Continental Illinois National Bank and Trust Company
Encyclopedia
The Continental Illinois National Bank and Trust Company was at one time the seventh-largest bank in the United States as measured by deposits with approximately $40 billion in assets. In 1984, Continental Illinois became the largest ever bank failure in U.S. history, when a run on the bank led to its seizure by the Federal Deposit Insurance Corporation
(FDIC). Continental Illinois retained this dubious distinction until the failure of Washington Mutual
in 2008 during the financial crisis of 2008, which ended up being over seven times larger than the failure of Continental Illinois.
, and the Continental National Bank, founded in 1883.
In 1910 the two banks merged to form the Continental & Commercial National Bank of Chicago with $175 million in deposits – a large bank at the time. In 1932 the name was changed to the Continental Illinois National Bank & Trust Co.
N.A. of Oklahoma
—loans for oil & gas producers and service companies and investors in the Oklahoma and Texas oil & gas boom of the late 1970s and early 1980s. Due diligence
was not properly conducted by John Lytle, an executive in charge of oil lending, and other leading officers of the bank such as Bill Jennings. Lytle later pleaded guilty to a count of defrauding Continental of $2.25 million and receiving $585,000 in kickback
s for approving risky loan applications. Lytle was sentenced to three and a half years in a federal prison. The Penn Square failure eventually caused a substantial run on the bank's deposits once it became clear Continental Illinois was headed for failure. Large depositors withdrew over $10 billion of deposits in early May 1984.
(FDIC) feared a failure could cause widespread financial trouble and instability. To avert this, regulators prevented the loss of virtually all deposit accounts and even bondholders. The FDIC infused $4.5 billion to rescue the bank. A willing merger partner had been sought for two months but could not be found. Eventually, the board of directors and top management were removed. Bank shareholders were substantially wiped out, although holding-company bondholders were protected. Until the seizure of Washington Mutual
in 2008, the bailout of Continental Illinois was the largest bank failure in American history.
The term "too big to fail
" was popularized by Congressman Stewart McKinney in a 1984 Congressional hearing, discussing the FDIC's intervention with Continental Illinois. The term had previously been used occasionally in the press.
has a retail branch and hundreds of back-office employees at Continental's former headquarters on South LaSalle Street
in Chicago. Bank of America operates dozens of retail branches in the Chicago area and purchased LaSalle Bank
in 2007 to expand its Chicago business and several lines of corporate and investment banking
business.
Continental Illinois Venture Corporation, an investment subsidiary of the bank, formed a semi-independent private equity firm, CIVC Partners
, with backing from Bank of America.
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC). Continental Illinois retained this dubious distinction until the failure of Washington Mutual
Washington Mutual
Washington Mutual, Inc. , abbreviated to WaMu, was a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association until its collapse in 2008....
in 2008 during the financial crisis of 2008, which ended up being over seven times larger than the failure of Continental Illinois.
Early history
Continental Illinois can be traced back to two Chicago banks, the Commercial National Bank, founded during the American Civil WarAmerican Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
, and the Continental National Bank, founded in 1883.
In 1910 the two banks merged to form the Continental & Commercial National Bank of Chicago with $175 million in deposits – a large bank at the time. In 1932 the name was changed to the Continental Illinois National Bank & Trust Co.
Insolvency
In May 1984, Continental Illinois became insolvent due, in part, to bad loans purchased from the failed Penn Square BankPenn Square Bank
Penn Square Bank was a small commercial bank located in the rear of the Penn Square Mall in Oklahoma City. The bank made its name in high-risk energy loans during the late 1970s and early 1980s Oklahoma and Texas oil boom. Between 1974 and 1982, the bank's assets increased more than 15 times to...
N.A. of Oklahoma
Oklahoma
Oklahoma is a state located in the South Central region of the United States of America. With an estimated 3,751,351 residents as of the 2010 census and a land area of 68,667 square miles , Oklahoma is the 28th most populous and 20th-largest state...
—loans for oil & gas producers and service companies and investors in the Oklahoma and Texas oil & gas boom of the late 1970s and early 1980s. Due diligence
Due diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
was not properly conducted by John Lytle, an executive in charge of oil lending, and other leading officers of the bank such as Bill Jennings. Lytle later pleaded guilty to a count of defrauding Continental of $2.25 million and receiving $585,000 in kickback
Bribery
Bribery, a form of corruption, is an act implying money or gift giving that alters the behavior of the recipient. Bribery constitutes a crime and is defined by Black's Law Dictionary as the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or...
s for approving risky loan applications. Lytle was sentenced to three and a half years in a federal prison. The Penn Square failure eventually caused a substantial run on the bank's deposits once it became clear Continental Illinois was headed for failure. Large depositors withdrew over $10 billion of deposits in early May 1984.
FDIC rescue
Due to Continental Illinois' size, regulators were not willing to let it fail. The Federal Reserve and Federal Deposit Insurance CorporationFederal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) feared a failure could cause widespread financial trouble and instability. To avert this, regulators prevented the loss of virtually all deposit accounts and even bondholders. The FDIC infused $4.5 billion to rescue the bank. A willing merger partner had been sought for two months but could not be found. Eventually, the board of directors and top management were removed. Bank shareholders were substantially wiped out, although holding-company bondholders were protected. Until the seizure of Washington Mutual
Washington Mutual
Washington Mutual, Inc. , abbreviated to WaMu, was a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association until its collapse in 2008....
in 2008, the bailout of Continental Illinois was the largest bank failure in American history.
The term "too big to fail
Too Big to Fail
Too Big to Fail is a television drama film in the United States broadcast on HBO on May 23, 2011. It is based on the non-fiction book Too Big to Fail by Andrew Ross Sorkin. The TV film was directed by Curtis Hanson...
" was popularized by Congressman Stewart McKinney in a 1984 Congressional hearing, discussing the FDIC's intervention with Continental Illinois. The term had previously been used occasionally in the press.
Emergence from FDIC majority ownership
Continental Illinois was renamed Continental Bank. It continued to exist, with the federal government effectively owning 80% of the company's shares and having the right to obtain the remainder (ultimately exercised in 1989) if losses in the rescue exceeded certain thresholds. The federal government gradually disposed of its ownership interests in Continental Bank, completing the process on June 6, 1991. In 1994, Continental Bank was acquired by BankAmerica in order to broaden the latter's midwestern presence. In 2007, successor bank firm Bank of AmericaBank of America
Bank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
has a retail branch and hundreds of back-office employees at Continental's former headquarters on South LaSalle Street
LaSalle Street
LaSalle Street is a major north-south street in Chicago named for Sieur de La Salle, an early explorer of Illinois. The portion that runs through the Loop is considered to be Chicago's financial district...
in Chicago. Bank of America operates dozens of retail branches in the Chicago area and purchased LaSalle Bank
LaSalle Bank
LaSalle Bank Corporation was the holding company for LaSalle Bank N.A. and LaSalle Bank Midwest N.A. . With $116 billion in assets, it was headquartered at 135 South LaSalle Street in Chicago, Illinois...
in 2007 to expand its Chicago business and several lines of corporate and investment banking
Investment banking
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
business.
Continental Illinois Venture Corporation, an investment subsidiary of the bank, formed a semi-independent private equity firm, CIVC Partners
CIVC Partners
CIVC Partners, previously known as Continental Illinois Venture Corporation, is a Chicago-based private equity firm that presently has over $1.3 billion of equity capital under management. The firm's predecessor was established in 1970 as a subsidiary of Continental Illinois National Bank and Trust...
, with backing from Bank of America.
Silver dollar hoard
Part of the bank's required reserves were held in silver dollars, which provided the opportunity to profit from a rise in silver prices. The hoard, estimated to be 1.5 million silver dollars, was sold to a coin dealer to raise money in the early 1980s.See also
- Too Big to Fail policyToo Big to Fail policy"Too big to fail" is a colloquial term in regulation and public policy that refers to businesses dealing with market complications related to moral hazard, macroeconomics, economic specialization, and monetary theory....
- Banking regulation
- Bank conditionBank conditionBank condition is a random variable used to represent the probability of failure of a bank. The true probability of failure is unknown to depositors....
- CIVC PartnersCIVC PartnersCIVC Partners, previously known as Continental Illinois Venture Corporation, is a Chicago-based private equity firm that presently has over $1.3 billion of equity capital under management. The firm's predecessor was established in 1970 as a subsidiary of Continental Illinois National Bank and Trust...