Longreads + Open Thread

North Korea, Fraud, Safety, Blackberry, Experts, Alpha, Aging, Banking



Funny Money, published in 1985, details the rise and fall of Penn Square Bank. It's a now-obscure company, but in the late 70s and early 80s, Penn Square was one of the US's fastest-growing banks. They'd tapped into two related trends: first, high energy prices meant that dollars were piling up in oil-exporting countries, and found their way back to big US banks, which then sought out borrowers so they could put those funds to work. One growing set of borrowers: independent oil and gas exploration companies in Oklahoma, where Penn Square was based. So Penn Square originated loans, passed most of them on to larger banks, and kept a small slice of the risk in order to align incentives.

The broad outline of that story is familiar to anyone who lived through or read about the great financial crisis. One difference in the 1980s was that banks were less levered, less dependent on wholesale funding, and generally less interconnected, so a credit problem in one industry didn't lead to liquidity seizing up everywhere else. The way financial crises get bad is when some asset or strategy that looked money-good suddenly turns out to have some risk; shrinking the set of assets that people treat as money is equivalent to suddenly, sharply reducing the money supply. But the root cause of a change in the perception of moneyness is a change in the perception of bankiness: Penn Square's larger bank counterparties assumed that the bank was underwriting carefully, but it mostly grew fast by getting sloppy with paperwork, and, for a while, kept its financial performance looking good by lending more to borrowers so they could service their older loans. Not all medium-risk loans to small businesses are created equally.

The book has some good asides and nice character portraits; it's quite fun to read about a teenage oil entrepreneur whose oil play is ruined by flooding—a banker tells him that, since he's under 18, he isn't legally on the hook for the debts he owes. The entrepreneur explains that he just doesn't do business that way, and the banker gives him a loan which gets him back on his feet. It's a great story about either personal honor or incredible risk tolerance. (As it turns out, mostly the latter; here's what that founder did later in life.)

Open Thread

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