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Internal memos show state officials anticipated a collapse of Utah's thrift industry four months before it occurred and feared they were deceiving depositors by allowing them to put money into insolvent thrift and loans.

In documents released Saturday by a federal magistrate (see accompanying story), Gov. Norm Bangerter was told by Utah's Department of Financial Institutions in March 1986 of the critical situation and that depositors were being misled."The depositors in fact think their money is much safer than it actually is, and the state is partially responsible for this false impression," wrote George R. Sutton, then deputy commissioner of financial institutions, to a Bangerter aide.

"The depositors believe we would not allow an insolvent institution to continue operating - but we are. The depositors also believe that we would not allow the ILGC (Industrial Loan Guaranty Corp.) to continue insuring their deposits unless it had capability to do so - but we are," Sutton's memo said.

The state finally declared the ILGC, which was to guarantee thrift deposits up to $15,000 per account, insolvent on July 31, 1986, and took control of its seven remaining member thrifts. Two of those thrifts eventually secured federal deposit insurance, but five others are now being liquidated, and some 15,000 depositors stand to lose a substantial portion of their money.

Sutton is now commissioner of financial institutions. He and his predecessor, Elaine B. Weis, are named as defendants - along with the state and private parties involved in the defunct thrift industry - in lawsuits filed in Utah's state courts.

In his March memo, saying two thrifts were on the verge of collapse while the others were losing money, Sutton outlined the options to resolve the pending crisis: Let the industry collapse or consolidate the seven thrifts into a single large institution.

The former owners of Commerce Financial, Rich Robinson and local automobile magnate and Utah Jazz owner Larry H. Miller, would have managed the merged thrift.

Sutton wrote that either option risked losses to depositors, and in either case depositors could argue they had been misled. But, Sutton added, the state's actions could be defended.

"The big risk is that a court would find that our concealment of this otherwise hopeless situation constituted a fraud upon the depositors," Sutton said. "But it is no more a fraud now that it was when the ILGC commenced operations under authority of state law."

The ILGC was created by the Legislature in 1975 to insure deposits of Utah's industrial loan corporations, more commonly known as thrift and loans. State regulators have publicly admitted that the ILGC was never adequately capitalized and that since 1982 it was insolvent.

A May 8, 1986, memo informed Bangerter that the consolidation concept couldn't succeed because of the troubled financial condition of the thrifts and other complications. Sutton also said that the likelihood of federally insured institutions buying a thrift was not promising.

"I believe the commissioner will have no option but to close and liquidate Charter Thrift and Loan, Copper State Thrift and Loan and possibly Commerce Thrift and Loan, unless she is directed by the governor to allow these companies to continue operating as long as they are capable of doing so."

Sutton wrote that the ILGC board of trustees had agreed to let the commissioner take the fund into receivership and requested a meeting with Bangerter.

The rest of the memo outlines the history of the ILGC and Utah's thrift industry, describing efforts made by regulators to prop up the deteriorating situation and buy time for a solution.

Sutton wrote that justification for letting the insolvent thrifts continue operating was that regulators' efforts since 1983 had reduced deposit liabilities from $660 million to about $120 million.

"However, once all the credible options have played out, there will no longer be any defensible reason for permitting the insolvent institutions to continue operating."

A draft of the May 8 memo came across much stronger, saying that every time Charter Thrift and Loan accepted a deposit it was worth 30 cents on the dollar, constituting "a fraud the state is participating in by not closing and liquidating the insolvent institutions."

Notes scribbled into the draft's margin said such a statement "may be too speculative and inflammatory" and was deleted from the final version.

The memo concluded that the state held out hope that a bank seeking to expand into Utah would acquire one or more of thrifts, further relieving some or possibly all of the problem.