The District government's recently acquired authority to raise cash on the bond market is a powerful symbol of the city's coming of age.

It is also a raw nerve. With $1.6 billion in general obligation bonds issued since late 1984, the District's bond program now has come under scrutiny by federal investigators probing for evidence of illegal political favors.

The FBI and the U.S. attorney's office are asking investment bankers and former city officials whether they know of any kickbacks to city officials, illegal campaign contributions to Mayor Marion Barry in his reelection bid last year or pressure on financial underwriters to hire former city officials, according to individuals who have been interviewed.

A federal grand jury, meanwhile, is hearing testimony on whether financial firms have been given the inside track to earn some of the $24 million in fees so far generated by bond sales, sources said.

No specific allegations of wrongdoing have been made public, and some of those interviewed by investigators say the inquiry appears to be in a preliminary stage.

Further, some former city officials and investment bankers suggest that the practices under federal scrutiny do not violate the law, but simply reflect the highly political nature of a bond program that, such as those in numerous other jurisdictions, selects financial underwriters by reputation and negotiation -- not competitive bidding.

Investment bankers, vying for lucrative bond deals with competitors who have similar professional credentials, say they try to gain an advantage by raising campaign funds for candidates or hiring former District officials. Some have offered key District aides minor gratuities, such as free theater tickets and dinners, according to two former District officials familiar with the city's bond deals. Three firms have hired ex-D.C. finance or policy officials.

"Everybody wanted to be your buddy," said one former city official involved in the bond sales. "They have a lot of money at stake."

Said one former investment banker: "You do things to try to keep yourself in favor."

For Barry, the city's bond program is a point of pride, an important achievement of his second term and a cost-saving tool. Since the District first issued bonds in October 1984, general obligation bonds have been a critical element of District finances, providing cash to meet budget obligations.

While many local jurisdictions have sold bonds for decades, the District's unique status deprived it of such power until the city's financial experts successfully lobbied Congress for the authority and bond rating agencies granted the city an acceptable rating. The selling authority enables the District to sell bonds on the market at relatively low interest rates.

Investors purchase the bonds, generating cash for the city, and the "Everybody wanted to be your buddy. They have a lot of money at stake."

-- former city official

city is obligated to repay the investors with interest, usually within 20 years. Previously, the city was forced to do all its borrowing from the U.S. Treasury, at substantially higher interest rates. The proceeds from many of the city's recent bond sales have gone to pay off old debt to the treasury, replacing it with less costly bond debt.

Apart from the benefits to city taxpayers, the District's entry into the bond market created a wealth of opportunities for a select group of bond merchants, law firms and financial advisers.

Each bond deal involves a largely unseen but costly team of players who have split the roughly $24 million in fees so far paid by the District. For a typical bond issue, city officials select about 10 investment banking firms, who make up an underwriting "syndicate" that sells the bonds to investors. The "senior manager" or "book-running manager" takes the biggest cut of the syndicate's profits, followed by the cosenior managers and the managers.

Three other players also extract a fee from the city. The city has a contract with an investment firm, which serves as the "financial adviser." In addition, the underwriting syndicate and the city each hire bond counsel to review bond documents.

Responsibility for the selection of underwriters rests with top city officials. Former deputy mayor Alphonse G. Hill selected them until his resignation in March 1986; Barry says that since then, he has picked the firms based on the recommendations of the city's financial adviser.

The city's selection method, which substitutes negotiation for competitive bidding, brings both praise and blame. Some municipal finance experts contend that the procedure invites political interference and often raises borrowing costs; others say it gives city officials more information on the prospects of a bond deal and cuts the risk without any proven rise in costs.

John Petersen, senior director of the Government Finance Officers Association, said that while negotiation is common, "it's a second-best option unless there are very variable markets or special problems with the credit."

The surrounding counties of Prince George's, Fairfax, Arlington and Montgomery rely on competitive bidding, but investment bankers say many major cities, such as New York and Chicago, negotiate bond deals in a manner similar to the District's.

Probing the process of selecting underwriters, federal investigators have posed questions about the success Cranston Securities Co., D.C.-based 11-year-old firm, has had in beating out some of Wall Street's most prestigious firms for a prominent role in some of the city's bond deals, according to sources.

Investigators are scrutinizing how the firm rose to be a co-senior manager on two recent bond deals and how Lazard-Freres & Co., a prominent Wall Street firm that advises the city on short-term notes, lost its position as a key underwriter on general obligation bonds. City officials have not picked Lazard-Freres to help sell the city's bonds since last year when Cranston officials complained about Lazard-Freres' activities as lead underwriter for a mid-1986 bond sale.

Cranston alleged to a top city official that Lazard-Freres unfairly restricted the number of bonds that Cranston, as a member of the syndicate, could sell. Lazard-Freres countered with the claim that Cranston collected its profit without selling its fair share of bonds, according to investment bankers who are not a party to the dispute. Neither firm was alleging illegality.

Cranston Chairman Robert C. Kanuth and its president, Danny J. Bakewell Sr., have said in interviews that the firm has obtained all its D.C. bond work properly. They attribute the firm's success to its aggressive style, its headquarters in Washington, and its progressive hiring practices. Bakewell is one of the few blacks in the country serving as president of an investment banking firm.

Cranston has run into controversies in two other states over its bond work.

In Kentucky, Gov. Martha Layne Collins announced last year that her husband Bill would not seek investments from firms doing business with the state after disclosures of his business ties with Cranston and other firms. Cranston officials, who invested $450,000 in a firm owned by Bill Collins, obtained about $1.2 million in business from the state.

Louisiana state authorities began an investigation in August after determining that Bakewell was not registered with the National Association of Security Dealers and had not taken NASD examinations, as required by state law and NASD bylaws for member firms such as Cranston. The lack of an NASD registration would prohibit Bakewell from selling municipal bonds or supervising the sale of municipal bonds, according to a spokesman at the Municipal Securities Rulemaking Board. State officials dropped the investigation after the firm pulled itself out of the municipal bond market there.

Bakewell said in an interview that his failure to register with NASD is "a nonissue. I just had not taken the exam and gotten licensed." NASD records show Bakewell was registered in October, a year after he said he became Cranston's president.

In the areas of campaign contributions and hiring, meanwhile, federal investigators have been probing to determine whether the principals in D.C. bond deals have stepped over the line between savvy politics and wrongdoing.

During Barry's reelection campaign last year, investment bankers staged campaign receptions, cocktail parties and breakfasts from New York to Chicago, raising more than $127,000. The fund-raising effort was coordinated in part by former deputy mayor Hill.

Three bond merchants have hired former city officials. R.W. Corby Inc. hired Hill, who resigned from city government last year after disclosures that he allegedly accepted $3,000 from a city contractor. Hill lost his post at the firm after he pleaded guilty in January to defrauding the government by steering auditing contracts to his friends.

Jeffrey L. Humber, the District's former finance and revenue director, is Merrill-Lynch Capital Markets' vice president for municipal finance.

Bettye L. Smith, former assistant secretary of the District of Columbia, is a consultant for W.R. Lazard & Co., which has earned more than $2.8 million as the city's financial adviser for general obligation bonds. W.R. Lazard & Co. is not affiliated with Lazard-Freres.

Each of the major law firms selected to assist in the underwriting process has had an important political contact in city government.

After the 1982 mayoral primary in which Barry defeated Patricia Roberts Harris, the city dropped a firm it had employed as bond counsel since the administration of former mayor Walter E. Washington -- a firm that played a role in pressing the District's case for bond-selling authority. A key partner with the firm had supported Harris over Barry.

The city since then has given the legal business to two firms, one of which is headed by Clinton W. Chapman, whose wife Charlotte served as treasurer for Barry's last two campaigns.

An underwriting syndicate, meanwhile, is free to hire any law firm it wishes for the negotiations with District officials. Without exception, the underwriters for the eight general obligation bonds issued since 1984 have selected the law firm of Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey as lead counsel.

The firm's Washington managing partner is Robert B. Washington Jr., a close political ally of Barry's. A spokesman for Finley Kumble said the law firm has been chosen because of its expertise in the field, national reputation and knowledge of D.C. finances.

As cocounsel between 1984 and March 1986, when Hill resigned, underwriters routinely picked the firm of Lewis, White and Clay, a Detroit firm headed by David Baker Lewis, a former classmate of Hill's. Lewis said his firm benefited from the District's emphasis on hiring minority-owned firms. Asked if his friendship with Hill helped, Lewis said, "I wouldn't doubt it."