Financial History Issue 133 (Spring 2020) | Page 35

slow fade that crude followed over the next
few years. Rather, it was the too-close rela-
tionship the banks had with their borrow-
ers, who in turn, had too much dependence
on one global commodity. As crude prices
went down, banks doubled down.
At first that seemed both wise and pru-
dent. One shrewd Wall Street adage is sell
into strength and buy into weakness. That
works well through normal fluctuations,
but not in structural declines.
“As oil prices continued to weaken,
southwestern banks sought new investment
opportunities and therefore increased their
lending to the then-booming real estate
markets, particularly commercial real
estate,” according to the FDIC history. “In
hindsight this strategy proved to be unwise,
for the health of the real estate markets was
tied to the hitherto-strong energy markets.”
As often is the case, there were early
warning signs. Records show that from
1981 through 1983 office vacancy rates
across the region were rising even while
commercial real estate construction
expenditures remained high. Then in 1986
crude prices tipped over from a slow fade
to a steep drop. That pulled the rug out
from under the entire economy of the
region. A classic oil bust.
In the FDIC’s assessment, “compound-
ing the difficulties caused by the weak-
ening energy markets was the excessive
emphasis that some banks had placed on
making energy loans to maintain market
share in an environment in which the
competition to keep oil and gas custom-
ers, during 1981 and 1982, was intense.”
The FDIC cited one specific case in
which officials of Republic Bank of Texas
were under pressure from members of the
board of directors to preserve the bank’s
market share in energy lending.
“It was reported that Chairman James
D. Berry summoned the bank’s top energy
lenders to his office and told them he
wanted to make more energy loans. The
lenders, who knew the industry was
gripped by a gold-rush psychology, ‘all
sat there and blinked at the chairman, like
a bunch of owls in a tree.’ But lenders at
other institutions were assuming the price
of oil would climb to $60 a barrel or more
and had lowered their lending standards
to grab new business. Republic’s custom-
ers were going to those other banks.”
There are many such examples ranging
from ingenuous optimism, to cynical cal-
culus, to oblivious bumbling. There were
also a few Cassandras.
In late 1985, Sandra Flannigan, a vice
president at Paine, Webber, Jackson &
Curtis Inc. in Houston, believed that, “If
we see oil prices go below [$20 a barrel]
and remain there for an extended period,
we’ll have substantial problems.” Flanni-
gan also anticipated that a serious decline
in crude prices would have a knock-on
effect across the entire state economy,
especially real estate.
Texas
and
Not to put too fine a point on it, but
that included losses of nearly $6.3 billion
in 1988 and $5.1 billion in 1989, respectively
91% and 82% of the total FDIC failure-
resolution costs for those two years. For
the three years 1987 through 1989, 71% of
the banks that failed in the United States
were southwestern: 491 out of 689.
That flood of failure was not just broad,
it was deep. It included some noteworthy
and notorious busts. The rogues’ gallery
comprised First City Bancorporation, First
RepublicBank Corporation and MCorp
holding companies, among others.
In its official history and analysis of the
period, the FDIC wrote, “The pervasive-
ness of the problems facing the region’s
depository institutions is indicated by the
fact that the biggest savings and loan
debacle also occurred in the Southwest,
with Texas alone accounting for 18% of
the Resolution Trust Corporation’s reso-
lutions and 29.2% of its resolution costs.”
While the carnage was worst within
Texas, the knock-on effects spread across
the country. It may be said, unkindly if not
untruthfully, that the Texas and south-
western banking crises of the mid-1980s
were boomerang justice. The regional oil
companies tried to play global trends to
their advantage, aide—even exhorted—by
the regional banks. The generous way to
think of it would be that they believed
their own hype. The harsher expression
would be that they played with fire and
got burned.
As with any global commodity market,
crude oil prices are subject to myriad
influences both statistical and sentimental.
The ground was set for the southwestern
banking crises of the ’80s by the oil embar-
gos of the early ’70s.
In retaliation for the support from the
United States and a few other nations for
Israel in the Yom Kippur War, October
1973, several major Arab oil-exporting
countries halted oil exports. While the ces-
sation itself only lasted five months, until
March 1974, its long-term effects funda-
mentally changed the structure of the US
economy and the global oil industry.
The immediate effect was a rapid return
to domestic development that had waned
after World War II. In fits and starts,
booms and busts, that domestic develop-
ment continues to this day.
Crude prices peaked in 1981, but no one
could call the top, at least at the time. The
trouble for banks, however, was not the
Founded as Hogtown in 1875, Desdemona boomed from 300 denizens in 1904 to about 16,000 in 1919, the
peak of its oil production. Corruption killed the industry; flood and fire destroyed most of the settlement.
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