Creature From Jekyll Island by G. Edward

'Inside the bank, all was calm, the teller lines moved as always, and bank officials recall no visible sign of trouble—except in the wire room. Here the employees knew what was happening as withdrawal order after order moved on the wire, bleeding Continental to death. Some cried.'2

This was the golden moment for which the Federal Reserve and the FDIC were created. Without government intervention, Continental would have collapsed, its stockholders would have been wiped out, depositors would have been badly damaged, and the financial world would have learned that banks, not only have to talk about prudent management, they actually have to adopt it.

Future banking practices would have been severely altered, and the long-term economic benefit to the nation would have been enormous. But with government intervention, the discipline of a free market is suspended, and the cost of failure or fraud is politically passed to the taxpayers. Depositors continue to live in a dream world of false security, and banks can operate recklessly and fraudulently with the knowledge that their political partners in government will come to their rescue when they get into trouble.

FDIC GENEROSITY WITH TAX DOLLARS

One of the challenges at Continental was that, while only four per cent of its liability was covered by FDIC 'insurance,' the regulators felt compelled to cover the entire exposure. Which means that the bank paid insurance premiums into the fund based on only four per cent of its total coverage, and the taxpayers now would pick up the other ninety-six per cent. FDIC director Sprague explains:

Although Continental Illinois had over $30 billion in deposits, 90

percent were uninsured foreign deposits or large certificates substantially exceeding the $100,000 insurance limit. Off-book 1- Chernow, p. 658.

Sprague, p. 153.

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liabilities swelled Continental's real size to $69 billion. In this massive liability structure only some $3 billion within the insured limit was scattered among 850,000 deposit accounts. So it was in our power and entirely legal simply to pay off the insured depositors, let everything else collapse, and stand back to watch the carnage.

That course was never seriously considered by any of the

players. From the beginning, there were only two questions: how to come to Continental's rescue by covering its total liabilities and, equally important, how to politically justify such a fleecing of the taxpayer. As pointed out in the previous chapter, the rules of the game require that the scam must always be described as a heroic effort to protect the public. In the case of Continental, the sheer size of the numbers made the ploy relatively easy. There were so many depositors involved, so many billions at risk, so many other banks interlocked, it could be claimed that the economic fabric of the entire nation—of the world itself—was at stake. And who could say that it was not so. Sprague argues the case in familiar terms: An early morning meeting was scheduled for Tuesday, May 15, at the Fed. .. We talked over the alternatives. They were few—none really.... [Treasury Secretary] Regan and [Fed Chairman] Volcker raised the familiar concern about a national banking collapse, that is, a chain reaction if Continental should fail. Volcker was worried about an international crisis. We all were acutely aware that never before had a bank even remotely approaching Continental's size closed. No one knew what might happen in the nation and in the world. It was no time to find out just for the purpose of intellectual curiosity.

THE FINAL BAILOUT PACKAGE

The bailout was predictable from the start. There would be some preliminary lip service given to the necessity of allowing the banks themselves to work out their own problem. That would be followed by a plan to have the banks and the government share the burden. And that finally would collapse into a mere public-relations illusion. In the end, almost the entire cost of the bailout would be assumed by the government and passed on to the

taxpayer.

At the May 15 meeting, Treasury Secretary Regan spoke

eloquently about the value of a free market and the necessity of having the banks mount their own rescue plan, at least for a part of 1. Sprague, p. 184.

2. Ibid., pp. 154-55,183.

PROTECTORS OF THE PUBLIC

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the money. To work out that plan, a summit meeting was arranged the next morning among the chairmen of the seven largest banks: Morgan Guaranty, Chase Manhattan, Citibank, Bank of America, Chemical Bank, Bankers Trust, and Manufacturers Hanover. The meeting was perfunctory at best. The bankers knew full well that the Reagan Administration would not risk the political embarrassment of a major bank failure. That would make the President and the Congress look bad at re-election time. But, still, some kind of tokenism was called for to preserve the Administration's conservative image. So, with urging from the Fed and the Treasury, the consortium agreed to put up the sum of $500 million—an average of only $71 million for each, far short of the actual need. Chernow describes the plan as 'make-believe' and says 'they pretended to mount a rescue.'1 Sprague supplies the details:

The bankers said they wanted to be in on any deal, but they did not want to lose any money. They kept asking for guarantees. They wanted it to look as though they were putting money in but, at the same time, wanted to be absolutely sure they were not risking anything.... By 7:30 A.M. we had made little progress. We were certain the situation would be totally out of control in a few hours.

Continental would soon be exposing itself to a new business day, and