Financial History Issue 133 (Spring 2020) | Page 36

Aerial view of downtown Midland, Texas, January 1977, during the boom when George Bush
established himself in the Permian Basin petroleum industry. First National Bank is 24 stories tall.
By the reckoning of the FDIC, at the
beginning of 1987 one in six homes and
apartments in Houston stood vacant. By
early 1987 the tax rolls of Harris County
had declined by about $8 billion. Property
values fell by has much as half in some
areas. In a penumbration of what was seen
across the country in 2007-10, foreclosure
rates in some sections were more than 50%.
Many people just abandoned their homes.
To put the situation into perspective,
total foreclosures in Houston for 1984
were greater than 70,000, which is roughly
the total number of houses that were built
during 1986 in the cities of Detroit, Chi-
cago and Seattle combined, according to
federal statistics.
In such a climate, widespread bank
failures were inevitable. Making matters
worse, Texas mostly banned branch bank-
ing until the late ’80s. Interstate or even
national reach is no panacea, as was seen
in later financial crises, but certainly the
limited scope of Texas banking also lim-
ited capital and diversification of deposi-
tor and lender bases.
Of the two poster-child bank failures
in the period, the more widely known
is the collapse of the Penn Square Bank
of Oklahoma City; the more devastating
to the region was the demise of the First
National Bank of Midland, Texas.
Penn Square went early: it was shuttered
the day after Independence Day 1982, after
running through $436 million in capital.
At the time of its closure it was the sev-
enth-largest bank in Oklahoma. According
to regulators, “the effect of its failure on
other major banks was devastating.”
That is surprising, given that despite
its name evoking Eastern Establishment,
Penn Square was “a one-office bank in a
shopping mall on Oklahoma City’s north
side,” in FDIC’s own words.
That strip-mall lender far outstripped its
rivals in aggressive energy lending. Records
indicate about 80% of its loans had been
made to energy-related businesses, as com-
pared with just 20% by the bigger local and
regional banks. In the five years ending
March 1982, Penn Square’s assets grew
from $30 million to a $436 million.
At the time Penn Square was held to
be a vanguard of hometown industry.
In truth, “Penn Square appears to have
had extremely lenient loan standards,”
the FDIC concluded dryly. The regulator
noted that “whereas the common bank-
ing practice was to accept about half of a
This herd of cattle shown in downtown Midland, Texas was driven from South
Texas to Lubbock in commemoration of the bicentennial celebration of
the opening of the Ranch Headquarters at Lubbock, July 1976.
company’s claimed proven reserves of oil
and gas and then base loans on 30% of that
figure, Penn Square regularly accepted
75% of the gross value as collateral.”
Worse, the bank bought deposits and
syndicated its lending among regional
and money-center banks. As happened
with collateralized mortgage obligations,
that spread the default risk without the
counterparties being fully aware of their
exposure. Of course, Penn Square earned
34    FINANCIAL HISTORY  |  Spring 2020  | www.MoAF.org
fees for loan service as well.
Chase Manhattan Bank bought $212
million of Penn Square loans, a number
that is coincidentally Manhattan’s area
code. Later Chase sued Penn Square for
fraud claiming the loans it bought “were
backed with bogus collateral, ranging from
oil rigs to thoroughbred race horses.”
Chase survived its brush with Penn
Square. Continental Illinois of Chicago
did not. The latter bought a billion dollars