PORTLAND, ORE. -- David Nierenberg is a California venture capitalist who answered the U.S. government's call in 1987, putting together a group of investors to buy a failed savings and loan institution and keep it alive. Now, instead of encouragement, Nierenberg said the government is treating his Far West Federal Savings Bank like one of the characters in the Monty Python movie about the search for the Holy Grail.

In the movie, a man pushes a cart through a medieval town during the plague, calling for people to bring out the dead. When someone on the wagon sits up amid the bodies and protests, 'Wait, I'm not dead yet,' the body carrier says 'What? Not dead yet?,' and clubs the survivor on the head.

In Nierenberg's real-life drama, the cart is full of savings and loan carcasses, federal regulators are pushing the cart and Nierenberg's Far West Federal is protesting that it's not dead yet. But he fears it will end up that way, perhaps to the detriment of taxpayers, if regulators don't lay down their club.

Far West Federal belongs to a category of ailing S&Ls that say they are not terminally ill. The thrifts cannot meet the stringent capital requirements imposed last year by a federal law, but they say they can grow stronger if given a little more time. Nierenberg, 37, said Far West Federal can make it -- without any government subsidy, any tax breaks or any accounting gimmicks.

The fate of these institutions is in the hands of federal regulators from the Office of Thrift Supervision (OTS). Letting the S&Ls stay in business is not simply a question of capital but of character, and judging character is not a customary government function.

OTS regulators are skittish about pleas for leniency, given public outrage about the S&L debacle. They fear that Far West Federal and other S&Ls could sink deeper into trouble if they delay. For now, they don't have much choice. To forestall a government takeover, Far West Federal has sued to stop OTS regulators from seizing the thrift and booting out management; a circuit court has temporarily blocked any seizure, a rare setback for the government.

If the OTS does move to seize Far West Federal, it won't be cheap: A federal takeover of the thrift today would cost taxpayers about $265 million.

Karen Shaw, a Washington consultant on S&Ls, estimates that there might be 120 thrifts, including many of the biggest, with a "fighting chance" to survive even though they now can't meet capital requirements. "There is no reason to put them in the tank, especially when the government is doing so badly with the ones it has," Shaw said.

Robert R. Glauber, under secretary of the Treasury, warned that the OTS "can look at a business plan, but we are absolutely not going to back away from high capital standards. That would be penny-wise and pound-foolish."

Nierenberg argues that a little latitude should be given to people bringing fresh blood -- and fresh cash -- into the business. "We're privatizing a public sector problem," he said. "The government should be coming to me and saying thank you for bringing equity capital to the industry."

But thank you has not been exactly what the government has said. When Nierenberg's group, Trinity Ventures, bought Far West Federal on the last day of 1987, regulators agreed to a 10-year recovery plan. Now that the political climate has changed and Congress has called for tough action against thrifts, OTS regulators don't want to wait that long.

Much is at stake. If regulators seize the thrift, Nierenberg's group stands to lose $27 million it put into the thrift less than three years ago, even though Far West Federal has met the financial targets set in its contract with the government.

There also is a larger issue at stake: Can the government tear up an agreement it doesn't like anymore? The judge who gave Far West Federal a restraining order against the OTS regulators said seizure of the thrift would violate the sanctity of contracts.

In a related case, a U.S. Claims Court judge in Washington has ruled that the thrift bailout law that changed accounting rules violated pre-existing contracts made by regulators. In the 1980s, regulators allowed S&Ls to accumulate goodwill, an intangible balance sheet item, to encourage healthy thrifts to acquire ailing financial institutions. Under the bailout law, S&Ls are not allowed to count goodwill as an asset, thus instantly putting many thrifts into insolvency.

The U.S. Claims Court ruling, if not overturned, could force the government to pay compensation of $12.4 billion to thrifts that were encouraged to use the accounting technique, plus billions more in damages, lawyers say.

Federal courts in Florida and Georgia this month ruled against the OTS, saying the agency had violated earlier agreements with S&Ls on goodwill and deferred loan losses that perviously were counted as capital.

The possibility that the government will renegotiate contracts that now look too favorable to investors isn't encouraging to new investors. "Why enter a deal with someone who reneges on deals?" said an attorney who represents investors.

But going back on an agreement might seem more palatable to the OTS than enduring the kind of harsh criticism that its predecessor, the Federal Home Loan Bank, received for the way it handled high-flying thrifts in the 1980s. James Barth, former chief economist for the OTS, said the agency wants to distance itself from the thrift crisis at almost any cost, even if it means seizing thrifts, dumping more of them on the Resolution Trust Corp. (RTC) and raising the overall cost of the cleanup.

Other officials are open to a more flexible strategy.

"OTS always brings up the question of whether we would be going down the same road as we did before," said L. William Seidman, chairman of the RTC, the agency responsible for disposing of seized thrifts. "But every time we add an institution to the RTC, it increases the cost. I think it's very important not to put any more financial institutions in the RTC than necessary ... {even if it} may take longer for some institutions to recover."

As with other aspects of the cleanup of the S&L industry, the fate of Far West Federal and similar thrifts is clouded by confusion from the lowest ranking regulator to the highest levels of government. On the one hand, the government is trying to woo private investors to take over sick thrifts. On the other hand, the Bush administration is openly discussing an overhaul of the financial system that could make the S&L industry obsolete.

This debate didn't exist in 1987, when the Federal Home Loan Bank was courting investors to take over Far West Federal and other S&Ls. In the early 1980s, Far West Federal lost about $200 million in bad commercial loans that it had acquired through brokers. Many of those loans may have involved fraud, executives believe. "The company was going amok," says Donald Tisdel, now the chief executive. The thrift didn't even have a senior officer to check the credit-worthiness of borrowers.

In 1985, a revolt by upper middle management led to the ouster of the thrift's chairman and Tisdel's installation as chief executive. Tisdel moved to control the damage already done. A newly hired credit officer reconstructed the thrift's ledgers, keeping three-by-five-inch index cards on each problem loan he discovered.

But Far West Federal still needed a cash infusion, and management talked to scores of potential investors.

Nierenberg, who had just started his own venture capital firm after seven years with the high-profile management consulting firm Bain & Co., was interested for several reasons: Far West Federal had about $2 billion in deposits, it was the third largest financial institution in a growing Portland market, and its brokered deposits -- the ones least loyal to the thrift -- made up 1 percent of deposits.

But Far West Federal also had a negative net worth of $300 million. Among thrift experts, this is known as "The Hole."

Nierenberg's group won the competition with its $27 million bid. The cornerstone of the deal was a $1.5 billion loan from the Federal Home Loan Bank, called open thrift assistance, although it involves no subsidy. Far West Federal pays three-quarters of a percentage point more than what the Treasury pays to borrow money. The thrift turns around and lends that money to customers at higher interest rates, making about a 1 percent profit, or about $15 million a year. How it lends or invests the money is closely monitored by regulators, who can overrule any decision at Far West Federal.

Whether this assistance is a good idea or not "boils down to management," said Jim Thomas, the chief investment officer of Far West Federal. If management invests and lends the money wisely, Thomas said, then earning a profit should be "kind of like shooting layups."

The agreement also gave the investor group 10 years to fill "The Hole" and meet capital targets -- regardless of any changes in laws and regulations.

In 1988, Far West Federal was supposed to earn $1.8 million. Instead, it made $3 million in operating profit and another $5.5 million from the sale of assets. It was the thrift's first operating profit in a decade.

In 1989, Far West Federal had an operating profit, but writing off bad debts gave it a net loss. Even with that loss, it will be ahead of schedule on meetings its capital plan. And, at a time when people were taking billions out of S&Ls, deposits at Far West Federal rose.

The reorganized S&L also has trimmed expenses and cleaned up its portfolio of loans and real estate. Through sales, auctions and writeoffs that began with the management shake-up in 1985, Far West Federal has whittled down a heap of troubled assets from $530 million to just $50 million. It has unloaded a host of problems, including hundreds of repossessed homes in the Portland area, a foreclosed resort in the Pocono Mountains, a Tulsa office building, a Phoenix condominium project and a Virginia Beach hotel.

Already, Nierenberg's group has saved the government about $85 million. Not only did the group invest new cash but it averted any need for the government to borrow $300 million -- at a cost of $25 million in annual interest charges.

Nierenberg's group didn't do any of this out of a sense of philanthropy. If its plans had continued uninterrupted, the group might have been able to sell shares of the thrift to the public in 1993 or 1994 and made five or six times as much as the group invested originally.

Far West Federal's plans were spoiled when regulators cracked down on thrifts in the wake of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Regulators cut back on loan assistance to Far West Federal, limiting the thrift's ability to lend money and depriving it of $3 million a year in income.

Regulators also imposed lending limits that obstructed the sale of foreclosed properties. Far West Federal was ordered to sell its $100 million in high-risk, high-yield junk bonds, even though the thrift was making money on that portfolio.

Finally, regulators wanted additional management changes.

"I understand the political atmosphere is poisoned," Nierenberg said, "but at a time when the rest of the problem is ballooning, it is the wrong time to be driving responsible people away from the industry."

The government's conflicting goals of putting all problems behind and minimizing the cost of the cleanup were apparent at a board of directors meeting in May at Far West Federal's offices in downtown Portland.

That day in Washington, Treasury Secretary Nicholas F. Brady admitted in testimony to Congress that the thrift cleanup would cost two and a half times as much as he had estimated eight months earlier. Meanwhile, Far West Federal's directors sat around an oval table with cold sandwiches and sodas trying to figure out how to cope with their own problems. Most of the conversation focused on problems from FIRREA and the threat of a takeover by regulators.

One official complained that Far West Federal could have saved $200,000 if it had been allowed to sell certain securities when it wanted. Another official said the OTS had taken seven months to clarify a rule, which cost the thrift an opportunity to unload costly repossessed real estate.

Another official said that talk in the newspapers of a possible government takeover of the thrift had been hurting deposits. A March article in the Portland Business Journal quoted Bill Durbin, director of the Office of Thrift Supervision in Seattle, as saying his office did not plan on taking Far West Federal into conservatorship in the near future. "They're safe for a couple of days anyway," he said jokingly, according to the newspaper.

"This is death by inches," fumed Leland Prussia, a Far West Federal director and former Bank of America executive.

After the meeting, Prussia shook his head as he tried to make sense of the government's handling of Far West Federal.

"If Far West could stay on its game plan, it would cost taxpayers nothing," Prussia said. "If put into conservatorship, it will cost taxpayers hundreds of millions of dollars."

What is the government's next step? "We have strategies. They have strategies," said a Seattle OTS official, who spoke on the condition that he not be quoted by name. "It's best left undiscussed."