The FDIC and the Continental Illinois Bank Bail Out
Executive Summary
- The bail out of Continental Illinois Bank by the FDIC provides important clues for the FDIC really operates.
Introduction
The bailout of Continental Bank illustrates how corrupt the FDIC is by the private banking sector.
How the FDIC Was Pressured into Overcovering the Continental Bank Failure
The FDIC was pushed into overcovering the Continental Bank failure, and far more than the bank paid into the FDIC.
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 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.
Source: Creature From Jekyll Island
https://www.scribd.com/doc/54912935/The-Creature-from-Jekyll-Island-G-Edward-Griffin
One might ask, if there are such interlocking risks, then why did the government just not take over the bank and make it a government-run bank? These questions are never asked. Instead, the FDIC normally places the banks they save back into private hands.
How The Contential Bank Failure Was Kept From Wiping Out the FDIC Reserves
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
Source: Creature From Jekyll Island
This is a critical point. The FDIC lacks the reserves to bail out a bank of significant size, and they will coordinate with the Fed, which can create as much money as it wants and has an incentive to protect banks and their management at the expense of the public. In this relationship between the FDIC and the Fed, the Fed is the senior partner, and the FDIC is essentially a lacky of the private banking interests.
This gets to the next important point.
A Government Agency or Controlled by the Fed?
The problem with the FDIC is that while they are a government agency, they are to a great deal remotely controlled by the Fed, which is not a government agency.
This is explained in the following quotation.
The directors of the FDIC did not want to cross swords with the Federal Reserve System, and they most assuredly did not want to be blamed for tumbling the entire world economic system by allowing the first domino to fall. “The theory had never been tested,” said Sprague. “I was not sure I wanted it to be just then.”2 So, in due course, a bailout package was put together which featured a $325 million loan from FDIC, interest free for the first year and at a subsidized rate thereafter; about half the market rate. Several other banks which were financially tied to First Penn, and which would have suffered great losses if it had folded, loaned an additional $175 million and offered a $1 billion line of credit. FDIC insisted on this move to demonstrate that the banking industry itself was helping and that it had faith in the venture. To bolster that faith, the Federal Reserve opened its Discount Window offering low-interest funds for that purpose. The outcome of this particular bailout was somewhat happier than with the others, at least as far as the bank is concerned. At the end of the five-year taxpayer subsidy, the FDIC loan was fully repaid. The bank has remained on shaky ground, however, and the final page of this episode has not yet been written. CONTINENTAL ILLINOIS Everything up to this point was but mere practice for the big event which was yet to come. In the early 1980s, Chicago’s Continental Illinois was the nation’s seventh largest bank. With assets of $42 billion and with 12,000 employees working in offices 1. Sprague, pp. 88-89. 2. Ibid., p. 89.
Source: Creature From Jekyll Island
Why Did and Does the FDIC Care What the Fed Wants?
This brings up an interesting question. Why is a government agency being remotely controlled by the Fed, which is a cabal of private banking interests? This brings up an extra problem with the central bank being entirely private. It means due to their centrality in the financial system, that they have great influence over any financial regulation that the government seeks to impose. This same issue came up with the Commodities Futures Trading Commission, which was pressured not to regulate derivatives by then Chairman Allan Greenspan. By not regulating these derivatives, eventually led to the subprime mortgage crisis of 2007 2008.
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 over their smaller competitors was also one of the objectives of the Jekyll Island plan. Perhaps the most interesting—and depressing—aspect of the Continental Illinois bailout was the lack of public indignation over the principle of using taxes and inflation to protect the banking industry. Smaller banks have complained of the unfair advantage given to the larger banks, but not on the basis that the government should have let the giant fall. Their lament was that it should now protect them in the same paternalistic fashion. Voters and politicians were silent on the issue, apparently awed by the sheer size of the numbers and the specter of economic chaos. Decades of public education had left their mark. After all, wasn’t this exactly what government schools have taught is the proper function of government? Wasn’t this the American way? Even Ronald Reagan, viewed as the national champion of economic conservatism, praised the action. From aboard Air Force One on the way to California, the President said: “It was a thing that we should do and we did it. It was in the best interest of all concerned.”1 The Reagan endorsement brought into focus one of the most amazing phenomena of the 20th century: the process by which America has moved to the Left toward statism while marching behind the political banner of those who speak the language of opposing statism.
Source: Creature From Jekyll Island