WSJ: 40 YEARS AGO: Continental Illinois, Its Safety Net in Place, Ponders Next Hurdles

By SIMON CONSTABLE 

In May 1984, just after Wall Street had escaped stagflation, up popped a crisis. Continental Illinois, one of the country’s largest banks, looked as if it would fail.

Continental had made many dodgy loans to the oil-and-gas industry, which was a big part of the problem. “There was ferocious government pressure to create energy independence,” says David Salem, managing director of capital allocation at financial-research company Hedgeye Risk Management.

But the loans started to sour, and stock investors became wobbly. As the crisis became increasingly apparent, the S&P 500 dropped 9% between December 1983 and May 1984. 

Starting around May 7, depositors quickly withdrew their money, and the bank lost 30% of its funding, according to the Federal Reserve. The bank sought funds from the Federal Reserve Bank of Chicago, and eventually, the Federal Deposit Insurance Corp. stepped in to avoid a failure. “It would guarantee all of the bank’s creditors,” according to the Fed, and the FDIC also lent it $2 billion.

 “You thought there were upper limits to how much the government would bail out a bank, but there weren’t,” he says. “This is where ‘too big to fail’ began.” See full story here.

The Clark Street facade of the Continental Illinois Bank Building Chicago.

Beyond My Ken, CC BY-SA 4.0, via Wikimedia Commons