(FORTUNE Magazine) – WEARY bank regulators and emissaries of Ronald O. Perelman deliberated late into the night last December 27 in the offices of the Federal Home Loan Bank of Dallas. Finally, in a room bereft of Christmas decorations, they signed documents making Perelman the new owner of the largest solvent savings and loan institution between New York and California. Representatives of Perelman, whose holding company owns Revlon among many other properties, agreed to put $315 million into the thrift. In return, the regulators gave them the keys to First Texas Gibraltar, with its $7.1 billion in good assets, plus a $5.1 billion guarantee to cover the thrift's bad assets, and tax benefits worth $900 million. True, Perelman did undertake the business risk of keeping the big S&L running. But how risky was that? So generous were the terms of the deal that to lose money on it, he would have had to let the thrift founder and go bankrupt within 18 months -- a near impossibility, financial analysts say. For the first 90 days of 1989 alone, Perelman's rate of return on the capital invested is estimated at over 80%. It's enough to make you wonder whether he didn't get too good a deal. Some irate officials in Washington want to renege on the sale. L. William Seidman, chairman of the Federal Deposit Insurance Corp. (FDIC), and the man charged with cleaning up the thrift mess, has said that he wants to reexamine this and similar deals that were cut last year at a total cost to taxpayers of $44 billion. A close look at the First Texas Gibraltar transaction suggests that Seidman may have a point. The story has twists and turns enough to recall a Balzac novel: A small group of wealthy and politically influential Texans, including former Democratic Party chairman Robert Strauss, buy a troubled Dallas thrift. Under their ownership it expands by lending aggressively to real estate developers. Then, with the collapse of the Texas real estate market, it's left teetering on the edge of insolvency. To the rescue come federal regulators. Desperate to attract a buyer for the institution, they stage a helter-skelter auction, holding up the tax-shelter benefits as a particular prize. The scent of money attracts a pair of alert Texans -- a bank turnaround artist and a real estate developer -- who hope to capitalize on the government's rush to sell. But they lack the financial resources to swing a deal. Enter Ronald Perelman, a 46-year-old New Yorker, chairman of MacAndrews & Forbes, and by some accounts America's wealthiest man. In an ironic coda to the deal he strikes, some of the same Texans who originally ran the thrift into the ground are left with lucrative business arrangements they negotiated for themselves while still running the institution. The big loser: the U.S. taxpayer. The tale begins in the summer of 1982. Bob Strauss, Texas native and big- time Washington insider, was relaxing at his vacation home in Del Mar, California, when the phone rang. It was Strauss's close friend, J. Livingston Kosberg, a millionaire nursing home and S&L operator from Houston. Kosberg told Strauss that he planned to buy a sick Dallas-based thrift named First Texas. With $2.4 billion in assets, mostly long-term loans earning low fixed rates, the S&L was losing money at a $40-million-a-year clip, largely because interest rates were rising, including the interest First Texas had to pay to attract depositors. Kosberg was going to steer the thrift away from home mortgage loans. Deregulation of the industry had opened up the possibility of lending money to developers in Texas's then booming commercial real estate market. The up-front fees on construction and development loans were inviting, and profit-sharing agreements with the developers could mean millions more when the properties $ ultimately were sold. Strauss invested about $400,000, he says, in exchange for 10% of the equity. His son, real estate developer Richard C. Strauss, was promptly made a director of First Texas, and within a year bought a quarter of his father's share. Despite rising land prices, Kosberg's charge into commercial real estate never succeeded. The problem: Everybody and his brother was lending money to erect office towers and garden apartments. Rampant overbuilding threatened profit margins at almost all the thrifts involved. But the crush of the crowd did not lead Kosberg to rethink his strategy. He wanted to go still deeper into commercial lending. So in June 1984, financed largely with junk bonds, his thrift bought Gibraltar Savings of Houston, the state's largest S&L, with $4 billion in assets. Gibraltar lent primarily to developers of large residential properties, clients whose business Kosberg wanted. KOSBERG AND Rick Strauss, who by now was on the S&L's investment committee, aggressively began to commit the thrift to putting more money directly into real estate, into owning property rather than just lending to its developers. Perhaps the most dramatic example: First Texas Gibraltar's March 1985 purchase of a 6,230-acre ranch 40 miles north of Dallas. Billionaire Ross Perot had already negotiated a deal to buy the Flying M Ranch for $108 million when Strauss got wind of the pending transaction. Moving fast, Strauss offered the sellers $135 million. Over a weekend he and Kosberg decided to have the S&L buy the property; there wasn't even time to appraise it. The plan was to have the S&L put up a luxury housing development on the land. Before the purchase by First Texas Gibraltar was complete, Kosberg and Strauss negotiated another contract, this time between the thrift and Strauss's land development company. The deal guaranteed Strauss's outfit a fee for managing the property of up to $2.9 million a year for 25 years. He was also given 25% of any profits realized after the development was sold. Shareholder records show that at the time, Strauss owned over 9% of the S&L and the Strauss family another 8%, enough to raise the question of whether the deal was truly at arm's length. Says Kosberg: ''I never felt there was any conflict. We had great confidence in Rick.'' Observes a former officer of the thrift: ''They may have met the letter of the law, but it didn't pass the smell test.'' The S&L's purchase of the land also raised a stink with Perot. He felt that Strauss and Kosberg had stolen his deal and demanded compensation. To avoid a lawsuit and bad publicity, First Texas Gibraltar paid Perot $8 million to go away. In retrospect, it's clear that Perot was lucky to have lost. By the spring of 1985 the market for real estate in and around Dallas began to fall apart. Beleaguered, Kosberg depended more and more on Rick Strauss. In addition to his political connections -- besides being Bob's son, Rick is the nephew of Dallas Mayor Annette Strauss -- he demonstrated a knack for foreclosing on borrowers behind in their loan payments. Their ranks were growing, and he and Kosberg met almost every week to wrestle with the problem. Robert Strauss's law firm, Akin Gump, helped out. Its lawyers executed the bulk of the foreclosures for the S&L. Former officers of First Texas Gibraltar say that Akin Gump was billing the thrift over $1 million a month for this and other work. Unfortunately for First Texas Gibraltar, as fast as it buried one improvident debtor, another would keel over. The institution's losses worsened. In 1987 its capital as a percentage of total assets slipped to 1.8%, well below the 3% required by regulators. By 1987 Congress realized, at long last, that further delay was simply making the S&L crisis in Texas worse. Almost 40% of the state's 281 savings and loans were insolvent and losing money at the rate of $500 million a month. To lead the federal rescue effort, M. Danny Wall -- a protege and senior aide of Senator Jake Garn (R-Utah), author of the Garn-St. Germain Act of 1982 that deregulated the thrifts -- was appointed chairman of the Federal Home Loan Bank Board. In what came to be called the Southwest Plan, Wall proposed packaging the failed with the failing, giving them enough government aid to survive and then selling each package to private investors who would provide additional capital. In exchange for kicking in capital equal to 3% of a thrift's assets, a buyer would receive from the government a note equal to the negative net worth of the institution -- that is, the difference between its assets and liabilities -- plus a guarantee to make up losses on assets that went bad in the future. In most cases, the government would also pay the buyer a tax-free yield on the note of 50 basis points -- hundredths of a percentage point -- above the cost of funds in Texas. On the assets covered under the agreement, it would pay a return of 150 to 275 basis points above that cost of funds. Finally, the new owner would share the profit on real estate sold for more than half book value. Despite these generous terms, Wall had sold only six S&L packages by Labor Day 1988. He decided to sweeten the deal. A buyer would now get not only the goodies outlined above, but also the thrift's past and future tax losses, which could be used to shelter profits from his other enterprises or from assets subsequently placed in the S&L. Congress had explicitly given the bank board this power to sell the tax losses. The only hitch was that the legislators, concerned that they had given away too much, had amended the law so that the value of the tax benefits would be halved come January 1, 1989. Wall had to complete his deals by midnight, December 31. Transforming the program into a tax-shelter game had the desired effect. By the end of September, FORTUNE 500 corporations and other big-time investors were besieged by guys pitching S&L tax deals. Among the crowd of promoters were a pair of Texans, real estate developer Robert K. Utley III and Gerald J. Ford, who runs a string of profitable small-town banks stretching from Dallas to Albuquerque, New Mexico. Utley and Ford had been scouting for deals since August and in September settled on a package that the bank board had code- named Pear. For lots of juice, perhaps: Pear was First Texas Gibraltar, which the feds had taken over. At least six financially heavier hitters were also looking at the deal. They included First Nationwide Financial Corp., a subsidiary of Ford Motor Co., considered by some to have the edge. In November, Utley and Ford were told by the regulators that they could not stay in the bidding unless they got themselves a big-time backer. The day before Thanksgiving, the pair found Daddy Warbucks in the person of Ronald O. Perelman. The Texans' investment bankers, Bear Stearns, introduced them. One of the firm's managing directors in Dallas is Theodore Strauss, Robert's brother and Rick's uncle, though it was the firm's New York office that handled the matter. Over the holiday weekend Perelman's people crunched the financial numbers and decided that the deal was no turkey. Perelman decided to bid. On Monday, November 28, the rest of the would-be buyers met the bank board's deadline for final bids. Utley and Ford, however, did not. Instead, they flew to New York: Perelman wanted to meet them face to face. He also talked with lawyers from Akin Gump, including Robert Strauss, to vet the two Texans and discuss strategy for negotiating with the regulators. Robert Strauss's firm had long done work for Perelman, and one of its partners, former civil rights leader Vernon Jordan, sits on the Revlon board. On Friday, December 2, Perelman, Utley, and Ford signed a letter of agreement and submitted a revised bid to the bank board. THE NEW BID blew everyone else out of the water, with the exception of Ford Motor's First Nationwide. Perelman had the most to gain from the $1.2 billion of net operating losses that would come with the thrift: He had huge profits from Revlon and his other operating companies that could be sheltered. After some final skirmishing with First Nationwide and another round of bids, Perelman won the deal in early December. With 1988 fast winding down, the bank board was losing bargaining power and growing desperate to do the deal. One of the board's negotiators says, ''The attitude was, 'This is a stink bomb. Let's get rid of it.' '' To accomplish this, the regulators agreed to give Perelman what amounted to $900 million in tax benefits in exchange for $300 million paid over ten years. Tax shelters usually trade for about 80% of their value, which in this case would have been $720 million. An investment banker who helped negotiate the deal concludes: ''They were hard up, and he took their pants off.'' Perelman insisted on being sure that his tax shelter would stand up if anyone later tried to undo the deal. Before signing, he required a ruling from the Internal Revenue Service to that effect. The process of securing a ruling can take months, but Perelman, like some other Southwest Plan bidders, got his in less than three weeks. Some people close to this deal say that Robert Strauss participated in the effort to speed the plow. Both Strauss and Perelman vigorously deny this. ''I don't lobby,'' Strauss says. ''I frequently tell clients, 'Yes, I do have influence, and the reason I have it is that I don't sell it, or use it.' '' PERELMAN and Ford, the thrift's new chairman, won't say what kind of return they expect to earn on the deal, nor will the regulators offer their analysis. But the figure can be approximated. Perelman invested $315 million, $155 million of it borrowed. Less than a week after closing the deal, he sold $2 billion of the thrift's assets for a loss, mainly mortgage-backed securities. One investment banker familiar with the transaction estimates that this generated about $200 million of losses for tax purposes. The red ink saved Perelman $135 million of tax he otherwise would have had to pay. That's an 84% return on his equity capital in the first 90 days of the deal. Does he face any risks on the transaction? Says an expert: ''The only one is that he can't run an S&L on a 250-basis-point spread, which is unlikely since even mediocre guys can make a buck on a 100-point spread.'' If Perelman got such a good deal, then how did the taxpayer fare? Not very well. The bank board has done little more than make the Treasury's loss its gain and, to the extent it underpriced the tax shelter, the taxpayers' loss Perelman's gain. One of the board's advisers recalls asking them: '' 'Who is our client, you ((that is, the bank board)) or the federal government?' They said, 'We are.' ''

Most ironic is how well the thrift's former owners made out. In the future all three stand to make further millions from the thrift. Akin Gump is now First Texas Gibraltar's only outside counsel. It also is getting more business from Perelman, who probably will need lobbying help to stop Congress from undoing the deal. Boasts a partner at Akin Gump: ''We were able to get off the sinking ship, grab the nets, and get on board the new one.'' Bob's son Rick will do all right as well. One of the few First Texas assets that the feds chose not to sell to Perelman was the residential development, now named Stonebridge, on the Flying M Ranch property. In no other Southwest Plan deal was so large an asset held back by the government. So now it is the taxpayers who are paying Strauss to manage the sprawling property. Before it was declared insolvent, the thrift took steps that in effect tied the government's hands on that score. Weeks before the S&L was sold to Perelman, Strauss and Kosberg, with legal help from Akin Gump and approval from Dallas regulators, placed Stonebridge in a new subsidiary of the thrift. The move prevents the feds from repudiating Strauss's management contract. Remarkably, Rick Strauss may even get the chance to buy Stonebridge from the regulators. Purchased at the right price, the property -- complete with roads, two lakes, and a pair of country clubs featuring 18-hole golf courses -- might not be a bad investment. Says Strauss: ''I have spoken to them about it, and the property is being appraised.'' In Dallas real estate circles the word is that he offered $30 million for the property First Texas bought for $136 million, then invested $164 million more in. ) Kosberg may not be going to the poorhouse either. In July 1988 with insolvency staring First Texas Gibraltar in the face, he sold the S&L's electronic data-processing unit. The buyer was a private company named Affiliated Computer Systems (ACS), at that time a shell without any significant data-processing capacity. In exchange, First Texas Gibraltar received 50.1% of the common and preferred stock of ACS. According to a suit subsequently filed against ACS and the government by Perelman, the assets transferred to ACS included $11 million of computer hardware and software, $25 million in cash, a ten-year service contract with First Texas Gibraltar, and a $36 million prepayment for the tenth year of the contract. Kosberg, the suit alleges, owned options to buy stock in ACS on favorable terms. These options vested once First Texas Gibraltar was declared insolvent last December 27. The list of 35 ACS shareholders as of November 1988 includes Don Dixon, who is under federal investigation for criminal fraud in the collapse of another Texas S&L, and trusts whose beneficiaries are Senator Lloyd Bentsen and his family. Asserts a senior executive in Perelman's camp: ''What Kosberg did is just like the guy who sees personal bankruptcy coming and switches all his assets to his wife to stave off the creditors.'' Kosberg won't comment and ACS denies the allegations. Stay tuned, taxpayers, for further antic developments.