A Senate Judiciary subcommittee chairman yesterday called on the government to tear up an agreement that promises $1.85 billion in federal subsidies to an Arizona insurance executive who took over 15 failed savings and loan institutions in 1988 while putting up only $1,000 of his own money.

Sen. Howard M. Metzenbaum (D-Ohio), said the executive, James M. Fail of Phoenix, should have been disqualified as a potential S&L buyer because a company he controlled had pleaded guilty to securities fraud in 1976 in Alabama. Fail himself was indicted for securities fraud in that case, but the charges were dropped.

Fail fell short by $10 million of making the full $70 million initial payment for the 15 Texas thrifts by the December 1988 deadline set by the S&L regulators, Metzenbaum said, and that should relieve the government of any obligation to provide further assistance to Fail, the senator added. In selecting Fail, the Federal Home Loan Bank Board turned down a competing offer that would have required $97 million less in subsidies, according to documents obtained by the senator's staff.

The Ohio senator, chairman of the Judiciary subcommittee on antitrust, monopolies and business rights, has scheduled a hearing today to review the decision by the bank board to award Fail the 15 Texas thrifts, which have been merged into a new institution called Bluebonnet Savings, in Dallas.

Fail was one of many investors who acquired bankrupt savings and loans during 1988 under a program called the "Southwest Plan," aimed primarily at S&Ls in that region of the country. Directed by M. Danny Wall, then the bank board chairman, the program's goal was to get rid of the thrifts at the least possible cost to the government, and timing was critical because tax benefits the bank board was using to attract investors like Fail were due to expire at year's end.

But Metzenbaum and other members of Congress have charged that in many cases the sales were giveaways that will cost taxpayers billions of dollars in future years.

"The government got shafted," said Metzenbaum, who hired an investigator, serving on his Senate staff, to look into the Southwest Plan deals.

The background of the Bluebonnet transaction and the results of Metzenbaum's investigation were reported Sunday in the New York Times.

Neither Fail nor Wall could be reached for comment yesterday. According to the New York Times, Wall said his agency authorized the sale to Fail chiefly because other regulators with the Federal Deposit Insurance Corp. (FDIC) had approved Fail's purchase of an Oklahoma bank in 1987.

"There was a thorough analysis of each prospective purchaser," said Karl Hoyle, a former senior bank board official. The fact that Fail had "passed muster" with the FDIC "carried a good deal of weight" with the bank board, Hoyle said.

Wall declined Metzenbaum's request to appear at today's hearing, as did Fail and several others involved in the deal.

George M. Barclay, president of the Federal Home Loan Bank (FHLB) in Dallas, said he did not know an affiliate of Fail's company had pleaded guilty in the 1976 Alabama case. "All we knew was that he had been indicted 15 years earlier and that he had come to an accommodation without admitting or denying guilt," said Barclay.

He said that if the Dallas FHLB had known about the guilty plea, it would have been a "presumptive disqualifier" that Fail would have had to overcome. It would "shift the burden of proof," Barclay said, to Fail to show that he should be allowed to bid to acquire a savings and loan.

The role of the Dallas FHLB wasn't to approve or disapprove Fail, but to bring any potential problems to the attention of the bank board in Washington. Barclay's aide responsible for collecting the information, Wayne Frena, is expected to testify before Metzenbaum. He is a regulator with the Office of Thrift Supervision, which replaced the bank board as S&L regulator.

Barclay said "nobody pressured me, or twisted my arm," responding to the Times article, which said Barclay overruled his staff and sent a letter to the board at the last moment, finding that Fail was an eligible buyer.

Barclay said the letter in question -- the second regarding Fail's bid -- was written at the request of the bank board. "I had forgotten to put in a paragraph saying we would be able to supervise the deal," Barclay said. Barclay then dictated the second letter to the bank board. Barclay said both letters mentioned Fail's earlier indictment.

Ellis Regenbogen, a lawyer for Fail, asserted that Fail had fully disclosed the 1976 guilty plea by one of his affiliated companies to the bank board. "It was part of the material submitted with the application," Regenbogen said.

Regenbogen also said the plea would not have automatically disqualified Fail, rather that it just would have made it harder for him to convince regulators to award him the S&Ls. "There are other managerial considerations at work. Keep in mind that that {plea} was in 1976 and he's got a record {of} buying troubled institutions and turning them around," Regenbogen said.

Regenbogen denied Metzenbaum's allegation that Fail hadn't come up with the required capital on time.

"The amount he was required to contribute on or around the time the transaction closed was contributed in a time frame of which FSLIC was aware and to which its people did not object," Regenbogen said, referring to the Federal Savings and Loan Insurance Corp.

Metzenbaum said the hearing will also look into the role played by a Washington lobbyist, Robert J. Thompson, in promoting Fail's bid before the bank board.

Thompson, a former aide to George Bush when he was vice president, wrote to Wall in December 1988 on Fail's behalf, as the deadline for approving deals under the Southwest Plan was at hand.

His "Dear Danny" letter said Fail "is a top notch person who has been enormously successful in turning around distressed financial institutions as well as managing healthy ones. We believe it is very important to close this year in order to preserve the tax benefits so that both FSLIC and our group will benefit." According to Metzenbaum aides, Thompson owes $500,000 to companies controlled by Fail, including a $356,250 mortgage on a property on A Street SE.

"I think Mr. Fail had a wonderful lobbyist who was a close friend of Danny Wall," Metzenbaum said yesterday.

Wall told the Times: "I did nothing for Bob Thompson that I didn't do for anyone else. There is nothing nefarious about it."

Under the Southwest Plan provisions, Fail was able to acquire the Texas thrifts for $120 million, of which $70 million was to be paid in December 1988. In return, the government pledged to provide $1.85 billion worth of subsidies, necessary because so many of the properties on which the thrifts had foreclosed were themselves bankrupt.

The subsidies were tax-free to the S&L buyers like Fail and the federal law -- which has since been changed -- allowed the new buyers to use the earlier losses of the thrifts as future tax deductions.

In all, some 200 bankrupt savings and loans were sold to investors in 1987 and 1988, at a cost to the government that is now estimated at $52 billion. Because the insurance fund that had stood behind the federal deposit guarantee went broke, the continuing costs of the S&L cleanup must be borne by taxpayers.

In Fail's case, the thrifts he was able to acquire with $1,000 of his money and borrowed funds from his insurance companies and other lenders are thus far in the black. Counting the first installment of $250,000 in federal subsidies, Bluebonnet recorded a profit of $35.4 million in 1989, giving it the best return of any of the Southwest Plan thrifts, according to Metzenbaum.

The Southwest plan sales, said Metzenbaum, were "the most absurd proposition I've ever heard of in my life."

Staff writer Sharon LaFraniere contributed to this report.