Government's Role in the S&L Mess. Yes, there was fraud; there was also a Congress that changed the rules, says an insider. BUSINESS: INTERVIEW

TAKING a late-afternoon sip from a can of diet cola, Gary H. Driggs begins simply: ``I think the current debate is almost totally missing the underlying factors that have led to the current savings and loan crisis,'' he says. Then, for the next 45 minutes, he lays out an insider's view of one of the knottiest challenges facing the new administration in Washington: the near-collapse of the nation's thrift industry.

Even as he speaks, the debate continues to boil. President Bush's $90 billion plan to prop up the nation's sagging savings and loan (S&L) industry is now on the table.

Two months before that announcement, however, Mr. Driggs resigned as president and chief executive of Western Savings and Loan Association, a firm founded by his father and grandfather in 1929 that grew to become the second largest thrift in Arizona. His resignation was suggested by federal regulators to ease their concern over the stability of the Phoenix-based company. Earlier in 1988, his $6.2 billion institution had sold all of its branches outside Maricopa County, where Phoenix sits, following millions of dollars of losses in soured real-estate loans and investments.

Driggs and Western Savings are by no means alone in their troubles (see accompanying charts). In an industry caricatured for its cowboy entrepreneurs and shady high-rollers, however, he and his institution command great respect.

``He is very highly regarded in the community,'' says Mary C. Short, who stepped down early last month as Arizona's Superintendent of Banks. She feels the federal regulators did not need to suggest that he resign. ``I would not have felt uncomfortable with Gary still there,'' she says, adding that he is ``a very bright and very honest man.''

``He's regarded as one of the best, one of the most imaginative, one of the most creative in the business,'' says a local journalist who follows the financial industry. When the crunch came, he adds, Driggs ``was braver than most, and got caught off base a little further.''

``He's one of the most outstanding people who have ever hit this valley,'' confirms Janet Beauchamp, director of the Arizona Business and Education Partnership, a Phoenix-based nonprofit group which will award Driggs its top award for community service later this month. His reputation, she adds, is of someone who ``lost his money honestly.''

How did it happen?

``There are many many lessons to be drawn from this,'' notes Driggs philosophically, ``and we really won't have perspective until some time in the future when we can look back and see how a web of events wove into a pattern of the cloth.''

That pattern, as he sees it, includes:

Inflation. ``You had a history of inflation that made everybody believe that investment in real estate was going to be a very lucrative thing.'' Few foresaw the current downturn - causing home foreclosures in fast-growing cities like Phoenix to rocket upward last year, and idling office buildings all across the Southwest.

Deregulation. Following a crisis in the thrifts in 1981-82 sparked by high interest rates, the industry was deregulated by state and federal governments. ``In effect, they made the savings and loans more like banks,'' says Driggs, adding that where interest rates had previously been tightly regulated, the regulators now allowed institutions to pay whatever rate they could.

But many older thrifts still had a high proportion of 30-year mortgages at very low interest rates in their investment portfolios. They could only offer high rates to new depositors by finding even higher-yielding (and sometimes more risky) investments in commercial real estate and apartment buildings - not to mention recreational-vehicle parks, stud horse ranches, and windmill farms.

Tax reform. A massive 1981 tax cut, new investment tax credits, and accelerated depreciation all encouraged investment in real estate. ``In effect,'' insists Driggs, ``the [new] law said, `Please invest in real estate, Mr. and Mrs. America,' with the biggest incentives that had ever been given.''

New deposits. The early 1980s also saw new accounts pouring in from Wall Street, drawn to the S&Ls' high interest rates. Traditionally, says Driggs, S&L officers solicited accounts ``one at a time, by building a branch and attending the local Rotary Club.'' Suddenly Wall Street was ``offering to deliver to any institution vast amounts of funds.''

ALL these factors, he says, produced the real estate boom of the early 1980s. He acknowledges that falling oil prices sapped that trend, especially in Texas and Oklahoma. But the real culprit for Arizona, he feels, is an issue rarely mentioned: the sudden reversal of tax policy in 1986.

``When that [1986] tax reform act was passed,'' he notes, ``not one hour of debate took place on the impact of the tax reform act on the financial state of the country. The deal was actually made over a weekend with a few senators.''

The new law, however, dramatically changed the real-estate rules. ``The net effect was to reduce the value of commercial real estate by a tremendous amount. ... We're paying the price of a stop-and-go government policy that said `invest in real estate' and [then] changed the rules.''

Does he mean that the institutions themselves are free from blame? That what President Bush described as ``unconscionable risk-taking, fraud, and outright criminality'' were not factors?

``If you take all of the accumulated fraud ... and compare that to the cost to the industry of the high interest rates caused by deficit financing, of the real-estate development that took place as a result of federal policy, and of the accumulated regional depression,'' says Driggs, ``there's no comparison.''

``There were certainly a reasonable number of charlatans that got into the business,'' he says. ``The banking business is not better or worse than business as a whole.''

``But it's popular to look for a scapegoat, to blame some individual. The [US] public demands ... a quick and simple solution, because we are not a patient people.''

Should that solution come in part from tax dollars, as the president has proposed? Driggs compares the S&L problem to that facing the large commercial banks with third-world loans.

``The large banks have massive amounts of foreign loans, the losses of which could well exceed any losses in the savings and loan business,'' he says. ``They are enormous....''

``If you had the choice between hundreds of millions of dollars of loans from Mexico and Brazil and Argentina, for which there is no collateral - is that a better asset than [a loan secured by] an office building or apartment in Dallas or Houston? At least that is a US national asset.''

``The banking crisis is being covered up ... and the S&L crisis is being washed in the public view. They are both serious problems. They both deserve a national solution.''