The current debate about a bailout of the financial mess with subprime mortgages reminds me of that scene in The Bridge Over the River Kwai when William Holden is ordered to jump into Jap territory on the mission to destroy the bridge with Jack Hawkins. Holden’s character had never jumped before and when they looked into it they decided that the odds of injury were too great on a practice run so that he would have to just go the first time. So he was told you’ll just have to jump and hope for the best. Holden replied “with or without a parachute”? I have already expressed my opinion about bailouts generally and I oppose them. They won’t solve the problem as efficiently as the market and will inevitably lead to more Government oversight which just means more opportunity for the Government to manipulate our economy and make things worse. You are reminded again that the majority of the subprime loans bought up by Fannie and Freddie were those that were mandated by the Government in the first place to support the politically correct goal of affordable housing for those who couldn’t really qualify for a loan. The Government got what it asked for–an increase in home ownership among certain groups in our society regardless of the merits of the loans.
This is like the situation in the S and L meltdown we had in the mid ’80’s and that is something I know a little about up close and personal. I was very active at that time representing many land developers, bank holding companies and individuals in those industries. You must remember then that oil had been pushing up hard for years. The last Arab oil embargo was only a couple of years removed and the disasterous way it was handled by Carter and the FERC agency created by the Government to “solve” the problem was still skewing oil markets. As usual the solution of the Government with its regulation to help everyone just made things much, much worse with shortages and even higher prices. After all, the Government couldn’t regulate the world markets for oil. Oil was expected to hit the astonishing price of $100.00 per barrel in 1982. Inflation had been rampant but was finally ebbing some due to Reagan’s policies. I attended seminars where the topic was the price of oil and how it was going to change the face of America in that decade. The suburbs were going to die because no one would be able afford commuting and everyone would be moving back into the inner cities. The auto industry was gearing up as fast as it could for smaller cars and that is when the Japanese cars first made a significant impact on the auto market. Then as now the price of everything was influenced by oil prices because it is utilized in so many of our products. The price however did not continue to go up; it peaked in 1982 at just under $40.00 per barrel. Inflation was coming down, the country was more confident than it had been in years with Reagan in the White House and the Arabs were willing to sell us all the oil we wanted. They wanted to make up for the lost revenues from the two embargoes on oil they imposed in the ’70’s. Most of the country was enjoying a real growth spurt and especially in the Sunbelt of the west and southwest. The Rustbelt was continuing its slow decline that has been going on since the end of the War.
There was a new and high binder bank in Oklahoma City called Penn Square. It wanted to grow and it did by making loans to every oil man with a rig or even a dream of a rig when the price looked like it was going up forever. They also heavily promoted themselves as a depository and their capital base grew. Then when the price of oil hit the wall, everything changed quickly. Suddenly those oil deals weren’t so good with oil at $15.00 a barrel rather than $35.00 or more. Their loans started going south. The deterioration was fast. The FDIC came and shut them down to show everyone a lesson that was in that financial business. Many other banks were in the same business in the southwest and even though they operated much more prudently they were beginning to hurt. Things were not desperate but tough for them. There were lots of headlines about Penn Square and their risky loans. Some were risky, some weren’t so much so. Investigative reports were made by the media. Calls for punishing the greedy were loud. The FDIC deposit insurance was only $25,000.00 at that time and some folks lost their money. So now the Feds were on the warparth. Just so happens the next bank up on their list for audit was one in Abilene. It had made many loans in the oil patch and some of those loans had become shaky but nothing that couldn’t be managed over a period of years and some reworking of the loans. The FDIC decided the Abilene bank was under capitalized and gave them a weekend to raise and additional $20 million in capital. They managed to raise $10 million in two days and asked for a couple more weeks for the balance. The Feds said no and shut in down that monday morning. There were more headlines and outrageous allegations of phony loans, bribes, etc. None of which turned out to have any merit. But as always it was several years later before that was determined. But the Feds had “taught” those high flying banks and S and L’s in the southwest that they were going to be punished for imprudent loans. Everyone from the Congress to the media forgot that markets in any industry have cycles and that those drops in oil prices would adjust upward a bit later. But no, everyone forgets history and only lives in the “now” and that is what the Government did at that time. They were already finding the scapegoats for making the banking regulators look bad to the media. It was about perceptions more than sound policy.
During those early years of the ’80’s there was a tremendous building boom going on in the southwest. Fueled in part by the oil industry growth and the increasing migration of those snowbirds from the Rustbelt to the southwest. We forget that then the majority of newcomers to the southwest were Americans moving from the northeast. The S and L’s and banks were making loans for building deals hand over fist. They were for residential projects, commercial buildings, apartments and raw land deals for future development. The land and improvements were there as collateral and the lenders started to take the land as it only collateral and not require personal guarantees from the developers. The competition among the banks was very intense in the early ’80’s for the real estate deals. I had many clients who were contacted first by the bank asking them if they needed to borrow some money for one of their deals! Can you believe that. All of this was known to the bank regulators and Congress and was encouraged. They wanted that economic activity and thought it was good for America to build, build, build. The encouragement cut across party lines. Each had their own motives but the result was applause for such phenomenal growth. There was some jealously in the Rustbelt because it was in decline and they resented the “rednecks” making all this money.
We are going to stop today but continue this tomorrow. You really do need to understand this episode in our financial history to guage your opinion of today’s headlines about Government regulation and bailouts. It will give you a better perspective. Many of you were not even born then or were only children. I lived through this time and don’t have to consult archives–I lived it with my clients. We will examine the FDIC and the FSLIC and bank examiners more tomorrow. Naturally, we will take a look at the politicians and their views and actions to fix that meltdown and take a look if there had to be a meltdown at all and if the Government helped or hurt the situation.
My peach tree leaves are beginning to really show the color now. The pin oaks are starting to have that dull brown tint to them. Even if you live in the city you might start watching in a couple of weeks for the geese flying south. They often flying at night but you can hear them. With all the background noise and lights of the cities we often miss them entirely but they will be there. Very comforting to know that some things do remain constant.