Thanks for posting.... “I personally think we have the acute phase of the financial crisis largely behind us.
could be, typically these things end with a bigger player going under such as Long-Term Credit and Russia,
The Hunt brothers going under as Silver Collapsed in 1980.
Penn Square collapsing in July of 1982 coupled with Mexico defaulting on it's debt in August 1982.
findarticles.com
I remember siting out by my pool in college at UT in Austin the first week of AUG 1982 reading the WSJ and wondering if we were on the brink of depression.
THE HUMAN GENOMES OF GREED, FEAR AND HUBRIS"
Penn Square, an Oklahoma bank, failed July 5, 1982, with $470.4 million in deposits and $516.8 million in assets. In the five years leading up to its failure, Penn Square's assets had grown from $30 million to $436 million. In that time, this small, one-office bank located in a shopping mall in Oklahoma City's north side had grown into the seventh largest bank in the state.
The speculative growth of Penn Square was driven by the bank's willingness to lend money to almost any individual in the oil and gas business. More than 80% of Penn Square's loans were to energy related businesses compared to the traditional 20% exposure more conservative banks followed. Lured by the incentive of average prices 10 times higher than a decade before - the price of deep natural gas reached more than 50 times what it would have fetched in the 1960s.
Penn Square then sold majority interests in those loans to other banks in the form of loan participations, but retained the responsibility for servicing the entire loan amount. At its failure, Penn Square was servicing approximately $2 billion in loans. It grew by paying higher-than-market rates for brokered deposits.
In addition, it based repayment on collateral value rather than on the ability of the borrower to repay, and collateral documentation deficiencies were common. Regulators were horrified at the conditions of Penn Square when they arrived in Oklahoma to close down the freewheeling energy bank.
Although the Office of the Comptroller of the Currency (OCC) set lending limits on the amount of credit that could be extended to any one customer, Penn Square devised a work around. When one of its oil and gas customers wanted to borrow more than the limit, Penn Square would make the loan and sell a participation to another bank.
In 1981, the Southwest region saw a huge increase in commercial loans, particularly in the oil and agricultural industries. In April 1981, oil price peaked at $36.95 a barrel and then began to fall. Recessions in oil-consuming nations, conservation efforts and the sale of oil by some OPEC members in excess of their quotas all combined to reduce oil prices in world markets. The demand for oil rigs reached its peak in the Southwest. As oil prices continued to decline during 1982, profits for the oil industry slowed, moving the Southwest region toward recession.
In response to the decline in oil prices, Penn Square's participant banks began pressing the bank to clean up the loan participations. Penn Square had sold loan participations to 53 different participant banks; Continental Illinois Bank in Chicago, the sixth largest U.S. bank at the time alone held $1 billion of those participations. A particular problem at the time was that interest rates remained high - the Federal Reserve discount rate was 12% in January 1982 and Penn Square paid higher interest rates on deposits.
In May, rumors of problems at Penn Square began circulating, which caused a deposit runoff that forced the bank to rely increasingly on brokered funds that typically pay higher interest rates on deposits. Brokered funds at the bank, which in January had been about $20 million, reached $150 million by May.
As a result of its April 1982 examination, the OCC requested Penn Square raise capital by $7 million. The OCC also demanded that Penn Square charge off $10 million in loans. By June 28, it was apparent Penn Square would fail. All that was left to decide was how to handle the failure.
Some government officials were concerned that a payoff of only the insured deposits at Penn Square would have serious adverse effects on the stability of the banking system. Less than 45% of Penn Square's $470.4 million in deposits were insured. Among the depositors were 29 commercial banks, 44 savings and loan associations and 221 credit unions. Normally, uninsured deposits represent a small percentage of deposits, less than 5%; but Penn Square was a different story with more than half of its deposits exceeding the insurance limit of $100,000 per depositor.
Penn Square was the 21st bank to fail in the U.S. in 1982. The period between. 1980 through the mid 1990s was disastrous for financial institutions across the Southwest, witnessing the highest number of bank failures since the Great Depression.
On July 19, 1982, the Wall Street Journal wrote on the Penn Square collapse: "While the losses are still being sorted out, many bankers are asking how a tiny bank could have sold so much bad business loans to some of the nation's biggest and most elite banks."
The answer should be clear. It was the biggest banks themselves, which held 80% of the uninsured funds at Penn Square, that had virtually set up these small ones as a means of siphoning off what appeared to be an endless stream of millions of dollars coming out of the oil and gas business. Volcker put the blame on what he called "the human genomes of greed, fear and hubris.
Seafirst, the largest bank in the Northwest, was the first big casualty precipitated by Penn Square. Penn Square's collapse was followed by Mexico's August 1982 debt default, which triggered the 1980's LDC (less-developed-country) crisis. Bad Penn Square loans also helped lead to the federal government's 1984 rescue of Continental Illinois with a $4.5 billion bailout - at the time, the largest in history
(nice work when you can get it -ed-- JP) |
