PROVIDENCE, R.I. -- In the spring of 1985, when state examiners arrived at Greater Providence Deposit Corp. to audit the books, the bank president's son Joseph Maggiacomo III allegedly waved an M-16 automatic rifle at them.

In what a report for the state attorney general called "a series of harassing incidents," Maggiacomo, who was a bank employee at the time, also sat and stared at the examiners all day while they were doing their work. Later, the report added, he let the air out of the tires of their car.

If the Rhode Islanders who deposited $200 million in Greater Providence had learned then how their bank allegedly treated the state officials sent to monitor it, they might have suspected something was amiss. But when Arlene Violet, then the state attorney general, tried in March 1986 to get the finance committee of the state legislature's House of Representatives to hold a special meeting to look at the report, the panel refused to study it.

Nobody today seems to remember who was responsible for rejecting the report, but Violet suspects that the bank's influential political friends had something to do with it. After all, she said, an uncle of the young man who allegedly wielded the rifle was Edward Maggiacomo, who previously had been the Democratic Party leader in the House.

The tale of the bank and the rebuffed report is only one example of what Violet and banking regulators say was a pattern of reckless business practices, lax oversight and hints of political corruption that are at the root of what has become the biggest financial crisis to strike this small state since the Great Depression.

The results are dire. Greater Providence and 22 other banks and credit unions are closed for the foreseeable future. The private fund insuring customers' deposits has collapsed, and the federal government believes these institutions are too weak financially at present for regulators to provide them with the necessary backing to permit them to reopen.

Tens of thousands of customers have been cut off for an undetermined period from well over $1 billion in deposits and savings. The state government, already struggling with a huge budget deficit, expects to have to slash spending or increase taxes to raise hundreds of millions of dollars to cover depositors' losses.

Looking back, it is easy to recognize the signs that the problem was brewing. "Warnings have been sounded for years, signaling that the state's slipshod system of credit union supervision was headed for trouble," wrote Brian Dickinson, a columnist for the Providence Journal-Bulletin.

But, Dickinson and other critics said, state regulators and most politicians looked the other way, their judgment clouded by what Dickinson called "that chummy political incest that helps keep Rhode Island in the news." The economic cause of the trouble was familiar: excessively fast, high-risk growth. State-chartered banks and credit unions, monitored only rarely by an inadequate regulatory apparatus, went on a lending spree similar to the one launched by many of the savings and loans that have gone under in recent years elsewhere in the country, current and former regulators said in interviews.

Owing to an unusual provision under state law, regulators frequently did not require state-chartered financial institutions to provide detailed documentation to back up their claims to be solvent. Instead, the regulators merely accepted the institutions' portrayal of their financial condition.

As a result, institutions "have taken advantage of their unique regulatory situation by operating with little or no genuine capital, and by engaging in all sorts of dangerous, indeed reckless, management practices," said the report prepared for then-attorney general Violet by two special investigators. The report was published in full only on Friday by the Providence Journal-Bulletin, more than five years after it was written.

In addition, there is evidence of inside dealing and conflicts of interest in lending practices at some of the largest institutions. The trigger for the crisis was an alleged $13 million embezzlement by a bank president, Joseph Mollicone Jr., who has disappeared and whose father was a reputed mobster with links to Raymond Patriarcha, one of New England's leading organized crime figures, according to Rhode Island state police.

Former attorney general Violet said the basic problem was that many of the credit unions and banks were "private piggy banks for the rich and infamous." Because of inadequate oversight, she said, "there's no question that the situation was ripe for organized crime."

A lawyer and former nun, who now is a popular radio talk-show personality, Violet is one of the few political figures in the state who tried years ago to call attention -- unsuccessfully -- to the brewing problem.

Violet says now that the legislature and former governor Edward DiPrete, a fellow Republican, may have been discouraged from addressing the problem by thousands of dollars in campaign contributions from the financial institutions and their executives.

She and other critics also note that many of the troubled banks and credit unions made loans to leading politicians, such as to Providence Mayor Vincent Cianci Jr., who has been silent on his ties to the credit unions since the crisis erupted.

Layne L. Bumgardner, a senior federal regulator brought here in November to help sort out the mess, chooses his words more carefully than Violet, but he made many of the same points in explaining the roots of the problem that resulted in his agency's refusal for now to insure 11 closed Rhode Island credit unions.

"There is a question of solvency" for the 11, he said. "That's the bottom-line issue when it comes to insurance," said Bumgardner, a regional director for the National Credit Union Administration.

Asked how the credit unions got in such bad shape, Bumgardner said that adequate oversight is a "key part" of keeping financial institutions healthy, but "the structure {in Rhode Island} has some flaws in it."

The credit unions were "very profitable" for a time for the executives who ran them, Bumgardner said, but that was a result of their very unusual lending practices.

While credit unions normally make only automobile loans and small personal loans, those in Rhode Island made speculative real estate loans of a sort that normally would be made only by commercial banks.

"I have not seen anything like this" in 20 years as a regulator, Bumgardner said. The now-troubled Rhode Island credit unions "functioned as if they were banks," he said.

For individuals and families with money in the affected institutions, the impact ranges from inconvenience to financial paralysis.

"I can't pay my rent. I can't pay my bills," said Robin Ricci, a 28-year-old U.S. Postal Service letter carrier. She had all of her savings in Greater Providence and said it looks like she's going to have to postpone plans to buy a new Toyota Celica to replace her 1981 Datsun.

"The old people had the right idea. They didn't put their money in banks. They put it in the mattress," Ricci said.

Joe Mastrobuono Jr., a co-owner of a television and furniture store in Cranston, was pessimistic. He said the bank emergency led three customers to cancel orders for big-ticket items because they didn't have access to funds to make down payments.

"This is unquestionably going to have a far-reaching effect on the economy," Mastrobuono said.

The long-term impact on the state is uncertain, partly because nobody knows how long it will take Gov. Bruce Sundlun to make good on his promise to cover all depositors' losses up to $100,000.

As citizens' ire increases, the search is on for someone to blame. Many of those directly involved -- such as the allegedly rifle-wielding Maggia-como -- have been unavailable for comment. Peter Nevola, president of the private insurance company that collapsed, is at home and said he is too ill to comment.

One exception is Robert V. Bianchini, who is both president of the Rhode Island Credit Union League and deputy majority whip in the House. He was a leading opponent of efforts by Violet and others to require federal insurance and oversight for the state's financial institutions -- a position he now says that he regrets.

"Hindsight is 20-20. They were right and I was wrong," Bianchini said in a telephone interview.

Nevertheless, despite holding influential positions in both the financial industry and the state legislature, Bianchini insists that he had no idea until this week that many of the state's credit unions and banks were in troubled financial condition.

"I certainly share the blame" for not looking into the issue more aggressively, he said.