Who watched while S&Ls drove into bankruptcy?

If you were a highway patrolman, you might not stop cars going 60 or 70 miles an hour. But if someone passed clocking 300, ``it's clear you've got a problem on your hands,'' says Jonathan Gray, an analyst at Sanford C. Bernstein & Co., a brokerage in New York. By pumping unbridled and unmanageable growth into their savings-and-loans, Mr. Gray says, many industry managers have similarly driven their companies into bankruptcy. But no one, including their policing agency - the Federal Home Loan Bank Board - stopped them.

The two most recent S&L casualties - the North America Savings and Loan Association and the American Diversified Savings Bank, both of Costa Mesa, Calif. - will be liquidated by the Bank Board for $1.35 billion, in the largest payoff of insured depositors ever.

Several industry analysts put a large share of the blame at the foot of the Federal Home Loan Bank Board itself. They criticize the regulatory arm of the S&L industry for letting the problem continue unchecked.

The assets of American Diversified, for example, grew from $11 million in the middle of 1983 to about $800 million 18 months later, and then ballooned to its current $1.2 billion, Gray says. A little less than 80 percent of its loans are bad today, according to the Bank Board.

The Bank Board has filed suit against the officers and directors of both thrifts, charging them with fraud, negligence, and racketeering.

The same thing happened about four years ago, with Empire Savings and Loan in Texas, which until now had been the most expensive thrift liquidation.

But the board defends its ability as a regulator.

``When you're looking at more than 3,000 institutions, it's a matter of trying to make sure before you take action that the institution is indeed hopelessly insolvent,'' says James Barth, chief economist at the Bank Board. ``When they become insolvent, based on regulatory procedures, it's much easier to deal with them than when they aren't insolvent.''

Others argue, however, that losses would not have been so great had the banks been shut down when their capital fell below minimum capital requirements.

Minimum capital requirements, for both banks and thrift institutions, were supposed to prevent this kind of thing from happening. If an institution were to fall below the minimum standard, the regulator would close it down while it still had some capital remaining as a safety cushion to the insurance fund.

``As more and more banks got close to that precipice, there was a great deal of political pressure to not close banks down,'' says Glen King Parker, publisher of the Income and Safety newsletter. Banks were staying open even as they fell under the 3 percent capital requirement to 2 or 1 percent, even to a negative net worth, he says.

``The survival or nonsurvival of the institutions became a gamble on the trend of interest rates, not on whether the managers were prudently managing their affairs on a day-to-day basis,'' Mr. Parker says.

Gray suggests that the Bank Board itself needs a revamping, so that it won't permit losses to continue on this scale. ``The regulator is not making the right rules, and they're not enforcing the rules they do make.''

Analysts tend to agree that the thrift industry is in financial high water - there is no more money left, even though Congress recently authorized the Federal Savings and Loan Insurance Corporation to raise $10.8 billion to manage the problem. Existing insolvent S&Ls will cost an estimated $40 billion to clean up.

Plans to liquidate the two Costa Mesa thrifts were part of a campaign by the Bank Board to drive down the high costs of funds that are hurting even healthy institutions. Both of the thrifts were paying deposit interest rates far above the national average, and as a result were forcing other California thrifts to do the same.

Last week, for example, American Diversified was offering to pay 8 percent on six-month deposits and 8.25 percent on one-year deposits, with a minimum of $90,000. This week's Bank Rate Monitor says the national average for one-year CDs is 7.3 percent.

Bank Board chairman M. Danny Wall said it was not feasible to merge these two S&Ls with other healthy thrifts, since neither had retail deposit bases but relied almost completely on brokered deposits. Thus, the board decided to remove them and pay off depositors.

But closing the Costa Mesa thrifts wiped out only about 1 percent of the insolvent assets. There are ``dozens of other equally unsolvent and equally aggressive high-rate-paying institutions,'' Parker says.

In 1985, the Bank Board set up its management consignment program, in which it has placed 50 failing thrifts so far. Institutions in the program are managed by private consultants or executives culled from well-to-do thrifts, often for minimum compensation.

American Diversified and North America Savings were both in the consignment plan, which to date has liquidated 18 thrifts and merged 12 others.

While members of the banking industry say the consignment program has been very effective in overseeing the management of its various charges, the savings-and-loans, as a group, continue to lose money.

``This might be the best alternative available, since it does save the industry some money,'' says Noel Fahey, senior vice-president and deputy director of research at the United States League of Savings Institutions, the thrift trade group. ``But it's obviously not the answer.''