WASHINGTON -- Senior officials in Washington knew as long ago as 1988 that preferential treatment was being given to some troubled savings and loans whose senior executives also served on government regulatory boards, newly disclosed documents show.
Congressional investigators said the failure to make such conflicts of interest public, along with other serious regulatory lapses, discouraged local examiners from being more aggressive.
This in turn slowed recognition of difficulties at savings and loans, adding billions of dollars to the costs of bailing out the industry.
In one case a director of the Federal Home Loan Bank in Dallas who was also a savings executive received a $1.5 million mortgage loan from a troubled institution at the same time that local examiners were being "influenced improperly by senior officials" of the home loan bank.
In another instance, local examiners removed one auditor who questioned a senior executive at an Arkansas institution who was also a director of the Home Loan Bank in Dallas and who had been accused of defrauding the institution's shareholders. Rather than remove the official, the documents show, "the FHLB of Dallas had been more interested in helping a fellow director."
The newly disclosed documents -- reviews conducted from 1986 to 1989 by outside government examiners at 10 districts of the Federal Home Loan Bank system -- show that senior regulators at the bank board knew that in three of the larger districts "losses were deliberately concealed by the thrifts with the approval" of local examiners.
The home loan banks had a dual role: they both lent money to savings institutions and were charged with overseeing them.
The federal bailout put into place last year transferred the regulatory functions of the home loan banks to the Office of Thrift Supervision.
"People have debated whether it was ascertainable in 1988 to know the extent of the savings and loan problem," said Rep. Charles E. Schumer, D-N.Y. "The reviews show that officials knew the real extent of the problem and there was a deliberate effort to conceal that information."
Mr. Schumer is the chairman of the House Task Force on Urgent Fiscal Matters, whose staff investigators discovered the reviews of local examiners' activities and reports, conducted by examiners from other districts.
This procedure was set up in 1986 to keep the cost of savings failure under control.
It was to provide Washington officials with a "detailed independent report of the current effectiveness" of the home loan banks.
The investigators provided summaries of some of the reviews to The New York Times on the eve of a congressional hearing about the documents.
The contents of the reviews were confirmed by interviews with people who were officials when the reviews were prepared.
"The peer review team vigorously contested the rationalization that the failing economy had caused all the problems and pointed to incompetence, poor lending practices, insider abuse, inadequate supervision and oversight, and fraud," the congressional summary of the Dallas review said.
The findings include instances in which local regulators approved enormous compensation to savings executives managing institutions that were losing large sums of money. One example cited a $5 million bonus and a commitment of more than $8.5 million that was given to an executive of an institution reporting an annual loss of $4.5 million.
At the request of the Office of Thrift Supervision, the institution was not identified because it is still in private hands.
M. Danny Wall, the chairman of the Federal Home Loan Bank Board at the time the reviews were prepared, yesterday strongly defended the decision not to publicize the internal reviews, insisting that much of the information had already been generally known.
Wall said in an interview that he and other senior bank board officials had used the reviews to seek significant changes in 1988 and 1989 in the way institutions were being supervised at the local levels.
Allegations of conflicts of interest had been investigated, he said, and directors of the home loan banks in some districts had been forced to step down.
The documents and interviews with regulators make clear that as early as 1988, Home Loan Bank Board staff gave officials in Washington estimates that the bailout could cost much more than the $15 billion that officials were assuring Congress and the public would be adequate.
In two instances alone, the documents show, those involving the Lamar Savings Association and the Sunbelt Savings Association, the local examiners had failed to account for additional losses of $1 billion.
The most conservative estimates now are that the bailout will cost taxpayers $130 billion, excluding interest, while some have put the ultimate cost at more than $500 billion.
Most industry experts now agree that hewing to the $15 billion figure delayed a comprehensive cleanup of the largest financial scandal in the nation's history, and so drastically increased its cost.
Mr. Wall said that it was only in hindsight that the higher estimates of the cost of the bailout proved accurate. He attributed the rise in the cost to the decline in the economy and regional real estate markets.
"What we did not have at any time was any better sense of the numbers," he said.
But Mr. Schumer said the documents and testimony from officials demonstrated that Mr. Wall had "clearly been told that the magnitude of the problem was much greater than what he had told Congress."
Investigators on Mr. Schumer's task force said the decision not to make the findings public was a political one, saying that since 1988 was a presidential election year, the regulators had decided not to paint too alarming a picture.