the stock market would open at ten o'clock. Isaac [another FDIC
director] and I held a hallway conversation. We agreed to go ahead without the banks. We told Conover [the third FDIC director] the plan and he concurred....
[Later], we got word from Bernie McKeon, our regional director in New York, that the bankers had agreed to be at risk. Actually, the risk was remote since our announcement had promised 100 percent insurance.2
The final bailout package was a whopper. Basically, the government took over Continental Illinois and assumed all of its losses.
Specifically, the FDIC took $4.5 billion in bad loans and paid Continental $3.5 billion for them. The difference was then made up by the infusion of $1 billion in fresh capital in the form of stock purchase. The bank, therefore, now had the federal government as a stockholder controlling 80 per cent of its shares, and its bad loans bad been dumped onto the taxpayer. In effect, even though 1 Chernow, p. 659.
2- Sprague, pp. 159-60.
60 THE CREATURE FROM JEKYLL ISLAND
Continental retained the appearance of a private institution, it had been nationalized.
LENDER OF LAST RESORT
Perhaps the most important part of the bailout, however, was that the money to make it possible was created—directly or indirectly—by the Federal Reserve System. If the bank had been allowed to fail, and the FDIC had been required to cover the losses, the drain would have emptied the entire fund with nothing left to cover the liabilities of thousands of other banks. In other words, this one failure alone, if it were allowed to happen, would have wiped out the entire FDIC! That's one reason the bank had to be kept operating, losses or no losses, and that's why the Fed had to be involved in the bail out. In fact, that was precisely the reason the System was created at Jekyll Island: to manufacture whatever amount of money might be necessary to cover the losses of the cartel. The scam could never work unless the Fed was able to create money out of nothing and pump it into the banks along with
'credit' and 'liquidity' guarantees. Which means, if the loans go sour, the money is eventually extracted from the American people through the hidden tax called inflation. That's the meaning of the phrase 'lender of last resort.'
FDIC director Irvine Sprague, while discussing the press release which announced the Continental bail-out package, describes the Fed's role this way:
The third paragraph ... granted 100 percent insurance to all depositors, including the uninsured, and all general creditors.... The next paragraph ... set forth the conditions under which the Fed, as lender of last resort, would make its loans.... The Fed would lend to Continental to meet 'any extraordinary liquidity requirements.' That would include another run. All agreed that Continental could not be saved without 100 percent insurance by FDIC and unlimited liquidity support by the Federal Reserve. No plan would work without these two elements.1
By 1984, 'unlimited liquidity support' had translated into the staggering sum of $8 billion. By early 1986, the figure had climbed to $9.24 billion and was still rising. While explaining this fleecing of the taxpayer to the Senate Banking Committee, Fed Chairman Paul Volcker said: 'The operation is the most basic function of the 1. Sprague, pp. 162-63.
PROTECTORS OF THE PUBLIC
61
Federal Reserve. It was why it was founded.'1 With those words, he has confirmed one of the more controversial assertions of this book.
SMALL BANKS BE DAMNED
It has been mentioned previously that the large banks receive a free ride on their FDIC coverage at the expense of the small banks.
There could be no better example of this than the bail out of Continental Illinois. In 1983, the bank paid a premium into the fund of only $6.5 million to protect its insured deposits of $3 billion. The actual liability, however—including its institutional and overseas deposits—was ten times that figure, and the FDIC guaranteed payment on the whole amount. As Sprague admitted, 'Small banks pay proportionately far more for their insurance and have far less chance of a Continental-style bailout.'2
How true. Within the same week that the FDIC and the Fed
were providing billions in payments, stock purchases, loans, and guarantees for Continental Illinois, it closed down the tiny Bledsoe County Bank of Pikeville, Tennessee, and the Planters Trust and Savings Bank of Opelousas, Louisiana. During the first half of that year, forty-three smaller banks failed without an FDIC bailout. In most cases, a merger was arranged with a larger bank, and only the uninsured deposits were at risk. The impact of this inequity upon the banking system is enormous. It sends a message to bankers and depositors alike that small banks, if they get into trouble, will be allowed to fold, whereas large banks are safe regardless of how poorly or fraudulently they are managed. As a New York investment analyst stated to news reporters, Continental Illinois, even though it had just failed, was 'obviously the safest bank in the country to have your money in.'3 Nothing could be better calculated to drive the small independent banks out of business or to force them to sell out to the giants. And that, in fact, is exactly what has been happening. Since 1984, while hundreds of small banks have been forced out of business, the average size of the banks which remain—with government protection—has more than
doubled. It will be recalled that this advantage of the big banks p~Quoted by Greider, p. 628.
~ Sprague, p. 250.
New Continental Illinois Facing Uncertain Future,' by Keith E. Leighty, Associated Press, Thousand Oaks, Calif.,
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