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Flashbacks
This year marks American Banker's 175th anniversary. To commemorate the milestone, we've dug into our archives to bring readers highlights from our coverage of pivotal moments in U.S. banking history. In addition to this series, look for our special 175th anniversary edition this fall.
1987
Greenspan Urges Glass-Steagall Repeal
WASHINGTON, Nov. 19 — Federal Reserve Board Chairman Alan Greenspan urged Congress on Wednesday to strike down barriers that have kept bank holding companies out of the securities underwriting business.
In an appearance before a House Banking subcommittee, Mr. Greenspan said repeal of the Glass-Steagall Act would lead to lower costs and wider availability of investment banking services for businesses and state and local governments.
But he said repeatedly that bank involvement in underwriting would have only a minor impact on pricing. And he reiterated his view that healthy competition already exists within the securities industry.
Mr. Greenspan's testimony — his first before Congress since the stock market plunge — provided the greatest detail to date of his stand on Glass-Steagall and banking deregulation since he became Fed chairman in August.
Among the federal banking agencies' stands on banking powers, only the Fed's has remained largely obscure, and Mr. Greenspan's remarks on Wednesday are expected to lend strong support to current legislative efforts under way by the Senate Banking Committee to move banks further into the securities business.
In its pursuit of expanded securities powers, the banking industry has argued that oligopolistic conditions exist for a number of instruments, such as commercial paper. Moreover, banks have argued that their participation in underwriting would drive down prices dramatically.
A number of subcommittee members expressed concern about the degree of risk banks would assume if they entered the underwriting business. Mr. Greenspan acknowledged that underwriting and dealing in securities is at the very least somewhat more risky than traditional commercial lending.
In part, that is because earnings from underwriting are more volatile than those obtained in lending, the central bank chairman said. That risk may be offset, though, by the generally higher profitability of investment banking, he said. Risk also arises because of the secondary market support that underwriters usually provide to clients, he said.
Mr. Greenspan said bank involvement in underwriting would not dramatically affect either the price of underwriting services or bank industry profits.
He said, without elaborating, that underwriting prices might decline by 10 to 30 basis points. Moreover, U.S. institutions would not become significantly more competitive internationally as a result of a Glass-Steagall overhaul, he said.
"There will be some improvement in the competitive situation," he said, "but not a great deal. There will be no tremendous change."
"What I am saying, is that if you have artificial barriers that create higher costs, I can find little to say on their behalf," he said. "So they should be eliminated."
Committee Chairman Fernand J. St Germain declined afterward to discuss his views on repealing Glass-Steagall. Subcommittee hearings on restructuring of the financial industry will resume Dec. 2 and 3 with testimony from consumer groups and banking trade associations.
Rep. Chalmers Wylie, R-Ohio, ranking minority member of the committee, said he doubts that any bill repealing Glass-Steagall would be likely to win committee approval. The only chance such a measure would have, he said, is if it passes the Senate first.
"Today, a majority of the committee would be opposed to a Glass-Steagall repeal," Mr. Wylie said. He added that he also has serious reservations about overhauling the 54-year-old act.
Most House members would prefer not to vote on a Glass-Steagall repeal, he said. "It's not a front-burner issue. There's no great crisis out there in banking that would militate in favor of a bill."
On the Senate side, however, prospects for a bill continued to brighten this week. Senate Banking Committee Chairman William Proxmire, D-Wis., and ranking committee Republican Jake Garn of Utah, moved closer to an agreement to cosponsor a bill that would repeal key sections of Glass-Steagall.
A Republican staffer said the two senators are likely to introduce a bill today.
Mr. Proxmire said he believes the Fed should have considerable authority to set capital requirements and oversee securities units. Mr. Garn, an advocate of "functional regulation," believes the Securities and Exchange Commission should handle those functions.
Similarly, Mr. Proxmire said he believes bank securities affiliates should be subsidiaries of holding companies, which are regulated by the Fed.
A number of close observers say they believe Mr. Garn will eventually conceded the point, although Mr. Proxmire may compromise as well by limiting the central bank's oversight role.
The Reagan administration and federal bank regulators said this week that they will concede to Mr. Proxmire's view that securities units should be structured within holding companies, rather than in bank subsidiaries, if that is the only way to move a bill.
Mr. Greenspan told the committee that the best way to insulate insured banks from the more risky activities of securities affiliates is to require that the securities units be owned as subsidiaries of holding companies.
Mr. Greenspan said he agrees it would probably be difficult to win approval of a Glass-Steagall measure without some kind of limits on concentration. He said the Fed would not oppose the concentration limits Mr. Proxmire has proposed — though for political rather than philosophical reasons. The Proxmire bill would prohibit mergers between the nation's largest commercial and investment banks.
Ensuring Against Losses
Requiring securities units to be owned as subsidiaries of holding companies, Mr. Greenspan said, would ensure that any losses incurred by securities affiliates would not be reflected on the books of the banks.
Moreover, he said, "it is difficult if not impossible, from a practical standpoint, for a bank to avoid assuming responsibility and liability for the obligations of its direct subsidiaries.
In order to isolate insured banks from their securities affiliates, Mr. Greenspan recommended a number of measures that he said would effectively create a "firewall."
In particular, Mr. Greenspan said rules that now prohibit extensions of credit between banks and affiliates — especially Sections 23A and 23B of the Bank Holding Act "do not work as effectively as we would like." As a result, he said, the Fed is recommending that banks be prohibited from making loans to securities affiliates or purchasing any of their assets.
Securities affiliates would still be free to borrow from their parent bank holding companies, which are not protected by federal deposit insurance. He said an exemption should be made to permit fully collateralized, intraday borrowing by securities underwriters to support U.S. government and agency securities clearing operations.
In addition, Mr. Greenspan said Congress should:
• Require securities affiliates to be adequately capitalized and to disclose to customers that their products are not federally insured.
• Bar banks from enhancing the creditworthiness of securities underwritten by affiliates through financial guarantees.
• Restrict banks from lending money to issuers of securities underwritten by affiliates for the purpose of making principal or interest payments on the securities.
• Limit officer and director interlocks between banks and securities affiliates.
• On a number of occasions, the central bank chairman declined to answer questions, noting that the board had yet to develop a consensus. In particular, he said, the board had not given him guidance on the issue of bank activity in insurance and real estate.
[Back to top]1980
Chrysler Saga, Act V: Washington Migraines
NEW YORK, Nov. 18 — Last May 30, Robert Mundheim, the U.S Treasury general counsel, arranged a mid-afternoon meeting with representatives from less than a half dozen of the world's largest banks.
For two and a half days, Mundheim had been shuttling messages between two warring factions within the Chrysler Corp.'s lending group. One one side were the Canadian banks, which had quietly arranged a separate debt restructuring agreement with Chrysler's Canadian subsidiary; on the other were the U.S. and European banks, which objected to the favorable treatment given the Canadians.
Mundheim's delicate exercise in international diplomacy had finally paid off. After two days in virtual isolation, the Canadians had agreed to meet with the other bankers. The Canadians were ready to make a concession to the other lenders, but only after being convinced that without a concession Chrysler would be allowed to go bankrupt.
In a brief, icy session — with the Canadians refusing even to shake hands with the other lenders — the compromise was ratified. Almost three weeks after a May 10 meeting in which G. William Miller, Secretary of the Treasury, told a phalanx of reporters and TV cameras that Chrysler's lenders had approved a restructuring plan, the final, nearly disastrous confrontation with foreign banks was almost over.
The Canadians had agreed to demands that they delay the amortization of their loans to Chrysler Canada, Ltd., for three years. Grudgingly they assented to begin collecting principal and interest in September, 1986, the same month in which all other lenders are scheduled to begin collections.
A 'Deal Breaker'
Under their private agreement with Chrysler, the Canadians would have started collecting at the end of 1983, almost three years before the others. It was the prospect of waiting empty-handed for three years while the Canadians collected money that encouraged the Europeans and Americans to label their dispute with the Canadians a "deal breaker."
Even with the concession, the Canadians retained favored status. They never agreed to all the covenants of the U.S. and European deal, having stated months before that the Canadian arm of Chrysler was a separate company in a separate country, with problems that required a separate Canadian solution.
One of the covenants that the Canadians did not accept was a clause that now seems virtually sure to delay collections by other lenders until 1990. Under the basic restructuring agreement the non-Canadian lenders have agreed to postpone their amortization until all loans guaranteed by the U.S. government are repaid, a condition that may not be met until 1990.
With the Canadian concession, a string of last minute compromises among Chrysler's banks was complete. Finally Chrysler had a $4.75 billion debt restructuring that could be shipped to the company's lenders with the blessing of the Federal government. It had taken more than a month to turn the debt restructuring agreement forged in two eventful weeks in early April into a document that was acceptable to the U.S. government.
Shuttle to Washington
A push to sell the debt plan to the loan board had begun April 17. At noon, about 40 lenders, lawyers and Chrysler executives boarded an Eastern Airlines shuttle from LaGuardia Airport in New York headed for Washington. Two days earlier Steve Miller, Chrysler's assistant treasurer, and a few bankers had made the same flight with depressing results, hearing for the first time of the government's strong objections to the proposed restructuring. Now they were scheduled to meet at 2 p.m. with the Treasury officers that comprised the staff of the loan guarantee board.
In the heady days of early April the banks and the company had agreed in principle on a $4.75 billion package. That agreement dramatically shifted the balance of power in the negotiations. The banks were now formally committed to a specific plan, while the government was not. The loan guarantee board's staff had gained leverage, because it had a target proposal to criticize. It could refuse the debt restructuring plan entirely or could push to extract concessions from the banks by threatening to refuse aid if the banks did not bend.
The government had already established its key bargaining points. It wanted the banks to include an equity investment in their contributions to Chrysler, and it wanted the banks to officially increase or extend their credit lines to Chrysler Financial Corp. Those were the most significant modifications of the restructuring that the government would seek in weeks of discussion.
In Whose Hands?
Before addressing those issues, a more fundamental test was to occur. The government stated in an otherwise uneventful opening meeting that it wanted to examine the details of the loan agreements. Much of what the banks and Chrysler had negotiated in April was presented to the Treasury in summary form. A large part of the final loan document, the banks assumed, would be boilerplate language. But the Treasury specialists realized the importance of the specific language of the loan agreements. A company that is nearly insolvent survives or perishes on the conditions spelled out in loan covenants. The wording of the loan would determine whether the fate of Chrysler and Chrysler Financial was in the hands of the government or in the hands of the banks.
The details of the careful negotiations on the loan covenants remain largely secret. But it is clear that when the talks began the government, which had been granted virtually complete authority over Chrysler by the Loan Guarantee Act, wanted to increase its control over Chrysler Financial. The banks had kept Chrysler Financial free of the government, and wanted it to continue that way — but they also wanted some power over Chrysler's fate.
Battle Scars Evident
When negotiations ended, the balance of control remained almost unaffected, but the scars of the battle are evident in the covenants. The most obvious sign is four brief paragraphs in the government's agreement with Chrysler that restricts its relation with Chrysler Financial.
Unable to get control over the finance company, the government obtained prohibitions on arrangements that might drain cash from the parent company into the subsidiary.
This short section freezes Chrysler Financial's contracts with, and its financial ties to, the parent and all other Chrysler subsidiaries.
The section also abridges an existing income-maintenance agreement between the parent and the subsidiary. Under the previous arrangement Chrysler was obligated to make payments to its finance subsidiary when certain of the subsidiary's financial ratios dropped to a specific level. Under the new agreement Chrysler must still advance money to Chrysler Financial, as before, but now, under most conditions, the finance company must funnel that money back to the parent as dividends. The Treasury, worried that the banks might siphon off the income-maintenance payments, forced a covenant that will keep the banks from removing those funds from Chrysler Financial.
The compromise on Chrysler Financial was developed in talks that paralleled work on Chrysler. In the Chrysler talks, the banks were attempting to obtain a covenant that would give them the right to push Chrysler into bankruptcy if the firm appeared certain to fail.
Under the conditions of the Loan Guarantee Act, the government has near complete control of Chrysler's fate. The banks wanted a fail-safe clause; they wanted a covenant that would allow them to throw Chrysler into bankruptcy over the objections of the Treasury, if Chrysler's deterioration accelerated. The Treasury staff, deeply skeptical of the bank position, objected to such a clause, and vetoes it, leaving the government and the banks in a standoff on the issue of control.
Parallel Efforts
The negotiations that led to this were frustrating for both sides. After a disappointing opening session in the cavernous Cash Room at Treasury (at which some bankers had to sit at hastily erected card tables and could not hear other speakers), the talks broke into two parallel efforts, one on Chrysler Corp., the other on Chrysler Financial, that would run for eight days.
The government was represented by the staff of the Treasury's Office of Chrysler Finance which had been working diligently on the entire private aid package for Chrysler. It had developed projections of Chrysler's future that ran beyond 1983, when the loan guarantee act expires and no further guaranteed credit extensions will be made. The staff projections showed the need for additional support for Chrysler and Chrysler Financial.
Treasury, however, was approaching the banks without having participated in previous negotiations between Chrysler and the banks, and was prepared to force its positions. The most visible member of its staff was Roger C. Altman, a young assistant secretary of the Treasury, who, along with the other staff members of the Office of Chrysler Finance, had been putting in 14-hour days to prepare the financing plan.
Altman was one of the forces behind the tough positions that Treasury was to take on Chrysler, most of which were based on a thorough analysis of the various projections provided by the company and outside consultants. Despite the validity of some of these positions, Altman quickly alienated many of the lenders. Although bright and industrious, he is instinctively distrusted by many people, and at time during the talks he displayed a bureaucratic arrogance that made it difficult for the bankers to keep their tempers and continue negotiating.
Days and Nights at the Madison
For the talks, the bankers established a headquarters in the Madison Hotel, one of Washington's poshest. They met with Treasury during the day or retired to a reserved conference room in the hotel for strategy sessions.
At meals they would share details of the negotiations, with the Chrysler negotiating forces nearly filling the Montepelier Room, the hotel's dining area. The U.S. banks and their lawyers would convene at several adjoining tables. At another table would be financial specialists from Chrysler and Chrysler Financial, while in a third grouping the insurance companies would share details of the negotiations. (The foreign banks chose to attend the Washington talks for only one day, a decision they would later regret.)
After dinner the sessions continued in suites or conference rooms, often running until early morning.
Initially, the bankers found the Treasury position vague, almost obscure. "It took us several days just to figure out what they were asking," said one negotiator. Once they found out, they often could not understand the logic behind the request. "We would ask them to explain why they wanted a specific concession," he remembers. "The answer would boil down to 'Because.'"
Sluggish Responses
Treasury found the bank responses sluggish. Said one senior Treasury official, "We would present the bankers with a position and they would ask for time to consider it. Three hour later they would return with a response."
The delays were maddening. But the banks were reaching positions by consensus and delay had to be expected. The separate negotiations, one focusing on Chrysler, the other on Chrysler Financial, were being coordinated by Leonard Rosen, special counsel to the U.S. bank committee. But the bank negotiators felt compelled to inform all the banks in Washington of any change in government positions. That process sometimes took hours, as they waited for one of the two parallel meetings to break. The Treasury staff, for its part, was rushing to complete an analysis of Chrysler's request for aid which would run almost 900 pages. That kept its staff tied up, delaying responses to the bank positions.
The frustrations intensified as the negotiations moved beyond questions of control to consideration of the government's demand for more equity and additional financing.
Before coming to Washington, the banks had thought the equity issue was dead. The company and the Treasury had suggested several times that the banks should convert outstanding debt to preferred stock, but they never pressed the issue. So, when the Treasury mentioned the issue again in the first day of Washington talks, the bank negotiators chose to ignore it, going on to other subjects. They knew such conversions would be hard to sell. Many banks have rules against such swaps, while others consider them distasteful.
But Treasury was convinced that more equity was needed in order to help Chrysler return to the public debt markets. Their calculations suggested an infusion of $1 billion or more would be needed to lower Chrysler's debt-to-equity ratio sufficiently to allow the company to sell debt privately after 1983, but the staff realized quickly that the banks would never agree to that amount, so they dropped their request to a more palatable $750 million.
Midway through the week of talk, the banks suddenly realized that Treasury was adamant on the $750 million figure. Faced with an unyielding demand from the government, the bank negotiators decided to find a way to compromise without converting outstanding debt into equity, a change they knew would not be acceptable to many lenders.
At one 4 a.m. meeting in the Madison, they developed a compromise. The banks had been toying with an obvious $300 million conversion of notes. The Pan Am accord called for the banks to accept 15% senior notes in lieu of interest payments between 1980 and 1983. By 1983 the total of those notes would exceed $300 million. It was possible, they reasoned, that if they continued to defer interest past 1983 and accepted notes that would be convertible into preferred stock, they could meet the Treasury's equity goal without touching their principal.
One of the bankers ran some rough calculations and found that at some point in late 1986 or early 1987 the deferrals would total $750 million. Since Treasury expected the guaranteed loans to remain outstanding to 1990, conversions of the notes through that date was within reason.
With Safeguards Added
The bank negotiators, led by Scott Taylor of Chase Manhattan, Garry Scheuring of Continental Illinois, Roger Vincent of bankers Trust and Rosen had a basic plan to take to Treasury. They added some safeguards, however. Conversions would not begin until 1984 and only then if Chrysler had met certain financial tests: It would have to be making money, and be unencumbered by bankruptcy proceedings. In addition, its 1981 sales of K-cars would have to equal at least two-thirds of planned production for the model year.
The Treasury accepted the compromise, after some resistance, but added a vital clause to its agreement with Chrysler: the board can force Chrysler to use the conversion option at any point after 1983.
A similar compromise was worked out for Chrysler Financial. The Treasury wanted additional financing to insure that after 1983 the finance company would be able to finance the projected sale of Chrysler's autos.
The banks and the company argued that if the Chrysler cars were selling well, the finance company would have no trouble arranging new debt. Treasury saw the logic of such a proposal, but stuck to its position. It wanted the financing assured. Unable to establish new credit lines, the banks proposed to extend the maturity of several existing agreements to buy accounts receivable that would have expired in the early 1980s. That, Treasury agreed, would provide the needed financial flexibility.
The Canadian Problem
With those compromises, the bank agreement was complete. It became the centerpiece of a private support package for Chrysler that consisted of $680 million of lender aid, $723 million of proposed asset sales, $150 million from dealers and suppliers, $400 million from various governments and $456 million from deferred pension contributions.
The loan agreements were not yet signed, the assets remained unsold and the government aid was still pending, but only one problem was occupying the U.S. government. Canada was expected to aid Chrysler, and its support was considered critical because the Canadian banks had made their support conditional on an aid package from the Canadian government. (Without the Canadian banks no debt restructuring was likely.)
On April 25, as eight days of negotiations between the U.S. banks and Treasury were ending, a rush of meetings was beginning between Chrysler and Canada. At one point in early April, Chrysler had expected the Canadian government to provide $700 million in aid to Chrysler Canada, consisting of $500 million in loan guarantees and $171 million of grants.
By April 25, the aid proposal had slipped to about $200 million, and political forces in Canada were pushing for commitments from Chrysler to guarantee jobs in the country.
A Dwindling Package
The precarious Canadian situation forced a two-week delay in the final announcement that Chrysler had qualified for aid, while company executives and bankers shuttled to Toronto and Ottawa for meetings with the government and the Canadian banks.
As talks went on, the Canadian aid package dwindled further. Finally the government, on May 9, agreed to guarantee $170 million of loans for the Canadian subsidiary. The Province of Ontario was willing to provide a $10 million matching grant to the company for research and development in Canada. In return, Chrysler had agreed to continue its Canadian operations at a size near current levels.
At last, late on Saturday, May 10, the loan guarantee board announced that Chrysler had qualified for $1.5 billion in loan guarantees, pending the signing of loan documents by its 400 lenders and the waiver of certain claims by its public debt holders.
The board had determined, as required by Congress, that Chrysler would survive through 1983. But the 888-page report it issued did not inspire confidence. The company's success and the $3 billion aid package depended, at least initially, on the success of the K-car, Chrysler's new model for 1981. The loan board's staff saw "a high degree of risk" in the Chrysler plan but expected the firm to be marginally profitable from 1981 through 1983.
Unsettling the Europeans
The board's report was supposed to end negotiations on the credit restructuring, but in their week of talks in Washington, the government and the U.S. lenders had agreed to important changes in the aid proposal. Within days, banks that were not parties to the talks were objecting.
On May 13, the European lenders met in Amsterdam to hear details of the new settlement. The found the changes from the Pan Am meeting unsettling. They did not wish to swap deferred interest notes for preferred stock, and they rebelled at the idea of owning a portion of a troubled American automaker, especially as that company had sold its European subsidiaries.
Representatives of the American banks — Ronald Drake of Irving and Scott Taylor of Chase Manhattan — attempted to explain the modifications, but the Europeans wanted a fuller justification of the Treasury's position than the American banks could provide. Algemene Bank, which had called the European meeting, adjourned the session until Friday, when Chrysler was prepared to meet with the European banks. That session would bring together the European banks and officials from the U.S. government. (In addition, European lenders to Chrysler Financial found themselves suddenly included in the restructuring, and they wanted someone to explain why, prompting the U.S. bank negotiations on Chrysler Financial to fly to Amsterdam.)
The second Amsterdam session went "better than we expected," said one banker, as Roger Altman laid out the Treasury's position on issues, but it did not settle European objections to the credit. Steve Miller, Chrysler's assistant treasurer and James D. Wolfensohn, financial advisor to Chrysler and a general partner in Salomon Brothers, attempted to win over some dissenters through a whirlwind tour of five major European cities in five days, but that also proved frustrating.
Big Miller Talks
While the European meetings were going on, a group of American bankers flew to Toronto to meet with the Canadian bankers. In the two-week delay of the government announcement, the U.S. banks had discovered just how separate the Canadian bank agreement with Chrysler was. The Canadians appeared to be getting money out faster than the other lenders, they were not to be stuck with preferred stock, they had security for their loans and they had a more flexible interest-rate formula than the other banks. Chrysler and the government had accepted that package, but the U.S. banks found it unappealing.
To settle the U.S.-Canadian difference and the European doubts, Treasury called a second session of negotiations in Washington for May 28, inviting any lender with questions about the restructuring.
Some 140 dubious lenders arrived to hear G. William Miller, Secretary of the Treasury, open the talks. The negotiators expected a few general opening remarks from Miller and were surprised when the "brief remarks" turned into a 45-minute working session. "He was very effective," said one banker who feels that a number of uncommitted banks swung to the support of the credit because of Miller's explanations of why the nation needed a Chrysler package.
Other Concessions
Other banks wanted changes in the credit. Europeans felt they had to gain additional concessions, and went to Washington with a list of objections, some major and some minor. They had chosen to defer a relatively large amount of interest and would, therefore, pick up a good chunk of preferred stock. In earlier talks they had pressed unsuccessfully for pricing equal to the U.S. banks. The U.S. banks had compensating balances, while the Europeans did not. The balances added about 1 ½ % to the annual U.S. bank return.
With the government mandated option on preferred stock, the Europeans pressed this point again, this time with more success. They won a few minor concessions including a change in the calculation of their base lending rate, and got fees that will be charged after 1984 which will raise their annual return by about 1 ½ %.
To gain these changes, however, the Europeans had to go around Altman to Robert Carswell, deputy secretary of the Treasury and the senior Treasury officer with day-to-day responsibility for the negotiations. One European banker said Carswell's involvement stemmed from a brief session attended by the Europeans at which Altman announced perfunctorily that all questions about Chrysler Financial had been settled. The Europeans, with a list of objections to the Chrysler Financial restructuring plan, had never been allowed to discuss their objections. They were furious and told Altman so, ending up chasing him down a hallway to ask for a meeting with either Carswell or G. William Miller.
More Complications
One of the issues that had not been resolved was a long-brewing controversy over debt to Chrysler Financial. In October, when the U.S. banks reduced their loan commitments to the finance company by 35%, several European banks quietly negotiated similar reductions in credit commitments. When that became known, other European banks were furious, arguing that either those few banks had to raise their credit lines up to their original levels, or other banks had to be awarded similar reductions. At a final meeting in Washington the banks that had reduced their credits agreed to reinstate their lines to Chrysler Financial, but not until 90 days after the loan restructuring agreement was signed.
A smaller problem arose with seven Japanese trust banks. Their loan of about $26 million was to be amortized shortly after 1983. They objected to stringing it out until 1987. In talks complicated by language barriers and long-distance communications, the U.S. banks allowed them to "snow-plow" their amortization. They would not collect principal until the end of 1983, but would then collect it in a very short period.
Finally, for two days, the Canadians and the U.S. banks faced off in a stalemate finally broken by the realization that without a compromise between them the deal would collapse.
400 Signatures
The Canadians had proved to be tough negotiators, perhaps the toughest bargainers of all during the eleven-month negotiations. They had set off $60 million of Chrysler's deposits, fashioned a unique secured credit and had held those gains. "They were never co-opted," says one admiring banker. "They stayed away from the talks and they won their points."
Now, all that remained was to obtain signatures from the 400 lenders. This would not be easy. There were dissidents. A German bank, Deutsche Genossenschaftsbank AG, had startled the banking group by attempting a setoff in mid-May. They had claimed an $8 million payment from a Chrysler supplier and used it to reduce their exposure to the automaker.
A half dozen other banks had taken Chrysler to court and perhaps 20 had expressed opposition to the restructuring.
Chrysler had enough money to last about two weeks, but not much longer. The U.S. banks were not going to abandon their bottom-line condition, though. Since August they had been thumping the drum of unanimity, pushing for a rule that forced every Chrysler lender to join the restructuring. The letter they drafted to obtain approval from the banks embodied that clause; signers were agreeing to the credit only if all other banks joined. The loan guarantee board, Chrysler and the company's advisors doubted that the banks would stand by that principle. Until a few days before the last bank signed, the doubt remained.
[Back to top]1984
United States Rescues Continental Illinois Corp.
CHICAGO, May 18 — The largest bank rescue in American history was launched Thursday by the Federal Reserve Board, the Federal Deposit Insurance Corp., and the Comptroller of the Currency. In conjunction with 24 U.S. banks, they announced a $7.3 billion bailout for Continental Illinois National Bank and Trust Co., the nation's seventh largest bank.
The regulators took the unprecedented move of assuring all Continental's depositors — large and small — that their money will be fully protected.
The rescue package comprises a $2 billion capital injection by the FDIC and the group of 24 banks and an unsecured line of credit by the banks of $5.3 billion. Last weekend, 16 of these banks had agreed to a credit line of $4.5 billion. That was extended to $5.3 billion by the addition of 8 more banks.
Continental's new capital takes the form of subordinated notes of the FDIC. They bear an interest rate 100 basis points higher than that of the one-year Treasury bill.
David G. Taylor, chairman of Continental, told a press conference that the bailout was undertaken to combat a severe liquidity crisis caused by rumors surrounding the bank's financial condition. "The bank was not insolvent; it's not about to fail. In my judgment, it wasn't about to fail," he said. "This action was taken before the bank was in real danger."
He added that further action must be taken quickly to resolve Continental's problems. This includes a possible merger with one of the world's 50 largest banks. "We are already taking steps to start this process," he said, but a merger is not inevitable. Continental has hired Goldman, Sachs & Co. as its investment banker. He would not elaborate further on possible merger partners.
Mr. Taylor said Continental had already begun a number of programs to boost its capital. These include an injection of capital by outside sources or a sale of its troubled loans.
More immediate action will be the omission of the 50-cent-a-share dividend for the second quarter, which will save $20 million. The FDIC did not request that the dividend be omitted, "but it would be very imprudent to take government money and pay a dividend," Mr. Taylor said. He added that the bank's board of directors decided during an unusual telephone conference on Wednesday night to pass up the payment to stockholders.
Asked whether the FDIC would play a management role in the bank, Mr. Taylor said he was not totally free to discuss that aspect of the rescue package. But he added: "If we proceed with all due speed, we will have a minimum amount of interference from the FDIC." It is very obvious that the agency will have an interest, he added.
And it is very important that Continental's problems are resolved quickly, he stressed. The rescue package is for an indeterminate time but is not meant to be long term. Mr. Taylor often referred to it as a temporary bridging package, designed to hold the bank over while it solved its problems.
The rescue followed a severe funding crisis that stemmed from rumors in the press that Continental's financial situation had become quite precarious. Since Friday, its funding sources have remained fairly stable, "but we were all uncomfortable enough that something more should be done," said Mr. Taylor.
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