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Continental Illinois

From Wikipedia, the free encyclopedia

Continental Illinois National Bank and Trust Company of Chicago
IndustryBank holding company
FateInsolvency; seized by the FDIC, ultimately sold to BankAmerica
SuccessorBank of America
Founded1910
Defunct1994
HeadquartersChicago, Illinois, United States
ProductsFinancial services

The Continental Illinois National Bank and Trust Company was at one time the seventh-largest commercial bank in the United States as measured by deposits, with approximately $40 billion in assets. In 1984, Continental Illinois became the largest ever bank failure in U.S. history, when a run on the bank led to its seizure by the Federal Deposit Insurance Corporation (FDIC). Continental Illinois retained this dubious distinction until the failure of Washington Mutual in 2008 during the financial crisis of 2008, which ended up being over seven times larger than the failure of Continental Illinois.[1][2][3]

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  • ✪ Should Government Bail Out Big Banks?
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Transcription

In 2008, America experienced the biggest meltdown of its financial sector since the Great Depression. The conventional wisdom is that this failure and subsequent government rescue, commonly known as "the bailout" was brought about by three decades of bank de-regulation. There were a lot of causes for the meltdown, but deregulation wasn't one of them. Ironically, it wasn't because the banks had become unmoored from government control that led them into the financial storm, it was because they had become too closely tied to government. For three decades Uncle Sam, like an enabling parent, had always "been there" when the big banks got into trouble. The shock in 2008 was that for one brief moment, Uncle Sam wasn't there. In the wee hours of September 15, 2008, Lehman Brothers filed for bankruptcy. The financial industry waited for the Feds to step in and save Lehman bondholders like it saved those of Bear Stearns some months earlier. That didn't happen. Global financial markets seized up. As the Dow Jones Industrial average fell 498 points, or nearly 4.4 percent, financial institutions effectively went on strike. Banks wouldn't lend money to other banks and thus, indirectly, to the public because they had no idea which financial institution might go belly up next. The economy can withstand a stock-market crash, but a credit-market freeze -- essentially a cash freeze -- can cause a Depression, as credit underpins almost all business and personal activities. Indeed, some large companies, including General Electric, were so dependent on these short-term credit markets that they were in danger of not being able to pay their workers. The financial industry pleaded with the government to act. Later in the same day, September 15, it did. The Feds wouldn't save Lehman's but it would save AIG, the primary insurer of mortgage loans. A month later, the Troubled Asset Relief Program (TARP), a $700 billion plan to pump taxpayer cash into America's banks and financial institutions was approved by Congress. Public officials generally agreed that the free market had failed. In November 2008, President George W. Bush came to New York to explain why he, a Republican president, had signed TARP into law. "I'm a market-oriented guy, but not when I'm faced with the prospect of a global meltdown," he said. But free-market capitalism had not melted down. Again, the problem was not that banks had been too free, but that they had grown too dependent on government over the last few decades. Here's a brief history. America's first post-Depression bailout of a big bank came in 1984 when the Republican administration of Ronald Reagan, with help from the Federal Reserve bailed out Continental Illinois, the eighth largest commercial bank in the nation. The bailout introduced the phrase "too big to fail" to the financial media's vocabulary. The premise for rescuing Continental was simple: the bank had many global bondholders, big investors, and the government feared that the bondholders might pull their money out of all American banks if they saw that a bank like Continental could fail. That might have stemmed a short-term panic, but it created a long-term monster. The government had effectively said to financial markets: if you lend money to a big bank, it's just like lending money to the U.S. Treasury -- only it's better because the banks will pay you more interest than you can get from your Treasury bonds. And so money poured in from investors. The banks got bigger... and more reckless. And when the next crisis rippled through the financial industry, there was Uncle Sam, ready with his checkbook. In 1998 the government, this time under Democrat Bill Clinton bailed out Long-Term Capital Management, a hedge fund that teetered at the edge of bankruptcy and threatened to drag some big banks down with it. The message to the banks was clearer than ever: take bigger risks. Uncle Sam would be there, if any thing went wrong. Indeed, as I noted, early in the crisis, in March 2008, the government brokered the purchase of the Bear, Stearns investment bank (to JP Morgan) to save its bondholders and other creditors from suffering huge losses. And that summer, Washington rescued Fannie Mae and Freddie Mac, the giant government sponsored mortgage companies. It's the fact that the government didn't rescue Lehman Brothers that set off the 2008 panic because the financial world simply assumed that Uncle Sam would. Would we have been better off had the government saved Lehman's? Maybe in the short run. But it's likely that crisis would have occurred anyway. Because banks assumed that the government would always bail them out, their risk models by 2008 were all out of whack; conservative practices, like lending only to credit-worthy borrowers, a relic of the past. What's the solution? How do we bring sanity back to the financial industry? Not by passing thousands of new regulations. The banks' army of accountants, lawyers and lobbyists can always work their way around those. The solution is that the government must stop guaranteeing the big banks' losses. Only then will bondholders, the big investors like pension funds and insurance companies, who lend the financial sector the money they need to operate, have an incentive to police the industry. It's that simple. I'm Nicole Gelinas, a senior fellow at the Manhattan Institute, for Prager University.

Contents

History

Early history

The neo-classical Continental Illinois Bank Building at 231 South LaSalle Street in Chicago, Illinois
The neo-classical Continental Illinois Bank Building at 231 South LaSalle Street in Chicago, Illinois

Continental Illinois can be traced back to two Chicago banks, the Commercial National Bank, founded during the American Civil War, and the Continental National Bank, founded in 1883.

In 1910 the two banks merged to form the Continental & Commercial National Bank of Chicago with $175 million in deposits – a large bank at the time. In 1932 the name was changed to the Continental Illinois National Bank & Trust Co.[4]

Insolvency

In May 1984,[5][failed verification] Continental Illinois became insolvent due, in part, to bad loans purchased from the failed Penn Square Bank N.A. of Oklahoma—loans for oil and gas producers and service companies and investors in the Oklahoma and Texas oil and gas boom of the late 1970s and early 1980s. Due diligence was not properly conducted by John Lytle, an executive in the Mid-Continent Division of oil lending, and other leading officers of the bank. Lytle later pleaded guilty to a count of defrauding Continental of $2.25 million and receiving $585,000 in kickbacks for approving risky loan applications. Lytle was sentenced to three and a half years in a federal prison. The Penn Square failure eventually caused a substantial run on the bank's deposits once it became clear Continental Illinois was headed for failure. Large depositors withdrew over $10 billion of deposits in early May 1984.[6] In addition, the bank was destabilized by massive losses from an options firm it had just acquired, First Options Chicago (FOC), a leading clearinghouse operation. FOC guaranteed that trades will settle, but found during the market's crash in October 1987 that many customers could not meet their margin calls, forcing FOC to step in to settle with cash or the underlying securities to complete the trade. This meant Continental absorbed massive risks on behalf of FOC customers, in the period leading up to a major stock market crash. Nassim Nicholas Taleb summarized the practice "...(FOC) were so incompetent... they netted exposure by traders, not realizing that the (sic) trader that goes bust, the trader making money isn't going to write (FOC) a check".[7] Ultimately, this meant that Continental Illinois had to infuse $625M in emergency cash to keep its $135M FOC investment afloat.[8] The FOC crisis, and the extent to which it may have jeopardized Continental Illinois; the banking system; and the financial markets as a whole, was the subject of a hearing by the Subcommittee on Oversight and Investigations of the House Committee on Energy and Commerce, headed by Rep. John Dingell (D., Mich.), in 1988.[9]

FDIC rescue

Due to Continental Illinois' size, regulators were not willing to let it fail.[10] The Federal Reserve and Federal Deposit Insurance Corporation (FDIC) feared a failure could cause widespread financial trouble and instability. To avert this, regulators prevented the loss of virtually all deposit accounts and even bondholders. The FDIC infused $4.5 billion to rescue the bank. According to Daniel Yergin in The Prize: The Epic Quest for Oil, Money, and Power (1991), "The Federal Government intervened, with a huge bail-out—$5.5 billion of new capital, $8 billion in emergency loans, and, of course, new management."[11] A willing merger partner had been sought for two months but could not be found. Eventually, the board of directors and top management were removed.[12][13] Bank shareholders were substantially wiped out, although holding-company bondholders were protected. Until the seizure of Washington Mutual in 2008, the bailout of Continental Illinois under Ronald Reagan was the largest bank failure in American history.

The term "too big to fail" was popularized by Congressman Stewart McKinney in a 1984 Congressional hearing, discussing the FDIC's intervention with Continental Illinois.[14] The term had previously been used occasionally in the press.[15]

Emergence from FDIC majority ownership

Continental Illinois was renamed Continental Bank. It continued to exist, with the federal government effectively owning 80% of the company's shares and having the right to obtain the remainder (ultimately exercised in 1989) if losses in the rescue exceeded certain thresholds. The federal government gradually disposed of its ownership interests in Continental Bank, completing the process on June 6, 1991. In 1994, Continental Bank was acquired by BankAmerica in order to broaden the latter's midwestern presence. In 2007, successor bank firm Bank of America has a retail branch and hundreds of back-office employees at Continental's former headquarters on South LaSalle Street in Chicago. Bank of America operates dozens of retail branches in the Chicago area and purchased LaSalle Bank in 2007 to expand its Chicago business and several lines of corporate and investment banking business. In 1984 the Town and Country Mastercard, issued by Continental Illinois Bank, assets were sold to Chemical Bank of New York including the remote credit card servicing centers in Hoffman Estates and Matteson Illinois. After moving the credit card staff out of the Continental facility, the operations were reopened at a new facility and rebranded Chem Credit Services later in 1984.

Continental Illinois Venture Corporation, an investment subsidiary of the bank, formed a semi-independent private equity firm, CIVC Partners, with backing from Bank of America.

Silver dollar holdings

Part of the bank's required reserves were held in silver dollars, which provided the opportunity to profit from a rise in silver prices. The holdings, estimated to be 1.5 million silver dollars, was sold to a coin dealer to raise money in the early 1980s.[16][17]

See also

References

  1. ^ Dash, Eric; Sorkin, Andrew Ross (September 26, 2008). "Government Seizes WaMu and Sells Some Assets". The New York Times. p. A1. Retrieved 2008-09-26.
  2. ^ "Washington Mutual sold to JPMorgan Chase after FDIC seizure". KING 5 TV. 2008-09-26. Archived from the original on September 26, 2008. Retrieved 2008-09-26.
  3. ^ DeSilver, Drew (2008-09-26). "Feds seize WaMu in nation's largest bank failure". Seattle Times. Retrieved 2008-09-26.
  4. ^ Wilson, Mark R. "Continental Illinois National Bank & Trust Co." in Porter, Stephen R. & Reiff, Janice L. eds. (2004-05). Encyclopedia of Chicago. Chicago: Chicago Historical Society/Newberry Library, University of Chicago Press. ISBN 0-226-31015-9. Accessed 2009-10-28.
  5. ^ Gorner, Peter. "Bank Deal Tied To Pope's Death?" Ottawa Citizen (June 12, 1984)
  6. ^ Some of this is detailed in the books Funny Money by Mark Singer (New York: Knopf, 1985, ISBN 0671502484) and Belly Up: The Collapse of the Penn Square Bank by Philip Zweig (New York: Crown, 1985, ISBN 0517557088).
  7. ^ Interview "Nassim Taleb on Black Monday, Fed, Market Lessons" .Bloomberg TV (October 26, 2017)
  8. ^ Archive "Losses at options unit hurt Continental Illinois?" The New York Times (October 20, 1987)
  9. ^ Atlas, Terry "1st Options` Loss Was $112 Million". Chicago Tribune (October 20, 1987)
  10. ^ Wall, Larry D.; Peterson, David R. (1990). "The effect of Continental Illinois' failure on the financial performance of other banks". Journal of Monetary Economics. 26 (1): 77–99. doi:10.1016/0304-3932(90)90032-y.
  11. ^ Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991. ISBN 0-671-50248-4. p. 732.
  12. ^ Division of Research and Statistics (1997). "Continental Illinois and 'Too Big to Fail'". History of the Eighties — Lessons for the Future (PDF). Washington, D.C.: Federal Deposit Insurance Corporation. ISBN 0-9661808-0-1.
  13. ^ "Continental Illinois National Bank and Trust Company". Managing the Crisis: The FDIC and RTC Experience, 1980–1994 (PDF). Washington, D.C.: Federal Deposit Insurance Corporation. 1998. ISBN 0-9661808-2-8. Archived from the original (PDF) on 2003-06-24.
  14. ^ Dash, Eric (2009-06-20). "If It's Too Big to Fail, Is It Too Big to Exist?". The New York Times. Retrieved 2009-06-22.
  15. ^ Stern, Gary H.; Feldman, Ron J. (2004). Too Big to Fail: The Hazards of Bank Bailouts. Brookings Institution Press. ISBN 0-8157-8152-0.
  16. ^ Professional Coin Grading Service See paragraph "The Continental-Illinois Bank Hoard"
  17. ^ Highfill, John W. The Comprehensive U.S. Silver Dollar Encyclopedia ISBN 0-9629900-0-0

External links

This page was last edited on 16 November 2019, at 19:05
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