Reply #37: It reminds me of the 80s in OKC [View All]

[UpInArms]

Penn Square Bank - was the object of ridicule later - but would loan lots of dollars to speculative oilies - taking stupid things as collateral - I remember in particular then taking a 10 year old Cadillac as collateral for a couple of million dollars :rofl:

here's a bit of history for you:

http://www2.sjsu.edu/faculty/watkins/mon.htm

EPISODES OF FINANCIAL FRAUD AND SPECULATION
A CASE OF PERFECT COUNTERFEITING

<snip>

Penn Square Bank of Oklahoma City

Notes on Funny Money by Mark Singer

Funny Money is the story of Penn Square Bank of Oklahoma City, Oklahoma. Penn Square Bank was the bank in Penn Square shopping center. It was a small, neighborhood bank until control of it was acquired by William "Beep" Jennings in 1972. Jennings proceeded to promote a more agressive style of operations. For example, he created a special department to make loans to the oil-and-gas industry in Oklahoma. The OPEC oil price increases which started in 1973 had made energy exploration a much more lucrative venture than it had been before. But there was an adverse selection problem in the energy exploration field. As a bankruptcy lawyer acquaintance of Mark Singer, the author of Funny Money, expressed it, "You've got thirteen thousand oil and gas companies in Oklahoma; maybe fifteen hundred are looking for oil and gas, the rest are looking for investors." (p.12)

At the start Penn Square had capital of four million dollars. Under the rules for national banks, of which Penn Square was one, the largest loan that Penn Square could make to a single customer was ten percent of its capital; i.e., $400,000. This meant that if a borrower wanted a million dollars, Penn Square would have to find another bank to provide the other $600,000. Very soon Penn Square was making loans in excess of its limits and quickly selling the "overline" to other banks. There were some banks, notably Continental Illinois and Seattle First National, that were eager to buy such "overlines." It was a way that they could participate in the higher interest rates on oil-and-gas lending in Oklahoma without having banking operations in Oklahoma. Buying loans made by Penn Square not only gave such banks a way around the restrictions on interstate banking but they were counting on banks like Penn Square to have expertise about local conditions that it would be impossible for them to acquire.

Penn Square began to market most of their loans to "upstream" banks like Continental Illinois and Chase Manhattan. These large U.S. banks were presuming Penn Square was doing all of its homework and only making good loans. Penn Square was focusing more on the one percent fees it earned for making the loans and on the service fees it received for servicing the loans for the upstream banks which purchased the loans. Servicing meant collecting the interest and principal payments and forwarding them to the loan buyer.

This situation of Penn Square receiving fees for writing the loan but not shouldering the risk associated with the loan was dangerous. Penn Square had an incentive to ignore negative factors in the loan applications and soon many of the loans were made with incomplete documentation. Jennings developed the notion of character banking; i.e., lending on the basis of his perception of the character of the borrower rather than the financial fundamentals of the loan project. Jennings often made verbal committments to the borrower without formal applications being completed. The paperwork was to be handled later. But this made it difficult for Penn Square's loan officers to do a proper job on the paperwork for the loan. If the committment on a loan had already been made and the funds withdrawn, how could the loan officer include negative aspects in the paperwork. To do so would have created an embarassing situation in a bank audit or jeopardized the sale of the loan in the secondary market.

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