The long lines of depositors waiting to withdraw their money from the Penn Square National Bank in its final hours created a fearful scene reminiscent of the Great Depression. One regulator commented after Penn Square was closed for good last Monday that "there would have been blood on the streets" if the Oklahoma City bank had tried to reopen.
In the aftermath of the Comptroller of the Currency's decision to close the bank, unorthodox tactics of some financial institutions severely pressed to make profits despite high interest rates are prompting new worries.
Depositors and others who dealt with Penn Square stand to lose hundreds of millions of dollars, even after federal insurance pays off all deposits of up to $100,000, and the repercussions from Penn Square are rippling through the nation's network of banks, savings-and-loan institutions, credit unions, stock brokerages and money market funds.
"Banking takes good judgment," says Lawrence Fuller, banking analyst of Drexel Burnham Lambert, a Wall Street securities firm. "Unfortunately, that is an element that seems to have gotten lost in the computer age."
Fears raised by the Oklahoma bank failure are already causing what one financier calls "a silent run" on other financial institutions by large depositors. Some investors whose deposits exceed the $100,000 insured by the federal government are spreading their money among enough banks so insurance will cover it.
Credit unions and other financial institutions also are reassessing whether the higher interest rates paid by "go-go" banks like Penn Square are worth the risk.
Charges of fraud, embezzlement and mishandling of funds at Penn Square are under investigation by the FBI, and special agent C. Edwin Enright said the case may take months to complete.
Finding it increasingly difficult to earn enough on their loans to cover their costs, some of the bankers who have resorted to increasingly exotic transactions do not understand the risks involved, as evidenced by the multimillion-dollar losses banks have had to report recently.
On the heels of the Drysdale Government Securities trading company's collapse in late May, Penn Square Bank became the latest casualty of the temptation to exploit high interest rates that has gotten some of the nation's biggest banks in trouble.
In a sense, the same temptation that attracted banks to Drysdale was operating among the large institutional customers that did business with the Oklahoma City bank, unaware that regulators were keeping close tabs on Penn Square. Oil was the chief business of Penn Square; it financed wildcat drillers who gambled on rising oil and gas prices to make their fortunes.
Banking powers such as Chase Manhattan and Continental Illinois National succumbed to the scent of oil profits, purchasing $2 billion in loans from Penn Square. When the oil market cooled off, many of the drillers couldn't pay their loans.
And credit unions--which supposedly are in business to finance their members' needs--were flocking to Penn Square to take advantage of the higher interest rates the bank was willing to pay for deposits.
Credit union managers say plaintively that because they couldn't make enough money from their usual business to pay the higher interest their members demand, the credit unions had to look elsewhere.
But a lot of the pressure came from within Penn Square itself. In four years, its aggressive executives turned a small shopping-center bank into the fourth largest bank in Oklahoma, with business coast to coast.
"This bank would not have experienced these problems if it had remained a shopping-center bank, which is probably what it should have done," said William Isaac, chairman of the Federal Deposit Insurance Corp.
The shock of Penn Square's closing stunned other financial institutions because the bank had looked sound on paper. Until the day before the fatal run on the bank, Penn Square was a customer in good standing with other financial institutions nationwide.
What the banks, savings institutions and credit unions apparently did not know was that Penn Square had been under "special supervisory attention" by the Comptroller of the Currency for more than two years. Other Oklahoma banks--more expert in the oil business--had complained to the comptroller's office that Penn Square's managers were out of control.
"Penn Square was acting as a promoter--not as a national banking association," according to allegations in one of the lawsuits filed against the bank.
Yet, during the 2 1/2 years that the bank was under the comptroller's special watch, it continued its high-flying ways.
Jerry Roley, assistant manager of the Wright Patman Credit Union in the House of Representatives, said the financial reports and Wall Street analyses available on Penn Square portrayed a healthy, profitable bank. There was no hint, he said, that the $1 million the credit union had deposited in Penn Square was at risk. The credit union is expected to lose $180,000.
The Comptroller of the Currency, like the other federal banking regulators--the Federal Deposit Insurance Corp. and the Federal Reserve--doesn't identify the banks it considers to be in trouble, for fear of setting off the kind of run that closed Penn Square.
Before the run on the bank, the regulators debated whether to close it, thereby stranding owners of $190 million of uninsured deposits, or to find some way to keep it open.
The deliberate decision to let the bank go under caught the banking world off guard because most felt that the government would not turn its back on a $450 million bank with that amount of uninsured deposits. According to one bank official, most large-scale investors--such as credit unions--assume the government has a "moral" obligation to protect public confidence in the banking system.
To this official, the decision to close Penn Square is a signal to the banking community of limits to this protection. Banking regulators say there was no alternative. No Oklahoma bank was willing to merge with Penn Square, and it couldn't go out of state to find a partner.
Whatever the intent of the banking regulators, the Penn Square closing already has made bank depositors more suspicious and careful.
Although FDIC Chairman Isaac and other bank regulators say there is little likelihood of another Penn Square, many investors aren't taking any chances.