Continental Illinois
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| Industry | Bank holding company |
|---|---|
| Fate | Insolvency. The bank was seized by the Federal Deposit Insurance Corporation and ultimately sold to BankAmerica (now Bank of America). |
| Successor | Bank of America |
| Founded | 1910 |
| Defunct | 1994 |
| Headquarters | Chicago, Illinois, United States |
| Products | Financial services |
The Continental Illinois National Bank and Trust Company was at one time the seventh-largest commercial 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.
Continental Illinois can be traced back to two Chicago banks, the Commercial National Bank, founded during the American Civil War, 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.
In May 1984, Continental Illinois became insolvent due, in part, to bad loans purchased from the failed Penn Square Bank 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 the Mid-Continent Division of oil lending, and other leading officers of the bank. Lytle later pleaded guilty to a count of defrauding Continental of $2.25 million and receiving $585,000 in kickbacks 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.
Due to Continental Illinois' size, regulators were not willing to let it fail. The Federal Reserve and Federal Deposit Insurance Corporation (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. According to Daniel Yergin in The Prize: The Epic Quest for Oil, Money, and Power (1991), "The Federal Government intervened, with a huge bail-out–$5.5 billion of new capital, $8 billion in emergency loans, and, of course, new management." 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.
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