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.
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