The history of Seattle First National Bank, the largest bank in the Northwest, is a chance to examine a trajectory in finance that leads from Great Depression to Great Recession and beyond.
The SuperSonics weren’t the first Seattle asset to be lost with the involvement of Oklahoma City. First to go was Seafirst, the largest bank in the Northwest.
I pick at this old wound because Gaw Partners of Hong Kong recently bought the 76-story Columbia Center in a $711 million deal. The second-tallest building on the West Coast was built three decades ago as Seafirst’s headquarters.
It’s an opportunity to examine a trajectory in finance that leads from Great Depression to Great Recession and beyond.
Formed in November 1929, a month after the stock-market collapse, Seattle First National Bank’s roots went back even further, to First National Bank, Dexter Horton National Bank and Seattle National Bank.
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Dexter Horton the man had established Seattle’s first real bank in 1870.
Originally the merged entity was called First Seattle Dexter Horton National Bank, not exactly friendly to stationery and signage but an institution strong enough to withstand the rickety banking system of the time.
Once the Glass-Steagall Act was passed in 1933 regulating banks and federal insurance-guaranteed deposits, Seafirst thrived. Thanks to a law from earlier in the century that was grandfathered in, the bank was able to expand into Oregon.
In 1969, Seafirst built a headquarters tower at 1001 Fourth Ave. — “the box the Space Needle came in” — that for a time was the tallest skyscraper west of the Mississippi. With lending that ranged from Boeing to shipbuilding and international customers, the bank outgrew it in little more than 15 years.
These were the years when banking was an important local economic asset. Each city of any size had its own banks, and to be the state or region’s banking center was a prime accomplishment. It brought all the benefits of large headquarters plus the influence that came from being the decision point for the deployment of loans.
As robber Willie Sutton replied when asked why he hit banks, “Because that’s where the money is.” The quote is perhaps apocryphal, but you get the idea.
Banking was also dull, deliberately so. Glass-Steagall had set up rules intended to prevent the rackets of the pre-Depression banking industry. Bankers were to be stodgy, heavily regulated and use their deposits to make loans and provide other financial products for reputable enterprises.
They were allowed to loan internationally and did so, not always with the best outcomes. Derivatives? High leverage? Sell stocks? No.
America had a few so-called money-center banks such as Chase Manhattan and Chemical Bank that provided larger loans, served big corporate customers and did more complicated business.
Banks could also work together in ”correspondent relationships” or ”loan participations” to amass large sums to fund business.
Glass-Steagall did not retard American capitalism; far from it. The period of its maximum effectiveness was a high point of corporate formation and growth (and the fortunes of the middle class). But the law was slowly being whittled away.
Which brings us to Oklahoma City in the early 1980s.
Penn Square Bank lacked an imposing skyscraper. It was based in a windswept suburban mall north of downtown. But starting with skyrocketing energy prices in the 1970s, Penn Square began lending to the flush, expanding oil and gas industry.
And the little suburban bank became a powerhouse. Unfortunately, that came from ”aggressively making large and speculative loans,” according to a later FDIC report. Penn Square also drew in loan participation from banks around the country. One was Seafirst.
Executive hubris was likely at work. Seattle’s biggest bank also had a problem: Deposit growth had made it so liquid that it needed to find places to make loans to shore up its net interest margin, a key measure of profitability. Penn Square’s energy loans looked like an excellent choice.
The early 1980s were a watershed. Paul Volcker, hired by President Carter to lead the Federal Reserve, embarked on an unprecedented effort to stop high inflation. He succeeded, but also caused the worst recession since the Depression. Oil prices peaked in spring 1981 and began to decline.
Nearly a generation of bankers had learned how to profit from pre-Volcker inflation. Some convinced themselves it was inevitable rather than a Fed policy choice. Many experts likewise believed energy prices would only go up.
Here was a classic example of discontinuity — and the dangers of assuming the future would be a replay of the recent past.
By 1982, the Oil Patch was defaulting on loans en masse and Penn Square suffered the first major bank run since the Depression.
Among the other casualties were those who bought into its loans. Continental Illinois, one of the largest banks in the nation, became the largest banking failure in American history until Washington Mutual went down in 2008.
Seafirst was mortally wounded. In June 1983, the site of its future headquarters being prepared, the onetime First Seattle Dexter Horton National Bank was acquired by Bank of America.
It was the largest interstate merger up to that time and required a special vote of the Federal Reserve.
Seafirst was allowed to keep its name until NationsBank bought BofA in 1998.
Although Penn Square provoked some legislation meant to avoid a repeat, the key lesson about reckless lending failed to stick. So did the cautionary tale of Continental Illinois’ size. Instead, bankers lusted after the profit margins in other financial sectors and determined to get bigger and break down Glass-Steagall.
Interstate compacts allowed for cross-state bank mergers, then regulators allowed truly national banks. With only a few exceptions, cities lost their local big banks.
Even before Glass-Steagall was repealed in 1999, Citibank had been allowed to acquire the brokerage Solomon Smith Barney and the insurer Travelers, breaching a wall that had existed since 1933.
Bank executives assured us that these huge ”financial supermarkets” were much stronger. In fact, the devil’s table was being set for the greatest financial collapse since the Depression.
By that time, Seafirst was only a faint echo.