Bankruptcy: Case Studies

995 Words4 Pages
1. There were considerable pressures at Penn Square Bank to bring in new loan business and to avoid dealing with key issues in order to do so. The issues stem from the corporate culture at the bank, which was driven by the conversion of the bank to a merchant bank designed to leverage contacts among those with assets in the Oklahoma oil industry. In order to complete deals in advance of other banks, Penn Square was lax on a number of fronts. One was the collection of appropriate documentation deals were done on napkins sometimes. Part of the problem was that Penn Square had good relationships with major out-of-state banks. These banks were supplying the money, Penn Square was only an intermediary, and these banks did not provide sufficient oversight into Penn Square's activities. The principals involved were generally rewarded for the business that they generated, so their incentives were to create new loans and find new opportunities for lending, rather than to make sound business decisions that would add long-term value to the firm. Underlying economic conditions were given some of the blame for the problem, as the price of oil was on a strong upward trajectory during these years. When the price of oil collapsed, the theoretical value of the collateral for these speculative loans also collapsed. It was at this point that oversight became a bigger concern for the regulators and the major lenders to Penn Square. Fuelling the boom was easy credit. The lure of oil

More about Bankruptcy: Case Studies

Open Document