The Rescuer of Last Resort

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Bank regulators consider taking over Continental Illinois

"Dreams, as we all know, vanish when we wake. Nightmares vanish too," wrote Continental Illinois Bank Chairman David G. Taylor in a memo to his beleaguered employees earlier this month. But Taylor's corollary proved only half true. The nightmarish flight of Continental's customers that led to the bank's near collapse two months ago has continued. Since May, customers are rumored to have withdrawn two-thirds of Continental's $30 billion in deposits. Last week bank officials appeared to have virtually given up looking for another bank or for some wealthy buyer to infuse new money into the institution. Instead, they were meeting in Washington with is federal regulators to discuss a drastic, last-resort solution in which the Government would assume ownership of Continental. If the deal is concluded, it will be the first nationalization of a major bank in U.S. history.

As part of one plan being discussed last week, the Federal Deposit Insurance Corporation would accept most of Continental's bad loans, estimated at $4 billion, in return for an estimated 80% stake in the bank. FDIC Chairman William Isaac would then dismiss Taylor and other top officials and install new bank management. In addition, observers say, the FDIC would substantially reduce the bank's $34 billion in assets by selling some holdings. The regulators may spin off the Chicago institution's weakest units into another bank, already dubbed "Trashco" by Continental employees, which could then be declared bankrupt. Federal officials believe that the down-sized bank, relieved of troubled loans to debtors ranging from oil drillers to Brazil, could regain public confidence and earn a profit. Then, at some future time, the FDIC might be able to sell Continental and recoup some of its investment.

The big losers under this plan probably would be Continental's stockholders. The FDIC continues to honor its earlier promise that all the bank's depositors will be protected against losses, even those with accounts larger than the legal $100,000 coverage limit. Stockholders, though, could lose the largest share of some $2.2 billion in equity if the Government takes over. Stockholders have already taken a beating in the market. Since last September, Continental stock V, has fallen from 25¼ to 3½. Said one Chicago investment analyst last week: "This is as if you were in the Viet Nam War and didn't get out on the helicopters. That's what's happening to the stockholders."

When the run on the bank started in May, sparked by rumors that Continental was unsound and was about to be sold to three Japanese financial institutions, the FDIC, the Federal Reserve and dozens of banks began supplying billions in funds in an effort to stop the panic. A package of more than $10 billion in loans was offered, but it was only the FDlC's pledge to protect all deposits, no matter how big, that halted the outflow of funds.