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Q&A with Phil G. Busey: What lessons were learned from Penn Square Bank collapse
June 26, 2007
The Oklahoman
By Ja'Rena Lunsford
Today's daily Q&A is with the chairman and chief executive officer of The Busey Group of Companies. Busey served as the vice president and legal counsel in the oil and gas division of Penn Square Bank for five months before the bank collapsed in July 1982.
Q: How has the collapse of Penn Square Bank (July 5, 1982) shaped the last 25 years of business in Oklahoma?
A: The collapse of Penn Square Bank, NA had a dramatic ripple effect on both the banking industry at large and Oklahoma's economy. The failure of the bank, with loans heavily concentrated in the energy business from reserves to supply, led to the bankruptcy of many oil and gas partnerships and companies and was compounded by greatly falling oil prices. The face of Oklahoma's economy was vastly different from pre-Penn Square days. The failure of many local and regional banks and loss of funding, plus changes in the oil industry did in fact reshape Oklahoma business for years after. Oklahoma suffered through a marked decrease in outside investment capital and a recession in the energy business.
Q: What can the business community learn from the fall of what was then Oklahoma's fourth largest bank?
A: A principal lesson to be learned from the Penn Square debacle is to focus on supporting diversity among industries and avoiding a reliance on one single industry to support an economy. Oklahoma's economy before 1982 was significantly dependent on the energy business. A downturn or major financial crisis in that energy industry left no other significant market industries to rely on. This resulted in negative impacts on housing values, increased foreclosures and bankruptcies, decreased tax revenues and high unemployment that took years to recover from. Further, local banks participating in Penn Square loans were impacted immediately and the residual economic downturn lead to the closing of other banks and savings and loans. Oklahoma has to focus on continuing to diversify industries.
Q: What did you teach Oklahoma City University law students about Penn Square Bank after it closed?
A: After Penn Square failed I was asked to teach several classes at OCU on the issues contributing to the failure of the bank. For banking students the main issues were avoidance of undue concentration of loans in one industry, insuring the proper documentation of loans for collateral purposes and abiding by rigid credit policies. The legal impact resulted in renewed interest in careful evaluation of oil and gas documents and mortgages for enforceability and adoption of new methods of documenting participation loans. Regulatory changes resulted in increased focus on banking laws and compliance. Further, boards of directors and senior management were encouraged to develop better controls, methods of enforcement of bank loan policies and loan limits.
Q: Now 25 years later, would your teachings be any different now that you've had more than two decades to reflect on the situation?
A: I learned a great deal from the failure of Penn Square. I would encourage this event to be studied in every business school. I had provided at least seven legal memorandums to management and file at the time of the failure outlining violations of the National Banking laws that we uncovered. These violations surfaced after certain officers were removed from the bank. I was called to testify on these memos and facts for the government at trials after the failure. Today I would teach the same basic principles but emphasize the need for strong internal controls, credit decisions and management oversight. Many of the issues at Penn Square could have been avoided if simple basic policies were enforced. However, the times were heady and the large banks were fueling the loans as much as Penn Square. The view was ‘Oil & gas prices would continue to rise', which just wasn't founded on good assessments. The same lessons from Penn Square apply today. A major factor is making sound business decisions and avoiding the greed factor which possessed this industry at the time and enabled people to ignore sound lending principles.
Q: Why will the collapse of Penn Square Bank forever top the list of Oklahoma's most devastating economical disasters?
A: The event was one of, if not the single worst impact, on Oklahoma's economy in the last half of the 20th century. It took over 10 years to recover. The collapse of Penn Square bank affected every aspect of Oklahoma's economy. The energy business downfall during the '80s was assisted by huge loan and debt commitments. Numerous banks failed, hurting depositors and borrowers alike. The FDIC struggled to understand and implement better ways of addressing financial institutional crisis. People were left without jobs, businesses closed and industries moved. Significantly, Oklahoma was tainted by the failure for years, making it very difficult to bring in outside capital for new growth. We did learn, though, to pull ourselves up by the bootstraps and focus on new and diverse industries. That is why, in part, today, I so strongly urge leadership to develop economic and business efforts that cross many industries.
Business Writer Ja'Rena Lunsford
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5721 NW 132nd Street
OKC, OK 73142
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