Oklahoma K.O.

Big losses for a small bank

At the start of business early last week, depositors crowded into the lobby of Oklahoma City's Perm Square Bank and patiently stood in line to take out all their money. Still more customers waited outside so that they could also withdraw their funds. Penn Square was in the process of becoming the 22nd bank in the U.S. to collapse this year.

The Oklahoma bank had assets of only about $525 million, or a mere fraction of those held by large commercial lenders like New York's Citibank, which counts nearly $105 billion in assets. Yet the tremors from Penn Square's fall were felt far beyond the bank's stuccoed shopping-mall office.

Under its aggressive and hard-charging chairman, William P. ("Wild Bill") Jennings, the bank had cultivated an image as a canny deal spotter in the risky business of financing energy drilling and exploration projects. The lending was made possible by a common practice called overlining. Under federal regulations, a bank cannot make loans to any one borrower that amount to more than 10% of its capital. One way around that restriction is for a small bank to parcel out shares in proposed large loan deals to more important banks. During the oil-drilling boom that peaked last December, Penn Square found big-city bankers more than willing to participate in the loans.

As a modest oil glut developed in the past year, however, the price of Oklahoma crude started slumping, from a peak of $38 per bbl. to a trough of about $32. Penn Square's once attractive loans suddenly became big burdens for borrowers increasingly unable to repay.

Two weeks ago rumors began to circulate that the bank was in trouble. When federal bank regulators last week declared the institution effectively insolvent and seized it, the biggest losers were not Penn Square's jittery depositors, whose savings were generally covered by federal deposit insurance up to $100,000 an account, but the bank's big-city banking partners. They may end up with huge losses from the collapse, and major lawsuits may result.

Hardest hit was Chicago's Continental Illinois National Bank & Trust Co., the seventh largest American commercial bank, which had made about $1 billion worth of loans in cooperation with Penn Square. Losses on the loans are now expected to wipe out Continental Illinois' anticipated $59 million profit for the current quarter.

Another potential loser is Chase Manhattan, the third-largest U.S. bank. Already reeling from a $117 million loss in the second quarter because of shaky deals with the now defunct Wall Street trading firm of Drysdale Government Securities Inc., Chase last week faced at least partial write-offs on perhaps $250 million worth of bad loans.

Moreover, some 150 credit unions could lose as much as $20 million Among them was that of the U.S. House of Representatives, which had $900,000 in uninsured deposits at Penn Square.

Publicly, banking officials sought to down-play the Penn Square collapse as a special case of a small bank having run amuck with grandiose schemes. Said Federal Deposit Insurance Corporation Chairman William Isaac: "It won't take long for people to calm down and recognize this for what it is, an aberration." Privately, moneymen seemed less confident. Lamented one top Federal Reserve official ruefully: "We just do not need this. You can only proclaim that so many tragedies are unique before a pattern begins to emerge in people's minds."

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