Financial ruin at Drysdale and Penn Square
July 20, 1982
Only a few weeks elapsed between the collapse of Drysdale Government Securities last May and the collapse this month of the Oklahoma-based Penn Square bank.
The reader will recall that the Drysdale affair was initially reported as the failure of a tiny brokerage company dealing in U.S. securities with no more than a couple of million dollars of its own capital. As far as popular conceptions go, the economic significance of this whole affair might easily have been dismissed as the result of some wild speculation involving only a small-fry, newly organized, and inexperienced U.S. securities dealer.
But it turned out that this tiny company was dealing with many billions of dollars and that its connections led straight to some of the biggest banks in the country, including Chase Manhattan and Manufacturers Trust. We characterized it at the time as a near social earthquake.
Drysdale: They knew it was bad
Of course, the whole financial community knew only too well that the Drysdale affair signified profound economic and financial trouble. One would think, therefore, that with all the knowledge now available about the capitalist market in general, and the financial market in particular, immediate measures would have been taken (were that possible) to prevent a second inevitable shock wave.
Wouldn't it be proper and in the self-interest of the so-called banking community to arrest another financial catastrophe? Wouldn't it be better to make private arrangements to prevent a domino effect in the financial markets than to have the government close the bank?
But the very sharp and bitter competition among the banks themselves made any so-called bold, private initiative impossible.
There was also the lesson of the Franklin National bank, which collapsed in 1974. Then, at least, much effort was made to avoid the collapse, but in the end it failed.
Alas, they said then, the rescue mission came too late and, at any rate, the bank was tainted with fraud and corruption. But hasn't this always been the case with every important banking failure which is in fact a harbinger of a deepening capitalist crisis?
It should be recalled that the Franklin National bank also had such interesting features about it as the involvement of Michele Sindona, who was a financial advisor to the Vatican. Of course, the Vatican bank at that time, no less than today, was subject to the same vicissitudes of the capitalist crisis as all the others.
Following the Drysdale affair, all arrows seemed to be pointing in the direction of a rescue mission, either by the much-vaunted private sector of the banking fraternity, or as a result of government initiative. But nothing like this, even if contemplated, was carried out.
Thus, the crisis in the financial community kept deepening slowly and almost imperceptibly so far as the broad public was led to believe. Dangerous economic signals, nevertheless, continued to emerge, showing that the economy was sliding downward -- unemployment was up, housing and construction down, retail auto sales down. Be that as it may, the Reagan administration continued to say that "the crisis is bottoming out" and that "signs of recovery are already in sight."
Penn Square collapse
It is generally a characteristic of capitalist crises that bank failures occur at the high crest of a capitalist cycle of development, at the peak of the boom. After that, there is generally a steep and precipitous decline of capitalist production. Stagnation of trade and huge increases in unemployment follow upon its heels.
Yet, when the Penn Square bank collapsed, it came not at the top of a boom period in the general capitalist economy of the U.S. but rather at a time when the economy was already deep in the throes of capitalist stagnation and rapidly deteriorating.
All the more should the so-called banking fraternity, the modern barons of high finance, have been on their guard. In their own self-interest, so to speak, they should have been mustering their cooperative forces, putting their own house in order first in an effort to halt the deterioration of the capitalist economy.
But, as we said earlier, nothing like this was attempted. This is of exceptional importance because it illustrates what we earlier alluded to (as correctly stated in Business Week): that the capitalist economy is in a gridlock (a traffic term indicating a state of semi-paralysis).
All the old remedies as well as the newer ones -- supply-side economics and all the rest of the malarkey that goes along with it -- proved to be of no avail. The Penn Square collapse followed.
As in the Drysdale affair, it was a small financial institution. And like Drysdale, it had very intimate connections, tantamount to domination, with the big banks. Once again, Chase Manhattan was deeply involved, just as in the Drysdale case but this time perhaps more so. And the connection with the big Continental Illinois Bank, which stands to lose a billion dollars or more, is of exceptional significance.
Why they were paralyzed to act
Both Chase and Continental, as well as Michigan National, Northern Trust and Seafirst Corporation are big banks which must have recognized the symptoms of impending collapse. They knew all this, but weren't able to do anything about it! That is what so reveals the depth and intractability of the capitalist crisis.
It illustrates once again, as so often before in the history of capitalist development, that in the long run the laws of capitalist accumulation assert themselves independently of the will of not only the individual capitalists but of the capitalist class itself. It proves once again in the most dramatic way that the ruling class is the tool of blind forces of the capitalist market. No matter how well they may rig it, no matter to what extent they try to insulate themselves against trouble, and no matter what liberal or conservative bourgeois economic dogmas they adhere to, they cannot master the market.
In the failure of both the Franklin National bank and Penn Square, there is the discovery of fraud, corruption, speculation, unwarranted risks, inexperienced people handling big sums of money, etc., etc. But these are merely the trappings that accompany each and every capitalist crisis, as in the big Wall Street crash of 1929, when the giant Bank of the United States failed and its officers were indicted for corruption and fraud.
At that time it was revealed that a vice president of Chase, the same bank that today is hurriedly reshuffling its top management on the heels of the Penn Square failure and the loss of its third quarter profits, was selling short on the stock market his own shares of Chase Manhattan bank.
But these are merely the superficial aspects and do not explain the fundamental causes of the collapse.
Little banks a front for big ones
The Wall Street Journal of July 19, 1982, comments on the Penn Square collapse: "While the losses are still being sorted out (in other words, there's a lot more money being lost than is listed on the chart on the next page) many bankers are asking how such a tiny bank could have sold so much bad business loans to some of the nation's biggest and most elite banks."
The answer should be clear to the Wall Street Journal. It is the biggest banks themselves that have virtually set up these small ones as a means of siphoning off what appeared to be an endless stream of millions and billions coming out of the oil and gas business.
And why was this not highly publicized at the time?
After giving the usual superficial answers, the Wall Street Journal raises such matters as faulty loan review procedures, aggressive salesmanship, bad judgment, etc. But then the Journal goes on to state that the motivation common to all these reasons is (surprise, surprise!) "greed."
That's all too true.
However, greed has been a characteristic of all previous exploiting social systems. But in these previous modes of exploitation, such as ancient slavery and feudalism, greed did not bring about a general collapse of the economic system. On the contrary, those systems, which were just as greedy as the present one, are not known to have suffered the particular greediness which is the hallmark of the capitalist chase for super-profits and resulting over-production.
So we have the Wall Street Journal, the most distinguished representative of high finance and industry, accusing big banks like Chase, and the small ones too, of greed. It should be added that the Journal frequently seeks out individual cases of faltering corporations, banks, and even huge capitalist enterprises for public exposure of their misdeeds. But it does so only as a means for covering up and protecting the whole capitalist system against its individual components when the latter are collapsing or deviating from the norm of capitalist accumulation.
But why did these big banks -- Chase, Continental Illinois, and the others -- get involved and actually set themselves up in the oil-based region of Oklahoma?
Capital stampedes to the Southwest
The answer to this question is, in part, that capital flows into areas and regions where the rate of profit is highest and away from areas where it is declining. Continental Illinois, Michigan National Corp., Northern Trust, Chase Manhattan, and a host of others have in previous decades all served as the financial bastions for the industrial Northeast and Midwest.
The latter are now in stagnation, the result not merely of the cyclical crisis of capitalism, but of the structural one. The basic industries of steel and auto are now in decay and need a complete overhaul entailing many billions of dollars.
But the capital available in these giant banks, so the bankers reckon, would earn much higher profits by fleeing westward into oil and gas ventures, where the profits come not only easier but in extraordinary amounts.
All of this is based on a decade-old oil and gas price boom which has in some ways distorted and diverted the long-term capitalist crisis. The crisis in reality began in the 1970s, and has continued with slight interruptions up to the present.
As we've seen, the banks were unable to intervene to stop the collapse of Penn Square, the second edition of the Drysdale affair, because of their own deep involvement and because it was in many ways their own creation. Almost all the big banks of the Northeast, which is the citadel of the U.S. and world bankocracy, have been turning away from the industrial areas of the Northeast and Midwest and making aggressive efforts to corner the Western markets in the U.S.
A virtual civil war is going on among the giant banks of the Northeast in an effort to not merely penetrate but perhaps dominate the entire West and Southwest areas of the U.S.
Witness, for instance, the bitter fight between Citicorp, the second largest bank in the country, and BankAmerica of San Francisco, the largest in the country and the principal one in California and the Southwest. Citicorp is waging a monumental battle to get into the more lucrative energy area, especially oil, and is abandoning the ghetto areas of the great metropolitan cities of the Northeast and Midwest, which were once considered the lifeblood of the capitalist system.
Ever seeking out areas where profit is highest, these banks have been emigrating in order to penetrate and take over the financing of the lush enterprises in oil, gas, and other energy-related industries in as determined and aggressive a manner as ever.
Oil prices can't remain artificial forever
All of this was made possible by a factor which dominated the 1970s and has helped to hide or mask the capitalist decay of that period. It is the very, very sharp rise in the price of oil and gas on the worldwide market.
Marxism teaches us that economics predominates over politics in the long run. And over a period of time the economic facts of the capitalist mode of existence determine its political character and trends.
The price of a barrel of oil or a cubic foot of gas, no matter how indispensable these resources may be, is nevertheless in the final analysis determined over a long period by the amount of socially necessary labor incorporated in it.
The price of a barrel of oil may, however, be kept very cheap for a while if a group of mobsters by the name of Standard Oil or Exxon move into the Middle East, where oil was for a time easily accessible, rob the countries of it, and sell it at a price below its exchange value. Later on, depending on how powerful the imperialist oil cartel has become, they may jack the price way above its real exchange value.
A cartel like the Seven Sisters (the seven biggest imperialist oil companies) having a monopoly over the refining and marketing of oil, may for a time be able to artificially dictate a price, either lowering or raising it to suit their needs. Multinational corporations are notorious for price-fixing and for bribing the feudal and bourgeois puppets under them in order to milk a country of its oil wealth at a dizzying speed.
However, there comes a time when political conditions, as a result of mass popular upsurge, bring about fundamental changes. The 1973 Arab-Israeli war for the first time brought about a general boycott by all the Middle East Arab countries which proved to be highly effective. This temporarily raised oil prices to soaring heights.
The capitalist recession that followed in 1975-76 was attributed at the very beginning to the soaring price of oil and gas. But an oil boycott is not different in this fundamental aspect from a general strike in an important industry such as steel or coal. A general strike has never caused a capitalist recession. There are temporary shortages and prices sometimes go up during a long strike, but they drop down again just as easily, depending upon how strong the cartel or trust is in the industry.
Neither strikes nor boycotts have ever in and of themselves throughout the entire history of capitalist development caused a capitalist recession. The oil boycott of 1973 is not at all responsible for the recession that followed.
This has largely been admitted now, years afterwards, by most of the capitalist economists. But what was unique about the capitalist crisis of 1975-76 was that the oil-producing countries, as a result of the new measure of sovereignty they had won through the Arab-Israeli war, were able to raise prices to a level more commensurate with the value of the oil than was previously possible. This, together with the nationalizations, enabled the oil giants, especially the Seven Sisters, to engage in a concerted effort to bid up the price of oil and gas on a world scale.
This was in part caused by the giant oil monopolies' fear of losing their vast empire of oil in the Middle East altogether, and also by the flow of capital into this speculative field of oil and gas precisely because of the prevailing capitalist recession, and not vice versa.
From tulips to oil -- speculation is the game
The New York Times of July 19, 1982, states in connection with the collapse of the Oklahoma-based Penn Square bank that the "price of deep natural gas (in the Oklahoma area) reached more than 50 times what it would have fetched in the 1960s."
Is this really any different from the skyrocketing prices in the "tulip mania" of the 1600s in the Netherlands, which we referred to in our earlier discussion? The tulip growers were no less intelligent than the wheelers and dealers of the Penn Square, Continental, and Chase banks who jacked up the price of natural gas 50 times what it was in 1960.
The explanation for this might be less damning if there had been some breakdown of modern technology, forcing the oil industry to go back to the pick and shovel days. But, on the contrary, the technology has been greatly improved since the 1960s. There is no rational reason (except that capitalism itself is irrational!) why the price of gas should be 50 times what it was, notwithstanding some limited increase in demand.
What has happened in the Penn Square oil and gas matter is true on a worldwide scale. No one can precisely translate the labor time in a barrel of oil or a cubic foot of gas into a precise monetary calculation, even with all the modern computerized technology. But roughly speaking, and taking account of political conditions such as wartime measures to stop the flow of oil, price-rigging by the corporations, and so on, it was becoming increasingly obvious that oil and gas, no matter how precious they may be regarded and how unrenewable these resources may be, are nevertheless subject to the same laws of capitalist accumulation as all other commodities.
And while these commodities were able for a while to escape the effects of the capitalist crisis, due to political conditions in the Middle East as well as price-rigging by the multi-national corporations, they could not avoid the effects of the capitalist crisis altogether.
They can artificially maintain the price for a period of time, milking the public. They can rob and plunder and thereby make the commodities more available. But avoiding the effects of a deep capitalist economic decline altogether is something beyond the pale of even the mightiest of the mighty multi-national corporations.
Thus it happens that along with a glut of wheat, corn, soybeans, automobiles, refrigerators, home appliances of all sorts, and all the basic commodities in general, there has been now for almost a year a glut of oil. This is notwithstanding the attempt to strangle Iran, the Iran-Iraq war, and the Herculean efforts of the multi-national oil companies to maintain the price level of oil.
Oil and gas prices have declined, and therein lies the basic reason for the collapse of the banking adventures of Chase Manhattan, Continental Illinois, Manufacturers Trust, etc. And more of them will be revealed as the capitalist crisis continues to take its toll.
A confession of truth
It is almost an invariable rule of capitalist morality that significant and fundamental truths regarding the capitalist operation of the mode of production filter through to the public during periods of crisis far more easily than they do in periods of so-called prosperity. In the "good" years of capitalist boom, these truths are deeply hidden as though they never really existed.
Take for instance the July 18, 1982, airing of This Week with David Brinkley, a TV news show. Walter J. Levy, a well-known consultant to the oil industry, was interviewed. He was able to say things he had never said before during the whole period of the gas hoax, and especially during the Iranian Revolution, with all the chauvinist hysteria in this country.
The reader will remember that at that time President Carter was urged by his domestic adviser Stuart Eisenstadt to blame the sharp rise in oil and gas prices and the consequent "shortages" on OPEC. This was published in the New York Times in the famous "Eisenstadt memorandum."
Carter then made a public address, desperately trying to explain away the steep prices in oil and gas by saying that OPEC "has a knife at our throat." It was difficult, indeed, in those days of hysteria directed at OPEC and especially Iran to say otherwise.
Walter Levy, the oil consultant who was frequently quoted in those days, seemed a very different person when interviewed on ABC July 18, 1982, as seen by this colloquy (taken from the official ABC transcript):
Donaldson: Is it in the U.S. interest to have OPEC break up?
Levy: I believe it would not be.
Donaldson: [startled]: Why?
Levy: It would not be ... Let me start with this observation. The oil price has never been a free market price as long as you or I can remember.
[This is a startling admission! What Levy is saying is that the oil price instead of being arrived at freely on the capitalist market was in reality rigged by the giant oil companies.]
Donaldson: [looking even more startled]: But we used to control that price by consortium.
[Donaldson is evidently confused, for a consortium is an agreement among the oil companies to artificially administer a price, which is another way of saying the prices are really rigged.]
Levy: Before that, the Texas Railroad Commission used to control the price and I don't think that the Texas Railroad Commission was more easily manageable than OPEC was.
[A truly incredible admission. The notorious Texas Railroad Commission operates as a so-called government agency from Texas. By virtue of controlling the transportation of oil it in reality dictates the price of oil, a fact which hardly anybody would mention during the hysterical days following the OPEC oil embargo, all the way up to 1981.
[In other words, OPEC may be a cartel, but the big oil companies operating through the Texas Railroad Commission are the real cartel and it's not any more manageable, that is, more generous with their prices, than OPEC.]
'Some of our bankers benefited'!
Brinkley: (But) they control the pumping of oil in Texas.
Levy: And therefore the price, and the U.S. price set the world price.
[In other words, the big U.S. domestic oil companies set the world price of oil.]
Donaldson: [looking chagrined]: Yes, but at least some of our bankers benefited from that. [!!!!]
Levy: The bankers usually benefit, up or down.
[That's certainly going much too far for the new Mr. Levy, and he had to somewhat backtrack to the old Mr. Levy of the hysterical days of the price rise.]
Levy: Since 1973 in the Middle East oil is about 30 times as high as the production cost. That means there is a 3,000% rent on that price. OPEC imposed about a trillion tax on the importing world.
All this needs a little explanation.
We saw earlier that the New York Times estimates that in Oklahoma, not in the Middle East, the price went "50 times" above what it was in 1960. In other words, you have to see this 3,000% increase in production costs in relation to the 5,000% increase in Oklahoma.
It doesn't seem so high after all, does it? And they didn't have to destroy all the modern oil technology in the Middle East any more than they did in Oklahoma.
As far as the 3,000% rent (as he calls it now), if that is rent, it is no different than the rent paid in the case of Oklahoma, Texas, New Orleans, or California. The "little OPEC" which has been so inconspicuous all these years -- the Texas Railroad Commission -- is no more considerate of the public interest in the U.S. than those who deal in oil elsewhere in the world.
But how about this trillion-dollar "OPEC tax on the importing world"?
'Recycling' petrodollars
Most of that trillion dollars has been recycled back to the Western imperialist banks, as a result of long-range planning and a conspiracy of the imperialist powers, especially U.S., British, Dutch, and several West German banks. This fourteen-carat word, recycled, has deep significance of a political character.
The Brinkleys and Donaldsons, who seem so knowledgeable on the TV news shows, did not dare, or did not know enough, to ask a question about it. Where is this trillion dollars? Is it mostly in U.S. banks?
Yes, of course, that is where it is. Also in some British and West German banks.
Is this giant lump of money capable of being withdrawn on demand, as you or I could do if we had a few thousand dollars in the bank? We could go to the bank and withdraw it immediately.
No, OPEC cannot do this. Most of these deposits are not withdrawable on demand. They are, to what extent no one has told us yet, in certificates of deposit with varying dates of maturity. That draws high interest -- which the U.S. encourages.
Some of the OPEC money is in 30-day certificates, some in 60-day, some in U.S. Treasury bonds, some in private stock. Some of the money has been used to purchase an interest in U.S. corporations, like Grumman, for instance. Some has been used to purchase an interest in industrial concerns in West Germany and Italy. As a result of the capitalist crisis, that money is in jeopardy and not easily withdrawable except at a loss.
Finally, the portion of the trillion dollars that is in currency is mostly in U.S. dollars and depends upon the vicissitudes of the dollar's exchange value. At present the rate is high, thereby encouraging more OPEC money to flow into the U.S. in order to get high interest, whether it be in U.S. securities, certificates or whatever other financial instruments pay a higher rate than is obtainable among the other Western imperialists.
Western-imposed 'development' creates paupers
Finally there is the much bally-hooed industrial development of the OPEC countries by the imperialist West. The architects of this development are mostly the imperialist powers and it is fashioned with a view to strengthening the economic and financial ties of these industrial and technological projects to Western predatory interests.
All this is paid for at high inflationary rates, so that, for instance, the big project that Bechtel has in Saudi Arabia, amounting to $30 billion, could end up ballooning to twice that amount. This goes for the Gulf states and all the other OPEC countries which have tried to use some of the revenues from the oil to industrialize.
According to Levy, "During this period the demand (for oil) is uncertain, has in fact been declining... (while) the revenue needs of the OPEC countries have been going up and up, have been increasing from year to year by 10 or 20 billion. Within a short while these $20 billion were committed to new projects so that the revenue needs, at least for many of the OPEC countries, were overwhelming."
In other words, the progress in industrialization made by the OPEC countries is not the result of the natural, automatic processes which the older capitalist countries went through. Rather it is industrialization imposed on them under conditions which leave them financially indebted and even more victimized by the capitalist crisis raging throughout the world than the Western imperialists. This is so despite the fact that it does also tremendously enrich a small clique of compradore bourgeois and feudal elements.
To this must be added, of course, the stupendous arms purchases which the Western imperialists, especially the U.S., have foisted upon them. These must be paid for, as the saying in the military-industrial complex goes, with cash on the barrelhead.
"The country that is more industrially developed," wrote Marx in the preface to his first edition of Capital, "only shows to the less-developed the image of its own future." (Page 13, Modern Library edition.)
This is what the feudal and compradore bourgeois elements in the OPEC countries aspire to. But this is precisely what the imperialist powers are determined to see does not happen. Indeed, the whole policy of imperialist finance capital in the epoch of monopoly has everywhere been to block such a future.
In doing so, however, it has laid the basis for the masses of toilers in the oppressed countries to move to the next stage, to leap-frog over the notoriously bloody period of capitalist development and carry out an industrialization program based not on chaotic imperialism, with its conflicting projects and contradictory material interests, but on socialist planning. A thoroughgoing socialist revolution would sweep away not only imperialist domination, but encrusted feudal and bourgeois reaction.