Last January, a Philadelphia police officer nearing retirement was nervous about the safety of his investment in Old Court Savings & Loan of Baltimore. Wondering whether to deposit more money in the thrift, patrolman Windell R. Carter Jr. sent a letter to the people he thought would know, asking: Are there any problems at Old Court that could jeopardize my money?

"The answer is no," wrote back John D. Hall, a financial analyst for the Maryland Savings-Share Insurance Corp. (MSSIC), a private company that insured deposits at 102 savings and loan firms. The insurer's tough regulation of S&Ls, and its "strength and depositor assurance . . . make us confident of the soundness of our corporation and its member savings and loan associations," Hall replied on April 8.

While Hall expressed confidence, others at MSSIC were at that moment gravely concerned about the soundness of the state's second largest thrift. In fact, MSSIC officials were aware as early as mid-1983 of numerous improper activities at Old Court, including a range of risky loans that threatened its financial health, but did little to stop such activities, according to MSSIC records and government records.

A month after Carter received the reassuring MSSIC letter and put his last $20,000 in Old Court, a depositors' run there prompted the state of Maryland to seize control of Old Court and force MSSIC out of business.

The state also limited withdrawals at the 101 other privately insured thrifts in Maryland to $1,000 a month. Most savings and loans in the state later resumed normal operations. Yet today, more than 100,000 depositors still have virtually no access to their $1.2 billion in savings.

The state of Maryland still controls four thrifts, including a 1,200-customer association in Baltimore County that collapsed just two weeks ago. A Baltimore judge has slashed interest payments at three of those thrifts, and eliminated interest payments altogether on money deposited at Old Court.

"I'm being cheated every day," said Carter, 54, a 30-year police veteran who now can't touch his money and estimates he has lost $8,000 in interest so far. "I haven't been this broke in years. I'm going from paycheck to paycheck."

Maryland's state government regulators share in the blame for the state's savings and loan fiasco, according to industry and government officials. But the first line of defense against a collapse should have been MSSIC.

MSSIC was an insurance pool funded by mandatory contributions from member thrifts. It monitored the health of its members by analyzing monthly financial reports they submitted, as well as reports from the state Division of Savings and Loan Associations. Its bylaws allowed it to exact either minor penalties against wayward thrifts, such as restricting an association's advertising, or very severe penalties including expulsion from MSSIC or a state takeover.

While boasting that its scrutiny ensured the S&L industry's robust health, MSSIC in fact never delved deeply. It rarely confronted the thrifts that jeopardized the insurance corporation, according to former MSSIC officers and staff, Maryland state government officials and internal MSSIC documents.

When dealing with a problem S&L, MSSIC officials would reach an agreement with the owner to stop a certain practice, "but he never would," a former MSSIC employe said. "It was frustrating. They'd slap his wrist and send him on his way." MSSIC records show that Old Court, Merritt Commercial and First Maryland savings and loans ignored an August 1984 order to stop making risky commercial loans. All three thrifts collapsed in 1985, and the state assumed control of them. The Diplomatic Approach

Former executives of MSSIC, including President Charles C. Hogg II and Vice President Paul V. Trice Jr., declined to comment on their role at the corporation. They have said through intermediaries that they would not comment while a special state counsel is investigating the origins of the crisis. The counsel, Wilbur D. Preston Jr., is expected to issue a report within two weeks.

But William F. Brooks Jr., an executive of the Salisbury-based Second National Building & Loan and former MSSIC official, said MSSIC leaders believed that diplomacy was more effective than punitive measures in dealing with serious violators.

"They felt they could work with the violators, that they were not crooks, that it could all work out in time," said Brooks. "But obviously, something was the matter because the problems weren't being corrected."

The insurance company was overwhelmed in its attempts to stay on top of the expanding Maryland savings industry, Brooks said. "We didn't have the tools at hand. There were so many problems at so many associations."

The irony is that MSSIC originally was supposed to be the savior of the Maryland savings and loan industry.

MSSIC was established by state law in 1962 in the wake of a savings and loan scandal that froze the deposits of 43,000 persons and sent several top Maryland politicians to jail.

MSSIC was set up as a private corporation, but state officials took pains to promote a feeling of permanence about it. They approved a corporate emblem that was virtually identical to the Maryland state seal. Over the years, the MSSIC seal on the windows of S&Ls made many depositors believe the state treasury stood behind these thrifts, though technically it did not.

MSSIC cultivated an air of corporate solidity, maintaining plush offices in the heart of Baltimore's financial district. MSSIC President Hogg's annual salary and benefits totaled more than $100,000. MSSIC's glossy annual reports spoke glowingly about "confidence" and "strength."

MSSIC's corporate structure included an 11-member board of directors -- three appointed by the governor and eight by the industry -- and a 12-person staff. MSSIC officials bragged that their sophisticated IBM 34 computer system, which collected key financial data about member thrifts, enabled them to pinpoint associations that engaged in improper dealings and thereby threatened depositors' money.

MSSIC rules prohibited thrifts from a range of activities. The insurer limited an association's loans for construction projects to no more than 25 percent of all commercial loans, and limited an association's commercial loans to no more than 40 percent of deposits. MSSIC also required thrifts to maintain a healthy balance between assets and liabilities, the "net worth" rule.

MSSIC and the state savings and loan division frequently exchanged information and sent representatives to one another's board meetings.

MSSIC's membership committee, executives from eight member thrifts, was supposed to keep tabs on associations that broke the rules or were in financial trouble, and make them change their ways.

But the only real punishment MSSIC officials could mete out -- a state takeover -- was one they never would seriously consider. The insurer had "the ultimate weapon, which is sort of like nuclear war," said William S. LeCompte Jr., the acting director of the state S&L division. "They know you're not going to use it."

Most of MSSIC's rules and enforcement powers were tailored to the industry of the 1960s, a safe, slow-moving business that generally confined itself to conservative home-mortgage lending. By the mid-1970s and early 1980s, a variety of economic forces and banking deregulation prompted many thrifts to alter radically the way they did business.

A new generation of entrepreneurs took over a number of Maryland savings and loans and expanded their operations into a range of highly speculative real estate ventures. They made large loans for commercial ventures such as office buildings and shopping malls, many outside Maryland's borders. They took a controlling share in ventures financed by their own associations, a practice traditional lenders consider questionable and risky.

"These guys were developers pretending to be savings and loans," said one Maryland savings executive, who watched his depositors and prospective loan customers flock to Old Court and the others.

The "go-go" spirit brought tremendous growth to Maryland S&Ls. From 1977 to 1984, assets of state-chartered thrifts more than tripled, from $2.75 billion to $8.9 billion.

Maryland's regulatory system "by definition was going to go to pot when they reached that size," said a Baltimore lawyer knowledgeable about the S&L industry. "By mid-1984, it was finished business."

The state became "a speculator's heaven," said one former S&L executive. "It was a formula for disaster."

The fast-growing S&Ls soon outstripped MSSIC's ability to regulate, and their growth first alerted the insurer's membership committee to widespread problems in 1983, according to minutes of MSSIC meetings.

The state Division of Savings and Loan provided an early sign of Old Court's ills when it forwarded to MSSIC a summary of its 1983 examination of Old Court. While it did not specify problems at the Baltimore thrift, the summary did cite "numerous and substantive" examples of "weak operational standards," according to MSSIC minutes. MSSIC's first real action against Old Court came a year later. Small Thrifts Worry

Another sign of trouble in the MSSIC system surfaced in June 1983, at the insurer's annual meeting in Baltimore's Belvedere Hotel. A number of small MSSIC thrifts from East Baltimore, alarmed by the practices of their fast-growing competitors, engineered passage of a bylaw amendment that barred S&L executives from MSSIC's board if their associations were not in compliance with the net worth rule.

But the victory was short-lived. The state Division of Savings and Loan later overturned the amendment after the attorney general's office advised that the General Assembly, not MSSIC, should make such a change.

That same year and again in 1984, MSSIC determined that First Maryland Savings and Loan of Silver Spring also was violating an MSSIC rule that limited commercial loans to 40 percent of an S&L's deposits, according to MSSIC records.

By January 1984, First Maryland's commercial loans had peaked at more than 74 percent of deposits. MSSIC's protests against the practice had little effect. In the following six months, First Maryland's commercial loans reached 68, 63, 70, 68, 68 and 71 percent of deposits, according to an MSSIC report on rules violators.

The high number and low quality of commercial loans made by First Maryland were key factors in the government's rejection of the thrift when it applied for federal deposit insurance this year. The state of Maryland now controls First Maryland and has fired its former managers.

According to MSSIC minutes and industry and government sources, First Maryland and some five to seven other S&Ls violated the insurer's rules month after month in 1984, either ignoring calls for reform or delaying corrective action. Minutes of MSSIC meetings and MSSIC committee meetings, held at least once a month, show a mounting chorus of complaints by the insurer's officers.

On March 28, 1984, for example, Ralph K. Holmes, MSSIC's senior vice president, announced that "improper management" and a bad investment at First Progressive Savings and Loan had resulted in a $950,000 loss for the small Carroll County thrift. The association suffered the loss by acquiring a partial interest in a faltering credit card company called Action Line "without MSSIC's approval or knowledge," Holmes said.

At an MSSIC membership committee meeting on April 4, 1984, Second National's Brooks said he was concerned about MSSIC's "apparent lack of progress in resolving problem institutions in a timely manner," and that chronic violators "seem to appear on the agenda of the committee month after month." An MSSIC staff member, William F. Mahon, added that when violators were told to stop certain practices, they debated the regulation with MSSIC rather than correct the violation.

At a May 9 meeting, David F. Wallace, a membership committee member, said that MSSIC's traditional means of correcting abuses, "jawboning associations into compliance," was ineffective. Another member, John D. Faulkner Jr., sounded the same theme, saying it was "unclear to what extent MSSIC has the power to influence management."

By mid-1984, several S&L executives, including Second National President Henry A. Berliner Jr. and Arthur Silber of Chesapeake Savings & Loan in Annapolis, were openly complaining to MSSIC and among themselves that the "go-go" operators were out of control and were walking all over the insurer.

By October 1984, Berliner, who had sent at least two warning letters to MSSIC earlier in the year, wrote to a friend at John Hanson Savings and Loan, another MSSIC member: "I have a deep and abiding concern that one of these associations will get in deep trouble and that we will all be dragged down in the wake of a failure."

One former MSSIC official, who asked not to be named, recalled telling Hogg and another MSSIC officer: "For God's sake, we're the regulators. How can we take these excuses?"

Some excuses were remarkably simple. In August 1984, MSSIC Vice President Trice ordered First Progressive's management to stop the often risky practice of trading in stock futures and options, MSSIC minutes show.

One month later, Trice informed MSSIC officials that First Progressive was violating his order, and that when confronted, its managing officer said he "did not understand" the order, according to the MSSIC minutes.

Another tack some thrifts took was simply to disagree with MSSIC when called on the carpet.

At Community Savings & Loan of Bethesda, which was one piece of a sprawling real estate empire known as EPIC, MSSIC officials in 1984 found an apparent violation of an MSSIC rule barring thrifts from concentrating a high number of loans in any one borrower -- in this case, tens of millions of dollars loaned by Community to EPIC partnerships. Community simply "countered" that MSSIC's reading of its own regulations was faulty, according to a later examination of EPIC by the Touche Ross & Co. accounting firm.

The issue rested there until August of this year, when EPIC collapsed and the state took over Community. Last month, the state government filed a $50 million lawsuit alleging that Community officials acted improperly in making these EPIC loans.

A former MSSIC staff member, who asked not to be identified, said many S&L executives believed that "the rules were there as a starting point, and were to be negotiated . . . . They didn't think MSSIC would ever do anything to them."

In a sense, those S&L executives were correct.

MSSIC officials often shrank from taking action out of fear that any criticism of an association could cause a run, according to numerous industry executives and MSSIC and state government officials.

"The idea was, 'We can't do that because it will bring attention to the problem,' " the ex-MSSIC official said. "They didn't want anybody else to hear bad news" about S&Ls. A former EPIC executive said of MSSIC officials: "They were paranoid about bad information getting out to the public." Reassuring Ads

MSSIC officials' desire to preserve public confidence in S&Ls sometimes drove them to extraordinary lengths.

In the first few months of 1985, the insurer was running upbeat commercials on television boasting of its soundness. "It's reassuring," said one ad, showing a lighthouse on a shoreline. "You know it's always there . . . . By day, a landmark of strength. By night, a comforting beacon to safety. We're the Maryland Savings-Share Insurance Corporation."

But even while these ads were airing on television, in the aftermath of Ohio's savings and loan collapse, MSSIC officials were growing more fearful than ever about the slightest suggestions of shakiness at any Maryland S&L.

On March 22, MSSIC officials composed a blistering letter to Old Court President Jeffrey A. Levitt pinpointing his thrift's numerous risky activities. Given MSSIC's extreme fear of bad news at that time, that letter was an explosive document, and MSSIC didn't mail it to Levitt for another month.

Also on March 22, MSSIC President Hogg wrote a letter to Ejner J. Johnson, Hughes' chief of staff, resisting Johnson's idea of pulling the MSSIC ads off the air. Johnson believed the ads were misleading because of the brewing S&L troubles.

But Hogg wrote Johnson that pulling the ads would be "most imprudent" because it would erode public confidence in MSSIC-insured institutions. "Any change in the way MSSIC advertises must be made only after careful planning and with the advice of both legal and public relations counsel," Hogg wrote.

Some industry officials said that Hogg and Trice were too close to the industry, in part because they had worked in it for years. Hogg had been a regional vice president of First National Bank of Chicago, responsible for the bank's dealings with MSSIC, before joining the Maryland insurer several years ago. Trice worked at the division and at MSSIC, then briefly as an Old Court executive in 1982 before becoming MSSIC's second-in-command.

Second National's Brooks said that Trice "leaned toward being too friendly with the industry. He thought the rainbow was there. That was his natural inclination."

Defenders of Hogg and Trice recall the two MSSIC officers complaining that they did not have enough enforcement power. One friend of Trice's said that Trice did his best to rein in errant S&Ls, and even exceeded his authority in the fall of 1984 by issuing "cease and desist" orders on his own -- a power not expressly granted him under MSSIC rules.

Although Hogg and Trice may have been privately concerned about S&L problems, their public statements reflected an unabashed optimism.

"We know our jobs and we do them well," Hogg told a congressional subcommittee studying problems in the U.S. thrift industry last March, two months before Maryland's system crashed. MSSIC's "early warning and regulatory-supervisory system . . . should preclude the failure of one or more large insured thrifts from occurring suddenly, or as a surprise to regulators and insurers.