the financial system.

Once excoriated for being regulatory pussycats--leaving taxpayers with a $500-billion tab for failing S&Ls; and possibly a huge bill for sick banks--examiners now stand accused of being pit bulls who have so terrified financial institutions that they dare not make loans to even worthy businesses.

One recent commentary from the Wall Street firm Paine Webber compared S&L; regulators to horror film stars Godzilla and Freddy Kreuger in a report titled “The Attack of the Psycho Regulators.”

Examiners have their own horror stories to tell. Federal S&L; regulators seizing the tiny Delta Savings Bank in Orange County in November alleged that the thrift’s president threatened an examiner’s life three times.

Resentments are running deep among examiners, who feel they have been made scapegoats in a recession. The “credit crunch,” many conclude, is just so much myth; instead, demand for loans fell as the economy weakened.

Regulators bristle over political pressure to ease up on banks and S&Ls;, including a recent Bush Administration initiative to take a more lenient view of real estate loans. Troubled institutions need to be dealt with firmly, they argue, or the bailout costs will only mount later.

“I don’t want to be embarrassed tomorrow by something I did today. I’ll go to the Oval Office, sit across the table from George Bush and defend everything I’ve done,” said Samuel P. Golden, the top examiner in Houston for the Office of the Comptroller of the Currency, which regulates the nation’s largest banks.

Never has the environment been more tense between bankers and examiners.

Results from a survey of small- to medium-sized bankers in the West released in November showed 43% of them are reluctant to make some good loans because of the tougher regulatory climate. More than one-third described their relationship with examiners as “adversarial,” with 7% going so far as to call it hostile.

“The examiners are overreacting to their marching orders,” said Kenneth A. Guenther, chief executive of the Independent Bankers Assn. of America, a trade group. “It’s unprecedented. Bankers have to look over their shoulders at their examiners whenever they are making a loan in a risky area.”

Surely, the time is long gone when the bank examiner was typified by the crusty auditor who visited George Bailey’s building and loan on Christmas Eve in the Frank Capra film “It’s a Wonderful Life.” Eager to get home to his family, the examiner’s most probing remark was: “Well, I trust you had a good year.”

Long Hours, Low Pay

Today, examiners describe themselves as part auditor, part detective, part management consultant and, increasingly, part undertaker. Examiners may spend months combing through an institution’s books, checking to see if borrowers are paying up and if lenders are saving enough for the rainy days when mergers and office towers they financed go bust.

The nation’s largest banks have full-time examiners, often working a short distance from the executive suite. From eight to 10 examiners at any given time are working on the 43rd floor of BankAmerica’s headquarters in San Francisco, just three floors up from the bank’s top managers.

Frequently toiling long hours for relatively low pay, they often make less than branch managers of the institutions they audit. Assignments can come suddenly and take them far from their homes for months at a time--plopping them into offices where the daily grind is uncomfortable and tense.

Golden, the Houston examiner, was helping his son assemble a remote-control car in their game room the day after Christmas in 1989 when he got a call ordering him to pack his bags. He was sent to examine an especially worrisome New England bank.

The assignment lasted four months, twice as long as expected. Golden visited his home only on weekends, returning to the airport at 3:15 each Sunday afternoon for a trip that got him back to his New England hotel around midnight. Even after the assignment ended, Golden’s daughter, so used to her father leaving each week, began pleading with him one Sunday to stay home.

Examiners tell of being forced to work out of trailers or cramped rooms with the air conditioning set as low as possible, accommodations apparently intended to get them to leave quickly.

Subtle intimidation is common as well. Veteran Federal Deposit Insurance Corp. examiners Pat Ralston and Tina Levy in Los Angeles, for example, tell of being greeted frequently by name-dropping executives who mention they know senior agency officials.

At the now-defunct Ramona Savings in Orange, whose former owners are now serving prison time for fraud, executives sent a list of complaints to examiner Jones’ superiors--falsely accusing her staff of eating fast food in a conference room, breaking a photocopy machine and littering the office with candy wrappers.

Bankers’ Resentments

Obstacles can be erected at every turn. At one Southern California institution, thrift examiners were barred from a lunchroom from 11 a.m. to 1 p.m. to prevent them from chatting with employees during breaks. Examiners say they often have to meet employees after-hours in coffee shops.

A group of Southern California thrift examiners once discovered a videotape taken by a security camera that proved employees were secretly moving records out of a building at night. In another instance, a well-hidden elevator was used to clandestinely ship records out of the building.

But bankers feel examiners treat them like crooks. “Their feeling is that if you are in this industry, you must be hiding something. The job is not to ask ‘What can be repaired?’ but ‘What are you hiding?’ ” said one consultant who until recently was a bank chief executive. So fearful are banks of angering regulators that few executives will talk on the record.

Part of the tension stems from a sharp turnabout in the traditional, cozy relations between regulators and the regulated. The S&Ls;’ main trade group practically handpicked the nation’s top thrift regulator for years. In contrast to monthslong examinations today, regulators as little as 10 years ago routinely gave institutions little more than a glance.

“We accepted things more readily. We examined a bank generally in one week,” said Joseph H. Calvert, a senior examination specialist for the FDIC in Dallas. But with giant institutions collapsing, examiners now have been told to get tough.

A Revolving Door

Despite the attitude adjustment, some problems with examiners persist. It has never been easy to recruit, train and hold on to top-notch examiners.

Examiners typically are hired straight out of college with degrees in accounting and finance, and enter a training program in which they accompany more experienced examiners. They start out inspecting small institutions with simple operations. At the comptroller of the currency’s office, examiners need three to six years’ experience and must be thoroughly tested before they can head an examination.

Low pay drives many of the most experienced examiners into the private sector. Salaries range from starting pay of a little more than $20,000 to around $65,000 for experienced examiners, roughly the base pay for many branch managers at major banks. A handful of top-level examiners at the nation’s largest banks earn more than $100,000.

Bank executives are known to treat examiners like government clerks. “The overriding atmosphere was one of ‘We’re smarter than you are. Who are you to question how we are managing this institution?’ ” said Michael Patriarca, the Office of Thrift Supervision’s top regulator in California and a former federal bank regulator.

A series of watershed events highlighted the importance of good examinations. Oklahoma’s scandal-plagued Penn Square Bank collapsed in 1982, forcing the rescue of its frequent business partner Continental Illinois Bank in Chicago. Then, nearly all the biggest Texas banks failed. BankAmerica flirted with disaster in the mid-1980s under the weight of problem foreign loans. And the S&L; fiasco grew so massive that taxpayers will foot the bill for 40 years.

Politicians looked for people to blame, and regulators were high on the list. The biggest casualty so far has been Robert L. Clarke, who was rejected for a second term as comptroller of the currency last month. Democrats on the Senate Banking Committee blamed him for being too soft on some banks that eventually failed, especially the Bank of New England in Boston. Ironically, just a year earlier Clarke was criticized as “the regulator from hell” whose excessive toughness was purportedly driving the New England economy into the ground.

Among the loudest critics of examiners have been some of the most tainted financial executives. Few were as critical of regulators as former Lincoln Savings & Loan owner Charles H. Keating Jr., who fought back by wielding his influence with five U.S. senators. Keating, who presided over the biggest thrift failure ever, was convicted earlier this month of defrauding investors who bought bonds issued by the Irvine S&L;’s parent firm. He faces up to 10 years in prison on those charges. On Thursday, Keating and four associates were slapped with a massive federal indictment.

Anger Widespread

Examiners note that the largest number of complaints typically come from regions where the economy is sliding. The loudest cries in 1989 came from New England as it was slipping into a deep recession. Before that, Texans complained the most. Today, the gripes come from California.

But it’s not just kooks and crooks who are angry. Mainstream business leaders are, too. Former Southern California Edison Chairman Howard P. Allen, who recently resigned as a director of the Los Angeles thrift CalFed Inc., flooded Washington offices with letters this fall warning that overzealous regulation could result in “wiping out a large additional segment of the financial institutions in the U.S.” Earlier this week, two directors of CalFed quit over what they say is heavy-handedness on the part of regulators dealing with the thrift.

At stake in any regulatory examination are financial institutions’ reported profits. When a loan is considered shaky, its value is reduced or money might be set aside as a reserve in case the borrower becomes a deadbeat. Both steps reduce profits; if significant enough, the result can be losses.

Disputes have been especially bitter this year because of the recession. Clashes over the future health of the economy and real estate markets are common. An optimist says a loan will end up just fine; a pessimist sees it as a loser.

An incensed Wells Fargo & Co. Chief Executive Carl E. Reichardt recently flew to Washington to dispute a call by the bank’s examiners over their harsh assessment of a loan made to an ailing drugstore chain that had not missed a payment. The bank will not talk about the incident, but sources familiar with it confirm that Reichardt was successful in getting regulators to back off.

An especially bitter source of disagreement the past two years has been the so-called “performing, non-performing loan”; payments are being made but who knows whether they will continue. Many bankers believe these loans should not be considered troubled until payments are actually missed. But examiners say borrowers often use one loan to pay off another, a shell game that hides their true condition.

Responding to complaints about examiners, four federal banking agencies in November urged regulators to ease up and devised a plan to make examiners in the field more accountable and set clearer guidelines for deciding when loans are bad. The plan was blessed by Bush, who is under fire to get the economy moving.

But how much should examiners bend? After all, bending too much opened the way for the bank and S&L; disaster in the first place. Comptroller General Charles A. Bowsher, the nation’s chief auditor, on Wednesday warned a House Banking Committee that the new policies could allow banks to paper over losses, leading to expensive failures.

Next week, Treasury Secretary Nicholas F. Brady is scheduled to meet with some 400 examiners from across the nation to discuss the new guidelines. In Senate testimony Thursday, Brady conceded that “they don’t like it.”

For all the sniping at examiners, they do have some rare allies in the banking industry. John G. Medlin Jr., the respected chief executive of Wachovia Corp. in North Carolina, deflects blame from regulators and toward business itself for today’s extra-tough credit standards. Some businesses, Medlin said, borrowed too much in the 1980s and now the economy is paying the price.

“It’s natural to look for a scapegoat,” Medlin said. “Bankers want to blame it on regulators and the politicians; the regulators want to blame it on the bankers and the politicians.”

How Examiners Evaluate a Loan

Evaluating a loan typically involves the five C’s: a borrower’s character; the financial capacity of the borrower to pay back the money; the capital the borrower has available, such as savings; general business conditions, such as the health of the local economy; and, the value and quality of collateral pledged by the borrower. After evaluating a loan, examiners put loans into the following general categories: Pass: A good loan not subject to criticism by examiners. The bank or thrift is expected to be repaid in the normal course of business. Other Assets Especially Mentioned: Low-level criticism that is effectively a red flag. Questions are arising about the ability of the borrower to ultimately repay the loan. A company’s profits may be falling, for example, or a salesperson’s commissions may be falling. Substandard: There is a clear risk that the borrower will not repay the loan, even though in most cases the borrower is continuing to make payments. The customer’s income may now be too low to cover the loan payments. Doubtful: There is a high probability the bank will lose some money on the loan. The loan is considered “non-performing.” The borrower may be 90 days or more behind on payments, for example, or may be current but lack enough cash or collateral to cover future payments. The bank’s profits are hurt because any payments it does receive must be applied to reducing the loan principal and cannot be considered profits. Loss: The bank is not expected to collect any meaningful amount on the loan and must deduct the amount of money it expects to lose from the financial cushion it has built up to protect against losses. Source: Office of the Comptroller of the Currency, Houston office.