Section 9-419(c) of the Financial Institutions article of the Maryland code is a monument to the lobbyist's art.
Inserted into the statute governing savings and loans during the final week of the 1983 legislative session -- some say at the behest of a smart thrift lobbyist -- 9-419(c) instantly transformed what had been a bill limiting the amount thrifts could deposit in out-of-state banks and other thrifts into one giving the savings and loan industry the broader overall investment opportunities of federally insured thrifts.
For a time, 9-419(c) even threatened to strip the state of its authority to regulate all investments of state-chartered thrifts. And during the most critical years of the rapidly growing industry, it discouraged a key regulatory board from restricting the types of risky investments that contributed to the collapse of Old Court Savings & Loan and the state's private insurance system.
The unwitting -- and unanimous -- approval of 9-419(c) by both houses of the legislature in 1983 is but one example of the Maryland General Assembly's failure to anticipate and prevent the monumental financial disaster that struck the state's savings and loan industry last spring.
From 1980 onward, the legislature consistently bowed to savings and loan industry requests for new powers. At the same time, both the legislature and Gov. Harry Hughes' budget office denied several requests from Charles H. Brown Jr., director of the state Division of Savings and Loan Associations, to increase staff and salary levels in the agency, which had prime regulatory authority. In 1981 and 1983, the legislature cut examiner positions from the budget, and in 1983 and 1985, agency requests for a total of three new examiner positions were overruled by Hughes' budget office.
"Legislatures," notes Alan Rosenthal, director of Rutgers University's Eagleton Institute of Politics, "are largely reactive institutions. Problems emerge and legislatures respond. . . . Legislatures have a difficult time in monitoring and engaging in oversight. It's almost part of legislative nature -- the incentives aren't there."
So it was that the Maryland legislature missed two early opportunities to pass measures requiring state thrifts to obtain federal deposit insurance, once in 1979 and again the following year during a major revision of the savings and loan statute.
The 1980 rewrite of the savings and loan law removed from existing law a prohibition on real estate investments by Maryland thrifts more than 50 miles from their home offices. That enabled high-flying thrifts such as Old Court and Merritt Commercial to invest in far-flung projects that were among their riskiest ventures, and which were largely beyond the view of state regulators.
Responding to economic forces well beyond their control, the legislature during the early 1980s also granted Maryland savings and loan firms expansive new powers the thrifts said were essential to their survival. Thrifts whose earnings depended on loan portfolios composed largely of low-interest mortgages found it increasingly difficult to compete for deposits in the more competitive market spurred by the lifting of interest-rate ceilings.
In 1982, the legislature, with only three of 188 lawmakers opposed and with the support of the government's top thrift regulator, granted to savings and loan companies the same investment powers as commercial banks, opening the way for aggressive savings and loan entrepreneurs to invest in shopping malls, apartment complexes and other large ventures.
The possibility for profit was larger, but so was the risk. "You have people that screw up mortgage lending and these people can now screw up something that is much more volatile and involves much huger possible losses," said William S. LeCompte Jr., the current acting director of the state savings and loan division.
Attempts by the state board of savings and loan commissioners to limit by regulation the broad new powers given by the legislature were sometimes hamstrung by the attorney general's office, which advised the board that in the absence of specific legislative limits, it could face antitrust suits.
The attorney general raised that concern in regard to the legislation that contained section 9-419(c) in 1983.
That legislation began as an attempt by the savings and loan division to ensure that all deposits by Maryland thrifts in out-of-state institutions were insured, which would have effectively limited such deposits to $100,000 in federally insured institutions.
However, at the urging of Stanford Hess, a Baltimore lawyer and lobbyist for Fairfax Savings and Loan, a Senate committee broadened the authority to give state thrifts parity with federally chartered thrifts in investing their deposits.
On the floor of the Senate during the final days of the session, the bill underwent a further transformation. The federal parity language was inserted as a separate section, rather than in the section dealing with the investment of deposits. Thus, not only were Maryland thrifts given parity in depositing funds, they were authorized to make any investment allowed federal thrifts.
Hess says the placement of the amendment was a drafting error by a legislative staff member, although some in state government believe the change was engineered.
W. Thomas Gisriel, the chairman of the board of savings and loan commissioners, was horrified by the bill's enactment. The placement of the new section, Gisriel said in a letter urging Hughes to veto the measure, "will strip virtually all of the statutory powers" from both the board and the savings and loan division. "I believe that the actual effect of this amendment was cleverly kept from the legislature," said Gisriel.
Hughes, assured by his staff attorneys that the bill would not remove the board's regulatory authority, signed the legislation into law. In a subsequent opinion the following year, the attorney general concurred that the board retained its overall authority, but warned the commissioners that if they imposed on state thrifts more restrictive investment limits than existed for federal associations, "they could be subject to an antitrust challenge."
The opinion had a chilling impact on the board. "As far as any new aggressive control action, it certainly had an effect," said Assistant Attorney General John C. Cooper, the board's counsel.
In 1984, the savings and loan division sought authority from the legislature to remove thrift officers who engaged in unsound financial practices. The legislation overwhelmingly passed the Senate, but failed in a House committee in the waning days of the session.
It was not until 1985, with the full weight of a special joint committee behind it, that the removal authority passed the General Assembly, along with a second regulatory tool giving the savings and loan division authority to issue cease-and-desist orders to renegade thrifts.
Those laws took effect two months after the collapse of Old Court.
Throughout the deliberations of the joint committee, officials from the savings and loan division and the thrifts' private insurer, the Maryland Savings-Share Insurance Corp., assured lawmakers the industry was sound.
In early 1985, MSSIC and the industry launched a quiet effort to scuttle legislation that would have required MSSIC to disclose that its members' deposits were not backed by the state.
At the February meeting of MSSIC's board of directors, its chairman pointedly warned that "it is very important that this bill not come to a hearing."
The industry would shortly be joined by the Hughes administration, which feared, said one industry source, that the legislation "would rattle the cage."
A hearing scheduled for March 6, 1985, was abruptly canceled at the request of Ejner J. Johnson, chief of staff to Gov. Hughes. By the end of March, after the crisis in Ohio, Hughes himself had called the sponsor, Del. Terry Connelly, to his office to ask him to withdraw the bill.
Connelly complied with the governor's request.