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The Fall of a House of Cards

May 09, 1985

"Any quest for oil and gas must yield to the preliminary quest for capital, and a cooperative banker can be a rewarding acquaintance." That is not the opening line of a book, but it is, nonetheless, the equivalent of Melville's "Call Me Ishmael." The understated words come from a superior piece of journalism in the three most recent issues of the New Yorker magazine detailing the remarkable rise and fall of the Penn Square Bank of Oklahoma City.

The oil and gas boys down in Oklahoma--call them oilies--did indeed have cooperative bankers at Penn Square. In fact, there were cooperative people all around trying to cash in on the untold natural-gas wealth that might be unleashed by incredibly deep wells drilled into Oklahoma's Anadarko Basin. Anyone who scanned the Penn Square bank scandal stories piecemeal as they unfolded back in the summer of 1982, and quickly moved on to the sports pages, would do well to invest some time in the three-part series "Funny Money" by Mark Singer.

Singer's series is a real-life yarn that makes the Ewings of Dallas and their banker friends seem like Norman Rockwell folk. More than that, it unfolds a truly scary scenario of how a goodly portion of America's banking economy was threatened to its core and how the whole mess might have been avoided.

The frenzied quest for capital and petroleum riches was rooted in a variety of factors, not the least of which was a laissez-faire attitude on the part of the jovial bankers making the loans, the bigger bankers buying the loans from the little bankers, and of the federal regulators who were supposed to be watching over the banks, big and little. It also involved the insatiable quest of money after tax shelters and the concept that if you can't make the interest payment on your outstanding loans you just borrow more money to cover it. It helped if your banker was not a stickler for details. But if the banker needed the money to cover his own obligations to the bigger bankers, he tended to overlook details.

You had to think big and play big. Being rich was not enough. The game was to keep on getting richer and turning over loans into bigger loans. It was the perfect can't-lose pyramid scheme that ultimately collapsed, of course, because the Organization of Petroleum Exporting Countries and the world economy exercised incredibly bad timing and let oil and gas prices tumble. It didn't help that many of the costliest wells on which the house of cards rested became spectacular multimillion-dollar dry holes.

Lessons? They jump from every page. But the fuel powering the Penn Square roller-coaster was the idea that there was easy money to be made and, as Singer writes, "It becomes very difficult to stop borrowing, unless you choose to assume the tax burdens that come with success." These fellows just couldn't quit when they were ahead.

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