When Penn Square National Bank collapsed last July, it left behind some $50 million in bad energy loans. The collateral posted for those loans included several million dollars worth of quarter horses in Texas and Oklahoma. Subsequent default by borrowers triggered the sale at auction in the fall of $1 million of horseflesh. The sale was ordered by the Federal Deposit Insurance Corp., charged with liquidating Penn Square.
For the government's bank insurer, handling unusual assets has become the usual way of doing business. Although most collateral is of a more mundane type--stocks, bonds, real estate--the FDIC, since its birth a half century ago, has administered a fair amount of exotic property in its role as receiver in bankruptcy.
At various times it has numbered among its assets a tuna fleet, a 640-acre almond orchard, a golf course, a California vineyard, an antique Koran, taxicab fleets, a bawdy house in Texas, and an interest in an R-rated film called "The Happy Hooker."
Penn Square was the fourth-largest bank bust in U.S. history. Its liquidation, one of the most complex yet, is expected to take five years or more. However, if the experience of the U.S. National Bank of San Diego is an indication, it could be longer. Liquidation of the $1.3 billion assets of the California bank, which failed in 1973, is now projected to take five more years, with the final loss to the FDIC being $59 million.
Penn Square is just one of 121 FDIC liquidations taking place in 32 states, Puerto Rico and the Virgin Islands, as banks continue to fail at a rate unequaled since the Great Depression. The FDIC is administering 50,000 assets with a total book value of about $2.1 billion. This represents a substantial increase from 1981, when there were 90 active liquidations totaling $1.4 billion. However, it does not yet match the 1976 post-Depression record of 78,000 assets amounting to $2.6 billion.
To handle this caseload the FDIC's Division of Liquidation employs about 700 people, up from 450 last year. Some 300 of these--many locally recruited--are working on Penn Square. The agency also employs about 150 career field liquidators who travel around the country, conducting operations on the sites of failed banks.
Most of the direction has traditionally come from Washington. As an efficiency measure, the FDIC this fall reorganized its structure and established permanent liquidation offices in five cities. The first, located here, opened last month. By the end of next year, there also will be offices in Atlanta, Chicago, Dallas and San Francisco.
Michael Martinelli heads the New York office, which covers New England, the Middle Atlantic States, Puerto Rico and the Virgin Islands. It is involved in 20 active liquidations, administering $600 million in assets with about 40 employes.
Martinelli and Richard Gaskill, supervising liquidator, recently discussed the implications of the reorganization. Bank supervisors will be housed with liquidators, thus fostering earlier cooperation between them when a bank is about to fail. Liquidators will have to spend less time in the field. There will be increased delegation of responsibilities to regional directors involving litigation and the sale of assets. It will not affect operations vis-a-vis the public.
Even before a bank fails, government officials attempt to arrange a purchase and assumption by another institution. Alternatives include paying off insured depositors, forming a Deposit Insurance National Bank, as was done in the Penn Square case, or direct assistance to keep a failing bank afloat.
Once the disposition of the institution has been decided, the liquidators close the books, prepare an inventory and try to sell the assets. The purpose is to get enough money from the sale to recover funds advanced by the FDIC as part of the closing process and secondarily to recover funds for other creditors and stockholders of the bank. The liquidator is required to dispose of assets at fair market value with "due regard to the condition of credit in the locality." In other words, they cannot be sold at a fire sale.
It makes business sense to hold some assets if the FDIC believes it can get a better price for them by improving them, such as buying out a second lien on a property, or completing a condominium under construction. However, Gaskill insisted that the FDIC does not "play the market," waiting, for example, for swings in mortgage interest rates to make its portfolio more valuable.
It is in this connection that the FDIC gets into the business of managing assets much the same as a conglomerate does. In addition to its liquidators, the FDIC must hire lawyers, appraisers and managers. Recently the government agency decided to advance $1 million to keep a golf course operating to protect its interest in a large $20 million investment on neighboring land. Sizable sums also have been put out to operate hotels, office buildings, factories, and citrus groves.
In the 1974 collapse of Franklin National Bank, the government acquired a loan to the distributor of movies, one of whose productions was"The Happy Hooker." Attendance at the film was good enough so the government got the loan repaid. But sometimes the market goes against the FDIC. William M. Dudley, who will head the San Francisco office, recalled the following fiascos. When tuna prices plunged a few years ago, the government was left with three tuna boats, worth $1 million each. They sit in a San Diego dry dock awaiting a buyer.
The FDIC acquired an almond orchard near Bakersfield, Calif., in the U.S. National Bank failure. Unfortunately, squirrels ate 25 percent of the crop, then almond prices fell by half, so operations were abandoned. The weed field is still for sale for $700,000. Sadder still is the 1978 story of the Chicago warehouse filled with a million pounds of meat. After the refrigeration broke, the rats took over. The liquidators drew the line at becoming exterminators and chose instead to walk away from a mortgage worth several hundred thousand dollars.
Up until the 1970s, the FDIC recovered on average 90 percent of its total cash outlay. However, the poor quality of the assets in several large bank failures since then has pushed down the return. For example, in the past year or so, the liquidated assets of failed New York mutual savings banks, consisting mainly of old loans made at low interest rates, brought between 60 and 70 cents on the dollar.