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While other industries enjoyed a banner year, banking endured some of its bleakest times since the Great Depression. Saddled with shaky loans to oil drillers, farmers and foreign governments, major banks suffered a 30% decline in profits during the first three quarters of 1984, and 79 institutions failed. In addition, Government regulators put 817 of the 14,700 U.S. banks on their "problem list." The worst problem was Continental Illinois, which started the year as the seventh largest U.S. bank. It would have collapsed under its bad loans if the U.S. Government had not provided a $4.5 billion bailout in July. Federal regulators took control of the bank, installed new management and fired most of the directors.
Such intervention went against the Administration's free-market philosophy, but regulators feared the stability of the entire financial system was in jeopardy. Said one top Federal Reserve official: "We did not know what would happen if we didn't rescue Continental. We could not take the risk." When Continental's fate was in doubt, the jitters affected even solid institutions. Manufacturers Hanover, for example, watched its stock price drop by nearly 11% in one day because of an unfounded rumor that it was in trouble.
High on the bankers' 1984 worry list were their loans to Latin American nations, which staggered under a $350 billion debt burden. In June representatives of the debtor countries huddled in Cartagena, Colombia, raising fears that they would form a cartel to bargain collectively for easier terms. Warned Colombian President Belisario Betancur: "We hear the far-off thunder of violent drums. We feel the winds of storms." Despite such rhetoric, most of the debtors chose negotiation over confrontation. Mexico persuaded the banks to stretch out its payments on $48 billion in loans, originally due between now and 1990, over 14 years at reduced interest rates. Brazil is seeking similar concessions. Argentina, however, played financial chicken with the banks, coming close to default. A day before one deadline, the country was bailed out by loans from several of its debt-ridden neighbors, including Mexico and Brazil. Argentina finally consented to an economic adjustment program overseen by the International Monetary Fund. In return, the IMF agreed to lend the country more than $1.6 billion.
The banks' troubles called into question the whole issue of deregulating the financial industry. Banks in recent years have gained new freedom to pay whatever interest rates they wish, move into different businesses like stock brokerage and open offices across state lines. After the banks' poor performance this year, critics are asking whether the institutions can safely handle so many swift changes. Several members of Congress are talking about slowing the pace of deregulation.
Some airlines are also discovering that deregulation is not always dandy. Since the industry was given increased freedom to set fares and pick routes in 1978, People Express and other new, cut-rate carriers have started shootouts in the skies. While such airlines as American, United and Delta reported strong profits in 1984, several others, including Pan American, Eastern, Western and Frontier, posted losses.