Funny Money by Mark Singer
... the President signed the Natural Gas Policy Act of 1978 (NGPA) -- at a stroke changing all the rules. One section of the new law exempted from federal price controls any newly discovered natural gas produced from below fifteen thousand feet. ... it was as if Congress, with the acquiescence of the White House, had pointed a finger at western Oklahoma and said, "O.K. Those right there -- we'll make them rich."
Back in 1979, the top income tax rate in the US was 70%, which made tax losses very appealing (so much so, they even showed up in popular culture, like in Slapshot, where the loser team is owned only because it's a tax loss). Due to the energy crises of the 70's, Congress had amended the tax code to allow 100% deductions for all oil exploration costs (page 25). With incentives like these, the market for oil/gas exploration went ballistic; too many dollars chasing too few real opportunities.
In the past, we have had irresponsible borrowers, and in the past we have had irresponsible lenders, but what we had here, and are having to witness the consequences of in profusion, is the meeting, for the first time, of the irresponsible lender and the irresponsible borrower.
The "extra" dollars from tax-incentivized investors were sopped up by oil schemes with a little drilling and a whole lot of spending. Borrowing from a yachting quote, one could say that drilling is about making a hole in the ground into which you pour money. Keep in mind that this book takes place in western Oklahoma, where boom and bust cycles had short booms and long busts. So when the money started pouring in, people knew to tap that gusher. From Singer's perspective, Oklahoman "civil" society compounded the problem:
... solid citizens lost control of themselves. How were you going to survive in a cocktail conversation if you were not in the game?
This story ends with the failure of Oklahoma's Penn Square Bank, which cascaded to the 7th largest bank in the US, Continental Illinois, which the US government bailed out. Seafirst (Seattle First) was also hit, but was bought by BankAmerica as it foundered on its bad loans to Penn Square.
Meanwhile, back in western Oklahoma...
... I decided that it was time to go. On my way past Martha Ann's desk, I saw that she was studying the Elk City phone directory, a slender tome. "I'm looking for millionaires," she said. "I don't know about the people that have the supply companies. I'm just counting the mineral owners, the ones I know about who we've banked. I'm only through the 'A's and the 'B's. I've counted forty-seven."
After reading this, it seems to me that the decision-makers should have known the future outcome. As Charlie Munger says, "The people who design easily-gameable systems belong in the lowest circle of Hell." Granted, we know a lot more now about the role of incentives than we did in the 70's. The question remains as to whether we will apply what we've learned....