Penn Square Bank collapse different than current business scandals

Journal Record, The (Oklahoma City), Jul 11, 2002 by Ray Carter

Twenty years ago this month, the U.S. Comptroller of the Currency closed Penn Square Bank in Oklahoma City, heralding the end of the oil boom and the beginning of the toughest economic conditions in Oklahoma since the Great Depression.

The next few years would see dozens of other banks follow Penn Square into financial ruin, and dozens of indictments would be filed against major officials with Penn Square Bank.

At the time, it was seen as a major business scandal, but in hindsight - given the accounting and corporate scandals under way today - the collapse of the Penn Square Bank now looks more like a case of bad luck and naivete than outright corruption.

"From my viewpoint as a securities administrator, I think they're very definitely two different kinds of things," said Irving Faught, administrator of the Oklahoma Securities Commission. "The current problems that we see in corporate finance with publicly traded companies are things that really do affect investor confidence in the market itself and in the security of those firms. And the accounting scandals directly impact the value of securities.

"The Penn Square thing really affected a bank."

Although many of the companies with loans from Penn Square Bank were publicly traded, the bank's collapse didn't have "such a direct market influence" as the current batch of corporate scandals, he said.

"I think the Penn Square thing was a one-bank situation at that time, whereas it does appear that maybe more companies have been taking liberties with some of the accounting procedures in these times," said Thomas L. Legan, president and chief executive officer of Americrest Bank, an official active in Oklahoma's banking industry in the 1980s. "That seems to be perhaps more widespread than the bank- failure situation with Penn Square, which was an isolated deal."

Officials blame the collapse of the Penn Square Bank on unrealistic belief in the longevity of high oil prices, rather than deliberate mismanagement.

"Everybody thought the price of oil was going to go to $100 per barrel, and a lot of the projections for the financial health of oil- and-gas companies was based on that kind of information," Faught said.

"In those days we all thought - bankers and regulators - that tomorrow's going to be a better day, the increase in property values and inflation would take care of everything," said Oklahoma State Bank Commissioner Mick Thompson. "And the bankers weren't as diligent in recognizing problems and the regulators weren't as diligent in making them recognize problems. I think it's made everyone who survived that, from the regulator standpoint and the banking standpoint, become a lot better bankers."

"This was really more of a consequence of an industry that fell on very hard times at the same time that banks had an unreasonably large concentration in loans to that industry," said Burn Hargis, vice chairman of Bank of Oklahoma.

Hargis noted that Penn Square Bank officials weren't the only ones who made that mistake.

"There was also a strong demand for these (energy) loans in the money-center banks," Hargis said. "At that time, they had lost a lot of money in Central America and I think the economy generally was not good for them, and so they were really ravenous about buying participations in these loans, these energy loans. So they helped kind of fund the frenzy."

Although the 1980s were a painful time for Oklahoma bankers and energy producers, the end result of that period is a stronger banking industry, officials say.

Thompson said the fall of Penn Square Bank "changed the mind-set" of those involved in banking, both regulators and bankers.

"I think it's made us all more conscious about what we should be doing and taking more direct action immediately rather than putting it off," he said.

"Issues like concentration of loans in industries have became a much greater focus for banks," Hargis said. "Banks have become much more cash-flow oriented, with demonstrated cash flow from existing operations, than they were then. I think back in those days banks tended to be more asset-based lenders, relying too much on projections for the repayment of their loans."

"We have had much more thorough examinations since (the 1980s) and I have not seen that change in any way in terms of letting up," Legan said. "There was much more scrutiny by the regulators and that has continued through today."

Officials believe publicly financed companies are about to undergo a similar transition period that re-establishes public trust in the markets.

Hargis predicted that today's accounting scandals will lead to a "much more controlled, much more supervised" and restrictive market, just as banks underwent more scrutiny following the Penn Square collapse.

Faught said several bills before Congress may strengthen regulation of corporations, much like bank regulations became stricter following the Penn Square situation. One reform that Faught likes would make the chief financial officer of a company legally and financially liable for the accuracy of earnings statements.