The records show at least 10 reasons why the National Bank of Washington should not have loaned $4.5 million in August 1978 to the owners of the Laurel Raceway north of Washington.

Repayment was "speculative," according to a confidential credit department memo. There also were conflicting appraisals on the value of the track property. One said it was worth $3 million, another $6 million.

"Management appears clouded . . . [and] there is a very negative shadow over this transaction," including the possibility of a "loan fee" or kickback, a memo written by the bank's senior loan officer added. Moreover, Joseph E. Shamy, one of the principals of the race track, had been suspended from the practice of law for falsifying real estate records.

But there were two reasons why the loan was made. First, Sam Church Jr. wanted it made, and Church was president of the United Mine Workers of America, the bank's majority stockholder.

Second, Dale L. Jernberg, who hoped to replace Walton W. (Hank) Sanderson as NBW president, wanted to please Church, Sanderson opposed the loan.

Jernberg, then executive vicepresident of the bank, knew there were serious deficiencies in the loan, but he pushed it through anyway. In the process, he misrepresented to the bank's directors the loan's weaknesses and lack of support for it among other senior bank officers.

The loan was made, but later went into default. After a few months, Jernberg replaced Sanderson as president. But the track owners were indicted on charges of misappropriating other track funds.

The Laurel Raceway loan more than any other in the last decade has plunged the National Bank of Washington into a crisis of legal and financial troubles. The bank has lost nearly $1 million from the loan to date, and legal fees for investigations set off by the loan have caused the sharpest quarterly dip in NBW earnings in recent history.

And the problems haven't stopped. Earlier this year, the bank's executive committee approved $1.6 million in interest-free loans to the track's new owner, Washington attorney Frank J. DeFrancis.

Top officials of the city's third largest bank acknowledge that they gave DeFrancis as sweetheart deal because he was willing to pay an inflated price for the track -- twice the highest bid at public auction -- to help the bank recover its loan losses from the previous owners.

Details about the loans as well as the bank's frantic search to find a buyer for the track are revealed in 3,000 pages of confidential executive committee minutes, other bank and mine records and more than 100 interviews conducted by The Washington Post during a five-month investigation.

The records show that at one point bank officials even considered going into the gambling business themselves, running the 5/8-mile harness track from the mahogany and leather boardroom 30 miles away.

But the would be wrong, the board decided.

The story of the Laurel Raceway loan illustrates the internecine boardroom politics that followed the ascension to power in January 1978 of a new group of mine workers men at the 171-year-old institution.

Church, who is still president of the UMW, and Baltimore ambulance executive Willie Runyon, whom Church had installed as a director of the bank boad, voted for the Laurel loans, but both have said publicly that they did not push within the bank for approval of the loan.

Nevertheless, the records indicate that with the backing of hand-picked mine workers representatives on the bank's board, loans to Laurel Raceway have mushroomed, compounding original mistakes.

The bank's decision to get involved in racetrack lending -- a business in which its officers had no experience or expertise -- propelled the once-stately Washington institution into relationships with Maryland political figures who proved to be corrupt -- former Gov. Marvin Mandel (convicted of rackerteering charges in 1977), his former patronage chief, Maurice Wyatt (convicted in June of bribery) and Mandel's convicted co-defendant, Harry W. Rodgers III. Enter the Shamys

Whyatt and some of his Washington contracts provided an entree to the bank for Shamy, his wife, Greta, and his father-in-law, Daniel Rizk.

Shamy, a fast-talking and hard-driving New Jersey real estate promoter whose license to practice law was suspended there in 1977 after he falsified records in two land transactions, was a quick study in the politics of Washington-area banking.

Laurel Harness Racing Association Inc., controlled by Shamy, his wife and Rizk, was in trouble with its lenders and its creditors almost from the day it took over the track in May 1975 with a $2.2 million loan to Rizk from the Citizens Bank and Trust Co. in Riverdale.

Shamy's group had agreed to repay the loan by August 1976. But the due date came and went. The loan went into default. The bank granted extension after extension.

In the spring of 1978, the FBI began investigating allegations that Shamy had misappropriated funds from the track through a construction company he set up for restoration work, and the Citizens Bank files a lawsuit to seize control of the track and force repayment of its loan.

It was shortly thereafter that the National Bank of Washington entered the picture.

Wyatt, Mandel's former appointments secretary and chief political operative, had left the government and was practicing law in July 1978 when Shamy hired him to help locate enough bank financing to retire the $2.2 million citizen's Bank loan and bankroll the following year's racing season.

Sanderson was NBW president at the time.One Wednesday afternoon, after an executive committee meeting, Sanderson was talking with the LATE joseph B. Danzansky, then chairman of Giant Food Inc. and a bank director.

Danzansky told Sanderson that he could expect to hear from Wyatt about a loan. He told Sanderson that Wyatt was a friend of another NBW director, Baltimore ambulance executive Willie Runyon, and that Runyon, and confidant of Church, wanted Sanderson to set up a meeting with a group of track officials. Danzansky told Sanderson to do whatever he could for the group.

A few days after the conversation, Wyatt came to the bank with Shamy, his wife, another lawyer and an accountant. They made a presentation to Sanderson for a multimillion dollar loan that would consolidate their debts, help them purchase the remaining stock in Laurel Harness Racing from the other stockholders and still have left over several hundred thousand dollars for "working capital."

Sanderson told colleagues later that the loan looked like a bad risk. The hard collateral and the amount of money generated by the racing receipts was dangerously low. More track income would be needed to pay the loan.

The bank's senior officer loan committee took up the Laurel loan for the first time in the first week of August. Under the bank's procedures, the senior officers met each week to consider which loans they would recommend to the directors on the executive committee, where loans were finally approved.

The number of senior officers who raised their hands to vote against the loan was overwhelming. Most of the senior officers had spotted its weaknesses quickly.

The loan was presented again to the senior officers during the second week in August, this time with slightly more collateral. J. Charles Gilbertson, cheif corporate loan officer, spoke forcefully against the loan. Again it was overwhelming voted down.

After the meeting, Jernberg did two things. He approved a change in membership of the senior officers loan committee, which removed Gilbertson from the panel, and he had a telephone conversation with Willie Runyon to tell him that it looked like the bank would not make the loan.

Runyon was disappointed. He said the "bank" from the race track -- the daily flow of funds from the betting windows -- would be good business for NBW. He didn't understand the objections to the loan.

Danzansky called less than half an hour later. It was apparent to Jernberg that the Giant Food chairman knew what had transpired in the senior officers committee. Danzansky urged Jernberg to have the committee reconsider the loan. The Laurel business would be good for the bank; there would be a daily cash flow from the track. Besides, Danzansky said, these were good people and he had checked them out.

Jernberg was torn. Key directors clerly wanted the loan to be made. Sanderson was against it. If Jernberg was to be a contender to replace Sanderson as president, he would have to reach an accomodation. A Short Walk to UMW

A few days later Jernberg traveled the half-dozen blocks from the NBW headquarters at 14th & G streets to McPherson Square, where the mine workers occupy the old University Club building.

Jernberg explained the problem to Church, then vice-president of the union, a new NBW director and a member of the executive committee. The loan had a lot of support. Runyon, Church's friend, and Danzansky, who by then was said in bank circles to be the next chairman, were strongly in favor of the loan.

Jernberg would say later in the bank inquiry that Church said he knew of the loan proposal but knew little of its details. Church said he wanted to talk to some people about it and would get back to Jernberg in two or three days. Jernberg did not offer and Church did not request any of the professional credit analyses that had been prepared by NBW loan officers.

Arthur E. Spielman, an NBW loan administrator, had prepared a memorandum dated Aug. 9 ticking off the problems with the loan. "The proposed loan of $4.5 million is deemed unacceptable," Spielman wrote, "for the following reasons:

"Repayment is speculative."

"Conflicting appraisals" on the value of the track property.

Shamy was proposing to use the NBW loan to his corporation to retire his father-in-law's $2.2 million personal loan from Citizen's. This would drain off corporate "equity" for purely personal interests.

"Management ability appears clouded . . . [and] there is a very negative shadow over this transaction."

"Payment of a loan presently in litigation, including legal costs of about $100,000 is an inappropriate purpose.

"There are also negative aspects" due to Shamy's suspension from legal practice for falsifying land transfer records. "Mrs. Shamy was executive secretary and assistant to the president of National Student Marketing . . . [a] company found guilty of stock fraud . . . [whose] president served timme on a criminal conviction."

"We have no underlying appraisals or data to support any of the values . . . in regard to real estate holdings."

". . . Proceeds of our loan, if approved, may be spread to cover certain fees and costs not enumerated in the proposal."

The last of Speilman's objections referred to rumors of a "loan fee" or kickback being paid by Shamy to an unidentified beneficiary who was assisting in arranging the loan.

Shamy told one of his business associates during August, using a cryptic sign language with his hands, that he had paid $250,000 in "fees" to unidentified people to get the NBW loan. This matter is now being investigated by a federal grand jury.

Similiar rumors reached bank officials, including Jernberg, who asked Wyatt to explain them. Wyatt denied the rumors and wrote a letter saying he accepted nothing for his services beyond normal legal fees. Jernberg did not ask how much in legal fees Wyatt was paid.

Jernberg told none of this to Church.

Church and Jernberg met again several days later, this time to go deep-sea fishing out of Ocean City. Sanderson had arranged the trip and was to meet the other two men at the beach.

Jernberg picked up Church in his bank-provided Cadillac. During the three-hour drive to the coast, the conversation drifted to many topics. Jernberg decided to raise again the question of the Laurel loan, since it would be presented once more at the end of the month.

Church said he had checked with some people about the loan. He did not identify them, and the Jernberg did not inquire.Church said that he thought the loan would be good business for the bank.

The daily cash generated by the track would be a plus, Church said. Jernberg later paraphrased Church's final comment as being:

"If there is a way to make the loan, we ought to make it."

The president of the United Mine Workers union had spoken. This was the man who would soon pick a new NBW president, a job Jernberg had coveted most of his life.

Church wanted the loan, Runyon wanted the loan, Danzansky wanted the loan.

It was a bad loan, but maybe if the bank forced Shamy to pledge as collateral his house, his lands in New Jersey -- virtually all of his personal assets -- it would be enough. The bank could make the best of a bad situation and pray for a few glorious racing seasons. Another Turndown

Tuesday, Aug. 29, was the day before the last executive committee meeting of the month. The senior officers of the bank assembled in the board room to vote on the loans they would recommend to the directors the next day.

There were not enough present for a quorum. Gilbertson, who had been dropped from the committee's roster, was sitting in the rear of the room as a spectator, and was called to sit as an alternative. Jernberg was there. Sanderson was out of town playing golf. The bank's chairman, Donald D. Notman, (soon to be dismissed by the mine workers) was vacationing in Maine.

Committee chairman John A. Gommengenger, executive vice president for credit, began calling for the loans. Laurel was down the list. There was an air of expectancy. Was Jernberg going to put his reputation on the line by pushing the loan for a third rejection?

Shortly before the Laurel loan was called up, Jernberg received a note of a waiting telephone call and left the room. While he was gone, Gommengenger announced that the committee had been asked to reconsider the Laurel loan. Collateral was listed at $8 million, a figure that few in the room believed.

The officers present rejected the loan in a 3-to-2 vote. Jernberg's vote had been cast in favor of the loan, but it did not matter. Gilbertson was one of those who voted against the loan.

Later in the day, as preparations were under way for the next morning's executive committee meeting, Gommengenger went to Gilbertson, the credit manager, and told him to prepare a Laurel loan presentation packet for the black binders given to each director. Jernberg had said the loan must go to the executive committee despite the vote of the senior officers.

Never in anyone's memory had a loan gone to the executive committee after being rejected by the officers.

The minutes of the senior officers meeting were changed from the usual parlance of "This loan was recommended for approval . . ." to "A loan was presented . . ." Jernberg also ordered that Spielman's memo listing the serious flaws in the loan be rewritten by Gilbertson. Some of the "red letter words" should be taken out, Jernberg said.

The next morning, 10 members of the executive committee filed into the board room to take their seats in two rows arranged before the large table where Jernberg was sitting as acting chairman. Church, Danzansky and Runyon also were there.

The Laurel loan was first on the agenda. John R. Cassidy, a longtime senior vice president, made the loan presentation.

Jernberg told the executive committee that senior officers had approved the loan. [He would say later that he was confused about the earlier vote.]

William S. Harps, a board member whose trade is property appraisal, pointed out that the bank's value on the track was $3 million while the borrowers contended the value was $6 million. The difference was of key importance since the track was offered as collateral on the $4.5 million loan. Foster Shannon, a board member and partner in the giant real estate firm, Shannon & Luchs, also criticized the difference in the appraisals.

Given all of the negative aspects of the loan, why had it been persented in the first place? Harps asked.

Jernberg replied that some of the directors thought it would be good business for the bank.

There were a few more questions and then the vote was called. Church, Danzansky, Ranyon, Shannon, parking executive John W. Lyon, NBW general counsel Ronald G. Nathan and IBM general counsel Irving B. Yoskowitz voted approval.

Harps voted against the loan and plumbing supply executive A. J. (Jack) Somerville Jr. abstained. (Somerville said later that he did so because he owned horses). Jernberg, as chairman, did not vote.

Before the vote, there had been 12 stories in Washington and Baltimore newspapers about the FBI investigation into Shamy's handling of track funds, but officers and directors claimed not to have seen them.

After the meeting adjourned, Danzansky stopped by Jernberg's office and said that he hoped Jernberg had not been referring to him when he implied in the boardroom that some directors had pushed the loan.

Jernberg would say later that he was stunned by Danzansky's words. No more than two weeks had passed since the phone call in which Danzansky urged Jernberg to prevail upon the senior officers to reconsider the Laurel loan after twice voting it down.

The 1978 racing season was over and the loan to Shamy's group was disbursed under the name of Handle Holding Co.

Shortly thereafter, the records of the loan were subpoenaed by a federal grand jury in Baltimore investigating charges that Shamy had looted the track in previous years. Dinner With Mandel

The next month, Jernberg and Church met Runyon for dinner at the Gaslight Club in Washington. The Baltimore man had said he would be bringing guests. The guests were Mandel and Wilson Lau, a Baltimore insurance man. Mandel assured Jernberg that the Laural loan would be good business. He said that despite his own earlier conviction on corruption charges, he had been asked to become the manager of Laurel Raceway.

Mandel also told those at the table that he could help bring business to NBW from corporations who did business with the State of Maryland.

By May 1979, the FBI investigation led to the indictment of Shamy, his wife and Rizk on fraud charges. But in June, NBW approved another $325,000 loan to the track to set up the cashier's windows for the racing season.

Two months later, before the racing season was over, payments promised from the track's receipts were not made and the loan went into default. On the last night of the season in early September, Shamy loaded $600,000 in cash into the trunk of two cars and deposited the money in another bank, contrary to his agreement to turn all receipts over to NBW.

NBW began the long foreclosure process. It soon became clear that potential buyers for the track were not willing to pay more than $2.5 million -- half of what NBW had plowed into it. Bank officials stalled the foreclosure proceedings, desperate to find a less painful alternative than selling at a distress price.

In the meantime, Jernberg became president, Danzansky was named chairman and Jernberg's executive vice president, Frederick M. Henschel, was put in charge of the Laurel problem. On March 12, 1980, Henschel reported management's recommendations for handling foreclosure to the executive committee:

The bank would have to outbid everyone else because the bids were so low. The bank's bid should not go higher than $4 million, however. The bank would then enter into a three-year lease/purchase agreement with a willing buyer calling for $1.65 million in lease payments. At the end of three years, the purchase price would be set at $5.5 million.

In the interim, the bank probably would have to made a $1-million loan for "working capital." The profile of the purchaser the bank hoped to find was a ". . . group who had furnished financial statements indicating a combined net worth in excess of medium eight figures [$50 million]."

On March 18, four days after the bank outbid all others at the foreclosure sale, Henschel reported to the executive committee that talks with potential buyers were continuing.

"In the event a satisfactory sale or lease-purchase agreement does not materialize, the alternative would be the consider continuing ownership and running the track through a nominee," the minutes noted.

Henschel already had spoken privately with Frank J. DeFrancis, the man he thought could help NBW out of its quagmire. Henschel had known DeFrancis since 1977, when the bank had completed its 10-story operations center on upper Connecticut Avenue. DeFrancis' legal and accounting business leased a substantial amount of space in the building.

DeFrancis was wealthy, too, with a net worth of more than $5 million. The bank had done business with him in the past. But DeFrancis was reluctant. The bank would have to be a virtual partner in the takeover. Substantial new funding would be needed, he told Henschel.

At the March 19 executive committee meeting, Henschel reported that the Maryland Racing Commission had laid down the rules by which the bank could operate the track.

The bank would need a legal opinion showing that no federal or state laws prohibited such a role. The bank would have to demonstrate its competency and promise that it did not intend to be the permanent operator. And the bank would have to show that its position as operator would be in the best interest of the state of Maryland.

Henschel reported that a response was being prepared to the racing commission. In the meantime, management was trying to select a buyer by Friday of that week, two days later.

Jernberg announced on Friday, March 21, that a special meeting had been called for management to recommend the sale of the track to DeFrancis. The purchase price would be an astounding $4.8 million -- all borrowed from NBW -- twice as much as the highest bid at public auction. The only collateral offered was the track and $400,000 in securities. The interest rate was fixed at 15 percent, with interest payments only for the first year.

In a cryptic, but portentious note at the end of his presentation, Henschel "mentioned that certain debt would have to be cured [extended with lenient terms] and the bank has agreed to assist the purchaser financially in this connection," the minutes say.

On April 16, the bank made additional concessions to DeFrancis. The new track owner wanted to extend the terms of the largest loan in the package, the $4.2-million loan, to 10 years instead of five. He wanted to be able to make principal and interest payments late, and he wanted an $800,000 line of credit for 10 years with only interest payable.

"In light of the need to consumate the transaction this evening. Mr. Henschel requested some flexibility in negotiating these terms," the minutes reported. "Mr. Jernberg concluded the discussion stating that certainly he feels that we should authorize Mr. Henschel to make these concessions in order to conclude the transaction."

The authority was given. But it was not until May 14 that the executive committee learned fully what concessions Henschel had been forced to make to close the racetrack deal.

The terms of the main $4.2-million loan were the same. But Henschel then reported that the bank would lend up to $820,000 to acquire 18 additional acres at the site to guarantee automobile access to the track. The loan would be interest free for five years with only partial payments in the succeeding five years at a fixed interest rate of 12 percent.

In addition, another $800,000 loan would be granted for "working capital." Again, this loan would be interest free until the daily track receipts reached $600,000, a prospect that might not occur for several years. Indeed, first-year receipts were estimated at only $400,000 a day.

when it was all added up, Henschel reported that "the total outstanding [debt] of $5.820 million will be supported by $400,000 in collateral and a lien on the track."

On July 9, national bank examiner Stewart Marley, after a review of NBW's outstanding loans, recommended that the bank write off as losses almost $900,000 from the DeFrancis loans because the prospect of repayment in the near future was remote.

The bank approved the write-off. It was one of the largest in the institution's 171-year history. CAPTION: Picture 1, Exerpts from the National Bank of Washington credit memo pointing out flaws in the proposed Laurel Raceway loan. The Washington Post; Picture 2, JOSEPH E. SHAMY . . . wanted $4.5-million loan; Picture 3, DALE L. JERNBERG . . . wanted a promotion