Oklahoma; A Relevant Story

Oklahoma: 1970-1979

Things are booming. Oil is flowing like Texas tea, millionaires are being created by the thousands. Everybody has an airplane or two, if you aren’t wearing $1,000 cowboy boots you aren’t anybody. The booze is flowing almost as fast as the oil, alcoholics are being created faster than millionaires.

A friend of mine, Bill Patterson, has become the lead loan officer of the Penn Square Bank and is riding high. And getting high. Schmoozing with the millionaires is an everyday after hours event, in fact, creating wealth for oil people has become like a hobby to him. Bill is writing million dollar lines of credit on cocktail napkins at the bar. Rumor has it that he’s drinking scotch out of his shoe. Guys bring the napkins to the bank the next day, hand them to a secretary, and a couple of hours later are signing paperwork that allows them to leverage whatever amount of money that they want. If you are in the oil production business, or a business that supports the production of oil, the future is unlimited. Or, if you catch Bill especially lit up, all you have to do is tell him you are in the oil business and you can get a napkin. After a month, if a million isn’t enough, just make a phone call and that limit can be raised to five, or ten, or…………

My uncle lives in Cement Oklahoma. He has started his own business. He has found a niche in the oil industry that no one in Oklahoma has filled. He takes old, dilapidated oil rigs, gets the rust off, adds a little paint and makes these old parts look new. Sells them for half of what a new one would cost, and becomes a millionaire in one year. He has one employee who does the dirty work, Red (my uncle) just runs around the state taking useless parts off the hands of people who are tired of the eyesores, tired of having a no longer producing oil rig on their land. Most of the time he doesn’t have to pay anything for these products, just pays someone to haul them to his shop. Landowner is happy, Red is happy, and the people buying the parts are happy. It’s a win, win, win for everybody.

While this is occurring, Penn Square decides to share the wealth. And, admittedly, lessen the overextension that has occurred during these high times. In looking at their asset sheets, they realize that they are on the line for billions of dollars, money that they obviously don’t have. So, they need to downsize a bit. They begin selling a lot of these loans to other banks around the country. Banks are lined up wanting a piece of this action, so they have no problem unloading whatever they choose to rid themselves of. Eleven billion sold here, 18 billion there, easy come easy go. The five largest banks in the United States get most of the action, buying notes for airplanes, condos in the Caribbean, real estate in Florida, you name it. Or so they thought. Riding high and it will never end.

Halfway around the World; 1980

OPEC has a meeting. They see what is going on in the United States, all these people making all this money, and they really don’t know how much oil there is to be had there. Between western Oklahoma and the panhandle region of Texas, they see that there are thousands upon thousands of producing oil wells. They wonder, are all these wells a threat to our long term future? Could America slow down on the need for Middle Eastern oil because they have more of it than anyone ever thought? They decide that they are not willing to take that risk, so they decide to drastically drop the price of their oil. They have a whole lot of money, so selling oil as a loss leader for a while won’t hurt them much. Besides, oil was going to be a lifelong game for them, so they better nip this thing in the bud while they can. They don’t follow the usual procedure and give a heads up about this decision, they just pick a date to drop the price and do it.

Back in Oklahoma, 1980

Bill Patterson wakes up, grabs the newspaper and heads to work. When he arrives, he finds messages from banks all over the country marked urgent. Call them the second you get in the office. Bill thinks, “Screw it. I made these guys more money than they could ever have imagined, I’ll call them when I feel like it.” Besides, he’s hung over after last night’s activities. Then he opens the paper, and suddenly wants to jump out of a window. There in the headline it states that OPEC has decided to drop the price of oil to $15 per barrel. (an arbitrary figure, I don’t recall the actual number) Now he knows what all the emergency messages are about. Bill’s got a big problem, and Penn Square Bank has a bigger one.

You see, Bill knows that it costs $17 per barrel to get the oil out of the ground in Oklahoma. If OPEC is selling it for $15 then you are paying money to go get the oil. It doesn’t take a genius to see where this is headed. No one is going to pay money to go to work. He summons the courage to call one bank, the largest bank in the nation, a bank which purchased around $20 billion in oil loans from Bill. It seems that although the money was transferred, the paperwork had been overlooked. This guy wants the paperwork so he can start planning for how to snatch the collateral for these loans from these oil guys, now that it was obvious that they would immediately stop oil production. He tells the guy that he’ll get back with him soon.

Bill knows something that the other banker doesn’t. And, it’s not good news. While all these guys had bought condos and airplanes and fast cars and the like, all that Penn Square Bank had for collateral was the oil rigs themselves. Not their homes, cars, airplanes or anything else. Just the oil rigs, the same things that my Uncle Red had been getting for free from former oil producers. An oil rig that is not producing oil is nothing more than a very heavy paperweight. Totally worthless to anyone, including Red under those circumstances. Now he was out of business as well because he would no longer have any clients. But, he had made his money so it didn’t matter to him. He had no debt. But he knew the same thing that Bill and Penn Square Bank knew. The game was over.

The Fallout

All of the millionaire oil men were broke. Immediately, and overnight. Lawsuits were filed against Penn Square Bank by all the other banks. The courts assumed control of all of the fast cars, houses, and airplanes of all of the people who had been given loans by these banks. Million dollar homes were abandoned, airplanes and cars were placed in bullpens where they sat untouched for years while banks and oil men fought over who actually owned them. Penn Square Bank folded, and we came as close as we have ever come to the collapse of the entire American banking system.

Bill became the fall guy for the bank, his bosses claimed that they had no knowledge of the fact that none of these loans were collateralized. Pure bullshit, of course, but it quickly became every man for himself. Some bankers went to jail. All of the oilmen lost everything that they owned. Oklahoma was essentially bankrupt, and has only recently recovered, though it will never be like it was in the “good old days.” The smart ones that hadn’t leveraged everything they owned got away with a little money, but those were rare cases. Most believed that it would never end and were leveraged to the hilt.

Today

I know that this was a long story, but I think it is an important one. What you read here really happened, though most outside of the state of Oklahoma probably never knew the magnitude of the event. Bill Patterson is a real person, as is my Uncle Red. Red passed away a few years ago, but had a whole lot of money when he died. He was probably the smartest of the oil people, never borrowed a dime and made a small fortune.

This is what is about to happen to America, when the economy crashes. Nationwide, if not beyond. The super rich will remain so, the rest of us will have very little. Those who are living way beyond their means, with a huge house with 3 mortgages, several $40,000 cars and high credit card debt are going to end up on the streets. So, take it for what it is, hope that I am wrong, and get prepared.

Cyclone