As details emerge about insider dealings at Maryland savings and loan associations, it is becoming easier to understand why some S&Ls that were regularly reporting profits could suddenly turn up broke.

Some of their deals produced paper profits, but no cash, it turns out. In other cases, associations reported profits on transactions that in reality drained away their assets.

Take a bit of creative accounting, a little conflict of interest, a few naive auditors and a bunch of incompetent regulators and you have the recipe for a scandal.

Plenty of people suspected trouble in the Maryland thrift industry, but their doubts were always dismissed by apologists who pointed to the audited financial reports issued by members of the Maryland Savings-Share Insurance Corp. (MSSIC).

MSSIC members had stronger financial reserves than federally insured savings associations, according to the published numbers. MSSIC members not only were making money, the financial reports showed, but they also were steadily salting away profits to increase their net worth and protect shareholders.

That's what the books said, anyway.

To understand how some S&Ls could simultaneously make money and go broke, you need only to look at a couple of their transactions through the eyes of skeptical thrift executives.

Take the case of the truck stop that was purchased by a subsidiary of a Maryland savings and loan. To finance the purchase, the subsidiary borrowed about $1 million from its parent savings and loan. But the lender drove a hard bargain, demanding that the borrower pay an up-front fee of 3 points -- 3 percent of the loan.

When you and I take out a mortgage, we also have to pay points, usually coming up with the cash as part of our down payment. But in this case, the points come out of the proceeds of the loan. Thus, the parent company loaned money to the child but kept part of the loan as a fee.

Why would it do that?

Because the loan fee could be counted as instant profit, say other thrift executives who have discussed the deal. The right pocket lends money to the left pocket, keeps part of the money and reports a profit on the deal.

No, things aren't supposed to work that way. Generally, parent companies and subsidiaries consolidate their finances, and there would be no profit to report on such a transaction. But apparently that is not the way some Maryland savings and loans kept their books.

Claiming to make a profit when you shift money from the right pocket to the left pocket is petty profiteering compared with the potential for inflating earnings by selling yourself something.

In several similar cases, it now appears, Maryland savings and loans reported profits on real estate that they sold at inflated prices to themselves or their affiliates.

To understand how that works, imagine that an affiliate of a savings and loan puts up a commercial building costing $4 million -- financed, of course, by the parent association. When the building is finished, the affiliate sells the property for $5 million to a subsidiary of the same savings and loan, which -- needless to say -- borrows the money from the parent association.

One way of looking at the transaction is to say the S&L made a million dollars, because one of its affiliates invested $4 million in a project and sold it for $5 million. Another way of dissecting the deal is to figure that the association has increased its investment exposure by $1 million; instead of having $4 million at risk in this property, it now has $5 million secured by the same collateral.

By claiming a profit on the deal, however, the association would have been able not only to report it was making money, but also to add much of that phony $1 million to its net worth. Thus, a transaction that weakened the association's finances would look as if it were substantially adding to the association's reserves.

The potential for perfidy is evident in many transactions that have been uncovered by state regulators and reporters trying to unravel the rat's nest of financial dealings that led to the collapse of Maryland's privately insured savings associations.

As auditors dig into the books of MSSIC members that are seeking federal insurance, it becomes clear that several S&Ls are in much worse shape financially that their public reports indicated. The certified public accountants who audited the Maryland S&Ls are going to have to answer a lot of questions -- and probably a few lawsuits -- before this inquiry is over.

The true condition of Maryland's savings and loan industry was still a mystery when Maryland lawmakers voted a few weeks ago to close down MSSIC and take over its responsibilities. Before the legislature takes the next step and puts the taxpayers' money into a bailout, someone should take a hard look at the books of the troubled S&Ls. Before any association gets state aid, its true financial condition ought to be made public. That's the only way to restore confidence in Maryland's savings and loan associations.