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.
