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What I Learned Working at the Original Too Big to Fail Bank

One of the biggest and best banks of its time was also the first bank to be called “too big to fail.” I should know. I worked there.

Continental Illinois National Bank and Trust Co. of Chicago would have been 155 years old next year. You may be surprised to hear me praise this institution so highly. But it was my first real job and the place where I learned how to be a professional, including how to be professionally skeptical.

I joined Continental in 1981 as an intern in the employee relations department. The bank’s lending training program faced a charge of persistent discrimination by the Equal Employment Opportunity Commission in the recruiting, hiring, retention, and promotion of their lending program trainees. The bank hired several PhDs to build the data case that would prove otherwise. I spent three summers and all my school holidays during college primarily digging through dusty files gathering data to defend Continental Bank against the EEOC charge.

I was enormously proud to ride the train from the South Side of Chicago every day to work at a world-class bank wearing a navy blue suit and matching low-heeled navy classic Ferragamo bow-style pumps. Continental Bank headquarters was a beautiful, historic building at 231 S. La Salle St., across from the Federal Reserve Bank of Chicago and at the beginning of the financial district “canyon” anchored by the architecturally significant art-deco Chicago Board of Trade. 

This was the age of gracious banking. We had “coffee” dates with colleagues every morning in the subsidized cafeteria. Bank officers dined in a private buffet or oak-paneled rooms served by tuxedoed waiters when entertaining clients. I aspired to one day make it to their pay grade.

When I started working there in 1981, Continental Bank was the largest commercial and industrial lender in the United States. The bank had been buying loans from Penn Square, a tiny Oklahoma City shopping mall bank run by a guy named Bill P. "Beep" Jennings since 1978. However, significant growth in the syndication of the loans originated by Penn Square did not occur until 1981 and Continental funded its purchases with foreign and domestic overnight deposits rather than traditional retail ones. 

When Penn Square went belly up in 1982, the shock was heard around the world. Bank examiners and Continental Bank’s internal auditors had been documenting the deterioration of underwriting quality and the poor collateral due diligence as the volume of loans purchased from Penn Square ramped up.  

Unfortunately, no one listened. Just like no one listened 16 years later, in 2000, when Harry Markopolos tried to tell the SEC about the Madoff Ponzi scheme. It wasn’t until Penn Square’s failure that the world really paid attention to how Continental Bank had grown so big so fast.

Continental Bank, according to an FDIC report, “was the largest participant in oil and gas loans at Penn Square and experienced large losses on those participations.” Even worse, when Continental’s internal auditors visited Penn Square in December 1981 they found $565,000 in personal loans from Penn Square to John Lytle, the Continental Bank officer responsible for acquiring the Oklahoma City bank’s loans. According to testimony by C. T. Conover, then the Comptroller of the Currency, to the House Subcommittee on Financial Institutions Supervision, Regulation, and Insurance in September 1984, senior Continental Bank management heard about the loans but never received the full audit report. Lytle was not removed from his position until May of 1982 and did not leave the bank until August 1982.

Mark Singer, in his book “Funny Money”, theorizes that Continental executives repeatedly ignored danger signs rather than actively covered them up. “Among bankers there is an inbred tendency to react to a fiscal humiliation as if one had spilled gravy on a tablecloth or neglected to send a hostess a thank-you note.”

As of March 31, 1984, according to a GAO study, Continental Bank had approximately $40 billion in assets. It was the largest bank in Chicago and the seventh largest bank in the United States, in both assets and deposits. That GAO study says the Continental Bank crisis started on May 8, 1984 when the bank faced a sudden run on its deposits. The run began in Tokyo when a wire story reported rumors that a Japanese bank might acquire Continental Bank. According to reports at the time, “when the item was picked up by a Japanese news service, the translator turned ‘rumors’ into ‘disclosure’ and Far Eastern investors holding Continental's certificates of deposit panicked at the implications. That day, as much as $1 billion in Asian money fled from the bank.”

Eight days after the run began, regulators announced a bailout. The FDIC put $4.5 billion in new capital into the bank, assumed liability for the bulk of Continental's bad loans and began the search for another bank to take over the institution. To fulfill a promise to protect insured and uninsured depositors from any losses, the Fed made additional emergency loans to Continental Illinois that rose to $8 billion.

I joined Continental Bank full-time in June of 1984 as a trainee. There were 50 of us hoping to be placed in internal audit, IT, or accounting after completion of a 15-week rotational training program. But the bank run did not subside over the summer and we started to worry there would be no bank and, therefore, no job for us at the end of the training. Continental Bank was shrinking in response to the money market’s continued lack of confidence after the May funding crisis. Federal regulators found no buyer for it and, in late July, the bank was nationalized.

Continental Bank, and my fellow trainees and I, survived the summer of 1984. In 1997 the FDIC was still describing the 1984 bailout transaction as “the most significant bank failure resolution in the history of the Federal Deposit Insurance Corp.” It was the biggest failure too, until the takeover of Washington Mutual in 2008.

In the fall of 1984 I went to work in internal audit, reviewing trust accounts that had farmland and crops as their primary assets. My impression of the bank’s internal audit team was positive. The department was filled with serious audit professionals who went out in the field and on the road all over the world to ask the hard questions. During this era there was no discussion of risk management other than what a trader or lender might be concerned about.

Unfortunately, the Penn Square loans to Continental Bank’s Lytle are an example of the obstacles we faced as internal auditors all the time. It was rare, in my observation, for an unpleasant or embarrassing internal audit report to ever make it to top management or to capture their attention if the issues raised could put the brakes on revenue growth.

The FDIC agrees. In a case study of the Continental Bank failure included in the report, “History of the Eighties  - Lessons for the Future”, the agency says, “There was little doubt that the bank’s management had embarked on a growth strategy built on decentralized credit evaluation unconstrained by any adequate system of internal controls and that the bank had relied on volatile funds. But how well had the responsible bank regulators assessed Continental’s situation, and should they have been more assertive in requiring the bank to change its lending and other high-risk practices?”

I passed the C.P.A. exam in 1986 and left the bank in 1988 to take a job as an accounting manager at a publicly held distributor of electronics components. It was a step up in pay and a chance to manage people.

The FDIC slowly re-privatized Continental Bank after the bailout by periodically selling its shares to the public. The last shares were sold and the bank completely returned to private hands in 1991. In 1994, the bank was bought by the old (West Coast) Bank of America.

To see how much and, yet, how little has changed for the banks since, it’s interesting to look at Continental’s 1984 peer group. According to the Comptroller of the Currency’s testimony the eight wholesale money center banks in the bank’s peer group were Bankers Trust, Chase Manhattan Bank, First National Bank of Boston, First National Bank of Chicago, Irving trust Co., Manufacturers Hanover Trust Co. and Morgan Guaranty Trust Co.  

Bank Boston, the successor bank of the First National Bank of Boston, was also acquired by Bank of America. 

Nearly all the rest are now part of JP Morgan Chase.

My early professional education at Continental Bank significantly influenced my career and my attitudes about regulation and responsibility in financial services. Other alumni have gone on to bigger things than I did, though not always better.


(8) Comments



Comments (8)
@Timothy & @Francine, we also need another 'Ned' Gramlich. In 2007, the former Fed Governor had the courage and insight to criticize the Fed's the hands-off policy, writing, "In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat." Perhaps Thomas Hoenig can help as Vice-Chair at the FDIC.
Posted by jim_wells | Wednesday, December 28 2011 at 11:30AM ET
@Timothy H

I'm afraid there are very few really strong regulators like Bill Seidman. Too much regulatory capture and revolving door. Where are the professionals who are willing to devote their lives to public service? Why is the United States not able to create an intellectual class that considers it an honor to serve their country for life, like they have in France?

@James W
I agree wholeheartedly about the lack of prosecutions of the individuals responsible for the failures. And, of course, I am also disappointed the auditors have received a big pass. They are playing all sides and making money in the process whether their clients survive or falter.

Thanks to you both for your comments.
Posted by Francine McKenna | Wednesday, December 28 2011 at 10:47AM ET
What a great reminder that 'Too-Big-To-Fail' is essentially oxymoronic. The larger a bank is the more likely it is to do stupid things that may endanger its own survival. The situation only endangers the financial system when regulators fail to take action.

It was unfortunate when regulators failed to address the excesses at a single big bank over many years, as with Continental Illinois. But it was manageable.

When regulators continually ignore casino-like behaviors and imprudent lending practices at multiple big banks until businesses start to fall apart, as in the lingering financial crisis, they institutionalize a moral hazard on a scale that is unmanageable without throwing trillions of dollars at the problem, and sacrificing the financial well-beings of millions of Americans.

Adding insult to injury, in the current crisis, federal financial regulators have failed to hold a single senior officer of a single big bank accountable for the actions which contributed to the worst economic disaster in the US since the Great Depression. Instead, confining their regulatory actions to officers of community and regional banks.

As a result, regulators and big bankers escape responsibility for the crisis. They both get to play the roles of victims. And the stage is set for the next crisis as they return to 'normalcy'.
Posted by jim_wells | Wednesday, December 28 2011 at 9:42AM ET
Thanks for your column, Francine! Just like Continental Illinois preceded the Savings and Loan Bailout and the Resolution Trust Corporation, I fear that the 2008 financial crisis will precede something much larger and more grave. I guess a big question will be: Who will be our next Bill Seidman?
Posted by Timothy H | Wednesday, December 28 2011 at 9:38AM ET
@Douglas A and @Lori H

Thanks for your comments. I find myself using the expression. "Back when I started my career..." too often when I speak to accounting students. Must stop that. A lot of seasoning is fine for food but not always for talking to much younger professionals.

@Doug M I will double check where I got that about Bankers Trust. I may have gotten lost in the org charts that American Banker has published on the 175th anniversary site. Thanks for letting me know.
Posted by Francine McKenna | Tuesday, December 27 2011 at 1:11PM ET
Being a Bankers Trust alum, I think that you'll find that it was acquired by Germany's Duetsche Bank and is not part of the Chase/JPMorgan world.
Posted by Daniel M | Tuesday, December 27 2011 at 12:57PM ET
I was offered a position in the same training program in 1985, but passed to take a job at a regional in St. Louis now part of BofA. I ended up at JPMorgan Chase for 20 years. Thanks for the reminders of those days. "Back to the Future" so to speak...
Posted by LORI H I | Tuesday, December 27 2011 at 12:44PM ET
Thanks for reminding us that the "Too Big to Fail" concept did not originate with the 2008 crisis. Chasing yield irrespective of risk always ends in tears.
Posted by Douglas A | Tuesday, December 27 2011 at 12:21PM ET
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