Jan. 30, 2002, 9:14PM

Ads, memo differ on 'tough times'
candidate faced

By R.G. RATCLIFFE
Copyright 2002 Houston Chronicle Austin Bureau

AUSTIN -- Democratic gubernatorial candidate Tony Sanchez
says in a statewide television commercial that he faced "tough
times" during the 1980s Texas economic depression, citing
downturns in the oil and gas business and in banking.
That tough time in banking for Sanchez refers to the failure of his
Tesoro Savings & Loan of Laredo, which ultimately cost
taxpayers about $161 million in a federal bailout.

Sanchez, who was the thrift's majority stockholder and chairman
of the board of directors, has distanced himself from Tesoro's
failure -- blaming it on the economy, not poor management. And
his aides say he lost $3 million personally in the thrift's failure.
But a 1989 memo, drafted by a law firm the federal government
hired to investigate Tesoro's failure, claims that Sanchez was
highly involved in the thrift's operations and partly responsible for
its failure.

"Upon acquisition of the majority of Tesoro's stock, the Sanchez
family used its control to further their own business interests and
hobbies," said the unsigned memo written by lawyers at the firm.
"Sanchez Jr. treated Tesoro's funds as if they were his own
money," the memo said. The memo detailed the thrift's
involvement with other Sanchez businesses, including partnership
in a winery and "no-interest loans" to a Sanchez-owned
newspaper "disguised as `prepaid advertising.' "
Sanchez campaign manager Glenn Smith dismissed the memo as
hype "from a law firm seeking business from the federal
government."

"Even if that memo was sent to the federal agency, which no one
seems to be able to confirm, no action was taken on it," Smith
said.

Sanchez did pay a $1 million settlement to the Federal Deposit
Insurance Corp. in 1994, but neither he nor any other Tesoro
officers admitted wrongdoing, and no lawsuit was filed.
"There were no civil or criminal proceedings brought against
anybody," Smith said.

"And that the officers of Tesoro were still allowed to continue in
the banking and thrift industry speaks volumes about what the
regulators thought was going on at Tesoro."
The memo is clearly a prospectus for a lawsuit that likely would
have earned the law firm additional fees from the FDIC. And it
portrays Sanchez in a bad light without any opportunity for him or
other Tesoro officials to defend themselves.

The memo, some of which has been published previously, is
being circulated by Sanchez opponents, who won't say how they
obtained it. They're eager to see the memo publicized, while the
Sanchez camp has worked to suppress it as unreliable and unfair.
Sanchez, former Attorney General Dan Morales, John
WorldPeace of Houston and Bill Lyon of Waxahachie are
battling in the Democratic primary to take on Republican Gov.
Rick Perry in the fall.

The memo apparently was drafted by a Corpus Christi law firm
working as a subcontractor for a Washington, D.C., firm that
represented the FDIC.

The memo urged the FDIC to pursue a lawsuit against Sanchez
and other Tesoro directors.

FDIC officials will not confirm or deny that the agency ever
received the draft memo or a final version of it.
William Butterfield of the Washington law firm of Finkelstein,
Thompson & Loughran confirmed that he had conducted the
Tesoro investigation along with the Corpus Christi law firm. But
he declined to comment on the memo, and the Corpus Christi
firm did not respond to inquiries.

Some of the memo's criticisms are corroborated in supporting
documents circulated along with it, mostly statements to the law
firm by former Tesoro officials.

Some details in the memo also are consistent with a statement
issued in November 1988 by the Federal Home Loan Bank
Board when it took over Tesoro.

The board said Tesoro had a "large concentration of poorly
underwritten, high-risk acquisition development and construction
loans."

Sanchez was Tesoro's chairman and a member of its executive
loan committee from 1975 until the thrift collapsed in 1988, the
memo said. He and his father bought a majority interest in the
savings and loan in 1983 through a trade of land for stock.
From that point forward, the memo said, the Tesoro board of
directors acted to "rubber stamp" any deal brought to the board
by Sanchez or his hand-picked thrift president.

The suggestion that Sanchez was involved directly in running
Tesoro is consistent with statements he made to the Houston
Chronicle in 1991 that he had gotten a job at the thrift for Texas
House Speaker Pro Tem Hugo Berlanga, a personal friend.

"If he knew of a developer who was planning some type of
development, he (Berlanga) would meet with them at length and
then call me and tell me about it," Sanchez said at the time.
The thrift under Sanchez began pursuing an aggressive program
of real estate development loans. That was a pattern that almost
every savings and loan in the United States followed during the
1980s, ultimately leading to a collapse of the industry.
The winery mentioned in the memo was a 1984 joint venture
between the University of Texas, which leased the land for the
facility, and Sanchez-Gill-Richter-Cordier Ltd. to produce Ste
Genevieve wine.

Tesoro was a direct investor in the venture and at one point
owned 29 percent of the company. Tesoro lost almost $2 million
when the venture failed in 1986.

Another lender, Bank of America, foreclosed on the winery and
UT canceled the land lease. Ste Genevieve was revived by
another company in 1987.

Sanchez aides said his name was associated with the project as a
representative of Tesoro. They said he never stood to personally
profit from the venture. But Houston Chronicle and Dallas
Morning News stories at the time listed Sanchez as one of the
winery's owners.

The memo and supporting documents also questioned $210,000
in prepaid advertising Tesoro bought in The Laredo News, a
newspaper owned by the Sanchez family.

The lawyers investigating Tesoro suggested that the prepaid
advertising was effectively an interest-free loan from Tesoro to
Sanchez's newspaper.

A former Tesoro official told the law firm that the money was
meant to solve cash-flow problems at the newspaper.
The official said that Tesoro never used all the advertising it paid
for, and that $160,000 to $180,000 "came back to the institution
from Mr. Sanchez."

It was not clear from the statement whether Sanchez himself or
the newspaper refunded the money to Tesoro. The rival Laredo
Times, owned by the Hearst Corp., bought the newspaper in
1986 and closed it. Hearst now also owns the Houston
Chronicle.

Smith said the law firm memo is filled with inaccuracies. He said
all transactions at Tesoro were approved both by local thrift
officials, and that after the thrift entered a consent agreement in
1985 the loans also were scrutinized by a federal supervisory
agency.

"He's said in advertising that it was tough times. Tesoro did make
mistakes like many savings and loans, like almost all savings and
loans," Smith said.