Funny Money by Mark Singer

Half a town in the Midwest goes on tilt.

The Office of the Comptroller of the Currency, which is a branch of the Department of the Treasury, determines when a national bank has failed. On July 5, 1982, the Comptroller declared the Penn Square Bank insolvent, and the Federal Deposit Insurance Corporation (FDIC) moved in immediately to settle the bank's affairs. According to the Comptroller, the Penn Square Bank owned a portfolio of uncollectible loans whose face value exceeded the bank's capital; too many of the bank's customers had borrowed more money than they could ever repay; liabilities considerably surpassed assets; the bank was bankrupt. Two months into the liquidation, the automobile auction took place. The bank building stood about three hundred yards due east, tucked into a corner of the Penn Square shopping center, and the FDIC auditors toiled there right now, sifting for clues. The auditors believed that the bank had designed its own demise. The bank's owners, employees, customers, and admirers were convinced that liquidating the bank was a mistake

" Bill P. Jennings had been the chairman of the board and the largest stockholder of the Penn Square Bank, and Bill Patterson, his protégé, had been the head of the bank's oil-and-gas lending department. It had taken Jennings, Patterson, and the bank's employees less than three years to book almost two and a half billion dollars in oil-and-gas loans--three exhilarating years which had brought to Oklahoma more out-of-towners in quest of fun and profit than anything since the land rush of '89. If not for Bill Jennings and Bill Patterson, there would not have been an auction

As big little cities go, Oklahoma City has some imperfections. During the 1960s, for instance, the downtown business center was subjected to an urban-renewal blitz that eliminated whatever looked uncontemporary. After the bulldozers had finished their work it became evident that no one had given much thought to what might replace the old structures that had just been destroyed. Ever since, no-there-there architecture has flourished. You do not see many human beings at street level because most of the buildings are connected by a network of air-conditioned pedestrian tunnels. Summer usually lasts five punitive months. On hazy days all of downtown threatens to disappear

"Hold everything," he said. "The gentleman who bought the first car did not buy the first car after all. He did not have cash. He did not have a cashier's check. He did not have a certified check. He did not have two hundred dollars. He did not pass Go. We're going to have to resell the car. All right, let's finish the bidding on this car and we'll go back and resell the first one. Wait, no, excuse me, it seems he's found someone in the crowd who's going to lend him the money. He now has the two hundred dollars." There was laughter and more applause, and I contributed to it. As a gawker, I felt rewarded. On a late-summer evening I had gone to Penn Square to watch some used cars being liquidated. In no time at all I had witnessed an easy-money unsecured loan to someone who simply had not understood the rules

Surveying the landscape now, you would hardly assume that production had been declining for such a long stretch and had reached such a low level. In the Oklahoma City suburbs, where there are two taco joints for every tree, you see wellheads surrounded by high fences in undeveloped residential zones, you see pumping units in strip-shopping-center parking lots. Four-story derricks straddle the wells on the grounds of the state capitol and the governor's mansion, and it matters very little that so many of the wells are just barely oozing crude--that the derricks' main function is to provide a remembrance of things past

During the late seventies and early eighties, however, the value of fossil fuels changed, the odds changed, and a new mythology emerged. Oil and gas assumed an urgent aura of manifest destiny. It was not like high technology or any other growth industry that seemed headed toward a blindingly bright horizon. It involved mining a finite resource. The thought of running out of oilpromised that an enormous amount of money could be made between now and when the last economical drop came out of the ground, and to enjoy the benefits an opportunist did not necessarily have to take heroic chances. An acquaintance of mine, a bankruptcy lawyer, once pointed out, "You've got thirteen thousand oil and gas companies in Oklahoma. Maybe fifteen hundred of them are looking for oil and gas. The rest are looking for investors."

In grander times, when the bank actually had funds to lend, A1 Jennings regularly received requests for credit information about customers. When several of these query letters arrived in the mail one day, Bill Jennings, who had gone to work for the bank full-time in 1953, showed them to his father and asked what procedure he should follow. A1 Jennings laughed and said, "If they don't put anything in the letter, we just throw it away. If they put in two bits, we answer it. And if they stick in fifty cents, son, we tell them the truth

Much later, trying to explain what had happened, Jennings said, "I had a concept." Simply stated, the concept held that a bank did not have to lend its own deposits, because it could lend other banks' deposits. Penn Square could earn interest lending its own funds but could generate far greater earnings, with very little risk, by arranging loans and collecting fees as a middleman. Thus could a modest suburban bank in Oklahoma City become a loan-brokering merchant bank in the style of the great, loosely regulated financial institutions of Central and Western Europe.

Furthermore, in the course of things a big bank gets a chance to do profitable favors for a small bank without having to do much work, such as buying "overlines"--that is, lending money to customers of the small bank. The bank that buys the overline is said to "participate" in the loan. By law, a national bank can lend no more than one-tenth of its capital to a single customer. At its zenith Penn Square could legally lend up to three and a half million dollars at one time. A customer who wished to borrow four and a half million would place the bank in the situation of needing to sell a one-million-dollar overline. Banks also sell loan participations because they do not have sufficient funds on hand to make a loan (they lack "liquidity") or because they wish to diversify their portfolio (they have filled their quota of, say, commercial real estate loans and now along comes another real estate loan request, so they direct it to another bank) or because they lack expertise in a loan applicant's line of business (in other words, because they do not wish to diversify their portfolio). A bank can sell loan participations to banks either larger or smaller than itself. Fluid metaphors characterize these transactions. A larger correspondent bank is an "upstream" bank, a loan sold to a smaller bank goes "downstream." Transitive verbs blossom like waterlilies: "We upstreamed that loan to Chase Manhattan," or "We downstreamed a hundred thousand to First National of Tishomingo."

There was such a creature as a 100-percent loan participation. In this instance the loan-originating bank had in effect ceased being a bank. It found the borrower and delivered him into the hands of the big lender, collecting a fee but not retaining any investment in the loan. For its fee, the originating bank--Penn Square, say--would "service" the loan. The bank that had bought the loan wanted tangible evidence that the borrower was worth the risk, and Penn Square had a duty to provide this. Penn Square agreed to perfect any secured interest in collateral and to forward interest payments to the lender.

Automobile bumpers in Texas and Oklahoma and Louisiana started bearing stickers that said, "Let the Yankee bastards freeze in the dark" and "If you don't have an oil well, get one." Jennings was a registered Democrat who voted for Republican presidential candidates. He could bridge a gap and he could easily recognize an unpragmatic sentiment. As a patriotic Oklahoman, he instinctively understood the chauvinism of the oil-and-gas-producing heart of the country, but the truth was that the decent, right-thinking people who had gone to the trouble of owning or leasing mineral rights throughout Oklahoma, Texas, and Louisiana did not have the capital that they needed to get the oil and gas out of the ground. The Yankee bastards, among others, had the capital. That was what could make Jennings' concept work: an understanding that if the Yankee bastards had the dollars, what good did it do if you froze them? His role as merchant banker was to bring the two parties together for some common profit. "The government gave us a mandate, didn't they?" Jennings liked to say, referring to the exigencies of the energy crisis. A mandate meant that somebody had better get out there and do something. And if you left the job to people who took six weeks to look at a deal that could be sized up and shaken on by the time the waitress brought the tab, then New England would shiver and Oklahoma would still be no better than a dust bowl.

At times, trying to understand what the Penn Square Bank had been all about strained my capacities, made me feel that my grasp of the big picture was slipping, and I would consult an attorney whom I will call Murray. I valued Murray's ability to focus. We would meet for breakfast occasionally at a molded-plastic bistro called Denny's. I liked Murray, although he talked a bit too much, and I liked him because he talked a bit too much. You could stay as long as you pleased at Denny's; the waitresses just kept pouring the coffee. Murray started out in the Bronx or someplace like it, but he had been in Oklahoma enough years so that his monologues contained frequent pauses which were followed by the statement "Now, mister, I'm gonna tell ya somethin'," whereupon he would launch into a parable full of local color and universal implications.

One morning, Murray's lecture began, "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. Any bank that lends money to Poland is nuts. Any bank that lends to Yugoslavia is nuts. Anybody who lends a billion dollars to Mexico is out of his ever-lovin' gourd. And you know what is at the bottom of this? An irresponsible government. The guys who ran Penn Square weren't born mad killers. They were a symptom." Oklahoma's oilies, in other words, were just a bunch of semi-domesticated third-world borrowers -- reach for yield driven by short term rates up fed?

When the waitress delivered the eggs Benedict, Murray had a chance to regroup his thoughts. Lots of pepper atop the hollandaise, lots of salt atop the pepper. Then he held forth on Aramco, King Khalid, Colonel Qaddafi, OPEC, Exxon, and the culpability of David Rockefeller and Walter Wriston and their ilk; returned to Mexico, Poland, and Yugoslavia, with side trips to Chile and Morocco; and went on to the stupidity of experts, the timidity of bureaucrats, rampant inflation, worldwide recession, Dwight Eisenhower, Jimmy Carter, the corruption inherent in the tax codes, the indecent motives of the typical oil-and-gas drilling fund investor, and simple everyday greed--in other words, the vast matrix at the center of which, or in there somewhere, was an ambitious bank in Oklahoma City that had been run by promoters whose only sin was believing their own hype.

Because of Okiesmo, men did not merely set out to find hydrocarbons, they punched holes in the ground. Okiesmo (accent on the second syllable) emanated from the rig floor up. All the roughnecks had Okiesmo because they handled heavy pipe and got dirty every day--they toted some iron. The bosses in the office paid for the iron and imputed Okiesmo to themselves. When something went wrong out on a rig, men with mucho Okiesmo knew how to jam their hands in their pockets and utter four-letter words polysyllabically. Naturally, the more you owed the bank the higher your Okiesmo Quotient. It grew even more complicated: the more you borrowed to pay the interest on your previous debt, the higher your O.Q. Ironic self-pity was permitted, whining was not. Okiesmo dialogue went: "Only time I found oil last year was when I checked my dipstick

There are, in reality, as many breeds of independent oilmen as there are ways to screw up and lose a promising well. The lending standards of the Penn Square Bank were conceived with goodwill toward all Oklahoma-type independent oilmen, although among the subspecies who found their way to the bank were an inordinate number of arrivistes. These "new oilies"--as they were derisively called by the older oilies--did not seem to be interested in geology for geology's sake, did not carefully discriminate among theories of continental drift and collision, basin-and-range formation, plate tectonics, compaction of sediments, magma flows, and all of that. What attracted this fresh blood to the oil business in general and to the Penn Square Bank in particular did not really have much to do with concepts or blueprints for the twenty-first century. As a group, the new oilies tended to be either too young or too little concerned with history to realize that the oil business ran in cycles, subject to the law of gravity. Many of these customers did not know for sure what a balance sheet was, much less what one was supposed to look like

Now, one of the fundamental rules of oil-and-gas banking says that you can borrow more or less half the future value of the oil-and-gas production that you can prove you own. Two million dollars in the ground will get you a million dollars at the bank

Early believers in the deep potential of the Anadarko Basin--the zones below fifteen thousand feet--grew accustomed to seeing their enthusiasm translated into actual drilling only about once every four or five years. In 1946, in Caddo County, which is one of eleven Oklahoma counties situated above the Basin, Superior Oil drilled a well to 17,823 feet, a world-record depth. Wireline tests revealed the presence of hydrocarbons in a dozen different zones, or strata, but temperature problems made it impossible to complete the well and bring gas to the surface. Throughout the fifties and sixties, several major oil companies were persuaded to participate in deep wells in the region--Conoco in 1953, Gulf in 1957, Conoco again in 1961, Phillips in 1965. The Gulf venture, the Anadarko Basin No. 1, reached a total depth of 21,021 feet, another world record. Before the well could be completed, however, the crew blundered and cemented the drill pipe in the hole. Attempts to salvage the situation led to expensive misery and to repercussions

Hefner's grandfather, the original Robert A. Hefner, consistently delivered himself to the right place at the right time: to Beaumont, Texas, in 1903, on the heels of the blowout of the Spindletop well, which ignited the East Texas oil bonanza; to Ardmore, Oklahoma, soon after statehood, where he established an oil-and-gas law practice that benefited from the opening of the great Healdton Field; to Oklahoma City in the late twenties, just a year before the Oklahoma City No. 1 came in. A biography of the family founder, titled The Judge--he served a term as a justice of the Oklahoma Supreme Court, though his friends had called him "Judge" long before he became one--was issued some years ago by the Oklahoma Heritage Association, which is housed today in the Hefner family manse, in Oklahoma City. According to this book, Judge Hefner narrowly escaped penury early in his legal career when, in reckless self-sacrifice, he undertook a contingent-fee case on behalf of four Choctaw families who felt that they had been deprived of their tribal land allotments; although the Judge won the case, his clients turned out to be ingrates. He bounced back and went on to write the seminal state property laws pertaining to the sale of minerals.

Reading The Judge, one learns that by the time the protagonist began his Supreme Court term, in 1927, he owned almost fifty thousand acres of surface and minerals, mainly in southern Oklahoma. After retiring from the court, he served two terms as mayor of Oklahoma City and more than dabbled in the law, the oil business, and real estate. Along the way, he made only one dumb mistake. That happened in 1934, when he sold to an oil operator from New York City the "deep" rights to all his minerals in Carter County. Everything below four thousand feet he gave up for ten dollars an acre. Drilling below four thousand feet in southern Oklahoma was unthinkable because the Judge had not yet lived long enough to know better

If deep gas exploration had made economic sense as early as the 1960s, Hefner's devotion to the Basin would have been unremarkable; he would have been forced to line up behind the major oil companies, along with all the other independent promoters. Nature had behaved capriciously where deep Anadarko zones had been tested, but the existence of deep gas in western Oklahoma should have been neither debatable nor mysterious. Unreconstructed oilmen and government bureaucrats had the most difficulty accepting the idea that the gas was there. One easy way to offend Hefner was to refer to him as an oilman; crude-oil production shared a future with whaling. Natural gas--methane, a carbon atom bound to four hydrogen atoms--was the ticket. Hefner preached energy self-sufficiency through the divine gift of methane. He would pound the tabletop and say, "I learned early on that I couldn't talk to my father and my grandfather, because I had knowledge that they didn't have, that they couldn't see. They were oilmen. Oil and gas are distinct in every way--geologically, technologically, politically."

After college, he spent a year in Phillips Petroleum's training program. He learned more geology and he learned about seismic contouring and well-site economics. Some time spent in Phillips' economic analysis section convinced him that "no one there cared about gas; their economic analyses were entirely based upon the wellhead price of oil."

A good friend of Swan's has said, "Carl's the most likable guy in the world. If you like cigars." By chance or by design, photographs of Swan rarely showed him without a cigar--a long one. A cigar nicely complemented the rest of him. He had a sturdy member-of-the-posse physique, dark-reddish-brown hair, a walrus mustache, long sideburns, corn-fed cheeks--stolidity and no pretense. Ostentation was foreign to Swan. What you saw was what there was--except for the money. You did not see that on the surface because Swan lived true to the heartland etiquette which ordained that, watching two men walk down the street, you should not be able to tell whose pockets were deeper

To hatch and execute a successful disaster demands a sustained level of competence and dependability that is, by definition, unavailable to an average group of would-be conspirators. That is why calculated calamities are rare achievements and why, no matter what many of us often insist on believing, thieving conspiracies can almost never be built to last. Coincidence, meanwhile--four vehicles without headlights, all traveling at different speeds, converging on an unmarked intersection at dusk--gets less credit than it deserves. Entropy, random natural chaos, innate stupidity--all are important sources and forces of destruction, and all are quite underrated

Distinction as an energy lender was something that Continental had enjoyed since the mid-1950s, when it had begun to emerge as the coal bank in America. An effort to lend to the independent oil-and-gas industry got underway at that time, but it was conducted mainly by long distance, which meant that to be bankable you had to be more or less visible from Chicago. The operator who needed a few hundred thousand dollars to participate in some shallow gas wells in southwestern Louisiana did not fit the borrower profile that Continental then had in mind. In 1975, the bank opened a loan production office in Houston, and four years later it opened another, in Denver. The Continental Illinois money salesman who was assigned to Oklahoma at that time was expected to call on Phillips Petroleum, Cities Service, Kerr-McGee--giant Oklahoma-based oil companies--and to look for independents to whom he might be able to lend a million dollars or more. Everything west of the Mississippi except Texas, Colorado, and California belonged to this single loan officer's territory. Only Oklahoma showed growth potential, but even that seemed uncertain. As late as the spring of 1980, only three Continental Illinois representatives traveled regularly to Oklahoma looking for assets. Two years later, Continental Illinois had on its books more than a billion dollars' worth of loans that had originated at Penn Square. Something had happened. In a world governed by tidy conspiracies, it might appear that Beep Jennings, skillfully preying upon the institutional cupidity of Continental Illinois, had suckered Chicago's biggest bank into a neatly plotted trap. The chairman of the House Banking Committee said as much at hearings held late in the summer of 1982, when the Congress launched a brief crusade to find out precisely what had happened at Penn Square. "These fellows conned . . . Continental Illinois," the chairman said. "They conned the best." The flaw in this analysis was that the world is not tidy. Penn Square Bank was not a neatly plotted phenomenon. Something else had happened.

New employees were recruited, a stream of fresh arrivals that grew along with the bank. One of the recruits was William George Patterson. The most concise theory of Bill Patterson that I ever heard came from a woman who did not really know him but had attended the University of Oklahoma while he was there. She said, "I never met a Sigma Chi who wasn't crazy."

When Patterson was a freshman, an upperclassman had the inspiration to call him "Monkeybrains." It immediately stuck. Someone who grew up with Patterson in Bartlesville, Oklahoma, and attended high school with him there said, "In high school we didn't call him Monkeybrains, but there wasn't any reason we didn't." Patterson had blue eyes, brown hair, a fleshy face, a round-tipped straight nose, a lopsided grin, and large front teeth. His dimensions were size 40. Dressed up, he looked all right. He looked as if he could be expected to go to the office in the morning and make it home for dinner that night. Well into college, he often wore his high school letterman's jacket--he had been a decent varsity wrestler--knowing that this was not a cool thing to do. More than once the Sigma Chi brothers expressed their appreciation of Patterson by unclothing him and tying him to a tree. Once he pushed a practical joke far enough to get himself locked inside a garbage dumpster for an hour and a half. If there was a beer-chugging contest or if six guys were going to moon the Thetas, you could count Patterson in. He worked hard at getting people to laugh at him, and if someone else in the room knew how to be funny he was a good audience. Someone told me that Patterson once let in some fresh air by throwing a lamp through a window, but another Sigma Chi swore that it couldn't have happened. "Hanging nude from the light post, yeah, that's Monkeybrains. But throwing a lamp--no, no. Bill wasn't destructive."

Comfortable survival was possible because during his senior year in college he had married Eve Edwards, the only daughter of one of the wealthiest families in the Texas panhandle. Bartlesville, where Patterson had grown up--the home of Phillips Petroleum, a company town if one has ever existed--had a population of thirty thousand, three Republicans for every two Democrats, and one of the highest per capita incomes in the nation. It also had a rigidly stratified social system that no one complained about loudly. Bill Patterson's father, Pat, was a museum curator and an artist. He had enough Apache blood to sign his Indian name, Kemoha, to his oil and watercolor landscapes. Around Bartlesville, Pat (Kemoha) Patterson was as close to bohemian as you could get. Marrying Eve Edwards exposed Bill Patterson for the first time to people who meant business when they talked about estate planning. Eve's father, Gene, had grown up in Oklahoma City and had attended law school at the University of Oklahoma but had spent his working life in Amarillo. He was the chairman and chief executive officer of the First National Bank of Amarillo. Gene Edwards' father-in-law, Edward Johnson, had built a fortune in oil and cattle and real estate. Even by Texas standards, these were wealthy people. Two brothers of Eve's had attended OU and they knew Bill Patterson. When Eve and Bill announced that they were getting married, the family's joy was restrained. Eve was intelligent, even-tempered, and uncommonly well mannered. The closest she ever came to rebelliousness was when she married Bill Patterson.

One day not long after Patterson began working at the First National Bank, he went to lunch with an old friend. The friend asked him how he had spent his morning. "Counting quarters," Patterson said. The friend said, "No, seriously."

Patterson stayed at the bank three and a half years--long enough to persuade his superiors that he was not "loan officer material." The president of the First National Bank & Trust Company--unable to sense Patterson's special skills and gifts--had unam-bivalent feelings. Years after Patterson had departed, he said, "There was no way we were going to let Bill Patterson lend a dime of the bank's money." As a favor to Patterson's father-in-law, who was a friend of long standing, Beep Jennings asked Frank Murphy late in 1977 to talk to Patterson. "I thought he seemed like an intelligent young man," Murphy said later. "I hired him and put him to work in the credit department."

In Tulsa, Winget made one of his periodic calls on the Utica National Bank. Continental had always had a solid foothold in Tulsa, where the average oil company was older than in Oklahoma City and so was the money. An out-of-town banker just had to devote some time to the challenge. The chief lending officer at Utica National had attended high school and college with Bill Patterson. When Winget said that he was interested in buying overlines, the young banker said, "You ought to get acquainted with Bill Patterson, down at Penn Square, in Oklahoma City. They're going to be aggressive." Following this lead, Continental Illinois within the next few months bought from Penn Square three loan participations--a one-million-dollar credit to a small refinery and two production loans for roughly a million and a half each. One of the production loans went to a colorfully egotistical oilman who had become annoyed with a downtown Oklahoma City bank, and the other went to Carl Swan. Although Swan was not short of cash, having recently collected ten million dollars from the sale of Basin Petroleum, he recognized the economic wisdom of leverage and the evergreen revolver.

Each of these deals was, according to Winget's recollection, "done to perfection." Petroleum engineering reports were scrutinized well in advance of the loan closings. Financial statements were current. Mortgages were duly filed with county clerks. The borrowing was secured. This was still the early phase of an uncertain courtship. The relationship between a bank the size of Continental Illinois and its smaller correspondent banks is delicate and tricky. The larger bank can steal the smaller bank's business just as easily as it can extend assistance. Even Jennings, a man equipped with a loan-merchandising concept, was wary of that possibility.

Continental's representatives in Oklahoma noticed, perhaps a year and a half into the Penn Square era, a shift in the ground rules. No longer could a banker approach a prospect with the attitude: "Look, chances are you're not really worthy of credit, but let's talk anyway." Now the oilies were saying, "What can you do for me? I have a right to borrow." Cold-calling was becoming a harder sell. This is where Jennings and Patterson came in handy. Because they knew so many people who could use some money, they eliminated the need for the hard sell. Beating the bushes for new business began to seem inefficient. Why bother with that routine when you had Patterson doing your legwork? The word went out that Penn Square was becoming "Continental Illinois' Oklahoma loan production office."

The freedom that Continental's lenders enjoyed in the field had to be balanced with accountability to the home office. Even when a Dennis Winget found a loan that he was eager to make, he could not do it alone. Winget had the authority to commit to lend a million dollars but the approval of a second lending officer was required to put a loan on the books. Winget reported to Alvin J. (Jerry) Pearson, the head of Continental Illinois' oil-and-gas lending division, and Pearson was exacting. Roughly fifty people worked in Jerry Pearson's division--from administrative assistants to loan officers--and that number included three petroleum engineers. A petroleum engineer and banker both, with thirty years of combined experience

Pearson left Continental in the late summer of 1980 to go to work for one of his customers, Nucorp Energy. The initial Continental loan to Nucorp--which, in 1982, went into bankruptcy, owing the bank a hundred seventy-three million dollars--was booked in 1979. The loan officer on the account at that time was a vice-president named John Lytle. Lytle was a "section head" in charge of "independent oil and gas lending worldwide." When he moved into that job, in 1977, he inherited a four-hundred-million-dollar loan portfolio. After Pearson left, the organization chart at Continental took on a different look, and Lytle ruled a new bailiwick called the "midcontinent oil-and-gas division"--meaning America east of Denver, except Texas. As a result of the across-the-board growth in loan volume at Continental, Lytle, despite having lost much geographical territory, emerged with responsibility for eight hundred million dollars' worth of credits.

Pinney knew--as Tighe knew, as the bankers from Continental Illinois and Seafirst knew, as, indeed, all the bank representatives who were then knocking on Bill Patterson's door knew--that the real estate business was in a slump, New England was on its keister, the commercial fishing and lumber industries of the Pacific Northwest were dying, the upper Midwest had already been scrubbed down by the embalmers, and there was not a soothsayer in the country who did not believe that an acute energy shortage would descend before the end of the century. "Sunbelt" was the word of the day. Chase Manhattan's own economists predicted sixty-five-dollar-a-barrel oil not far down the road--a rather conservative prognostication, some would have said

That week in Chicago, Lytle had met with Paul Souder, who was the vice-chairman of the Michigan National Bank--the main subsidiary of a bank holding company with combined assets that made it comparable in size to Northern Trust. Souder had an interesting way of expressing how difficult it was to sell money at home. He said to Lytle, "The only thing we have in Michigan is unemployed blacks and empty automobile factories."

In the wary eyes of the Comptroller, Penn Square was burdened by excessively rapid growth, inadequate capital, and strained liquidity. Its employees were overworked, its loan portfolio was out of balance, its lending policies were insufficiently defined, its committee structure and credit-review apparatus were inadequate, insiders had overborrowed. Technical violation of banking laws abounded. The directors of Penn Square were required to sign a formal agreement to clean up the bank's act. Penn Square was, in sum, a bank that required "special supervisory attention." The upstream bankers knew none of this because no one told them. They knew only what they could learn by reading Penn Square's financial statement each quarter, and they saw a bank that was growing and thriving

Most of the mushrooming wad that GHK owed NIGAS was interest that had accumulated on the original debt. In the beginning, Hefner's bargaining strengths had been his pervasive knowledge of the Anadarko Basin and his foresight in having amassed large blocks of acreage. As time went on, those became secondary to his debtor's leverage. But the lender had some leverage as well. NIGAS believed in the moral correctness of quid pro quo. Each time the utility company renewed a note, its overseers grabbed another piece of GHK's title to the Anadarko, usually in the form of overriding royalty interests. Little things like paying bills might not have concerned Hefner, but losing acreage made him feel as if someone were slicing up his

Not quite two years after Jimmy Carter took office, by which time Hefner had lost affection for him, 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. Free-market forces would now determine the value of the deep Anadarko. Suddenly, gas from wells such as the No. 1 Green, rather than selling for twenty-two cents per thousand cubic feet, could go for two and a half dollars, perhaps much higher. More than any other artifact, the new law gilded the mythology of Robert A. Hefner III. Independent oil and gas producers, including many who were not fond of Hefner, believed that he had single-handedly drafted the provision for deep-gas deregulation. The truth was that he had feared becoming too closely identified with deep gas and had deliberately spent the last year or so of the legislative battle away from Washington. Hired lobbyists had done the legwork. Whatever Hefner's influence on the passage of the act, he could easily grasp its significance: it was as if Congress, with the acquiescence of the White House, had pointed a finger at western Oklahoma and said, "O.K. Those people right there--we'll make them rich

For sixteen years, he toured the southern Oklahoma oilfields for Halliburton, the giant well-servicing company. The eighty-four-hour workweek was not a rarity. He drove cement trucks and bulldozers, sidebooms and tankers. He hauled drilling mud, frac fluids, brine, and diesel. When he saw heavy mud used as a lubricant in deep wells, he got the idea of salvaging it from the pits and filtering and lightening and reselling it. As a sideline, he was becoming an entrepreneur, specializing in dirty work. Culpepper's skills were operational rather than managerial. Jack Hodges said, "What I guess I admired about Cliff was his gutsiness. Cliff'll roll the dice with you. The toolpushers on some of those wells Cliff was servicing would show him an electric log. Say whoever owned the well was going to plug and abandon it. But the log don't always tell the whole story. This toolpusher might see something he likes on that log and he tells Cliff about a zone they missed. So, for very little money, Cliff goes back in to some of those wells

During a five-year stretch beginning in 1977, registered drilling funds raised twenty billion dollars--more than a fifth of what was spent for onshore exploration in the United States. "There was an enthusiastic reception by the world for oil," I was informed by a broker in New York City, who had spent very little of his life on oil rigs. "Sometimes you have to sell what people want to buy

The Penn Square Bank was enamored of a device called a letter of credit, which is a bank's guarantee, on behalf of a creditworthy customer, that it will pay another party the face value of the letter. Historically, letters of credit have been tools of international trade but have not been widely used in risk ventures. In a leveraged drilling fund, the general partner might require of a limited partner a down payment of 25 percent, plus a letter of credit from a bank for the balance of an investment. The general partner would eventually take the letters of credit to the Penn Square Bank, where it was possible to borrow against their full amount, with the letters securing the loan. In turn Penn Square would sell the drilling fund loan to an upstream bank. From the point of view of, say, Continental Illinois, drilling fund loans had much promise. The interest rate was two or two and a half points above prime. Even if a drilling program found no oil or gas--an unthinkable possibility--the upstream bank's position was secured by the letters of credit. The administrative requirements for servicing these loans were considerable, but administrative details were supposed to be Penn Square's responsibility.

A lawyer for one of these sophisticated investors once asked me, "What would you do if you had a lot of money and if you had to figure out something to do with it, otherwise you're in a very high tax bracket and you're going to have to give it to the government? And someone tells you that for no money down, just a letter of credit, interest payments built into the investment unit share, a rollover down the line into a straight oil-and-gas production loan, a tax deduction right now for intangible drilling costs, a chance to make a lot more money down the road, and so forth--for all of that, all you have to do is sign on the dotted line right now? And, and, a bank in Oklahoma City that knows the guys who are selling the drilling fund says that they are good people, plus they do business with Chase Manhattan and Continental Illinois, a couple of the biggest banks in the country?

In 1979, Charles Harding, who had been a college fraternity brother of Allen's, proposed starting an Anadarko Basin exploration company called Continental Resources. Allen liked the idea and, in return for 90 percent of the equity, agreed to escort Harding to the Penn Square Bank and to cosign the company's promissory notes. Allen also agreed to let Harding and an associate run the operation day to day. Continental Resources was founded in January 1980, financed with a one-million-dollar line of Penn Square credit. Eventually, the company borrowed thirteen million from Continental Illinois, five million from Seafirst, almost two million from Michigan National

The piece de resistance of the Allen-Swan collaboration was the formation of Continental Drilling. When this idea germinated, the plan called for construction of a forty-two-rig fleet, at a cost of two hundred sixty-three million dollars. At some point it occurred to J. D. and Carl that forty-two rigs might be an overachievement, so they scaled their project down to nineteen rigs, which could be built for ninety-six million. The loan closed January 26, 1982, the day after the official drilling-rig count in Oklahoma reached 882, its all-time high

Between the time that Jennings bought the bank, in February of 1975, and its closing, in July of 1982, the Office of the Comptroller of the Currency examined the books ten times. In the eyes of the regulators, these audits revealed a steady decline in the institution's well-being. And yet, in the eyes of the public, the Penn Square Bank appeared to prosper

Secretaries armed with high school diplomas found themselves being anointed as banking officers and then as assistant vice-presidents. They worked for one of the fastest-growing banks in the country, one that showed fabulous earnings, that had a long-distance sprinter--a wizard who had gone from grunt to senior executive vice-president in less than five years--running the money-making end. The bank was in the habit of doubling its size every year or so. In that atmosphere, a secretary could hope to be lending a few bucks before long. When morale sagged under the burden of the work load, Patterson would remind his subordinates that they were the source of the Penn Square Bank's profitability. Salaries generally ran 25 percent higher than those at downtown banks in Oklahoma City, and within Penn Square's oil-and-gas department they were higher than elsewhere in the bank. Most of the oil-and-gas employees regarded the remuneration as combat pay.

Patterson would cavalierly reply, "Go ahead. Classify the loan. We'll just sell it." Patterson moved out of Penn Square and into the hands of upstream banks eight and a half million dollars of loans that the examiners had declared losses.

Even more pressing, GHK and Mobil had an agreement that permitted GHK to buy back a fractional interest in successful wells that the two companies had drilled near Elk City. To do that Hefner needed cash that he did not have. When Patterson approached Hefner with the idea of forming a corporation to buy the Mahan-Rowsey rigs just for a little while--long enough for Patterson to find a real and permanent buyer--there was a meshing of needs. Patterson assured Hefner that the rigs would soon be sold to the permanent buyer

In mid-June, Patterson bought from Eldon Beller, for eighty-one dollars a share, a thousand shares of stock in the First Penn Corporation, the Penn Square Bank's holding company. This increased his stake in the bank to almost 8 percent. Only Beep Jennings owned a larger portion of stock. Considering that Patterson had begun life short of cash, he had not, on paper, done badly. During the May and June meetings of Penn Square's directors some recent loans to Patterson came up for discussion. Patterson owed the bank more than three million dollars. His annual salary was sixty-five thousand dollars. His financial statement showed that he and his wife, Eve, had a net worth of almost five million dollars. A million dollars of Eve Patterson's inheritance had bought shares of the First Penn Corporation

When the final examination of the bank began, Penn Square's capital stood at thirty-seven million dollars. When Patterson and Jennings returned from their fishing outing they were told that the identifiable losses seemed to have exceeded twenty million

That same day, in Oklahoma City, a new order from the Comptroller arrived, giving the bank ten days to raise fresh capital. On Friday, July 2, the Wall Street Journal reported that the major upstream banks had been told by the Comptroller that their Penn Square loans were in trouble. That same morning, the Comptroller amended his previous order, giving the bank until the close of business that day to recapitalize

Inside the Penn Square Bank, a reasonable reaction--panic--obtained. And why not? The regional bank examiners, the chicken-fried-steak-and-yellow-gravy crowd, had never seen anything this big before, had no experience with a bank closing, much less a full-scale liquidation. A strange brew: the big boys in Washington, D.C.; a separate council within the Federal Reserve Bank in Kansas City; the liquidators assembling in Oklahoma City; the regional bank examiners inside the Penn Square Bank

As the mundane-bizarre tales proliferated, I would write notes to myself: "Remember to ask So-and-So how he came to owe the FDIC almost a million bucks." How charmingly naive! In time, with the litigation building steam, my standards rose and I refused to be distracted by any lawsuit that involved less than eight figures. Reading the newspapers, following the reports of bankruptcy filings, gathering hearsay, I encountered familiar names. I noticed which former Little League baseball teammates from my boyhood in Tulsa were on the ropes or close to it. The shortstop owed twenty million but remained afloat. The left fielder, owing more, had run off the road and into a deep ditch. With envy and empathy and a sense of relief, I developed a suspicion that if I had been living in Oklahoma during the boom the only thing that would have kept me out of permanent trouble would have been leg irons and a cell in a preventive-detention facility for probable deadbeats. Still, I was haunted by the knowledge that I could have borrowed five million during the boom, buried it in the backyard, and, come the bust, dug up four million and carried that over to the FDIC, which would have gladly settled for eighty cents on the dollar

No one at the FDIC knew how oil-and-gas financing worked; no one acknowledged the importance of cash flow; no one understood the classic and unavoidable pyramid of the typical oil-and-gas borrower; no one seemed to care how a loss of credit would damage the value of collateral. Wherever cash or collateral could be found, the FDIC intended to be at the head of the line. Later, when the damage became evident, the liquidators would shift blame to the Comptroller of the Currency, who had permitted a monster to mature at the Penn Square Bank and then had given the FDIC people so little time to prepare for the task of unraveling and liquidating.

"They didn't want to play by the rules," Procopio said. "They didn't want to stay in their environment and be a good shopping-center bank and serve the needs of their community, which is why they were given a charter in the first place

"I think about my forty-three thousand dollars a year," Procopio said, referring to his government salary. "And then I think about the guy who used to be in this office, who was making five hundred thousand. He had this big little city in the palm of his hand and if he had only wanted to go the straight and narrow this bank would have become what he wanted it to become."

Soon, one of every twenty-five banks across the nation had earned a spot on the FDIC's "problem list"; the list had grown far beyond its previous peak, which it had achieved in the wake of the recession of the mid-1970s. Six weeks after Penn Square, the Abilene National Bank, in Texas, a somewhat smaller institution, failed and was sold to a Dallas-based bank holding company. During the winter of 1983, the United American Bank of Knoxville, Tennessee, failed and was sold, and that failure rearranged the fates of a chain of almost twenty banks in Tennessee and Kentucky. During the first quarter of 1983, the ten largest banking companies in the country averaged more than a 17 percent increase in problem loans over the previous quarter. Later that year, the First National Bank of Midland, Texas, a major oil-and-gas lender, with assets three times as large as Penn Square's, failed and was bought by another Texas bank. Then InterFirst, of Dallas, announced the largest quarterly loss in American banking history--two hundred and forty-nine million dollars. The First National Bank & Trust Company of Oklahoma City announced a quarterly loss of fifty-eight million, which, as a percentage of assets, was even worse than InterFirst's. By the beginning of 1984, the FDIC's list of problem banks had risen to 617, a post-Depression record

The upstream banks had trouble admitting to themselves just how shaky many of their Penn Square loans were. Continental Illinois had bought loan participations whose face value equaled half of its capital

. If the Chase correspondent bankers had had more of a head start, the losses might not have been so easy to swallow. From early 1981 to mid-1982, Chase had managed to buy two hundred twelve million dollars in Penn Square loans. While fun was still being had, some of Chase's money salesmen had fantasized about one billion dollars in loan participations

During 1982, Continental's nonperforming loans rose by a billion dollars, of which almost six hundred million came from Penn Square.

One day, after the boom had died, I went to Elk City to see the friend of a friend. Driving into town, I passed the Robert A. Hefner III Municipal Airport. I was on my way to see a man who felt more than a little grateful for the existence of Bob Heftier. His name was Huff Kelly and he ran a one-horse oil-and-gas operation out of a ground-floor office in the rear of one of Elk City's three commercial banks. Huff Kelly used to be part of a group that had controlled the bank. When the group sold it, as the boom peaked, the deposits totaled sixty million dollars. Two years later deposits were down by six million dollars but the bank remained profitable. Kelly had kept his seat on the board of directors

By the time Patterson was indicted, in the summer of 1984, the Penn Square Bank failure had become the costliest in United States history. The upstream banks had charged off more than half of their Penn Square loans--more than a billion dollars' worth

When the Penn Square investigation began, Price's office had been deep into a long-running inquiry into the mores of Oklahoma's county commissioners, who had an institutionalized custom of accepting gratuities from contractors who did county business. ("Why do you think they call 'em commissioners? 'Cause they work on commission.")

In early May 1984--four and a half months before Lytle's indictment--a run began on the deposits of Continental Illinois: an outflow so severe that, within ten days, the Federal Deposit Insurance Corporation and a consortium of twenty-eight healthy banks were forced to intervene with a combination of credit and capital totaling seven and a half billion dollars. When the Penn Square Bank closed, deposit balances in excess of a hundred thousand dollars became worth about sixty cents on the dollar. By contrast, the FDIC was willing to guarantee all of Continental's deposits, regardless of the size of an account, in order to keep that bank open