BankAmerica to Acquire Continental Bank : A Near-Crash, a Bailout and Redemption

Back in the boisterous days before Oklahoma City’s Penn Square Bank failed in spectacular fashion, one of its brash young executives entertained out-of-town clients by guzzling beer out of a boot at a local watering hole called Cowboys.

A Manufacturers Hanover banker from New York City happened by and told colleagues, “There’s no way we’ll ever do business with this guy.”

If only Continental Illinois Bank had been that astute. Once a paragon of conservatism, the Chicago institution got lured by Penn Square into a quagmire of ill-fated energy loans that brought down the Oklahoma bank in 1982 and helped take Continental to the brink of insolvency before a federal bailout two years later.

On Friday, a much smaller, revamped and renamed Continental Bank--dedicated to corporate banking--drew a $1.9-billion surprise purchase offer from BankAmerica, the nation’s second-largest banking company.

Analysts said the rich price appears to justify the game plan of Thomas C. Theobald, the onetime Citicorp executive hired in 1987 to fix Continental.

“This was sort of the light at the end of the tunnel that made that strategy pay off,” said Douglas W. Diamond, a finance professor at the University of Chicago’s Graduate School of Business.

That Continental is around and about to become a wing of BankAmerica is something of a wonder. Formed in 1857 as the Merchants’ Savings, Loan & Trust Co., the bank had its first trial by fire in the Chicago Fire of 1871. Though its records were destroyed, the bank lost just $55,000 in making refunds to depositors based on their own honor-system estimates.

But Chicago’s oldest bank suffered its biggest calamity by believing in Penn Square Bank.

During the late 1970s, an OPEC-inspired surge in energy prices brought to prominence the go-go little bank based in an Oklahoma City shopping center. Penn Square courted customers aggressively, ignoring the fact that many wildcatters seeking loans provided little evidence of oil and gas reserves. At one point, the bank’s advertising theme was “The Wild Bunch.”

Eager to tap into the hot energy market but lacking oil patch connections, Continental wound up buying more than $1 billion worth of Penn Square’s loans. But those proved to be dregs unwanted by even the high-flying Texas and Oklahoma banks, and it didn’t take long for a series of dry holes to spell doom.

Embarked at the time on a growth-at-any-cost strategy, Continental executives took no action in 1981 when they discovered that their Penn Square investment was unsound.

By early 1982, tumbling energy prices were threatening to topple Penn Square. Government regulators, moving away from the “too big to fail” concept, let the medium-sized bank go under in midyear.

Giant Continental, meanwhile, soon found itself with $1.9 billion in uncollectible loans, including significant exposure in Latin American countries. News reports of a liquidity crisis triggered a global panic, and a run by depositors quickly drained Continental of billions of dollars.

Fearing that the entire banking system would suffer, the government reluctantly decided in 1984 to put up $4.5 billion to ensure the bank’s survival and assumed an 80% ownership in the bank.

The government took total control of the operations, selling its last shares in Continental to the public seven years later--an event that Theobald celebrated by distributing hot dogs to employees during a lunch hour party at its ornate headquarters on Chicago’s LaSalle Street.

Continental’s last two years have been profitable, but not profoundly so. Analysts say the bank has been hampered by a weak credit rating, which has boosted its cost of funds. It has also had to dig out from a hefty portfolio of soured loans for California residential real estate and corporate buyouts.

Times researcher Norma Kaufman and Associated Press contributed to this report.