Continental Illinois: A Bank That Went from Boom to Bust

Continental Illinois was a bank that experienced a meteoric rise in the 1980s, but ultimately faced bankruptcy in 1984.

The bank's growth was fueled by its aggressive lending practices, which led to a significant increase in assets.

By 1984, Continental Illinois had become the seventh-largest bank in the United States, with over $40 billion in assets.

Continental Illinois became insolvent in May 1984 due to bad loans purchased from the failed Penn Square Bank N.A. of Oklahoma.

These loans were for oil and gas producers, service companies, and investors in the Oklahoma and Texas oil and gas boom of the late 1970s and early 1980s.

Due diligence was not properly conducted by John Lytle, an executive in charge of oil lending, and other leading officers of the bank.

Lytle pleaded guilty to defrauding Continental of $2.25 million and receiving $585,000 in kickbacks for approving risky loan applications.

He was sentenced to three and a half years in a federal prison.

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The Penn Square failure caused a substantial run on the bank's deposits, with large depositors withdrawing over $10 billion in early May 1984.

Continental Illinois also absorbed massive risks on behalf of an options firm it had acquired, First Options Chicago (FOC), which guaranteed that trades would settle.

However, FOC customers couldn't meet their margin calls, forcing Continental to infuse $625M in emergency cash to keep its $135M FOC investment afloat.

The FDIC's involvement in Continental Illinois was a pivotal moment in the bank's history. Regulators intervened to prevent a failure that could have caused widespread financial trouble and instability.

The FDIC infused $4.5 billion to rescue the bank, and regulators also provided $5.5 billion in new capital and $8 billion in emergency loans. This massive bail-out was the largest bank failure in American history until the seizure of Washington Mutual in 2008.

The term "too big to fail" was popularized by Congressman Stewart McKinney in a 1984 Congressional hearing, discussing the FDIC's intervention with Continental Illinois. This term would go on to become a common phrase in financial discussions.

The FDIC effectively owned 80% of Continental Illinois' shares after the rescue, and had the right to obtain the remainder if losses exceeded certain thresholds.

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The rescue of Continental Illinois was a massive undertaking that required the intervention of the Federal Reserve and FDIC. The FDIC infused $4.5 billion to rescue the bank, with regulators fearing a failure could cause widespread financial trouble and instability.

Regulators took drastic measures to prevent the loss of virtually all deposit accounts and even bondholders. Bank shareholders were substantially wiped out, although holding-company bondholders were protected.

The term "too big to fail" was popularized by Congressman Stewart McKinney in a 1984 Congressional hearing, discussing the FDIC's intervention with Continental Illinois. This concept would become a topic of much debate in the years to come.

The federal government effectively owned 80% of Continental Bank's shares after the rescue, with the right to obtain the remainder if losses exceeded certain thresholds.

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