The president, directors and auditors of Penn Square National Bank testified today that they still do not know why the $500 million bank failed July 5, but they pointed the finger at Chairman Bill P. Jennings and chief energy lender William Patterson.
But when Jennings and Patterson were called to testify before the House Banking Committee meeting here, both asked that the session be closed to the public and news media. So did bank director Carl Swan and his partner in many oil ventures, J. D. Allen. All four were subpoenaed by the committee.
Committee Chairman Fernand St Germain (D-R.I.) led Allen, Swan and then Patterson one by one into a private hearing room with the seven committee members present. But the three witnesses each emerged within minutes and St Germain concluded the nonstop 12-hour hearing on the failed bank shortly after 9:30 p.m.
Jennings, who has changed lawyers, asked to come to Washington later to present testimony in executive session.
In the exhaustive hearing, Penn Square President Eldon Beller said he had been hired by management in April 1981 to correct a host of deficiencies identified by federal regulators. Beller said his prescription for Penn Square's ills was to slow the bank's growth but that when he tried to exercise some control over lending, Patterson "circumvented me."
He said that Patterson, who was responsible for 80 percent of the bank's loans, did not report to him but directly to chairman Jennings.
Beller said, however, that in the 15 months he served as president, he initiated reforms such as establishing loan review and documentation committees and bringing in qualified personnel in sufficient quantities to handle a $500 million institution that only seven years earlier had assets of about $35 million.
Penn Square grew by making about $2.4 billion of oil and gas loans during the last several years and selling about $2 billion of them to several larger banks, including Continental Illinois and Chase Manhattan.
Beller testified today that Continental was not only a purchaser of Penn Square loans but an active participant with the Oklahoma City bank in selling energy loans.
James D. Blanton, managing partner of the bank's auditors Peat, Marwick & Mitchell, said that his firm's examination of Penn Square showed a bank that was in "substantial compliance" with the regulators requirements and one that was showing improvement. A comptroller's audit last fall made the same finding.
But Clifton Poole, regional administrator of the comptroller's office, said the Peat, Marwick report that gave Penn Square a clean bill of health was faulty because it examined too few loans and overlooked the huge number of loans made that were poorly documented.
Blanton and outside directors called to testify said they were not aware that Patterson, in his desire to keep banks like Continental Illinois and Chase buying loans "originated" by Penn Square had, in contravention of banking practice:
* Paid interest on loans sold to these banks when the actual borrower was not paying the interest to Penn Square (which continued to service the loans). Through November of last year, Penn Square paid $2.18 million to banks such as Chase and Continental even though it had not collected the interest from borrowers.
* Agreed to take back from banks loans it supposedly sold on a no-return basis if the banks did not like the loans. Patterson worked closely with Continental's energy lending chief for the region, John R. Lytle. St Germain produced a letter from Lytle to Patterson in which Lytle said that as "we did previously," he promised Michigan National Bank to take back the loans if Michigan National "felt unconfident."
Lytle has been reassigned by Continental -- which had to classify about $200 million of the Penn Square loans it bought and reported a $61 million second-quarter loss as a result. The bank has refused to comment on Lytle or on any other aspect of Continental's involvement until it completes its own internal investigation.
Poole said most of the bad loans that caused Penn Square's downfall, more than $30 million of the $45 million the bank was required to write off, were made between Sept. 30, 1981 -- the date of the last comptroller's examination -- and March 31, 1982.