I’m sending this out again, originally posted in December 2011, in honor of the conference planned for next week, May 15, at Gleacher Center in Chicago. I plan to attend and am considering a book on the failure set in today’s context.
A conference organized by the Stigler Center of the University of Chicago’s Booth School of Business with financial support from The Clearing House…
One day conference to analyze the impact of the Continental Illinois Bank’s failure and bail-out in 1984 on the development of “too big to fail” in the US and the subsequent regulatory, supervisory, and market changes that have affected expectations about perceptions of government support.
There were some parts we had to cut so I thought I would put them here.
“The men and women of Human Resources that I worked for during college taught me how to talk and dress like a businesswoman and how to eat donuts and bananas with a knife and fork.
One of the most memorable lunches in my life took place with my three female mentors at the end of my last summer before my senior year of college. I was twenty-one by then, drinking age, so we went to Nick’s Fishmarket, an enormously expensive and extremely formal place. We didn’t skimp on the cocktails. It was first time I realized how many obsequious waiters someone else’s money can buy…”
“Continental Bank shrunk in response to the money market’s continued lack of confidence in the bank after the May funding crisis. Federal regulators found no buyer so, in late July, the bank was nationalized. That contentious term was not officially used, however. The word “nationalization” was studiously avoided by regulators and the media during the current crisis, too. In April of 2010, Andrew Ross Sorkin, author of the book and HBO movie “Too Big To Fail”, and Nobel Laureate and fellow New York Times columnist Paul Krugman ended up in a public debate about whether what the federal government did to Citigroup, GM, and AIG was actually a “nationalization”.
They agreed to disagree.”
“The Congressional testimony of the OCC’s Conover in September 1984 also mentioned that the OCC had considered earlier whether it should have taken action much sooner to stop Continental from growing so quickly and, in hindsight, so recklessly. Conover testified that he believed such action would have been inappropriate but that the OCC could have placed “more emphasis on . . . evaluation and criticism of Continental’s overall management processes.”
Federal Reserve Board Governor Charles Partee is quoted in William Grieder’s 1987 book “Secrets of The Temple” saying: “To impose prudential restraints is meddlesome and it restricts profits. If the banking system is expanding rapidly, if they can show they’re making good money by the new business, for us to try to be too tough with them, to hold them back, is just not going to be acceptable.”
If that’s not enough foreshadowing of the policy prescription the Federal Reserve would deliver during the 2008 financial crisis, here’s Conover again during his testimony explaining to Congress why everyone but shareholders was made whole in the Continental Bank bailout: “…had Continental failed and been treated in a way in which depositors and creditors were not made whole, we could very well have seen a national, if not an international, financial crisis, the dimensions of which were difficult to imagine. None of us wanted to find out…”
The day after Conover’s testimony, the Wall Street Journal published an article by Tim Carrington, “U.S. Won’t Let 11 Biggest Banks in Nation Fail—Testimony by Comptroller at House Hearing Is First Policy Acknowledgement”. A later academic study by O’Hara and Shaw (1990) documented a rise in the share prices of the eleven banks identified by the Comptroller of the Currency that day as “too big to fail”.”
Many of the professionals who mentored me in the early 80’s are still working in banking, professional services, and private equity in Chicago.
Continental Illinois National Bank and Trust Co. of Chicago would have been 155 years old next year. You may be surprised to hear me praise this institution so highly. But it was my first real job and the place where I learned how to be a professional, including how to be professionally skeptical.
Continental Bank’s auditor was Ernst & Young.
Read the rest at American Banker. And, please, leave a comment!