<It seemed to me that the real estate slow down began in the energy producing states like Texas, Oklahoma and Colorado in 1983.>
Actually there was a surge in new construction in '83, fueled by S&L deregulation. Slowdown started in mid-84 when price of crude plummeted. But it took until '86 for bankruptcies and foreclosures to pick up steam. By '87 "oil patch" was in full-blown recession.
I had drinks/dinner in mid-80's with CEO of Penn Square Bank --- The most costly bank failure (at that time) in U.S. history. They had LOTS and LOTS of oil/gas ventures and real estate deals primarily in “oil patch”. I only knew that this guy was a banker, and didn’t realize his background until he got drunk and was bragging about having more personal lawsuits filed against him that anyone in the history of the U.S.
I sat there naïve and wide-eyed as he told me how he guaranteed massive amounts of loans … with nothing to back it up except his signature [which was worthless]. Same collateral was used over and over again for a number of deals. He bragged how he screwed the bankers back East. Said they knew what was going on, but they were as greedy as he was. He laughed the whole time.
“At 7:l5 P.M. on July 5, 1982, a squad of FDIC federal examiners locked the doors of the Penn Square Bank of Oklahoma City, Oklahoma. Thus ended the legacy of a small shopping center bank that grew from total assets of $29 million in 1974, when it was acquired by the flamboyant B. P. “Beep” Jennings, to an asset structure of over. $500 million at the time of its closing. The more than $1.5 billion in losses suffered by Penn Square, its affiliated banks, uninsured depositors, and the FDIC insurance fund made this bank failure the most costly in U.S. history. smeal.psu.edu
Continental, along with Chase Manhatten, were the major players in Penn Square's deals. In 1994 Continental(6th largest bank in U.S.) became the BIGGEST bank failure & reorganization in U.S. history. It takes a long time for these things to play out.
I put a time-line together which shows what lead up to collapse of real estate in the “oil patch” and ultimate recession. I managed the advertising account for a large Savings and Loan with branches throughout Texas back then, and was well-versed in S&L deregulation.
Cheryl
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1979: Double digit inflation. Oil prices doubled. (Beginning in mid-70’s, with Arab Oil Embargo, price of crude steadily rose from about $2/barrel to $40.) Real estate booming in “oil patch”.
1980: Oil & gas prices began to slowly fall.
1981: Tax Reform Act provided powerful tax incentives for real-estate investment. Helped create a “boom” in real estate and contributed to over-building. Deregulation of Savings & Loan Associations starts here. [Deregulation of S&L’s was a BIG MISTAKE!!]
1981/82: Interest rates ran as high as 22%.
1982: Govt shuts down Penn Square Bank of Oklahoma City. Penn Square’s losses, its affiliated banks, uninsured depositors, and the FDIC insurance fund made this bank failure the most costly in U.S. history. [200 credit unions and saving and loans had money in Penn Square, none of which was insured.]
New rules make S&L acquisitions easier by allowing buyers to put up land and other real estate, as opposed to cash. [Think they would have learned from Penn Square fiasco?] Net worth requirement for insured S&Ls reduced from 4% to 3% of total deposits. S&L’s stopped using GAAP accounting standards. Started using something called “RAP” which is similar to today’s “pro forma”.
1983: S&Ls BEGAN LARGE-SCALE REAL ESTATE SPECULATION.
Depository Institutions Act passed in Dec ’82. Now developers could own S&Ls and owners of S&Ls could lend to themselves. Building boom started as many S&Ls rushed to finance high interest (and high risk) land acquisition, development & construction loans. This was particularly true in oil & gas producing states where record high prices for energy had sent local economies soaring. Even though price of crude was going down, it was still high by historical standards.
1984: Collapse in energy prices brings end to real estate boom in "oil patch". (Crude oil dropped from a 1979 high of $40 a barrel down to $15.)
"I worked on empty office buildings, condo projects, vacant land, residential, whatever portfolio the government had taken over. From 1986 to 1990, it was a bloodbath. I was often working with the original developers who were desperately trying to hang on. It was brutal. " Howard Kollinger (Dallas real estate developer who in mid-80’s helped S&Ls determine what to do with their failed real estate assets in Texas.) |
