MORALES SAYS SANCHEZ SHOULD HAVE KNOWN OF DRUG MONEY LAUNDERING

Democratic gubernatorial candidate Dan Morales said Monday opponent Tony
Sanchez should have known about drug money laundering at his Laredo savings
and loan in the 1980s.

"Let me be clear: I do not allege that Mr. Sanchez knew that Mexican drug
money was being laundered through his business. But I absolutely do believe
that he should have known," Morales said.

Morales, who has pledged he won't run a negative primary campaign, said
Sanchez's business background should be scrutinized, including his
management of the failed Tesoro Savings and Loan.

Sanchez should explain how $25 million in drug cartel money was laundered
through the thrift over 17 months in 1983 and 1984 and why Tesoro officials
wired $8 million of that money to an account in Panama as federal agents
were about to freeze those assets, Morales said.

At the time, Sanchez was chairman and majority shareholder at Tesoro.

The money laundering probe has been the subject of news reports for several
months since Sanchez entered the governor's race.

At a rally in Austin on Monday, Sanchez said Morales is wrong and doesn't
know the facts.

"These are desperate acts of a desperate man," Sanchez said. "The polls are
showing that he's plummeting and that we're going to be victorious and I
think these are very desperate acts. I feel sorry for him because he's
falling apart."

Earlier, Sanchez's spokeswoman Michelle Kucera said Sanchez has nothing to
hide and said "Tesoro was victimized by unscrupulous people who represented
themselves as legitimate businessmen."

Sanchez campaign manager Glenn Smith also noted that when Morales himself
went to Mexico to work on his anti-drug initiative as attorney general, he
wound up meeting with the main target of the Mexican anti-narcotic squad.

"We sympathize with Morales being fooled by someone pretending to be
someone they weren't," Smith said.

Last year, Sanchez commented on the Tesoro probe involving two depositors
and said neither he nor any officer of the institution was accused of
wrongdoing and that they were exonerated by three federal agencies and a
federal judge.

"But it happened on my watch and I took full responsibility. I also took
steps to make sure it never happened again, and it didn't," Sanchez said.

David Almaraz, a former assistant U.S. attorney, said last August that
"there was never any type of suspicion that any of the heads of the bank,
the stockholders, the president, had any knowledge of these transactions."

Sanchez, a multimillionaire, made his fortune through the Laredo-based bank
holding company International Bancshares Corp. and in the oil and gas
business, among other ventures. He has never held elected office.

Because his background is in business, his business record must be
examined, Morales said.

Morales said: "How can Mr. Sanchez claim to be able to keep drugs out of
our schools and our communities, when he cannot keep drug money out of his
own business?"

Morales, citing his own background as a Bexar County prosecutor and as the
attorney general, said as governor he would make fighting drugs and drug
money laundering a high priority.

Sanchez said Morales should not try to compare himself to Sanchez.

"He's never had a job outside of politics. He doesn't know what management
is from the private sector," Sanchez said.

At his lunchtime rally, where about 300 enthusiastic supporters were
offered 400 pounds of barbecue brisket along with potato salad, Sanchez
tried to focus on other topics.

Sanchez again stressed his proposals for improving education and questioned
whether failed state leadership contributed to the state's projected $5
billion shortfall. He also told the crowd he wanted to keep homeowner
insurance rates down through more regulation of the industry.

He proposed drafting a law that would force insurance companies, especially
those who are not currently regulated by the state, to justify any proposed
premium hikes. He also said he would give the Texas Department of Insurance
the tools it needs to enforce the law and refocus its efforts toward
lowering the cost of property insurance for homeowners.

"We're just very concerned that insurance rates are double the national
average, and we are going to try do some things to change that," Sanchez said.

He criticized Morales and Republican Gov. Rick Perry on economic
development, saying neither has created a job. Sanchez boasts that his
family's businesses and activities have created more than 75,000 jobs since
1981.

Now that he has raised questions about Sanchez's savings and loan, Morales
may face more questions about his dealings with private attorneys in the
state's $17.3 billion tobacco settlement, reached when he was attorney general.

State and federal investigators have looked into contracts with private
lawyers hired to pursue the case, including a friend of Morales who tried
to claim up to $500 million despite complaints from the other attorneys
that he did little or no work.

Morales said he is prepared to discuss those allegations.

"The entirety of the lawyers who worked on the tobacco case provided
substantive, valuable contributions to the state's ultimate victory,"
Morales said.

The Democratic primary is March 12. Sanchez and Morales along with Bill
Lyon and John WorldPeace are in the race.

The winner faces Perry, who is unopposed in his party, in November.

AP writer Natalie Gott contributed to this report.