The Feds come to the rescue of failing Continental Illinois
Huddled behind closed doors in Washington for the past two months, federal officials and bankers feverishly drafted a plan for the biggest bailout of a private company in U.S. history. The group of three dozen rescuers shuttled from one drab Government conference room to another, working 120-hr, weeks and pausing only occasionally to munch on fried chicken or hamburgers. Until the last minute, dozens of details were still undecided. But finally, William Isaac, chairman of the Federal Deposit In surance Corp., announced at a Washington press conference that the FDIC would put up $4.5 billion to rescue Chicago's failing Continental Illinois Bank. The commitment dwarfs the biggest previous U.S. bailout, the Government's 1979 guarantee to Chrysler of more than $1.2 billion in loans.
Since early May, Continental has been eroded by the most relentless run on a major bank since the Great Depression. At least one-third of its $30 billion in deposits has drained away. Despite an unprecedented $7.5 billion in emergency loans from the Government and 28 private banks, the outflow could not be stemmed. The banking system's difficulties in helping one of its key institutions have diminished public confidence in all U.S. banks. Even though each deposit up to $100,000 in a federally chartered financial institution is insured, many Americans began wondering about the safety of the money in their banks. Financiers feared that the failure of Continental, once the eighth-largest U.S. bank, could spark a chain reaction of similar collapses and set off financial panic.
The highly complex plan announced last week calls for the FDIC to hold 80% of Continental's stock. The agency hopes to create a more solid bank by shrinking the institution to less than three-fourths its former size. The bank will sell the FDIC $4.5 billion worth of its bad loans for $3.5 billion, taking a $1 billion loss on the deal. In addition, the agency will give Continental another $1 billion to put it in better financial shape. In a final sign of support, the FDIC stated, "If, for any reason, the permanent assistance package proves to be insufficient, the FDIC will commit additional capital or other forms of assistance as may be required."
The huge bailout represented a painful step for the Reagan Administration, which is philosophically opposed to Government intervention to save failing firms. Treasury Secretary Donald Regan described the structure of the bailout as "bad public policy," because it puts a federal agency out on a limb to protect private investors. In a 4½-page memorandum to the heads of the three federal agencies that regulate the banks—Isaac, Comptroller of the Currency C.T. Conover and Federal Reserve Chairman Paul Volcker—Regan argued that the action was "implicitly extending a U.S. Government guarantee to all bank holding-company creditors."