Banking Shake-Out Not Mystery to Isaac / Years of Inflation Followed by Very High Interest Rates, Recessions

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(R)The Journal Record, 1986 To William Isaac, there is no mystery about what caused the American banking industr y's worst shake-out in history.

"Years and years of inflation, followed by extraordinarily high interest rates, and two back-to-back recessions - that's what did it," said Isaac, the former chairman of the Federal Deposit Insurance Corp.

As FDIC chairman from 1981-1985, Isaac saw 300 banks fail. Together, those banks had assets worth $75 billion.

By comparison, in the FDIC's entire previous history of 47 years, there were only $9 billion worth of bank failures.

Isaac blamed those same factors - runaway inflation, soaring interest rates and twin recessions - for causing the build-up of problem loans, which have wreaked havoc with banks in the Southwest andthe Midwest during the last two years.

"The Southwest and the Midwest still have not recovered from it," said Isaac, now president of The Secura Group, a Washington, D.C., consulting firm that specializes in bank turnarounds.

Oklahoma, Kansas and Nebraska finished 1985 in a three-way tie for the most bank failures - with 13 each. Nationwide, 120 banks were declared insolvent last year.

This year, to date, the Sun Belt and the Grain Belt states have once again been hit the hardest by bank failures: 16 banks have been closed in Texas, followed by 11 in Oklahoma and Kansas, and 10 in Iowa. Nationwide, 100 banks have been closed so far in 1986.

The grim trend in the Southwest, and a growing client roster in the region, have inspired Isaac to announce The Secura Group's first expansion - after only six months in business this year.

On Oct. 1, The Secura Group will open a Dallas office. That office will be managed by Anthony J. Montelaro, currently a vice president of the Federal Reserve Bank of Dallas.

"I had always wanted to own my own business," Isaac said.

Before President Jimmy Carter appointed him to the FDIC's board of directors in 1978, Isaac had built a banking career in Kentucky and a law practice in Wisconsin.

But Isaac said his entrepreneurial streak might have taken a different turn, if he had not found himself caught up in the most volatile period in the history of American banking.

The crisis began in August 1981, shortly after Isaac was sworn in as FDIC chairman.

"I was named chairman and then the bottom fell out," Isaac said. "First, there was the thrift crisis in 1981. Then we had the mutual savings bank problems in the Northeast.

"Then Penn Square Bank came along, and then we had the Butcher bank problems in Tennessee, and Continental Illinois came along on top of that," Isaac said.

In Isaac's first six months as FDIC chairman, the agency spent $1.5 billion handling 11 savings bank failures, he recalled.

"Before that, in its first 47 years, the FDIC had spent only $500 million handling all bank failures," Isaac said.

In 1985, the FDIC racked up $1.8 billion in losses and expenses in connection with handling 120 bank failures, according to Alan Whitney, FDIC spokesman.

No one has calculated the cost of handling Oklahoma's 33 recent bank failures, which date back to July 5, 1982, when Penn Square Bank of Oklahoma City was declared insolvent.

However, Isaac needs no reminders of that date. Four years ago, he spent the Fourth of July weekend inside the Oklahoma City shopping center bank to determine whether it had any hope of regaining solvency.

"At first, I wondered why they were bringing this bank to my attention," Isaac said.

Penn Square Bank's assets totaled about $500 million.

But Isaac could not ignore the urgent message he got for an emergency meeting to discuss Penn Square Bank with the Office of the Comptroller of the Currency.

"About a half hour into the meeting, I became aware that there were about $3 billion worth of claims, mostly in the form of loan participations and letters of credit, off the balance sheet, involving major upstream banks, such as Continental Illinois and Chase Manhattan," Isaac said. …