Fullamanure #5: Banking and everyone should own a bank

I spent most of my career in the finance industry and so it should be no surprise that I know bankers literally in every state of the union and have traveled to every state except Alaska, but it is on my bucket list.  As it turned out one of my friends or at least was a friend from Eufaula, OK talked me into investing in a new bank which he would start in Elk City, OK.  It was to be American National Bank and we started out in a trailer house.  I never moved there but was on the board and some committees at least for a period of time and that is why this story is a humbling one rather than a source of pride.  One thing I should tell you is that you should read the little blue book about your liabilities for owning and being on a bank board before you invest and get involved.  I read it after the fact and it scared the begizzies out of me.  yes, that is an OKIE word.

Well it started out fine in about 1987 after almost all the banks in Oklahoma had either been closed or were in financial difficulty due to the FALL of the oil industry during the Early 80's.  If you do not know, about every home builder went broke and anyone who served the oil business that had a loan went broke.  In fact Penn Square Bank in Oklahoma City was the beginning of the end when it was closed.  That little 40 million dollar asset bank grew to over 400 million (as I recall)  in just a few years but the worst part was they had originated loans and sold them off to National Bank of Detroit, Continental Bank of Chicago and a large bank in Seattle which I cannot recall the name.  They had originated loans in the billions of dollars and Penn Square just about took down the entire banking system and pretty much these three banks.  Ultimately there were over 100 banks in Oklahoma closed by the FDIC and it was down right ugly.  

Elk City had grown so fast before the bust that folks were living in tents because there was not enough houses or hotels.  The bust had occurred and every bank in that part of the state was in trouble so it made a lot of sense that starting a bank at that time would be easy and a safe bet plus a great way for those who had lost faith to move their accounts.  GREAT PLAN!  Things went well for a few years but then I remember asking some questions at the board meeting that angered the president and a few board members.  In particular I had asked how the president spends over $4,000 per month every month and we add about 4 or 5 checking accounts and a few small loans each month and spend this amount of money.  I remember asking if we would ever make enough money on these few accounts to pay back our investment not including salary expense.  You would have thought I started a fire as the president got really angry with what I was implying.  Then a few months later we had an expense for $26,000 (approximately) for concrete work.  I asked where the concrete work had occurred and again I got a few folks mad.  Just a few months later we got a letter from the Comptroller of the Currency requesting some clarification of the books and specifically how we had accrued some income from the settlement of some loans we had purchased from the closed bank in Hammond, Oklahoma.  A side note is we made the Wall Street Journal for making the first total asset purchase of a failed bank.  It was only about $4 million in loans but we paid the FDIC around $400 (as I remember) for the loans and then we went about re-working the loans to put them on our books.  It seemed like a steal and I would say it was originally.  To make this long story short, basically our president and one of his buddies had a side company where they charged the bank 30% of the loan as it was re-worked.  Sounds pretty smart except the entire thing crashed.  Yes, the bank was closed and we lost a lot of money.

Well this story got a little long so let's just clean it up with:
What do you learn in the Osage?

• If it looks too good to be true, RUN
• You cannot outrun a loser, think hard
• Don't ever regret your mistakes, learn from them
• Enjoy the victories as they make the losers small in the rear view mirror

Thanks for listening,

gary@thepioneerman.com